e10vq

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LX0Rl28L58NqvGXHwiXtixzPtrrTBI/BmvybljqPNyNUBGY5spcRkYjCB/3q/lg9 x788p1Da1xAYW6mc2/tk0g== 0000892569-04-000342.txt : 20040316 0000892569-04-000342.hdr.sgml : 20040316 20040316172451 ACCESSION NUMBER: 0000892569-04-000342 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20040131 FILED AS OF DATE: 20040316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMONWEALTH ENERGY CORP CENTRAL INDEX KEY: 0001156443 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 330769555 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-33069 FILM NUMBER: 04673543 MAIL ADDRESS: STREET 1: 15901 RED HILL AVENUE STREET 2: SUITE 100 CITY: TUSTIN STATE: CA ZIP: 92780 10-Q 1 a97391e10vq.htm FORM 10-Q e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended January 31, 2004

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 000-33069

COMMONWEALTH ENERGY CORPORATION

(Exact name of registrant as specified in its charter)


California		33-0769555
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

15901 Red Hill Avenue, Suite 100, Tustin, California 92780
(Address of principal executive offices) (Zip Code)

(714) 258-0470
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of March 15, 2004, 27,645,067 shares of the registrant’s common stock were outstanding.

COMMONWEALTH ENERGY CORPORATION

Form 10-Q
For the Period Ended January 31, 2004

Index


		Page
Part I—Financial Information
Item 1.	Condensed Consolidated Financial Statements (unaudited):
	Condensed Consolidated Statements of Operations for the three and six months ended January 31, 2003 and 2004		3
	Condensed Consolidated Balance Sheets as of July 31, 2003 and January 31, 2004		4
	Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 2003 and 2004		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22
Item 4.	Controls and Procedures		22
Part II—Other Information
Item 1.	Legal Proceedings		23
Item 5	Other Information		24
Item 6.	Exhibits and Reports on Form 8-K		25
Signatures			26
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2
EXHIBIT 99.1

FORWARD-LOOKING INFORMATION

A number of the matters and subject areas discussed in this Quarterly Report on Form 10-Q contain forward-looking statements reflecting management’s current expectations. The discussion of such matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may differ materially from our actual future experience involving any one or more of such matters and subject areas. We wish to caution readers that all statements other than statements of historical fact included in this Quarterly Report on Form 10-Q regarding our financial position and strategy may constitute forward-looking statements. When used in this document, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “project,” “plan,” “should,” and similar expressions are intended to be among the statements that identify forward-looking statements. All of these forward-looking statements are based upon estimates and assumptions made by our management, which although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed on such estimates and statements. No assurance can be given that any of such estimates or statements will be realized and it is likely that actual results will differ materially from those contemplated by such forward-looking statements. Factors that may cause such differences include those set forth in this Quarterly Report on Form 10-Q, as well as the following:

• regulatory changes in the states in which we operate that could adversely affect our operations;

• our continued ability to obtain and maintain licenses from the states in which we operate;

• the competitive restructuring of retail marketing may prevent us from selling electricity in certain states;

• our dependence upon a limited number of third parties to generate and supply to us electricity;

• fluctuations in market prices for electricity;

• our ability to obtain credit necessary to support future growth and profitability; and

• our dependence upon a limited number of utilities to transmit and distribute the electricity we sell to our customers.

We have attempted to identify, in context, certain of the factors that we currently believe may cause actual future experience and results to differ from our current expectations regarding the relevant matter or subject area. In addition to the items specifically discussed above, our business and results of operations are subject to the risks and uncertainties described in this Report in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in our Annual Report on Form 10-K for the year ended July 31, 2003 which we filed with the Securities and Exchange Commission on October 29, 2003. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in our reports and documents filed with the Securities and Exchange Commission, and you should not place undue reliance on these statements. These forward-looking statements speak only as of the date on which the statements were made. We assume no obligation to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information.

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited).

