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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

(Mark One)

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2009

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 333-138425

MXENERGY HOLDINGS INC.

(Exact Name of Registrant as Specified in Its Charter)

(203) 356-1318

(Registrant’s telephone number, including area code)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act.  Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.  Yes o No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x

Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant:  Not applicable.  The registrant has no publicly traded equity securities.

As of June 30, 2010, there were 33,710,902 shares of the Registrant’s Class A Common Stock (par value $0.01 per share), 4,002,290 shares of the Registrant’s Class B Common Stock (par value $0.01 per share) and 16,413,159 shares of the Registrant’s Class C Common Stock (par value $0.01 per share) outstanding.

Documents incorporated by reference: None

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Explanatory Note

This Amendment No. 1 to Annual Report on Form 10-K/A (this “Amendment”) amends the Company’s Annual Report on Form 10-K for the year ended June 30, 2009, that was originally filed on October 13, 2009 (the “Original Form 10-K”). This Amendment corrects the typographical omission of the signature from the Report of Independent Registered Public Accounting Firm on the consolidated financial statements included in the Original Form 10-K.  The properly executed Report of Independent Registered Public Accounting Firm from the Company’s independent registered public accounting firm, Ernst & Young LLP, is included in this Amendment.  No information in the Original Form 10-K other than as set forth above is amended hereby. As a result, this Form 10-K/A does not reflect events occurring after the filing of the Original Form 10-K and does not modify or update the disclosures therein in any way other than as required to reflect the amendment described herein.  The filing of this Form 10-K/A should not be understood to mean that any statements contained in this document are true or complete as of any date subsequent to October 13, 2009. Currently dated certifications from our President and Chief Executive Officer and our Chief Financial Officer have been included as exhibits to this Amendment.

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MXENERGY HOLDINGS INC.

ANNUAL REPORT ON FORM 10-K/A

FOR THE FISCAL YEAR ENDED JUNE 30, 2009

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND CONSOLIDATED
FINANCIAL STATEMENTS

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
MXenergy Holdings Inc.

We have audited the accompanying consolidated balance sheets of MXenergy Holdings Inc. as of June 30, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MXenergy Holdings Inc. at June 30, 2009, and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2009, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Stamford, Connecticut

October 13, 2009

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MXENERGY HOLDINGS INC.

Consolidated Balance Sheets

(dollars in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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MXENERGY HOLDINGS INC.

Consolidated Statements of Operations

(dollars in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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MXENERGY HOLDINGS INC.

Consolidated Statements of Stockholders’ Equity

(dollars in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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MXENERGY HOLDINGS INC.

Consolidated Statements of Cash Flows

(dollars in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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MXENERGY HOLDINGS INC.

Notes to Consolidated Financial Statements

Note 1.  Organization

MXenergy Holdings Inc. (“Holdings”), originally founded in 1999 as a retail energy marketer, was incorporated as a Delaware corporation on January 24, 2005 as part of a corporate reorganization.  The two principal operating subsidiaries of Holdings, MXenergy Inc. and MXenergy Electric Inc., are engaged in the marketing and supply of natural gas and electricity, respectively.  Holdings and its subsidiaries (collectively, the “Company”) operate in 39 market areas located in 14 states in the United States (the “U.S.”) and two Canadian provinces.

Note 2.  Significant Accounting Policies

Basis of Presentation

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”).  Certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.

Principles of Consolidation

The Company owns 100% of all of its subsidiaries.  Accordingly, the consolidated financial statements include the accounts of Holdings and all of its subsidiaries.  Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates and Assumptions

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and accompanying notes.  Estimates used in connection with revenue recognition, fair value measurements, allowance for doubtful accounts, valuation of goodwill and other intangible assets, tax-related reserves and share-based compensation are often complex and may significantly impact the amounts reported for those items.  Although management uses its best judgment based on information available at the time such judgments are made, actual results could differ from estimated amounts.

Revenue Recognition

Sales of Natural Gas and Electricity

Revenues from the sale of natural gas and electricity are recognized in the period in which the commodity is consumed by customers.  Sales of natural gas and electricity are generally billed by the local distribution companies (“LDCs”), acting as the Company’s agent, on a monthly cycle basis, although the Company performs its own billing for certain of its market areas.  The billing cycles for customers do not coincide with the accounting periods used for financial reporting purposes.  The Company follows the accrual method of accounting for revenues whereby revenues applicable to natural gas and electricity consumed by customers, but not yet billed under the cycle billing method, are estimated and accrued along with the related costs, and included in operations.  Such estimates are refined in subsequent periods upon obtaining final information from the LDC.  Changes in these estimates are reflected in operations in the period in which they are refined.

Passthrough Revenues

Revenues also include certain “passthrough” revenues, which represent transportation charges billed to customers by certain LDCs.  These revenues are offset by corresponding amounts in cost of goods sold for amounts billed to the Company by the LDC.

Fees Charged to Customers

Various fees charged to customers, such as late payment fees, early contract termination fees, service shut-off fees and fees charged to customers for providing copies of bills, are generally recorded as revenue when collection is deemed to be reasonably assured.  Late payment fees charged in all markets, and various other fees charged in certain markets are recorded as revenue when billed to the customer.  Certain other fees are recorded as revenue when actually collected from the customer.

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Deferred Revenue

Customers who are on budget-billed plans pay for their natural gas or electricity at ratable monthly amounts, based on estimated annual usage, while the Company records revenue when the commodity is consumed by the customer.  The cumulative difference between actual usage for these customers and the budget-billed amount actually invoiced, net of cash payments made by the customers, is equal to the net budget-billed variance.  If the net budget-billed variance is a receivable from the customer at the balance sheet date, indicating that the customer’s actual usage has exceeded amounts billed to the customer, the amount is reported as accounts receivable in the consolidated balance sheets.  If the net budget-billed variance is a liability to the customer, indicating that amounts billed have exceeded actual usage, the amount is reported as deferred revenue in the consolidated balance sheets.

Sales Incentives

Cash rebates paid to customers under the terms of certain product agreements are recorded as a reduction of sales revenue.  Non-cash incentives, such as free products or services, are recorded as marketing expenses.

