##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended April 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 001-32239
 Commerce Energy Group, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction 
of incorporation or organization)
    
    20-0501090
(I.R.S. Employer
Identification No.)600 Anton Boulevard, Suite 2000Costa Mesa, California
    
    92626(Address of principal executive offices)
    
    (Zip code)
 (714) 259-2500  (Registrants telephone number, including area code)
 Not
Applicable  (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o o þ
  o þ




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##### 



COMMERCE ENERGY GROUP, INC.
 Form 10-Q
 For the Quarterly Period Ended April 30, 2007
 Index
 PageNo.PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)
    
    
    1Condensed Consolidated Statements of Operations for the
three and nine months ended April 30, 2007 and 2006
    
    
    1Condensed Consolidated Balance Sheets as of April 30, 2007
and July 31, 2006
    
    
    2Condensed Consolidated Statements of Cash Flows for the
nine months ended April 30, 2007 and 2006
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    30Signatures
    
    
    32EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 10.5EXHIBIT 10.6EXHIBIT 10.7EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 COMMERCE ENERGY GROUP, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedApril 30,
    
    
    April 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    95,518
    
    
    $
    57,755
    
    
    $
    258,670
    
    
    $
    194,777APX settlement
    
    
    5,057
    
    
    
    
    
    
    
    5,057
    
    
    
    Net revenue
    
    
    100,575
    
    
    
    57,755
    
    
    
    263,727
    
    
    
    194,777Direct energy costs
    
    
    82,946
    
    
    
    49,643
    
    
    
    221,509
    
    
    
    174,664Gross profit
    
    
    17,629
    
    
    
    8,112
    
    
    
    42,218
    
    
    
    20,113Selling and marketing expenses
    
    
    2,568
    
    
    
    1,420
    
    
    
    7,317
    
    
    
    3,346General and administrative expenses
    
    
    9,803
    
    
    
    5,911
    
    
    
    27,382
    
    
    
    20,367Income (loss) from operations
    
    
    5,258
    
    
    
    781
    
    
    
    7,519
    
    
    
    (3,600
    )Other income (expense):ACN arbitration settlement
    
    
    (3,900
    )
    
    
    
    
    
    
    (3,900
    )
    
    
    Interest, net
    
    
    185
    
    
    
    221
    
    
    
    846
    
    
    
    710Total other income and expenses
    
    
    (3,715
    )
    
    
    221
    
    
    
    (3,054
    )
    
    
    710Net income (loss)
    
    $
    1,543
    
    
    $
    1,002
    
    
    $
    4,465
    
    
    $
    (2,890
    )Income (loss) per common share:Basic
    
    $
    0.05
    
    
    $
    0.03
    
    
    $
    0.15
    
    
    $
    (0.09
    )Diluted
    
    $
    0.05
    
    
    $
    0.03
    
    
    $
    0.15
    
    
    $
    (0.09
    )
  1




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COMMERCE ENERGY GROUP, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Amounts)
 April 30, 2007
    
    
    July 31, 2006(Unaudited)ASSETSCurrent assets:Cash and equivalents
    
    $
    21,133
    
    
    $
    22,941Accounts receivable, net
    
    
    50,245
    
    
    
    30,650Natural gas inventory
    
    
    994
    
    
    
    4,578Prepaid expenses and other current
    
    
    6,357
    
    
    
    6,827Total current assets
    
    
    78,729
    
    
    
    64,996Restricted cash and equivalents
    
    
    10,451
    
    
    
    17,117Deposits
    
    
    1,143
    
    
    
    2,506Property and equipment, net
    
    
    8,121
    
    
    
    5,866Goodwill
    
    
    4,247
    
    
    
    4,801Other intangible assets, net
    
    
    6,638
    
    
    
    3,790Total assets
    
    $
    109,329
    
    
    $
    99,076LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Energy and accounts payable
    
    $
    28,462
    
    
    $
    26,876Other accrued liabilities
    
    
    10,686
    
    
    
    5,867Total current liabilities
    
    
    39,148
    
    
    
    32,743Commitments and contingenciesStockholders equity:Common stock  150,000 shares authorized
with $0.001 par value; 30,387 (unaudited)
at April 30, 2007 and 29,632 shares issued
and outstanding at July 31, 2006
    
    
    60,466
    
    
    
    58,849Accumulated other comprehensive income
    
    
    37
    
    
    
    2,271Retained earnings
    
    
    9,678
    
    
    