COMMONWEALTH ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)


	Three Months ended January 31,						Six Months ended January 31,
	2003			2004			2003			2004
Net revenue	$	31,759		$	47,038		$	65,441		$	105,434
Direct energy costs		24,569			42,961			50,775			97,036

Gross profit		7,190			4,077			14,666			8,398
Selling and marketing expenses		1,023			1,008			2,333			1,978
General and administrative expenses		4,680			5,829			8,969			11,347

Income (loss) from operations		1,487			(2,760	)		3,364			(4,927	)
Other income and expenses:
Reorganization and initial public listing expenses		—			(1,028	)		—			(1,146	)
Initial formation litigation expenses		(787	)		—			(3,327	)		(585	)
Provision for impairment on investments		—			(4,843	)		—			(4,843	)
Loss on equity investments		(148	)		—			(381	)		—
Minority interest share of loss		—			351			—			895
Interest income, net		215			151			449			281

Total other income and expenses		(720	)		(5,369	)		(3,259	)		(5,398	)

Income (loss) before provision for (benefit from) income taxes		767			(8,129	)		105			(10,325	)
Provision for (benefit from) income taxes		180			(768	)		44			(1,842	)

Net income (loss)	$	587		$	(7,361	)	$	61		$	(8,483	)

Earning (loss) per common share:
Basic	$	0.02		$	(0.27	)	$	0.00		$	(0.31	)

Diluted	$	0.02		$	(0.27	)	$	0.00		$	(0.31	)

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

COMMONWEALTH ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)


	July 31, 2003		January 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	40,921	$	54,376
Accounts receivable, net		37,861		23,482
Income taxes refund receivables		—		3,131
Deferred income tax asset		2,772		2,772
Prepaid expenses and other current assets		6,920		3,535

Total current assets		88,474		87,296
Restricted cash and cash equivalents		20,773		12,171
Investments		5,362		1,049
Deposits		4,207		4,207
Property and equipment, net		2,984		2,793
Goodwill		3,007		1,949
Intangible assets		1,063		936

Total assets	$	125,870	$	110,401

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	24,936	$	18,251
Accrued liabilities		7,127		6,577

Total current liabilities		32,063		24,828
Deferred income tax liabilities		187		187
Minority interest		603		851
Shareholders’ equity:
Series A convertible preferred stock — 10,000 shares authorized with no par value; 609 shares issued and outstanding at July 31, 2003 and January 31, 2004		700		752
Other convertible preferred stock, 352 shares reflected as outstanding		155		155
Common stock — 50,000 shares authorized with no par value; 27,645 shares issued and outstanding at July 31, 2003 and January 31, 2004		56,853		56,854
Retained earnings		35,309		26,774

Total shareholders’ equity		93,017		84,535

Total liabilities and shareholders’ equity	$	125,870	$	110,401

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


	COMMONWEALTH ENERGY CORPORATION
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	(In thousands)


	Six months ended January 31,
	2003			2004
Cash Flows From Operating Activities
Net income (loss)	$	61		$	(8,483	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		732			761
Amortization		110			127
Provision for doubtful accounts		724			1,125
Deferred income tax provision		(880	)		—
Impairment of Summit investments		—			4,843
Minority interest share of loss of consolidated entity		—			(282	)
Changes in operating assets and liabilities:
Accounts receivable, net		3,377			13,254
Prepaid expenses and other assets		(463	)		1,313
Accounts payable		(1,685	)		(6,685	)
Accrued liabilities and other		3,816			(550	)

Net cash provided by operating activities		5,792			5,423
Cash Flows From Investing Activities
Purchase of property and equipment		(264	)		(571	)
Purchase of intangible assets		(126	)		—
Loss on equity investments		(56	)		—

Net cash used in investing activities		(446	)		(571	)
Cash Flows From Financing Activities
Repurchase of common stock		(14	)		—
Cancellation of Series A convertible preferred stock		(83	)		—
Dividends paid on Series A convertible preferred stock		(92	)		—
Proceeds from exercise of stock options		15			1
Decrease in restricted cash and cash equivalents		809			8,602

Net cash provided by financing activities		635			8,603

Increase in cash and cash equivalents		5,981			13,455
Cash and cash equivalents at beginning of period		43,042			40,921

Cash and cash equivalents at end of period	$	49,023		$	54,376

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

COMMONWEALTH ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share and per kWh amounts)

1. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements for the three and six months ended January 31, 2004 include the accounts of Commonwealth Energy Corporation (“the Company”), all of its wholly-owned subsidiaries and the accounts of its controlled investment in Summit Energy Ventures, LLC (“Summit”), and Summit’s majority ownership in Power Efficiency Corporation (“PEC”)(see Note 4).