Collections of Sales Tax

Sales tax is added to customer bills for many of the markets served by the Company.  Sales tax collected from customers on behalf of governmental entities is recorded in accounts payable and accrued liabilities on the consolidated balance sheets.

Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.  Where available, the Company uses quoted market prices as estimates of the fair value of financial instruments.  For financial instruments without quoted market prices, fair value represents management’s best estimate based on a range of methods and assumptions, which are described below.  The use of different assumptions could significantly affect the estimates of fair value.  Accordingly, the net values realized upon liquidation of the financial instruments could be materially different from the estimated fair values presented.

Short-term Financial Assets and Liabilities

The carrying value of certain financial assets and liabilities carried at cost is considered to approximate fair value because they are short-term in nature, bear interest rates that approximate market rates and generally have minimal credit risk.  These items include cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, accrued commodity purchases, deferred revenue and short-term financing arrangements.

The Company had $22.1 million and $68.5 million invested in money market funds at June 30, 2009 and 2008, respectively.  Each share of the money market funds was valued at $1.00 at June 30, 2009 and 2008.

Derivatives

Derivatives are recorded at fair value.  Since the Company has not elected to designate any derivatives as accounting hedges, any changes in fair value are adjusted through unrealized losses (gains) from risk management activities, net (for commodity derivatives) or interest expense, net of interest income (for interest rate swaps) in the consolidated statements of operations, with related outstanding settlement amounts recorded in unrealized gains asset accounts and unrealized losses liability accounts in the consolidated balance sheets.

As of June 30, 2009, natural gas derivative instruments are generally with a single counterparty under the Company’s primary hedge facility and the Company uses various counterparties for electricity derivative instruments.  The Company generally enters into master netting agreements with hedge counterparties for settlement of derivative fair value assets and liabilities.  The Company records such fair value assets and liabilities net on the consolidated balance sheets.

The recorded fair values of derivative instruments reflect management’s best estimate of market value, which takes into account various factors including closing exchange and over-the-counter quotations, parity differentials and volatility factors underlying the commitments.  In addition, the recorded fair values are discounted to reflect counterparty credit risk and time value of settlement.

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Long-term Debt

At June 30, 2009, long-term debt includes the aggregate outstanding principal amount of Floating Rate Notes due 2011.  The carrying values of long-term debt instruments are not necessarily indicative of fair value due to changing market conditions and terms for similar unsecured instruments.  The Company has elected not to record these financial instruments at fair value at June 30, 2009.

Foreign Currency Translation

The Company has Canadian operations that are measured using Canadian dollars as the functional currency.  Assets and liabilities are translated into U.S. dollars at the rate of exchange in effect on the balance sheet date.  Income and expenses are translated at the average daily exchange rate for the month of activity.  Net exchange gains or losses resulting from such translation are included in common stockholders’ equity as a component of accumulated other comprehensive loss.

Cash and Cash Equivalents

The Company’s cash and cash equivalents consist primarily of cash on deposit and money market accounts.

Restricted Cash

Restricted cash consists of: (1) cash and money market funds required as security for letters of credit issued under the Company’s Revolving Credit Facility; (2) cash and money market funds required as security for surety bonds required by LDCs, utility commissions and pipeline tariffs and regulations; (3) money market funds held in escrow as contingent consideration related to acquisitions; and (4) cash deposits received from customers.

Accounts Receivable and Allowance for Doubtful Accounts

The Company delivers natural gas and electricity to its customers through LDCs, many of which guarantee amounts due from customers for consumed natural gas and electricity.  Accounts receivable, net primarily represents amounts due for commodity consumed by customers, net of an allowance for estimated amounts that will not be collected from customers. For those markets where accounts receivable are guaranteed by LDCs, the Company pays guarantee discounts that average approximately 1% of billed accounts receivable, which are charged to reserves and discounts in the consolidated statements of operations as revenue is billed.  The Company does not maintain an allowance for doubtful accounts related to accounts receivable in these guaranteed markets, as it does not expect to incur material credit losses from any of the respective LDC’s.

In markets where no LDC guarantees exist, the Company calculates and records an allowance for doubtful accounts based on aging of accounts receivable balances, collections history, past loss experience and other current economic or other trends.  Charge offs of accounts receivable balances are recorded as reductions of the allowance for doubtful accounts during the month when the accounts are transferred to outside collection agencies.  Delinquency status for customer accounts is based on the number of days an account balance is outstanding past an invoice due date.  Accounts are generally reviewed for transfer to collection agencies by 120 days from the initial invoice date.  Recoveries of accounts receivable balances previously charged off are recorded when received as reductions from reserves and discounts in the consolidated statements of operations.  Adjustments to record the allowance for doubtful accounts at calculated month-end balances are recorded in reserves and discounts in the consolidated statements of operations.

Accounts receivable also includes cash imbalance settlements that represent the value of excess natural gas delivered to LDCs for consumption by our customers and actual customer usage.   Such imbalances are expected to be settled in cash in accordance with contractual payment arrangements.  The Company bears credit risk related to imbalance settlement receivables to the extent that such LDCs are unable to collect imbalance settlements payable to them by other retail marketers.  The Company records an allowance for doubtful accounts during the month that full collection of any such imbalance receivable balance becomes doubtful, with a corresponding charge to reserves and discounts.

Natural Gas Inventories

Natural gas inventories include natural gas held in storage by third parties on the Company’s behalf, which are valued at the lower of cost or market value on a weighted-average cost basis.  The weighted-average cost of inventory includes related transportation and storage costs.

Natural gas inventories also include estimated commodity delivery/usage imbalance settlement amounts that represent natural gas to be transferred to the Company from various third parties within the upcoming twelve-month period.

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Adjustments to the value of natural gas inventories on the consolidated balance sheets result in corresponding adjustments to cost of goods sold on the consolidated statements of operations.  Such adjustments result from changes in inventory storage levels as natural gas is delivered to customers as well as changes in the weighted average cost of natural gas in storage.

Other Current Assets

Other current assets primarily include: (1) security deposits placed with commodity and other suppliers as collateral for future purchases in lieu of letters of credit or other credit enhancements; and (2) prepaid expenses and deferred charges, which include costs incurred that pertain to future benefit periods not exceeding twelve months.  These costs are amortized to appropriate expense lines on the consolidated statement of operations over their estimated benefit period.