    5,213Total stockholders equity
    
    
    70,181
    
    
    
    66,333Total liabilities and stockholders equity
    
    $
    109,329
    
    
    $
    99,076
  2




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COMMERCE ENERGY GROUP, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 Nine Months EndedApril 30,2007
    
    
    2006Cash Flows From Operating ActivitiesNet income (loss)
    
    $
    4,465
    
    
    $
    (2,890
    )Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation
    
    
    1,215
    
    
    
    801Amortization
    
    
    1,550
    
    
    
    835Provision for doubtful accounts
    
    
    2,793
    
    
    
    1,940Stock-based compensation expense
    
    
    421
    
    
    
    407Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (22,387
    )
    
    
    (210
    )Inventory
    
    
    3,584
    
    
    
    3,430Prepaid expenses and other current assets
    
    
    (367
    )
    
    
    4,407Accounts payable
    
    
    1,587
    
    
    
    (10,140
    )Accrued liabilities and other
    
    
    4,401
    
    
    
    218Net cash used in operating activities
    
    
    (2,738
    )
    
    
    (1,202
    )Cash Flows From Investing ActivitiesPurchase of property and equipment
    
    
    (3,470
    )
    
    
    (2,403
    )Purchase of intangible assets
    
    
    (4,236
    )
    
    
    Sale of intangibles  customer contracts sold
    
    
    756
    
    
    
    Net cash used in investing activities
    
    
    (6,950
    )
    
    
    (2,403
    )Cash Flows From Financing ActivitiesCredit line commitment fee
    
    
    18
    
    
    
    Proceeds from exercise of stock options
    
    
    1,196
    
    
    
    11Repurchase of stock
    
    
    
    
    
    
    (2,310
    )Decrease (increase) in restricted cash
    
    
    6,666
    
    
    
    (4,679
    )Net cash provided by (used in) financing activities
    
    
    7,880
    
    
    
    (6,978
    )Decrease in cash and cash equivalents
    
    
    (1,808
    )
    
    
    (10,583
    )Cash and cash equivalents at beginning of period
    
    
    22,941
    
    
    
    33,344Cash and cash equivalents at end of period
    
    $
    21,133
    
    
    $
    22,761
  3




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COMMERCE ENERGY GROUP, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
 Note 1. Summary of Significant Accounting Policies
 Basis of Presentation
  Preparation of Interim Condensed Consolidated Financial Statements
  Uses of Estimates
  Reclassifications
  4




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COMMERCE ENERGY GROUP, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
 Revenue Recognition
  Three Months Ended
    
    
    Nine Months EndedApril 30,
    
    
    April 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Retail electricity sales
    
    $
    52,654
    
    
    $
    37,800
    
    
    $
    156,776
    
    
    $
    132,168Excess electricity sales
    
    
    
    
    
    
    
    
    
    
    1,535
    
    
    
    6,963Total electricity sales
    
    
    52,654
    
    
    
    37,800
    
    
    
    158,311
    
    
    
    139,131Retail natural gas sales
    
    
    42,864
    
    
    
    19,955
    
    
    
    100,359
    
    
    
    55,646APX settlement
    
    
    5,057
    
    
    
    
    
    
    
    5,057
    
    
    
    Net revenue
    
    $
    100,575
    
    
    $
    57,755
    
    
    $
    263,727
    
    
    $
    194,777
  Stock-Based Compensation
   Nine Months EndedApril 30,2007
    
    2006Weighted-average risk-free interest rate
    
    
    4.6
    %
    
    
    4.95
    %Average expected life in years
    
    
    4.32
    
    
    
    5.12Expected dividends
    
    None
    
    NoneExpected volatility
    
    
    0.73
    
    
    
    0.77
  Options OutstandingWeightedNumber of
    
    
    
    
    
    
    Average
    
    
    AggregateShares
    
    
    Exercise Price
    
    
    Exercise
    
    
    Intrinsic(in Thousands)
    
    
    Per Share
    
    
    Price
    
    
    ValueOptions outstanding as of January 31, 2007
    
    
    7,643
    
    
    $
    1.00-$3.75
    
    
    $
    2.32
    
    
    $
    50Options exercised
    
    
    (535
    )
    
    $
    1.86-$2.75
    
    
    $
    2.24
    
    
    $
    45Options awarded
    
    
    45
    
    
    $
    2.56
    
    
    $
    2.56
    
    
    
    Options outstanding as of April 30, 2007 (1)
    
