Commerce Energy Group (EGR)

[analogdog]

Financial Statement

http://biz.yahoo.com/e/080314/egr10-q.html

Direct Energy Costs

Direct energy costs, which are recognized concurrently with related energy sales, include the commodity cost of natural gas and electricity, electricity transmission costs from the Independent Systems Operators, or ISOs, transportation costs from local distribution companies, or LDCs and pipelines, other fees and costs incurred from various energy-related service providers and energy-related taxes that cannot be passed directly through to the customer.

Direct energy costs for the three months ended January 31, 2008 totaled $55.4 million and $33.7 million for electricity and natural gas, respectively, compared to $40.4 million and $37.7 million, respectively, for the three months ended January 31, 2007. Electricity
costs averaged $0.093 per kWh for the three months ended January 31, 2008 compared to $0.090 per kWh for the three months ended January 31, 2007. Direct energy costs for natural gas averaged $7.51 per DTH for the three months ended January 31, 2008 as compared to $7.77 per DTH for the three months ended January 31, 2007.

Gross Profit

Gross profit increased $4.7 million, or 32.6% to $19.3 million for the three months ended January 31, 2008 from $14.5 million for the three months ended January 31, 2007. Gross profit from electricity increased $3.0 million to $13.5 million for the three months ended January 31, 2008 from $10.4 million for the three months ended January 31, 2007, reflecting the impact of customer growth in Texas. Gross profit from natural gas increased $1.7 million to $5.8 million for the three months ended January 31, 2008, from $4.1 million for the three months ended January 31, 2007 primarily due to the impact of higher margins in California and Ohio.

Selling and Marketing Expenses

Selling and marketing expenses increased to $4.3 million for the three months ended January 31, 2008 from $2.6 million for the three months ended January 31, 2007, reflecting higher third-party sales expenses, increased personnel expenses and higher advertising costs related to the Company's expanded customer acquisition initiatives.

General and Administrative Expenses

General and administrative expenses increased to $16.0 million for the three months ended January 31, 2008 from $9.6 million for the three months ended January 31, 2007. Of the $6.4 million increase, $4.9 million was attributable to an increase in the bad debt provision, primarily a result of the rapid growth in electricity revenue in Texas from $18.1 million to $37.8 million. Bad debt expense increased as the Company added customers in key markets and did not upgrade its back office systems rapidly enough to make collection calls to customers within a short period of the balance becoming delinquent, require deposits for customers with low credit scores and strengthen electronic data interfaces ("EDI") to efficiently process larger transaction volumes. The remaining $1.5 million was attributable to increased personnel costs related to additional customer service and information technology staff to support the Company's growing customer base, increased professional service fees and higher depreciation and amortization expenses.

Income Taxes

No provision for, or benefit from, income taxes was recorded for the three months ended January 31, 2008 or 2007. We provided valuation allowances equal to our calculated tax due to the amount of the Company's net operating loss carryforwards and the related uncertainty that we would realize these tax benefits in the foreseeable future. At January 31, 2008, the Company had net operating loss carryforwards of approximately $10.9 million and $12.9 million for federal and state income tax purposes, respectively.