Business Combinations and Goodwill

Since its organization in 1999, the Company has acquired natural gas and electricity operations of numerous energy companies, each of which was recorded as a purchase business combination.  For all purchase business combinations recorded through June 30, 2009, the purchase price was allocated to the net assets acquired based on their estimated fair values at the acquisition date.  Costs incurred to effect the purchase business combination transaction (e.g., legal, accounting, valuation and other professional or consulting fees) were added to the costs of the acquisition and allocated accordingly to the net assets acquired.  Certain intangible assets, such as customer acquisition costs and goodwill, were recorded as a result of purchase business combinations to the extent that the purchase price exceeded the values assigned to identifiable net assets.  The initial purchase price allocation was reviewed and adjusted for a period of twelve months subsequent to the acquisition date as new or revised information became available.

Effective July 1, 2009, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which establishes principles and requirements for an acquiring company to recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, goodwill acquired, any gain from a bargain purchase, and any noncontrolling interest in an acquired company.  Under SFAS No. 141(R), assets acquired and liabilities assumed for purchase business combinations after June 30, 2009, if any, will to be recorded at their estimated fair values, regardless of their cost.  Additionally, costs incurred to effect such transactions will be recognized separately from the acquisition transaction and generally be expensed during the periods in which the costs are incurred and the services are received.  Finally, restructuring costs that the Company was not obligated to incur will also be recognized separately from the purchase business combination transaction.

The Company has determined that its natural gas and electricity reporting units correspond with its business segments for management and financial reporting purposes.

As of June 30, 2009, goodwill of $3.8 million represents the excess of purchase price over the fair value of identifiable natural gas net assets acquired from Shell Energy Services Company L.L.C. (“SESCo”) in August 2006.   The Company has assigned this goodwill to its natural gas business segment.  Goodwill is not amortized, but rather is reviewed for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable.  Goodwill is tested for impairment annually at June 30.  The Company utilizes a discounted cash flow methodology for its impairment testing, which gives consideration to significant and long-term changes in industry and economic conditions as primary indicators of potential impairment.

Customer Acquisition Costs, Net

Customer acquisition costs are comprised of: (1) customer contracts acquired through bulk acquisitions and business combinations; and (2) direct sales and advertising costs, which consist primarily of direct-response hourly telemarketing, non-hourly telemarketing and door-to-door marketing costs incurred through independent third parties, and which are associated with proven customer generation.

For customer contracts acquired through bulk acquisitions and business combinations, acquisition costs are recorded at their fair value on the acquisition date and amortized on a straight-line basis over the estimated life of the customers acquired.  Non-hourly telemarketing and door-to-door costs represent incremental direct costs related to arrangements with third-party contractors.  The Company currently estimates a three-year life for these assets.

Direct-response telemarketing costs are capitalized to the extent that: (1) their purpose was to elicit sales to customers; (2) customers have responded specifically to the advertising; and (3) probable future economic benefit results from the activity.  Such costs are amortized over the period during which the future economic benefits are expected to be realized.

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The Company currently estimates a three-year benefit period for these assets.  Periodic amortization expense is calculated on a cost-pool-by-cost-pool basis, and is based on the current revenues generated for a cost-pool in relation to the total current and future estimated revenues for that cost-pool.

Amortization of customer acquisition costs is recorded in depreciation and amortization on the consolidated statements of operations.  Advertising and marketing costs not recorded as customer acquisition costs are expensed as incurred by the Company and recorded as advertising and marketing expenses on the consolidated statements of operations.

Customer acquisition costs are reviewed for recoverability on a quarterly basis, or whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.  In the event that recoverability of the entire carrying amount of the recorded asset becomes doubtful, the non-discounted future cash flows expected to result from the use of the asset and its eventual disposition will be estimated.  If the sum of the expected cash flows to be generated by the asset is less than the carrying amount, the Company would recognize an impairment loss and adjust the carrying value accordingly.  The adjusted carrying amount of the asset would then become its new cost basis, and would be amortized over the remaining useful life of that asset.

Fixed Assets, Net

Fixed assets consist primarily of computer hardware and software, office equipment and furniture.  Fixed assets are stated at cost on the consolidated balance sheets, less accumulated depreciation.  Depreciation is recorded on a straight-line basis over the estimated useful lives of the related assets, which generally range from three to five years.  Depreciation expense is reported in depreciation and amortization on the consolidated statements of operations.  Costs of maintenance and repairs to fixed assets are generally expensed as incurred, and reported in general and administrative expenses on the consolidated statements of operations.

Capitalized Software Costs

The Company capitalizes costs of software acquisition and development projects, including costs related to software design, configuration, coding, installation, testing and parallel processing.  Capitalized software costs are recorded in fixed assets, net of accumulated amortization, on the consolidated balance sheets.  Capitalized software development costs generally include:

·      external direct costs of materials and services consumed to obtain or develop software for internal use;

·      payroll and payroll-related costs for employees who are directly associated with and who devote time to the project, to the extent of time spent directly on the project;

·      costs to obtain or develop software that allows for access or conversion of old data by new systems;

·      costs of upgrades and/or enhancements that result in additional functionality for existing software; and

·      interest costs incurred while developing internal-use software that could have been avoided if the expenditures had not been made.

The following software-related costs are generally expensed as incurred and recorded in general and administrative expenses on the consolidated statements of operations:

·      research costs, such as costs related to the determination of needed technology and the formulation, evaluation and selection of alternatives;

·      costs to determine system performance requirements for a proposed software project;

·      costs of selecting a vendor for acquired software;

·      costs of selecting a consultant to assist in the development or installation of new software;

·      internal or external training costs related to software;

·      internal or external maintenance costs related to software;

·      costs associated with the process of converting data from old to new systems, including purging or cleansing existing data, reconciling or balancing of data in the old and new systems and creation of new data;

·      updates and minor modifications; and

·      fees paid for general systems consulting and overall control reviews that are not directly associated with the development of software.