    
    7,153
    
    
    $
    1.00-$3.75
    
    
    $
    2.33
    
    
    $
    625
 5




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COMMERCE ENERGY GROUP, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
 
 (1)
    
    Options exercisable as April 30, 2007 were 6,903 with weighted average exercise
price of $2.34 and an aggregate intrinsic value of $544.  Employee Stock Purchase and Stock Incentive Plans
   Income Tax
  Comprehensive Income (Loss)
   Three Months Ended
    
    
    Nine Months EndedApril 30,
    
    
    April 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    1,543
    
    
    $
    1,002
    
    
    $
    4,465
    
    
    $
    (2,890
    )Changes in fair value of cash flow hedges
    
    
    454
    
    
    
    854
    
    
    
    (2,234
    )
    
    
    (168
    )Comprehensive income (loss)
    
    $
    1,997
    
    
    $
    1,856
    
    
    $
    2,231
    
    
    $
    (3,058
    )
 6




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COMMERCE ENERGY GROUP, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
  Segment Reporting
  Accounts Receivable, Net
  April 30,
    
    
    July 31,2007
    
    
    2006Billed
    
    $
    38,732
    
    
    $
    21,768Unbilled
    
    
    15,626
    
    
    
    13,38254,358
    
    
    
    35,150Less allowance for doubtful accounts
    
    
    (4,113
    )
    
    
    (4,500
    )Accounts receivable, net
    
    $
    50,245
    
    
    $
    30,650
 Inventory
  Note 2. Basic and Diluted Income (Loss) per Common Share
  7




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COMMERCE ENERGY GROUP, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
  Three Months Ended
    
    
    Nine Months EndedApril 30,
    
    
    April 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income (loss)
    
    $
    1,543
    
    
    $
    1,002
    
    
    $
    4,465
    
    
    $
    (2,890
    )Net income (loss)
applicable to common
stock basic and
diluted
    
    $
    1,543
    
    
    $
    1,002
    
    
    $
    4,465
    
    
    $
    (2,890
    )Denominator:Weighted-average
outstanding common
shares  basic
    
    
    29,938
    
    
    
    30,186
    
    
    
    29,763
    
    
    
    30,659Effect of stock options
    
    
    254
    
    
    
    142
    
    
    
    119
    
    
    
    Weighted-average
outstanding common
shares  diluted
    
    
    30,192
    
    
    
    30,328
    
    
    
    29,882
    
    
    
    30,659
 Note 3. Market and Regulatory
     8




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COMMERCE ENERGY GROUP, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
 Note 4. HESCO Customer Acquisition
  Note 5. Contingencies
 APX Settlement
     9




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COMMERCE ENERGY GROUP, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
 ACN
Arbitration Settlement
  Note 6. Derivative Financial Instruments
    10




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COMMERCE ENERGY GROUP, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
 April 30,
    
    
    July 31,2007
    
    
    2006Current assets
    
    $
    
    
    
    $
    1,817Current liabilities
    
    
    (63
    )
    
    
    (362
    )Deferred gains
    
    
    100
    
    
    
    816Hedge ineffectiveness
    
    
    
    
    
    
    Accumulated other comprehensive income
    
    $
    37
    
    
    $
    2,271
   Note 7. Credit Facility
    11




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 As used herein and unless the context requires otherwise, references to the Company, we,
us, and our refer specifically to Commerce Energy Group, Inc. and its subsidiaries. Commerce
refers to Commerce Energy, Inc., our principal operating subsidiary. This discussion and analysis
should be read in conjunction with Managements Discussion and Analysis of Financial Condition and
Results of Operations set forth in our Annual Report on Form 10-K/A (Amendment No. 1) for the year
ended July 31, 2006, or the Form 10-K .
 Some of the statements in this Item 2 are forward-looking statements regarding our
assumptions, projections, expectations, targets, intentions or beliefs about future events which
involve risks and uncertainties. All statements other than statements of historical facts included
in this Item 2 relating to expectation of future financial performance, continued growth, changes
in economic conditions or capital markets and changes in customer usage patterns and preferences,
are forward-looking statements. In some cases, you can identify forward-looking statements by terms
such as may, will, should, expect, plan, intend, forecast, anticipate, believe,
estimate, predict, potential, continue or the negative of these terms or other comparable
terms. The forward-looking statements contained in this Item 2 involve known and unknown risks and
uncertainties and situations that may cause our or our industrys actual results, level of
activity, performance or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these statements. Factors that might
cause actual events or results to differ materially from those indicated by these forward-looking
statements may include the matters listed under Risk Factors in Item 1A in the Form 10-K and
elsewhere in this Form 10-Q , including, without limitation, changes in general economic conditions
in the markets in which we may compete; fluctuations in the market price of energy which may
negatively impact the competitiveness of our product offerings to current and future customers;
increased competition; our ability to retain key members of management; our ability to address
changes in laws and regulations; our ability to successfully integrate businesses or customer
portfolios that we may acquire; our ability to obtain and retain credit necessary to profitably
support our operations; adverse state or federal legislation or regulation or adverse
determinations by regulators; and other factors identified from time to time in our filings with
the Securities and Exchange Commission, or the SEC. We caution that, while we make such statements
in good faith and we believe such statements are based on reasonable assumptions, including,
without limitation, managements examination of historical operating trends, data contained in
records and other data available from third parties, we cannot assure you that our expectations
will be realized.
 Any forward-looking statement speaks only as of the date on which such statement is made, and,
except as required by law, we undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time, and it is not possible
for management to predict all such factors.
 Our Company
   12