Preparation of Interim Condensed Consolidated Financial Statements

These interim condensed consolidated financial statements have been prepared by the Company’s management, without audit, in accordance with accounting principles generally accepted in the United States and in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows for the periods presented. Certain information and note disclosures normally included in consolidated annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted in these consolidated interim financial statements, although the Company believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated results of operations, financial position, and cash flows for the interim periods presented herein are not necessarily indicative of future financial results. These interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto included in the Company’s most recent Annual Report on Form 10-K for the year ended July 31, 2003.

Uses of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts and classification of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts and timing of revenue and expenses during the reporting periods. These estimates and assumptions are based on the Company’s historical results as well as management’s future expectations. As a result, actual results could vary materially from these estimates and assumptions. The most significant areas that require management judgment are independent system operator costs, allowance for doubtful accounts, unbilled receivables, and legal claims arising out of our normal operations.

Reclassifications

Certain amounts in the condensed consolidated financial statements for the comparative prior fiscal period have been reclassified to be consistent with the current fiscal period’s presentation.

During the second quarter of the current fiscal year ending July 31, 2004 (“fiscal 2004”), the Company decided to reclassify certain non-operating expenses related to (a) the anticipated reorganization of the Company into a Delaware holding company structure and initial public listing of the reorganized company’s common stock on the American Stock Exchange (“reorganization and initial public listing expenses”) and (b) litigation expenses related to capital-raising initiatives of prior management during the initial formation of the Company (“initial formation expenses”), from general and administrative expenses to other income and expenses. (See Note 6).

During the fiscal year ended July 31, 2003 (“fiscal 2003”), the Company recorded a charge related to litigation with former employees who were employed during 1998 and 1999, exclusively to raise capital for the Company from outside investors. These former employees had no responsibilities relating to ongoing operations and management deemed it appropriate to disclose this charge as initial formation expenses.

Non-cash items

In the second quarter of fiscal 2004, we recorded an impairment of $4,843 on our investments to reflect our percentage ownership in the net equity of Summit’s investments, which were all non-cash items (see Note 4).

COMMONWEALTH ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(in thousands, except per share and per kWh amounts)

Stock-Based Compensation

The Company accounts for its employee stock options under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No.25”), and related interpretations. Under APB No. 25, no stock-based employee compensation costs are reflected in net income (loss) for the three and six month periods ended January 31, 2004 and 2003, because all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

In December 2002, the Financial Accounting Standards Board (“FASB”) amended the transition and disclosure requirements of SFAS No. 123 through the issuance of SFAS No. 148 (“SFAS No. 148”), “Accounting for Stock-Based Compensation – Transition and Disclosure”. SFAS No. 148 amends the existing disclosures to make more frequent and prominent disclosure of stock-based compensation expense beginning with financial statements for fiscal years ending after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148.

The following table illustrates the effect on net income (loss) as applicable to common stock (see Note 2) and earnings (loss) per common share if the Company had applied the fair value recognition provisions of SFAS No. 148:


	Three months ended January 31,						Six months ended January 31,
	2003			2004			2003			2004
Net income (loss) as applicable to common stock – basic	$	572		$	(7,387	)	$	28		$	(8,535	)
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(95	)		(9	)		(191	)		(92	)

Pro forma net income (loss) - basic	$	477		$	(7,396	)	$	(163	)	$	(8,627	)

Net income (loss) as applicable to common stock – diluted	$	587		$	(7,387	)	$	61		$	(8,535	)
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(95	)		(9	)		(191	)		(92	)