The costs of computer software obtained or developed for internal use is amortized on a straight-line basis over the estimated useful life of the software.  Amortization begins when the software and all related software modules on which it is functionally dependant are ready for their intended use.  Amortization expense is recorded in depreciation and amortization in

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the consolidated statements of operations.  The Company’s amortization period does not exceed five years for any capitalized software project.

Capitalized software costs are evaluated for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, including when:

·      existing software is not expected to provide future service potential;

·      it is no longer probable that software under development will be completed and placed in service; and

·      costs of developing or modifying internal-use software significantly exceed expected development costs or costs of comparable third-party software.

Income Taxes

The Company files a consolidated federal U.S. income tax return that includes all of its consolidated subsidiaries, as well as various U.S. state returns.  For operations in Canada, a Canadian federal tax return is filed, as well as an Ontario provincial return.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using enacted tax rates expected to be in effect for the year in which the temporary differences are expected to reverse.  The Company records a valuation allowance if it is “more likely than not” that the related tax benefits will not be realized.

Derivatives and Hedging Activities

Commodity Derivatives

The Company utilizes derivative financial instruments to reduce its exposure to fluctuations in the price of natural gas and electricity.  Commodity derivatives utilized typically include, swaps forwards and options that are bilateral contracts with counterparties.  In addition, certain contracts with customers are also accounted for as derivatives.  The Company has not elected to designate any derivative instruments as hedges under U.S. GAAP guidelines.  Accordingly, any changes in fair value during the term of a derivative contract are adjusted through unrealized losses (gains) from risk management activities in the consolidated statements of operations with offsetting adjustments to unrealized gains or unrealized losses from risk management activities in the consolidated balance sheets.  Unrealized gains from risk management activities on the consolidated balance sheets represent receivables from various derivative counterparties, net of amounts due to the same counterparties when master netting agreements exist.  Unrealized losses from risk management activities represent liabilities to various derivative counterparties, net of receivables from the same counterparties when master netting agreements exist.  Settlements on the derivative instruments are realized monthly and are generally based upon the difference between the contract price and the closing price as quoted on the New York Mercantile Exchange (“NYMEX”) or other published index.

The recorded fair values of derivative instruments reflect management’s best estimate of market value, which takes into account various factors including closing exchange and over-the-counter quotations, parity differentials and volatility factors underlying the commitments.  In addition, the recorded fair values are discounted to reflect counterparty credit risk and time value of settlement.

The Company also utilizes certain physical forward commodity purchase and sale contracts to reduce exposure to fluctuations in the price of natural gas and electricity, which are deemed to be “normal purchases and normal sales” under U.S. GAAP guidelines.  Accordingly, such contracts are not carried on the balance sheet at fair value.  All contracts documented for the “normal purchases and normal sales” exception are accounted for as executory contracts with the corresponding purchase and sale recorded for accounting purposes at the settlement date.

Interest Rate Swaps

The Company utilizes interest rate swaps to reduce its exposure to interest rate fluctuations related to its Floating Rate Notes due 2011.  The swaps are fixed-for-floating and settle against the six month LIBOR rate.  None of the interest rate swaps has been designated as a hedge, and accordingly, these instruments are carried at fair value on the consolidated balance sheets with changes in fair value recorded as adjustments to interest expense.

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Debt

Debt instruments are recorded at their face amounts on the consolidated balance sheets, less any discount or plus any premium.  Debt intended to be repaid within one year is classified as a current liability.

Debt Issue Discounts and Debt Issue Costs

Debt issue discounts are recorded as decreases to recorded debt balances and are amortized to interest expense over the remaining life of the related debt instrument.  Certain costs that are directly related to the issuance of debt, such as financing transaction fees, underwriting fees, legal fees and other professional services, are deferred and recorded in other assets on the Company’s consolidated balance sheets and amortized to interest expense over the remaining life of the related debt instrument.  In the event that debt instruments are partially or entirely repaid by the Company, a pro rata portion of related discount and debt issue costs are recorded as an adjustment to interest expense.

Early Extinguishment of Debt

During the period from August 2006 through June 30, 2009, the Company purchased approximately $24.8 million in aggregate principal amount of Floating Rate Notes due 2011 from the holders of the notes.  These transactions were recorded as early extinguishments of debt.  Gains from these transactions, which result from the discounts paid by the Company for outstanding Floating Rate Notes due 2011, are recorded as adjustments to interest expense.

Interest Expense

Interest expense includes interest accrued for various debt instruments, certain fees paid for issuance of letters of credit and other transactions related to the Company’s credit agreements, amortization of debt issue discount and amortization of deferred debt issue costs.   Interest expense on the consolidated statements of operations is presented net of interest income earned from cash and cash equivalents and restricted investments.

Redeemable Convertible Preferred Stock

Redeemable convertible preferred stock (the “Preferred Stock”) is recorded outside of stockholders’ equity on the consolidated balance sheets since it is deemed to be redeemable at the option of the holders of the Preferred Stock.  Since the Company has determined that it is probable that the Preferred Stock became redeemable at June 30, 2009, the Preferred Stock is recorded at its estimated redemption value as of June 30, 2009.

The agreement that governs the Preferred Stock contains various provisions for redemption of the Preferred Stock, for conversion of the Preferred Stock to common stock and for preferences of the holders of the Preferred Stock should the Company be liquidated.  Should any of these events occur, the holders of the Preferred Stock are guaranteed a minimum return of 12% per annum, compounded annually, from the June 30, 2004 issue date through the date of the redemption, conversion or liquidation event.  Adjustments to the carrying value of the Preferred Stock as a result of any of these events are recorded as a charge against retained earnings or, in the absence of retained earnings, by charges against additional paid-in capital.  On September 22, 2009, the Preferred Stock was converted into the newly authorized Class C Common Stock.  As of September 22, 2009, no Preferred Stock is outstanding.

Stock Based Compensation

As of June 30, 2009, the Company had three stock-based compensation plans in effect, under which stock options to acquire the Company’s common stock have been granted to employees, directors and other non-employees of the Company.  In addition, the Company has issued warrants to purchase its common stock to certain employees and non-employees that were not issued under any of its three approved stock-based compensation plans.  Refer to Note 18 for additional information regarding the Company’s stock based compensation plans and its grants of options and warrants.