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Significant Customer Acquisitions
 ACN Energy Acquisition
  HESCO Acquisition
  Market and Regulatory
    13




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APX Settlement
     14




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Results of Operations
 Three Months Ended April 30, 2007 Compared to Three Months Ended April 30, 2006
  Three Months Ended April 30,2007
    
    
    2006Dollars
    
    
    % Revenue
    
    
    Dollars
    
    
    % RevenueRetail electricity sales
    
    $
    52,654
    
    
    
    52
    %
    
    $
    37,800
    
    
    
    65
    %APX settlement
    
    
    5,057
    
    
    
    5
    %
    
    
    
    
    
    
    Natural gas sales
    
    
    42,864
    
    
    
    43
    %
    
    
    19,955
    
    
    
    35
    %Net revenue
    
    
    100,575
    
    
    
    100
    %
    
    
    57,755
    
    
    
    100
    %Direct energy costs
    
    
    82,946
    
    
    
    82
    %
    
    
    49,643
    
    
    
    86
    %Gross profit
    
    
    17,629
    
    
    
    18
    %
    
    
    8,112
    
    
    
    14
    %Selling and marketing expenses
    
    
    2,568
    
    
    
    3
    %
    
    
    1,420
    
    
    
    3
    %General and administrative expenses
    
    
    9,803
    
    
    
    10
    %
    
    
    5,911
    
    
    
    10
    %Income from operations
    
    $
    5,258
    
    
    
    5
    %
    
    $
    781
    
    
    
    1
    %
 Net revenue
  Three Months Ended April 30,2007
    
    
    2006Dollars
    
    
    % Revenue
    
    
    Dollars
    
    
    % RevenueRetail Electricity Sales:California
    
    $
    13,374
    
    
    
    13
    %
    
    $
    14,963
    
    
    
    26
    %Texas
    
    
    22,312
    
    
    
    22
    %
    
    
    4,104
    
    
    
    7
    %Pennsylvania/New Jersey
    
    
    9,329
    
    
    
    9
    %
    
    
    14,748
    
    
    
    25
    %Maryland
    
    
    5,942
    
    
    
    6
    %
    
    
    
    
    
    
    Michigan and Others
    
    
    1,697
    
    
    
    2
    %
    
    
    3,985
    
    
    
    7
    %Total Retail Electricity Sales
    
    
    52,654
    
    
    
    52
    %
    
    
    37,800
    
    
    
    65
    %Natural Gas Sales:California
    
    
    7,543
    
    
    
    7
    %
    
    
    6,366
    
    
    
    11
    %Ohio
    
    
    14,880
    
    
    
    15
    %
    
    
    9,006
    
    
    
    16
    %Georgia
    
    
    61
    
    
    
    
    
    
    
    2,711
    
    
    
    5
    %HESCO Customers
    
    
    19,756
    
    
    
    20
    %
    
    
    
    
    
    
    All Others
    
    
    624
    
    
    
    1
    %
    
    
    1,872
    
    
    
    3
    %Total Natural Gas Sales
    
    
    42,864
    
    
    
    43
    %
    
    
    19,955
    
    
    
    35
    %APX Settlement
    
    
    5,057
    
    
    
    5
    %
    
    
    
    
    
    
    Net Revenue
    
    $
    100,575
    
    
    
