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U.S. Market Offers Opportunities to New Commerce Energy Owner

The new owner of Commerce Energy, Toronto-based Universal Energy Group (UEG), is bullish on competitive retail energy in California and other states in which Commerce continues to operate, according to UEG's Shawn Dym, senior vice president for business development. UEG plans to continue operating under the Commerce name in the United States.

Still to be determined is what happens to Commerce senior management, its already depleted Costa Mesa, CA-based workforce and the company's strategy for offering retail natural gas and electricity services to a remaining core of about 90,000 customers in a half-dozen states, Dym told NGI. A small contingent of UEG's Toronto-based managers are working with Commerce staff in California, he said.

"We see California as a growth market, so we think operations in California will continue," said Dym, noting that several UEG senior executives, including Universal Energy Corp. COO Nino Silvestri, had previous experience in the United States in competitive retail energy markets. The level of future operations in California is not clear at this time, Dym said.

After first going for a piece of Commerce Energy, UEG decided in December to go for the total package, acquiring the troubled retail energy pioneer, the operating subsidiary of Commerce Energy Group (CEG), for approximately US$26 million. The deal replaced a partial acquisition that the companies had originally negotiated, only to hit an uncertain period (see NGI, Dec. 15, 2008).

UEG, through subsidiary Commerce Gas and Electric Corp. (CG&E), acquired more than 90,000 residential, commercial and industrial customers in the United States and also assumed certain letter-of-credit obligations related to the existing supply arrangements required to serve the Commerce customer base. Those obligations will unwind as current suppliers are replaced with UEG supply and credit arrangements, UEG said at the time.

On its website, UEG touts the fact that its electric and natural gas supplies come from RBS Sempra Commodities, the joint venture of units of San Diego-based Sempra Energy and UK-based Royal Bank of Scotland.

Mirroring the words of the UEG CEO at the time the deal was announced earlier in December, Dym said the his company sees growth opportunities in other states in addition to California, although he was short on specifics. "I think we do see other areas where growth is possible, but I think that will change as we move on," he said. "Certainly, if markets like Ohio get natural gas, that's a market where we see growth, and there are others in there.

"We want to first make sure we try to realize the value from the existing investment [which was all done with internal cash] before we begin focusing on growth. You have to walk before you can run, right?"

This is UEG's second move into the U.S. retail energy markets; the company has existing natural gas marketing operations in Michigan. Its Universal Gas & Electric operates out of Southfield, MI.

Dym said that in the coming months UEG should outline more clearly its strategy for its latest acquisition. "One thing I can say is that the Commerce Energy brand will survive and it will be part of our growth in the United States," Dym said.

He was not sure how the existing Commerce senior management team will handle the transition. "I think some of them are intending to transition out as a result of decisions they had made," said Dym, noting that any timetable will depend on the individual executives themselves. In the meantime, Silvestri and the Universal Energy operations group is overseeing the newly acquired Commerce operations.

For now, UEG CEO Mark Silver has made it clear that he feels the Commerce assets give the company a platform to be in almost every major deregulated market in the United States. UEG's stronger supply and credit arrangements through RBS Sempra will allow the company to "extract significant value" from what has been calculated as a US$25 million annual operational margin generated by Commerce, Silver said.

Earlier in December,Commerce said it had accepted a foreclosure by its secured lenders on all shares of Commerce after the lenders declared that CEG had defaulted on its debt. CEG said it "had a right not to consent to, and thereby delay," the foreclosure, but "the company recognized that a delay would likely not prevent a foreclosure." At the same time the company declared a cash dividend of 84 cents/share and said it would continue to market gas and electricity in its current markets as a subsidiary of CG&E. "The company will commence proceedings to wind up and dissolve as soon as practicable," CEG said.

Commerce, which began its operations a decade ago in California's fledgling retail electricity market as Commonwealth Energy, said in November it had agreed to sell most of its remaining customer base to UEG. That deal would have given UEG 60,000 of Commerce's retail gas customers in Ohio and its electricity customers in Pennsylvania, New Jersey, Maryland and Michigan. Commerce would have been left with residential customer operations restricted to California and Florida, along with a commercial/industrial group of customers in various states. That deal did not go through and UEG now is taking over all the Commerce assets.

Commerce previously reported that for the fiscal year, which ended Sept. 30, it had a net loss of C$31.8 million, or minus C$1.04/share, including C$23 million of bad debt it had to write off, C$20 million of which was in the Electric Reliability Council of Texas, where it earlier sold its customer base to Ambit Energy LP. This compared to a profit in fiscal 2007 of C$5.5 million, or C18 cents/share. The losses this most recent fiscal year came in the face of a 24% increase in Commerce's overall revenues, which hit C$459.8 million.

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