Pro forma net income (loss) - diluted	$	492		$	(7,396	)	$	(130	)	$	(8,627	)

Earnings (loss) per share:
Basic – as reported	$	0.02		$	(0.27	)	$	0.00		$	(0.31	)

Basic – pro forma	$	0.02		$	(0.27	)	$	(0.01	)	$	(0.31	)

Diluted – as reported	$	0.02		$	(0.27	)	$	0.00		$	(0.31	)

Diluted – pro forma	$	0.02		$	(0.27	)	$	(0.01	)	$	(0.31	)

Segment Reporting

The Company’s chief operating decision makers consist of members of senior management that work together to allocate resources to, and assess the performance of, the Company’s business. Senior management currently manages the Company’s business, assesses its performance, and allocates its resources as a single operating segment.

2. Basic and Diluted Earnings (Loss) per Common Share

Basic earnings (loss) per common share was computed by dividing net income (loss) available to common shareholders, after any preferred stock dividends, by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share reflects the potential dilution that would occur if all outstanding options or other contracts to issue common stock were exercised or converted and was computed by dividing net income (loss) by the weighted average number of common shares plus dilutive common equivalent shares outstanding, unless they were anti-dilutive.

COMMONWEALTH ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(in thousands, except per share and per kWh amounts)

The following is a reconciliation of the numerator (income or loss) and the denominator (common shares in thousands) used in the computation of basic and diluted earnings (loss) per common share:


	Three months ended January 31,						Six months ended January 31,
	2003			2004			2003			2004
Numerator:
Net income (loss)	$	587		$	(7,361	)	$	61		$	(8,483	)
Deduct: Preferred stock dividends		(15	)		(26	)		(33	)		(52	)

Net income (loss) applicable to common stock - basic		572			(7,387	)		28			(8,535	)
Assumed conversion of preferred stock		15			—			33			—

Net income (loss) applicable to common stock - diluted	$	587		$	(7,387	)	$	61		$	(8,535	)

Denominator:
Weighted-average outstanding common shares - basic		27,284			27,645			27,234			27,645
Effect of stock options		2,880			—			2,929			—
Effect of convertible preferred stock		609			—			609			—

Weighted-average outstanding common shares - diluted		30,773			27,645			30,772			27,645

For the three and six months ended January 31, 2004, the effects of the assumed exercise of all stock options and warrants and the assumed conversion of preferred stock into common stock are anti-dilutive; accordingly, such assumed exercises and conversions have been excluded from the calculation of net loss - diluted. If the assumed exercises or conversions had been used, the fully diluted shares outstanding for the three months and six months ended January 31, 2004 would have been 29,087 and 29,118, respectively.

3. Market and Regulatory Risks

Deregulated Electric Power Markets

California Operations

In the summer of 2000, California experienced a much publicized energy crisis. Demand for electricity exceeded supply and wholesale prices for electricity during certain time periods were far greater than the regulated rates set for the re-sale to consumers. The legislation authorizing deregulation in California called for a mandatory rate reduction that was to remain unchanged during the transition phase away from regulated service to competitive service. Providers of electricity were unable to procure enough supply for all hours of demand, which resulted in power blackouts. At the direction of former Governor Gray Davis, the State of California bought long-term power contracts and the California State Legislature limited the ability of consumers to purchase their power from sources using supply from other than the State’s long-term power contracts. Due to the above factors and to lock in a firm rate payer base to pay for these long-term contracts, on September 20, 2001, the California Public Utilities Commission (“CPUC”) issued a ruling suspending direct access (“DA”) pursuant to legislation by the California state legislature. DA allows electricity customers to buy their power from a supplier other than the incumbent utility. The suspension of DA permits the Company to keep its current customer base, allows it to continue to solicit business from other DA customers served by other providers, but prohibits the Company from signing up new non-DA customers for an undetermined period of time. The Company is actively seeking relief from this ruling.