    100
    %
    
    $
    57,755
    
    
    
    100
    %
  15




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Direct Energy Costs
   Gross Profit
  16




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Selling and Marketing Expenses
  General and Administrative Expenses
  ACN Arbitration Settlement
  17




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Income Taxes
  18




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Nine Months Ended April 30, 2007 Compared to Nine Months Ended April 30, 2006
  Nine Months Ended April 30,2007
    
    
    2006Dollars
    
    
    % Revenue
    
    
    Dollars
    
    
    % RevenueRetail electricity sales
    
    $
    156,776
    
    
    
    59
    %
    
    $
    132,168
    
    
    
    68
    %APX settlement
    
    
    5,057
    
    
    
    2
    %
    
    
    
    
    
    
    Natural gas sales
    
    
    100,359
    
    
    
    38
    %
    
    
    55,646
    
    
    
    29
    %Excess electricity sales
    
    
    1,535
    
    
    
    1
    %
    
    
    6,963
    
    
    
    3
    %Net revenue
    
    
    263,727
    
    
    
    100
    %
    
    
    194,777
    
    
    
    100
    %Direct energy costs
    
    
    221,509
    
    
    
    84
    %
    
    
    174,664
    
    
    
    90
    %Gross profit
    
    
    42,218
    
    
    
    16
    %
    
    
    20,113
    
    
    
    10
    %Selling and marketing expenses
    
    
    7,317
    
    
    
    3
    %
    
    
    3,346
    
    
    
    2
    %General and administrative expenses
    
    
    27,382
    
    
    
    10
    %
    
    
    20,367
    
    
    
    10
    %Income (loss) from operations
    
    $
    7,519
    
    
    
    3
    %
    
    $
    (3,600
    )
    
    
    (2
    %)
 Net revenue
  Nine Months Ended April 30,2007
    
    
    2006Dollars
    
    
    % Revenue
    
    
    Dollars
    
    
    % RevenueRetail Electricity Sales:California
    
    $
    44,729
    
    
    
    17
    %
    
    $
    49,051
    
    
    
    25
    %Texas
    
    
    57,124
    
    
    
    22
    %
    
    
    14,066
    
    
    
    7
    %Pennsylvania/New Jersey
    
    
    34,305
    
    
    
    13
    %
    
    
    49,884
    
    
    
    26
    %Maryland
    
    
    12,794
    
    
    
    5
    %
    
    
    
    
    
    
    Michigan and Others
    
    
    7,824
    
    
    
    2
    %
    
    
    19,167
    
    
    
    10
    %Total Retail Electricity Sales
    
    
    156,776
    
    
    
    59
    %
    
    
    132,168
    
    
    
    68
    %Natural Gas Sales:California
    
    
    18,178
    
    
    
    7
    %
    
    
    19,360
    
    
    
    10
    %Ohio
    
    
    30,398
    
    
    
    11
    %
    
    
    22,939
    
    
    
    12
    %Georgia
    
    
    2,676
    
    
    
    1
    %
    
    
    7,816
    
    
    
    4
    %HESCO Customers
    
    
    47,181
    
    
    
    18
    %
    
    
    
    
    
    
    All Others
    
    
    1,926
    
    
    
    1
    %
    
    
    5,531
    
    
    
    3
    %Total Natural Gas Sales
    
    
    100,359
    
    
    
    38
    %
    
    
    55,646
    
    
    
    29
    %Excess Electricity Sales
    
    
    1,535
    
    
    
    1
    %
    
    
    6,963
    
    
    
    3
    %APX Settlement
    
    
    5,057
    
    
    
    2
    %
    
    
    
    
    
    
    Net Revenue
    
    $
    263,727
    
    
    
    100
    %
    
    $
    194,777
    
    
    
    100
    %
  19




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##### Table of Contents



Direct Energy Costs
  Gross Profit
  Selling and Marketing Expenses
  20




---



##### Table of Contents



General and Administrative Expenses
  ACN Arbitration Settlement
  Income Taxes
  Liquidity and Capital Resources
 (Dollars in Thousands)April 30, 2007
    
    July 31, 2006Cash and cash equivalents
    
    $
    21,133
    
    
    $
    22,941Working capital
    
    $
    39,581
    
    
    $
    32,253Current ratio (current assets to current liabilities)
    
    
    2.0:1.0
    
    
    
    2.0:1.0Restricted cash
    
    $
    10,451
    
    
    $
    17,117Short term borrowings
    
    
    
    
    