Compensation expense related to all awards of options and warrants is recorded in general and administrative expenses in the consolidated statements of operations.

Awards of Stock Options to Acquire the Company’s Common Stock

For stock option awards granted after June 30, 2006, the Company recognizes compensation expense prospectively over the vesting period.  Compensation expense for option awards subject to graded vesting is recognized based on the accelerated attribution method as specified under U.S. GAAP guidelines.  The fair value of each option award granted subsequent to

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June 30, 2006 is estimated on the grant date using a Black-Scholes-Merton option valuation model.  Certain key assumptions used in the model included share price volatility, expected term, risk-free interest rate and expected forfeiture rate.  Total compensation expense to be recognized over the vesting period is based on: (1) the fair value of the Company’s common stock at the quarterly reporting date (e.g., September 30, December 31, March 31 and June 30) immediately prior to the grant date, as determined by an independent valuation of the Company’s common stock or internally developed valuation models; and (2) the total number of options expected to be exercised, net of expected forfeitures.  The cumulative effect on current and prior periods of a change in the number of options expected to be exercised, net of forfeitures, is recognized in compensation expense in the period of the change.

The Company has elected to follow APB No. 25, and related interpretations, in accounting for stock option awards granted to employees prior to June 30, 2006, rather than the alternative fair value method allowed under SFAS No. 123.  APB No. 25 provides that compensation expense relative to the Company’s employee stock and stock option grants be measured based on the intrinsic value of the stock or stock option at the grant date.  Pursuant to APB No. 25, for options granted to employees prior to June 30, 2006, the Company was not required to recognize compensation expense during the fiscal years ended June 30, 2009, 2008 or 2007 because the exercise price for all such awards equaled or exceeded the estimated fair value of the Company’s common stock at the grant date.

Awards of Warrants to Acquire the Company’s Common Stock

Prior to June 30, 2006, the Company issued warrants to certain employees and non-employees that permit the warrant holder the option to: (1) exercise such warrant for cash; or (2) exercise by withholding that number of common shares having a total fair value equal to the warrant exercise amount from the total number of common shares that would otherwise have been issued upon exercise of the warrant (a “cashless exercise”).  Compensation cost is accrued as a charge to expense over the vesting period of such warrants using the accelerated expense attribution method under FASB Interpretation No. 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.”  For these awards, it is presumed that the employee will elect the cashless exercise and compensation expense is adjusted periodically to reflect the amount by which the estimated current fair value of the Company’s common shares exceeds the exercise price of the warrant (known as “variable plan accounting”).  Increases or decreases in the estimated fair value of the Company’s common stock between the grant date and the exercise date result in corresponding increases or decreases, respectively, in compensation expense in the period in which the change in estimated fair value of common stock occurs.  Accrued compensation for an award that is subsequently forfeited or cancelled is adjusted by decreasing compensation expense in the period of forfeiture or cancellation.

Certain warrants issued by the Company prior to June 30, 2006 are not subject to variable plan accounting because there is no requirement to provide any future service to the Company in order to exercise the warrants.  Therefore, the Company does not record any compensation expense related to these warrants.

Transactions with Related Parties

In the normal course of business, the Company enters into transactions with various non-employee related parties for financing arrangements, legal services, financial advisory services and management services.  The Company utilizes accounting practices for these transactions that are consistent with similar transactions with unrelated third parties.  Refer to Note 19 of the consolidated financial statements for a summary of the Company’s related party transactions.

Note 3.  New Accounting Pronouncements

Accounting Pronouncements Adopted During the Fiscal Year Ended June 30, 2009

In September 2006, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”).  SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and requires additional disclosures regarding fair value measurements.  In addition, SFAS No. 157 requires that entities consider their own credit risk when measuring the fair value of liabilities including, but not limited to, liabilities related to derivative contracts.  The Company adopted the provisions of SFAS No. 157, effective July 1, 2008.  The adoption of SFAS No. 157 did not have a material impact on the Company’s financial position or results of operations.  Refer to Note 14 for fair value disclosures required under SFAS No. 157.

In February 2008, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits, but does not require, entities to elect fair value measurement for both the initial and subsequent measurements of certain financial assets and liabilities that were not previously measured at fair value, generally on an instrument-by-instrument basis.  Changes in fair value subsequent to initial

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measurement are to be recognized in earnings during the periods when those changes occur.  SFAS No. 159 also requires additional disclosures to compensate for the lack of comparability that will arise from the election of the fair value option for those financial instruments.  The Company did not adopt the provisions of SFAS No. 159 for any financial assets or liabilities as of the effective date of July 1, 2008.

In September 2008, the FASB ratified the consensus on Emerging Issues Task Force Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement” (“EITF No. 08-5”).  EITF No. 08-5 requires that the measurement of liabilities with inseparable, third-party credit enhancements carried or disclosed at fair value on a recurring basis exclude the effect of the credit enhancement.  EITF No. 08-5 also requires debtors to consider their own credit standing, and not that of the third-party guarantor, in measuring the fair value of a liability with a third-party guarantee.  EITF No. 08-5 is effective on a prospective basis for the first reporting period on or after December 15, 2008, with earlier application permitted.  The Company adopted the provisions of EITF No. 08-5 effective January 1, 2009.  Adoption of EITF No. 08-5 did not have any impact on the Company’s financial position or results of operations.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”).  SFAS No. 161 requires companies with derivative instruments to disclose information that would enable readers of financial statements to understand: (1) how and why a company uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under U.S. GAAP; and (3) how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows.  SFAS No. 161 must be applied prospectively for fiscal years and interim periods beginning after November 15, 2008.  The Company adopted the provisions of SFAS No. 161 effective January 1, 2009.  Refer to Note 13 for disclosures required under SFAS No. 161.

In April 2009, the FASB issued FASB Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. 157-4”).  FSP No. 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased.  It also provides guidance on identifying circumstances that indicate a transaction is not orderly.  FSP No. 157-4 is effective for interim and annual reporting periods ending after June 15, 2009.  The Company adopted the provisions of FSP No. 157-4 effective for its fiscal quarter ending June 30, 2009.  The adoption of FSP No. 157-4 did not have any impact on the Company’s financial position or results of operations.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”).  SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with U.S. GAAP.  SFAS No. 162 was adopted by the Company effective January 1, 2009.  The adoption of SFAS No. 162 did not have any impact on the Company’s financial position or results of operations.