Under a settlement agreement with the CPUC, Southern California Edison (“SCE”) was authorized to recoup $3,600,000 in debt incurred during the energy crisis of 2000-2001 from all customers. This debt was to be collected under the Procurement Related Obligations Account (“PROACT”) from bundled (non DA) customers and under the Historical Procurement Charge (“HPC”) from DA customers. The HPC is a charge only for non-utility customers in the SCE utility district. The purpose of the charge is to allow SCE to recover its past power procurement costs that were under collected during the previously mentioned California energy crisis. Wholesale costs during this period were extremely high and exceeded the regulated rate that SCE was allowed to charge retail customers.

COMMONWEALTH ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(in thousands, except per share and per kWh amounts)

In July 2002, the CPUC issued an order implementing the HPC sought by SCE to collect $391,000 in HPC charges from all DA customers. This amount is currently being collected by SCE as a $0.01 per kilowatt-hours (“kWh”) surcharge as a separate line item on the retail electricity bill paid by non-utility consumers, such as the Company’s customers. SCE estimates that this amount could be paid off by early 2006. The Company was unable to precisely determine the actual HPC charges applied to its customers by SCE because there are different charges by customer type, and this charge is only on the electricity usage above the monthly baseline usage allocation. On September 5, 2003 the CPUC issued a decision granting SCE’s request to recover additional shortfalls, and authorizing the HPC balance to be revised from $391,000 to $473,000; however, the $0.01 per kWh monthly charge remained in place.

In July 2003, SCE acknowledged that the PROACT debt was paid in full by non DA, or bundled customers. As a result, on August 1, 2003, all SCE rates were lowered. Consequently, to retain the Company’s customers in the SCE district, the Company lowered its customer rates proportionately. The Company’s estimates of the annual financial impact of this rate reduction is a decline in sales and pretax profit during fiscal 2004, in the range of $3,000 to $3,500. This reduction is separate from, and in addition to, the HPC reduction discussed above.

These rate changes on the Company’s customers in the SCE district will continue to cause a significant negative impact on the Company’s revenue and cash flow; however, currently, the Company does not expect they will preclude the Company from doing business in California.

The Federal Energy Regulatory Commission (“FERC”) has an ongoing investigation on the conditions surrounding the California energy crisis of 2000-2001. The FERC has not yet made a ruling on this investigation and currently, the results, if any on the Company’s revenue and cash flow are unknown.

In December 2003, Pacific Gas and Electric (“PG&E”) and the CPUC reached a settlement in the PG&E bankruptcy. In February 2004, a decision was issued by the CPUC that approved the rate settlement agreement, requiring PG&E not only to reduce their rates, but also required PG&E to list certain charges separately on bundled service customer bills as well as on DA customer bills. These DA bills, which will generally decline, may negatively affect the Company’s revenue and cash flow.

Pennsylvania Operations

In accordance with its standard customer contract in Pennsylvania, the Company may only charge certain customers maximum rates for its sales of electric power which, at times, could be less than the Company’s costs of acquiring, distributing and scheduling such electric power. This limitation expires in May 2004. Energy capacity charges for delivering electric power in the Pennsylvania market varies significantly from month to month and can affect gross profit margins. Management is currently analyzing the Company’s operations in Pennsylvania to determine the action plan necessary to achieve acceptable gross margins.

Michigan Operations

In February 2004, the Michigan Public Service Commission (“MPSC”) issued an order that grants partial and immediate rate relief to Detroit Edison Company (“DECO”). This interim relief has yet to be filed in DECO’s tariff. The Company’s initial evaluation of this rate relief illustrates that DECO is to reduce that part of its rates that relates to power supply cost recovery while increasing the portion that relates to transmission and distribution. Overall, modest increases were made to various rate classifications, however, customers who choose an alternative electric supplier, such as the Company, will pay a transition charge of 4 mills per kWh under the new order. Complete detail of these changes is expected by the end of March 2004 and have not been made public yet. These changes may adversely affect the rates of the Company’s customers in the DECO service area which may impact the Company’s revenue and cash flow. The Company will continue doing business in Michigan.