    
    Letters of credit outstanding
    
    $
    21,404
    
    
    $
    24,053
    21




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##### Table of Contents



Credit Facility
      22




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##### Table of Contents



Consolidated Cash Flows
  Nine Months EndedApril 30, 2007
    
    
    April 30, 2006Net cash provided by (used in):Operating activities
    
    $
    (2,738
    )
    
    $
    (1,202
    )Investing activities
    
    
    (6,950
    )
    
    
    (2,403
    )Financing activities
    
    
    7,880
    
    
    
    (6,978
    )Net decrease in cash and cash equivalents
    
    $
    (1,808
    )
    
    $
    (10,583
    )
    Contractual Obligations
  Critical Accounting Policies and Estimates
  
    
    Accounting for Derivative Instruments and Hedging Activities We purchase
substantially all of our power and natural gas under forward physical delivery contracts
for supply to our retail customers. These forward physical delivery contracts are defined
as commodity derivative contracts under Statement of Financial Accounting Standard No. 133,
Accounting for Derivative
 23




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##### Table of Contents



Instruments and Hedging Activities, or SFAS No. 133. Using the exemption available for
qualifying contracts under SFAS No. 133, we apply the normal purchase and normal sale
accounting treatment to a majority of our forward physical delivery contracts. Accordingly,
we record revenue generated from customer sales as energy is delivered to our retail
customers and the related energy cost under our forward physical delivery contracts is
recorded as direct energy costs when received from our suppliers. We use financial derivative
instruments (such as swaps, options and futures) as an effective way of assisting in managing
our price risk in energy supply procurement. For forward or future contracts that do not meet
the qualifying criteria for normal purchase, normal sale accounting treatment, we elect cash
flow hedge accounting, where appropriate.We also utilize other financial derivatives, primarily swaps, options and futures to hedge
our commodity price risks. Certain derivative instruments, which are designated as economic
hedges or as speculative, do not qualify for hedge accounting treatment and require current
period mark to market accounting in accordance with SFAS No. 133, with fair market value
being used to determine the related income or expense that is recorded each quarter in the
statement of operations. As a result, the changes in fair value of derivatives that do not
meet the requirements of normal purchase and normal sale accounting treatment or cash flow
hedge accounting are recorded in operating income (loss) and as a current or long-term
derivative asset or liability. To the extent that the hedges are not effective, for
transactions qualifying as hedges, any ineffective portion of the changes in fair market
value is recorded currently in direct energy costs. The subsequent changes in the fair value
of these contracts could result in operating income (loss) volatility as the fair value of
the changes are recorded on a net basis in direct energy costs in our consolidated statement
of operations for each period.As a result of a sale on January 28, 2005 of two significant electricity forward physical
delivery contracts (on a net cash settlement basis) back to the original supplier, the normal
purchase and normal sale exemption under SFAS No. 133 was no longer available for our
Pennsylvania market (PJM-ISO). Accordingly, for the period from February 2005 through July
2006, we designated forward physical delivery contracts entered into for our Pennsylvania
electricity market as cash flow hedges, whereby market to market accounting gains or losses
were deferred and reported as a component of Other Comprehensive Income (Loss) until the time
of physical delivery. Effective August 1, 2006, the normal purchase and normal sale exemption
has been reinstated for our Pennsylvania market.
    
    Utility and independent system operator Included in direct energy costs, along with
the cost of energy that we purchase, are scheduling costs, Independent System Operator
fees, interstate pipeline costs and utility service charges. The actual charges and certain
energy costs are not finalized until subsequent settlement processes are performed for all
distribution system participants. Prior to the completion of settlements (which may take
from one to several months), we estimate these costs based on historical trends and
preliminary settlement information. The historical trends and preliminary information may
differ from actual information resulting in the need to adjust previous estimates.
    
    Allowance for doubtful accounts We maintain allowances for doubtful accounts for
estimated losses resulting from non-payment of customer billings. If the financial
conditions of certain of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
    
    Net revenue and unbilled receivables Our customers are billed monthly at various
dates throughout the month. Unbilled receivables represent the estimated sale amount for
power delivered to a customer at the end of a reporting period, but not yet billed.
Unbilled receivables from sales are estimated based upon the amount of power delivered, but
not yet billed, multiplied by the estimated sales price per unit.
 24




---



##### Table of Contents




    
    Inventory Inventory consists of natural gas in storage as required by state
regulators and contracted obligations under customer choice programs. Inventory is stated
at the lower of cost or market.
    