In May 2009, FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events” (“SFAS No. 165”).  SFAS No. 165 establishes principles and requirements for subsequent events, including: (1) the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date.  SFAS No. 165 is effective for interim or annual financial periods ending after June 15, 2009.  The Company adopted the provisions of SFAS No 165 effective with its financial statements prepared for the fiscal year ended June 30, 2009.  The adoption of SFAS No. 165 did not have any impact on the Company’s financial position or results of operations.  Refer to Note 4 for disclosures related to subsequent events.

Accounting Pronouncements Not Yet Adopted as of June 30, 2009

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (“SFAS No. 141(R)”).  SFAS No. 141(R) establishes principles and requirements for an acquiring company to recognize and measure in its financial statements the identifiable assets acquired, liabilities assumed, goodwill acquired, any gain from a bargain purchase, and any noncontrolling interest in an acquired company.  In addition, SFAS No. 141(R) provides guidance for disclosures relating to business combinations.  SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company intends to adopt the provisions of SFAS No. 141(R) for acquisitions occurring on or after July 1, 2009.  The Company is currently evaluating the provisions of SFAS No. 141(R) to determine their likely impact on the accounting and reporting for future acquisitions, if any.

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Also in March 2008, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51” (“SFAS No. 160”).  SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, for changes in a parent’s ownership interest while the parent retains its controlling financial interest in a subsidiary, and for any retained noncontrolling equity investment by a parent when a subsidiary is deconsolidated.  SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The Company intends to adopt the provisions of SFAS No. 160 for acquisitions occurring on or after July 1, 2009.  The Company is currently evaluating the provisions of SFAS No. 160 to determine their likely impact on the accounting and reporting for future acquisitions, if any.

In April 2009, the FASB issued FASB Staff Position No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP No. FAS 141(R)-1”).  FSP No. FAS 141(R)-1 amends and clarifies SFAS No. 141(R) to address application issues relating to accounting and disclosures for assets and liabilities arising from contingencies in a business combination.  FSP No. FAS 141(R)-1 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company intends to adopt the provisions of FSP No. FAS 141(R)-1 for acquisitions occurring on or after July 1, 2009.  The Company is currently evaluating the provisions of FSP No. FAS 141(R)-1 for their likely impact on the accounting and reporting for future acquisitions, if any.

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”).  FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  It also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods.  FSP FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The Company intends to adopt the provisions of FSP FAS 107-1 and APB 28-1 effective with its reporting period ending September 30, 2009, which represents the first interim reporting period of its 2010 fiscal year.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 168”).  SFAS No. 168 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States.  SFAS No 168 replaces SFAS No. 162.   SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Company intends to adopt the provisions of SFAS No. 168 effective July 1, 2009.  The adoption of SFAS No. 168 is not expected to have any impact on the Company’s financial position or results of operations.

Note 4.  Subsequent Events

The Company has evaluated subsequent events through October 13, 2009, which is the date that these consolidated financial statements were issued.  Other than the consummation of the Restructuring described below, there were no material events or transactions during the period July 1, 2009 through October 13, 2009 that required recognition or disclosure in these consolidated financial statements.

Debt and Equity Restructuring

A sharp drop in natural gas market prices during the six months ended December 31, 2008 resulted in a significant reduction in the natural gas inventory component of the available borrowing base under the Company’s revolving credit facility with a syndicate of banks (the “Revolving Credit Facility”).  The reduced borrowing base strained the Company’s ability to post letters of credit as collateral with suppliers and hedge providers, caused defaults of certain financial covenants included in the agreement that governs the Revolving Credit Facility, prompted downgrades in the Company’s credit ratings from Standard & Poor’s and Moody’s and ultimately resulted in the Company seeking and obtaining material waivers of debt covenants and defaults and amendments to the agreement that governs the Revolving Credit Facility and the Company’s principal commodity hedge facility (the “Hedge Facility”). Such amendments had the following material direct impacts on the Company’s liquidity position:

·      The maturity dates of the Revolving Credit Facility and Hedge Facility were extended to September 2009.

·      The maximum amount that could be borrowed under the Revolving Credit Facility was reduced from $280.0 million at June 30, 2008 to $115.0 million at June 30, 2009, and $94.0 million effective July 31, 2009.

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·      The Company was required to actively seek a new facility to replace the Revolving Credit Facility and Hedge Facility.

·      Through June 30, 2009 the Company paid approximately $8.7 million of fees related to all amendments and extensions, which were deferred on the consolidated balance sheet and are being amortized as an increase to interest expense over the remaining terms of the Revolving Credit Facility and Hedge Facility.  During fiscal year 2009, the Company recorded approximately $7.5 million of incremental interest expense resulting from amortization of these deferred costs.

The Company explored a number of potential liquidity events, including the potential sale of its business.  Given the currently negative conditions in the economy generally and the credit markets in particular, there was substantial uncertainty that the Company would be able to effect a refinancing of the Revolving Credit Facility without a material restructuring of its debt and equity position.

On September 22, 2009, the Company consummated an equity and debt restructuring (the “Restructuring”), which was intended to reduce its debt exposure and interest expense, improve its liquidity and improve its financial and operational flexibility in order to allow it to compete more effectively.  The Restructuring included, among other things, the transactions described below.

Amendment and Restatement of Corporate Documents

On the consummation date of the of the Restructuring, the Company’s Certificate of Incorporation and Bylaws were amended and restated, and the Company entered into new stockholder agreements with holders of various classes of newly authorized common stock.  These documents contain customary provisions, including provisions relating to certain approval rights, preemptive rights, share transfer restrictions, rights of first refusal, tag-along rights and drag-along rights.

Additionally, the amended and restated Certificate of Incorporation authorized issuance of 200,000,000 shares of Common Stock, consisting of 50,000,000 shares of Class A Common Stock, 10,000,000 shares of Class B Common Stock, 40,000,000 shares of Class C Common Stock and 100,000,000 shares of Class D Common Stock.  Prior to the consummation of the Restructuring, the Company had 4,681,219 shares of common stock issued and outstanding.  Those shares of common stock were exchanged for 4,499,588 shares of newly authorized Class C Common Stock, which represented 8.29% of the aggregate shares of common stock outstanding as of the consummation date of the Restructuring.  Additional shares of Class A Common Stock, Class B Common Stock and Class C Common Stock were issued to various parties as a result of the Restructuring, as described below.