4. Investment in Summit Energy Ventures, LLC

In July 2001, the Company formed Summit as a vehicle through which it could invest in companies that manufacture or market energy efficiency products. The Company’s initial $15,000 capital contribution in Summit, which constitutes its entire investment to date, entitled it to a 100% preferred membership interest and a 60% common membership interest. The Company has the right to invest additional amounts under certain conditions. Additionally, should Summit propose to issue additional ownership interests or to sell any investment held by it, the Company has a first right of refusal at equivalent terms.

COMMONWEALTH ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(in thousands, except per share and per kWh amounts)

All investments made by Summit must be approved by its Investment Committee, which is comprised of three individuals appointed by the Company. Summit’s Investment Committee has appointed Northwest Power Management (“NPM”) as its investment manager, for which it receives a $700 annual fee.

At January 31, 2004, Summit had investments in three energy related companies. Summit has consistently accounted for its investment in Envenergy, Inc. under the cost method of accounting. The Company accounted for its investment in Turbocor, LLC under the equity method of accounting whereby it recognized its proportionate share of income and losses until January 31, 2003, when its ownership percentage was reduced. Summit subsequently accounted for its investment in Turbocor, BV (Turbocor, LLC was collapsed, and Summit’s equivalent investment in Turbocor, Inc., the operating entity, is now held directly through Turbocor BV) under the cost method of accounting. At January 31, 2004, Summit’s investment in PEC (ticker symbol: PEFF) was 59.7% and is consolidated.

The three Summit investments are all early stage entities incurring significant operating losses, which are expected to continue, at least in the near term. They all have very limited working capital and as a result, continuing operations will be completely dependent upon their securing additional financing to meet their immediate capital needs. There is no assurance that additional financing will be available on acceptable terms, if at all. The Company has no obligation, and currently no intention of investing additional funds into these entities. For the three months ended January 31, 2004, to reflect impairment of these investments, the Company has reduced its investment of $7,104 by $4,843, to its percentage ownership in the net equity of each of these companies.

5. Contingencies

Litigation

In September 2001, the Company filed a lawsuit for breach of contract with a customer who had a two-year contract with the Company for the supply of energy. In January 2004, the lawsuit was settled and the Company recorded $645 in revenue.

In February 2001, several former employees filed a lawsuit against the Company. These former employees worked in raising investment capital. The plaintiffs’ complaint alleged claims for unfair business practices, breach of contract, and fraud and intentional deceit. The plaintiffs allege, in summary, that they were owed commissions and stock options from the Company under their alleged employment agreements and based on alleged representations made to them by former officers of the Company. The Company filed a cross-complaint asserting various claims. The plaintiffs sought, among other relief, damages in the amount of up to $10,000, plus costs and attorney fees. A jury trial was held in this matter, and in December 2002, returned a verdict finding for the plaintiffs in the amount of $2,700 (accrued as of July 31, 2003) of compensatory damages. The Company filed an appeal in March 2003, seeking reversal of the judgment. In June 2003, the court ruled that the Company was the prevailing party on the contract claims brought by the plaintiffs and that the Company was entitled to recover attorney’s fees and costs from the plaintiffs totaling approximately $1,100. In November 2003, the Company settled this lawsuit, with final payments, including certain related taxes, to the plaintiffs made in January 2004 in an aggregate amount of $1,800. As a result, the Company reduced its reserve to $400 to cover any remaining related issues.

The Company currently is, and from time to time may become, involved in other litigation concerning claims arising out of the Company’s operations in the normal course of business. While the Company cannot predict the ultimate outcome of its pending matters or how they will affect the Company’s results of operations or financial position, the Company’s management currently does not expect any of the legal proceedings to which the Company is currently a party, including the legal proceedings described above, individually or in the aggregate, to have a material adverse effect on its results of operations or financial position beyond the accruals provided as of January 31, 2004.