    Customer Acquisition Cost The Company pays an upfront fee to certain third-party
vendors upon the successful acquisition of new customer contracts. These customer
acquisition costs related to specific new customers contracts acquired are deferred and
amortized over the life of the initial customer contract, typically one year.
    
    Legal matters From time to time, we may be involved in litigation and other
adversarial legal proceedings. We regularly evaluate our exposure to threatened or pending
litigation and other business contingencies and accrue for estimated losses on such matters
in accordance with Statement of Financial Accounting Standard No. 5, Accounting for
Contingencies. As additional information about current or future litigation or other
contingencies becomes available, management will assess whether such information warrants
the recording of additional expense relating to our contingencies. Such additional expense
could potentially have a material adverse impact on our results of operations and financial
position.
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
   
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  25




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 th th
 Arbitration Proceeding and Settlement with American Communications Network, Inc. American
Arbitration Association Case No. 13 198 J 00688 06
 APX Settlement
  26




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##### Table of Contents



Item 1A. Risk Factors.
  We may need additional capital in the future and it may not be available on acceptable terms,
or not at all.
  27




---



##### Table of Contents



We may issue additional shares of common stock that may dilute the value of our common stock
and adversely affect the market price of our common stock.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 .
 
 Item 3. Defaults Upon Senior Securities.
 .
 28




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders.
 .
 
 Item 5. Other Information.
 .
 29




---



##### Table of Contents



Item 6. Exhibits.
  ExhibitNumber
    
    Description3.1
    
    
    Amended and Restated Certificate of Incorporation of
Commerce Energy Group, Inc., previously filed with the SEC
on July 6, 2004 as Exhibit 3.3 to Commerce Energy Group,
Inc.s Registration Statement on Form 8-A and incorporated
herein by reference.3.2
    
    
    Certificate of Designation of Series A Junior Participating
Preferred Stock of Commerce Energy Group, Inc. dated July 1,
2004 previously filed with the SEC on July 6, 2004 as
Exhibit 3.4 to Commerce Energy Group, Inc.s Registration
Statement on Form 8-A and incorporated herein by reference.3.3
    
    
    Amended and Restated Bylaws of Commerce Energy Group, Inc.,
previously filed with the SEC on July 6, 2004 as Exhibit 3.6
to Commerce Energy Group, Inc.s Registration Statement on
Form 8-A and incorporated herein by reference.4.1
    
    
    Rights Agreement, dated as of July 1, 2004, entered into
between Commerce Energy Group, Inc. and Computershare Trust
Company, as rights agent, previously filed with the
Commission on July 6, 2004 as Exhibit 10.1 to Commerce
Energy Group, Inc.s Registration Statement on Form 8-A and
incorporated herein by reference.4.2
    
    
    Form of Rights Certificate, previously filed with the
Commission on July 6, 2004 as Exhibit 10.2 to Commerce
Energy Group, Inc.s Registration Statement on Form 8-A and
incorporated herein by reference.10.1
    
    
    Third Amendment to Loan and Security Agreement dated March
15, 2007 among Commerce Energy, Inc., Commerce Energy Group,
Inc., Wachovia Capital Finance Corporation (Western) and The
CIT Group/Business Credit, Inc., previously filed with the
SEC on March 19, 2007 as Exhibit 10.9 to Commerce Energy
Group, Inc.s Quarterly Report on Form 10-Q and incorporated
herein by reference.10.2
    
    
    Settlement Agreement and Mutual Release dated June 11, 2007
among Commerce Energy Group, Inc., Commerce Energy, Inc.,
Peter Weigand and American Communications Network, Inc.,
previously filed with the SEC on June 12, 2007 as Exhibit
99.1 to Commerce Energy Group, Inc.s Current Report on Form
8-K and incorporated herein by reference.10.3
    *
    
    Employment Agreement dated March 26, 2007 between Commerce
Energy Group, Inc. and Erik A. Lopez, Sr.10.4
    *
    
    Indemnification Agreement dated March 26, 2007 between
Commerce Energy Group, Inc. and Erik A. Lopez, Sr.10.5
    *
    
    Restricted Share Award Agreement dated March 27, 2007
between Commerce Energy Group, Inc. and Erik A. Lopez, Sr.10.6
    *
    
    Stock Option Award Agreement dated March 27, 2007 between
Commerce Energy Group, Inc. and Erik A. Lopez, Sr.10.7
    *
    