As a result of amendments and restatements to the Company’s corporate documents, effective September 22, 2009, the Company’s authorized board of directors increased to nine members from eight members prior to the consummation of Restructuring.  The initial composition of the new board of directors (the “Board of Directors”) is described below

·      Holders of the Class A Common Stock are entitled to nominate and elect five directors (the “Class A Directors”), at least two of whom shall be independent and qualify as a “financial expert”.

·      The holders of Class B Common Stock is entitled to nominate and elect one director (the “Class B Director”).

·      Holders of Class C Common Stock are entitled to nominate and elect two directors (the “Class C Directors”).

·      The ninth Director is Holdings’ president and chief executive officer.

Exchange of Floating Rate Notes due 2011 for Cash, Fixed Rate Notes due 2014 and Class A Common Stock

As of June 30, 2009, the Company had $165.2 million aggregate principal amount of Floating Rate Notes due 2011 outstanding (the “Floating Rate Notes due 2011”).  On September 22, 2009, the Company consummated an exchange offer of $158.8 million aggregate principal amount of outstanding Floating Rate Notes due 2011 for $26.7 million of cash, $67.8 million aggregate principal amount of Fixed Rate Notes due 2014 and 33,940,683 shares of newly authorized Class A Common Stock.  The shares of Class A Common Stock issued to the holders of the Fixed Rate Notes due 2014 represented 62.5% of the aggregate shares of common stock outstanding as of the consummation date.  The Fixed Rate Notes due 2014 were issued at a discount, which will be recorded as a reduction from the Fixed Rate Notes due 2014 on the Company’s consolidated balance sheets during the first quarter of fiscal year 2009, and which will be amortized as an increase to interest expense over the remaining life of the Fixed Rate Notes due 2014.

Refer to Note 16 for additional information regarding the Floating Rate Notes due 2011 and Fixed Rate Notes due 2014.

New Master Credit, Hedge and Supply Agreement

As of June 30, 2009, the Company relied on the following credit, commodity hedging and commodity supply arrangements

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for operation of its natural gas and electricity businesses:

·      The Revolving Credit Facility was used primarily to post letters of credit required to effectively operate within the markets that the Company serves;

·      The Hedge Facility was used as the Company’s primary facility to economically hedge variability in the cost of natural gas;

·      Commodity derivative arrangements with various counterparties were used to economically hedge variability in the cost of electricity; and

·      Arrangements with numerous commodity suppliers to supply natural gas and electricity necessary for customer consumption in the markets that the Company serves.

Effective September 22, 2009 the Revolving Credit Facility and Hedge Facility were replaced by a new exclusive credit, supply and commodity hedging agreement (the “Commodity Supply Facility”) with Sempra Energy Trading LLC (“RBS Sempra”), which effectively replaced the separate credit, hedging and supply arrangements outlined above.  As a condition for entry into the agreements governing the Commodity Supply Facility, the Company also issued 4,002,290 shares of newly authorized Class B Common Stock to RBS Sempra, which represented 7.37% of the Company’s aggregate shares of common stock outstanding on the consummation date of the Restructuring.  The aggregate fair value of the common stock issued to RBS Sempra was recorded as deferred financing costs in other assets on the consolidated balance sheets and will be amortized over the remaining term of the Commodity Supply Facility.

Refer to Note 15 for additional information regarding the Commodity Supply Facility.

Conversion of Redeemable Convertible Preferred Stock to Class C Common Stock

As of June 30, 2009, the Company had 1,451,310 shares of Preferred Stock outstanding, which was recorded at its estimated redemption value of $54.6 million on the consolidated balance sheets.  On September 22, 2009, all outstanding shares of Preferred Stock were exchanged for 11,862,551 shares of newly authorized Class C common stock, which represented 21.84% of the aggregate shares of the Company’s common stock outstanding after consummation of the Restructuring.  The excess of the redemption value over the aggregate fair value of common stock issued to the holders of Preferred Stock was reclassified to stockholders’ equity on the consolidated balance sheets during the first quarter of fiscal year 2010.

Refer to Note 17 for additional information regarding the Company’s redeemable convertible preferred stock.

Termination of the Credit Agreement with Denham Commodity Partners LP (“Denham”)

As of June 30, 2009, the Company had a $12.0 million outstanding balance under a credit agreement with Denham Commodity Partners LP (the “Denham Credit Facility”).  On September 22, 2009, all amounts previously borrowed were repaid and the Denham Credit Facility was terminated.

Refer to Note 19 for additional information regarding the Denham Credit Facility.

New Management Incentive Plan and Bonuses

In connection with the Restructuring, it is anticipated that the Company’s board of directors will authorize the creation of a new management incentive plan (the “Management Incentive Plan”), pursuant to which they may issue Class C Common Stock not to exceed 10% of the Company’s aggregate outstanding common stock (on a fully diluted basis) after giving effect to the Restructuring.  The Company expects that the Management Incentive Plan will provide the board of directors the flexibility to make awards to employees, officers, directors, consultants and advisors and will permit, among other things, the grant of options to purchase shares of common stock that are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code, grants of options to purchase shares of common stock that will not so qualify, grants of stock appreciation rights, and grants of common stock at incentive prices or for free.

In addition, the compensation committee of the board of directors approved a total bonus pool equal to $750,000, which was paid to 19 of the Company’s executive officers and employees, including the Company’s chief executive officer and chief financial officer, upon the consummation of the Restructuring.

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Settlement and Cancellation of Existing Options and Warrants

As of June 30, 2008, the Company had options and warrants outstanding which were, or may be, exercisable for 1,008,770 shares of common stock.  The vast majority of these options and all of the warrants were “out of the money” as of the consummation date of the Restructuring (e.g., the agreed-upon price for which the option/warrant holder may purchase the Company’s common stock exceeded the current fair value of the common stock).  Pursuant to the Restructuring, the Company terminated its existing share-based compensation plans and offered a cash settlement to holders of options and warrants to cancel and terminate such options and warrants.  As a result, all outstanding options and warrants were cancelled and terminated.  The total amount required for such cash settlement payments was approximately $0.2 million, which was recorded as general and administrative expense during the first quarter of fiscal year 2010.

Note 5  Seasonality of Operations

For the fiscal year ended June 30, 2009, natural gas and electricity sales accounted for approximately 85% and 15%, respectively, of the Company’s total sales.  Weather conditions have a significant impact on customer demand for natural gas and electricity consumption.  In addition, weather can have an impact on the price of natural gas and electricity.  Customer demand exposes the Company to a high degree of seasonality in sales, cost of sales, billing and collection of customer accounts receivable, inventory requirements and cash flows.  In addition, budget billing programs and LDC payment terms can cause timing differences between the billing and collection of accounts receivable and the recording of revenues.

The Company utilizes a considerable amount of cash from operations to meet working capital requirements during the months of November through April of each fiscal year.  In addition, the Company utilizes cash to purchase natural gas inventories during the months of April through October.  The majority of natural gas customer consumption and gross profit occurs during the months of November through March with collections on accounts receivable peaking in the spring.  By contrast, electricity customer consumption and gross profit peaks during the summer months of June through September with collections on accounts receivable peaking in late summer and early fall.

The impact of rapidly rising or falling commodity prices also varies greatly depending on the period of time in which they occur during the Company’s fiscal year.  Although commodity price movements can have material short-term impacts on monthly and quarterly operating results, operating results for a full fiscal year may not be materially impacted by such trends due to the Company’s economic hedging and contract pricing strategies,.  Therefore, the short-term impacts of changing commodity prices should be considered in the context of the Company’s entire annual operating cycle.

Note 6.  Accounts Receivable, Net

Accounts receivable, net is summarized in the following table.

The Company operates in 39 market areas located in 14 U.S. states and two Canadian provinces.  The Company’s diversified geographic coverage mitigates the credit exposure which could result from concentrations in a single LDC territory or a single regulatory jurisdiction, from extreme local weather patterns or from an economic downturn in any single geographic

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region.  In addition, the Company has limited exposure to risk associated with high concentrations of sales volumes with individual customers.  The Company’s largest customer accounted for approximately 2% of natural gas sales during each of the fiscal years ended June 30, 2009, 2008 and 2007.

The allowance for doubtful accounts represents the Company’s estimate of potential credit losses associated with customer accounts receivable in markets where such receivables are not guaranteed by LDCs.  The Company assesses the adequacy of its allowance for doubtful accounts through review of the aging of customer accounts receivable and general economic conditions in the markets that it serves.  Based upon this review as of June 30, 2009, and for the fiscal year then ended, the Company believes that its allowance for doubtful accounts is adequate to cover potential credit losses related to customer accounts receivable.  An analysis of the allowance for doubtful accounts is provided in the following table.

Reserves and discounts in the consolidated statements of operations includes the provision for doubtful accounts related to customer accounts receivable within markets where such receivables are not guaranteed by LDCs as well as discounts related to customer accounts receivable that are guaranteed by LDCs.  For the fiscal year ended June 30, 2009, approximately 55% of the Company’s total sales of natural gas and electricity were within markets where LDCs do not guarantee customer accounts receivable while 45% of total sales were within markets where LDCs guarantee customer accounts receivable at a weighted average discount rate of approximately 1%.  Such discount is the cost to guarantee the customer accounts receivable.  In cases where customer accounts receivable are guaranteed by the LDC, the Company is exposed to the credit risk of the LDC, rather than that of its customers.  The Company monitors the credit ratings of LDCs and the parent companies of LDCs that guarantee customer accounts receivable.  The Company also periodically reviews payment history and financial information for LDCs to ensure that it identifies and responds to any deteriorating trends.  As of June 30, 2009, all of the Company’s customer accounts receivable in LDC-guaranteed markets were with LDCs with investment grade credit ratings.

The higher provision for doubtful accounts for fiscal year 2009, as compared with the prior fiscal year, primarily relates to the Company’s largest non-guaranteed natural gas market in Georgia and its non-guaranteed electricity market in Texas.  Total sales of natural gas and electricity for these markets increased a combined 7% during the fiscal year 2009.  In addition, the Company experienced deterioration of the aging of billed customer accounts receivable within these and other markets during fiscal year 2009.  As expected, charge offs of customer accounts receivable related to the customer accounts acquired in the Company’s acquisition of Catalyst Natural Gas, LLC were also experienced during the final six months of fiscal year 2009.  The Company will continue to closely monitor economic conditions and actual collections data within these and other markets for signs of any negative long-term trends which could result in higher allowance requirements.

Note 7.  Natural Gas Inventories

Natural gas inventories are summarized in the following table.

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After reaching record highs during the three months ended June 30, 2008, natural gas market prices dropped sharply during fiscal year 2009, which resulted in a 60% decrease in the Company’s weighted-average average cost per MMBtu of natural gas included in natural gas storage inventory from June 30, 2008 to June 30, 2009.  The resulting decrease in natural gas inventories was partially offset by a 14% increase in MMBtus held in storage over the same period.

Adjustments to the value of natural gas inventories on the consolidated balance sheets result in corresponding adjustments to cost of goods sold on the consolidated statements of operations.  Such adjustments result from changes in inventory storage levels as natural gas is delivered to customers as well as changes in the weighted average cost of natural gas in storage.

Note 8.  Goodwill

All of the Company’s goodwill, which resulted from its acquisition of Shell Energy Services Company L.L.C. (“SESCo”) in August 2006, is assigned to the natural gas business segment.  The Company completed its annual impairment test of goodwill as of June 30, 2009.  At the testing date, the Company determined that the fair value of the natural gas reporting unit exceeded its carrying value.  As a result, no impairment loss was required to be recognized.  Since the testing date, there were no material events, transactions or changes in circumstances which warranted consideration for their impact on the recorded carrying value assigned to goodwill.

Note 9.  Customer Acquisition Costs, Net

Customer acquisition costs and related accumulated amortization are summarized in the following tables.