    Commerce Energy Group, Inc. Bonus Program as amended by
First Amendment adopted March 27, 2007.31.1
    
    
    Principal Executive Officer Certification required by Rule
13a-14(a) of the Securities Exchange Act of 1934.31.2
    
    
    Principal Financial Officer Certification required by Rule
13a-14(a) of the Securities Exchange Act of Act of 1934.32.1
    
    
    Principal Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted
 30




---



##### Table of Contents



ExhibitNumber
    
    Descriptionpursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.2
    
    
    Principal Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates management contract or compensatory plan. 31




---



##### Table of Contents



SIGNATURES
  COMMERCE ENERGY GROUP, INC.Date: June 14, 2007
    By:
    /s/ STEVEN S. BOSSSteven S. BossChief Executive Officer
(Principal Executive Officer)Date: June 14, 2007
    By:
    /s/ LAWRENCE CLAYTON, JR.Lawrence Clayton, Jr.,Senior Vice President
and Chief Financial Officer
(Principal Financial Officer) 32




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1
    
    
    Amended and Restated Certificate of Incorporation of Commerce
Energy Group, Inc., previously filed with the SEC on July 6,
2004 as Exhibit 3.3 to Commerce Energy Group, Inc.s
Registration Statement on Form 8-A and incorporated herein by
reference.3.2
    
    
    Certificate of Designation of Series A Junior Participating
Preferred Stock of Commerce Energy Group, Inc. dated July 1,
2004 previously filed with the SEC on July 6, 2004 as Exhibit
3.4 to Commerce Energy Group, Inc.s Registration Statement
on Form 8-A and incorporated herein by reference.3.3
    
    
    Amended and Restated Bylaws of Commerce Energy Group, Inc.,
previously filed with the SEC on July 6, 2004 as Exhibit 3.6
to Commerce Energy Group, Inc.s Registration Statement on
Form 8-A and incorporated herein by reference.4.1
    
    
    Rights Agreement, dated as of July 1, 2004, entered into
between Commerce Energy Group, Inc. and Computershare Trust
Company, as rights agent, previously filed with the
Commission on July 6, 2004 as Exhibit 10.1 to Commerce Energy
Group, Inc.s Registration Statement on Form 8-A and
incorporated herein by reference.4.2
    
    
    Form of Rights Certificate, previously filed with the
Commission on July 6, 2004 as Exhibit 10.2 to Commerce Energy
Group, Inc.s Registration Statement on Form 8-A and
incorporated herein by reference.10.1
    
    
    Third Amendment to Loan and Security Agreement dated March
15, 2007 among Commerce Energy, Inc., Commerce Energy Group,
Inc., Wachovia Capital Finance Corporation (Western) and The
CIT Group/Business Credit, Inc., previously filed with the
SEC on March 19, 2007 as Exhibit 10.9 to Commerce Energy
Group, Inc.s Quarterly Report on Form 10-Q and incorporated
herein by reference.10.2
    
    
    Settlement Agreement and Mutual Release dated June 11, 2007
among Commerce Energy Group, Inc., Commerce Energy, Inc.,
Peter Weigand and American Communications Network, Inc.,
previously filed with the SEC on June 12, 2007 as Exhibit
99.1 to Commerce Energy Group, Inc.s Current Report on Form
8-K and incorporated herein by reference.10.3
    *
    
    Employment Agreement dated March 26, 2007 between Commerce
Energy Group, Inc. and Erik A. Lopez, Sr.10.4
    *
    
    Indemnification Agreement dated March 26, 2007 between
Commerce Energy Group, Inc. and Erik A. Lopez, Sr.10.5
    *
    
    Restricted Share Award Agreement dated March 27, 2007 between
Commerce Energy Group, Inc. and Erik A. Lopez, Sr.10.6
    *
    
    Stock Option Award Agreement dated March 27, 2007 between
Commerce Energy Group, Inc. and Erik A. Lopez, Sr.10.7
    *
    
    Commerce Energy Group, Inc. Bonus Program as amended by First
Amendment adopted March 27, 2007.31.1
    
    
    Principal Executive Officer Certification required by Rule
13a-14(a) of the Securities Exchange Act of 1934.31.2
    
    
    Principal Financial Officer Certification required by Rule
13a-14(a) of the Securities Exchange Act of Act of 1934.32.1
    
    
    Principal Executive Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.32.2
    
    
    Principal Financial Officer Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates management contract or compensatory plan. 33