6. Quarterly Financial Information (Unaudited)

In the second quarter of fiscal 2004, management decided to reclassify certain non-operating expenses related to (a) the anticipated reorganization of the Company into a Delaware holding company structure and initial public listing of the reorganized company’s common stock on the American Stock Exchange, and (b) litigation expenses related to capital-raising initiatives of prior management during the initial formation of the Company, from general and administrative expenses to other income and expenses. The following table is a summary for all four quarters of fiscal 2003 and the first and second quarters of fiscal 2004, as if this reclassification had occurred in their respective quarters:

COMMONWEALTH ENERGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(in thousands, except per share and per kWh amounts)


	Three months ended
	October 31						January 31						April 30				July 31
	Reported			Adjusted			Reported			Adjusted			Reported		Adjusted		Reported		Adjusted
Fiscal year ended July 31, 2003:
General and administrative expenses	$	4,629		$	4,289		$	5,467		$	4,680		$	4,957	$	4,336	$	3,454	$	2,634
Income from operations		1,537			1,877			700			1,487			2,023		2,644		10,341		11,161
Initial formation litigation expenses		2,200			340			—			787			—		621		—		820
Fiscal year ended July 31, 2004:
General & administrative expenses		6,221			5,518			6,857			5,829
Loss from operations		(2,870	)		(2,167	)		(3,788	)		(2,760	)
Reorganization and initial public listing expenses		—			118			—			1,028
Initial formation litigation expenses		—			585			—			—

No change was made to gross profit or net income (loss) for all periods stated in the table above.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

We are an energy services company. We provide electric power to our residential, commercial, industrial and institutional customers in the California, Michigan and Pennsylvania electricity markets. In December 2003, we began to offer electric service in New Jersey. We are licensed by the Federal Energy Regulatory Commission (“FERC”) as a power marketer and we are licensed to supply retail electric power by applicable state agencies in California, Pennsylvania, Michigan, New Jersey, New York, Texas and Ohio.

As of January 31, 2004, we delivered electricity to approximately 107,000 customers in California, Pennsylvania, Michigan and New Jersey. The growth of this business depends upon the degree of deregulation in each state, the availability of cost-effective energy, and our ability to acquire retail or commercial customers.

Our core business is the retail sale of electricity to end use customers. The power we sell to our customers is purchased from third-party power generators. We do not have our own electricity generation facilities. The electric power we sell is metered and delivered to our customers by incumbent electric utilities. The incumbent electric utilities bill and collect for most of our customers on our behalf. We also sell surplus electric power to wholesale and utility customers to assist in balancing our end-user customer supply requirements. During fiscal 2003 and 2004, we purchased our electricity both under long-term contracts and in the spot market.

We buy electricity in the wholesale market in blocks of on-peak or round-the-clock quantities usually at fixed prices. We sell electricity in the hourly market based on the hourly demand from our customers at fixed prices. The inherent mismatch between our block purchases and our hourly sales produces a mismatch between our purchases and sales of electricity which we manage by buying and selling in the spot market. In addition, the independent system operator (“ISO”), the entity which manages the electric grid, performs real time load balancing and we are charged or credited for electricity purchased and sold for our account.

There are inherent risks and uncertainties in our core business operations. These include: timing differences between our purchases and sales of electricity, forecasting error between our estimated customer usage and the customer’s actual usage, weather related changes in quantities demanded by our customers, customer attrition, spread changes between on-peak and off-peak hourly power pricing and seasonal differences between summer and winter peak demand seasons and spring and fall off-peak demand seasons, unexpected factors in the wholesale power markets such as regional power plant outages, volatile fuel prices, transmission congestion or system failure, and credit related counter-party risk for us or within the system generally. Accordingly, despite our risk management initiatives, these uncertainties may produce results that can differ significantly from our internal forecasts. For a discussion of other risks related to the operation of our business, see the discussion herein under the caption “Factors That May Affect Future Results.”

In addition to continually assessing our risk profile in the markets that we serve, management continually monitors our direct energy cost and the regulatory developments in the states in which we currently operate and states we may enter.

The information in this Item 2, should be read in conjunction with the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended July 31, 2003, and the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report.

Deregulated Electric Power Markets

California Operations

ruling suspending direct access pursuant to legislation by the California state legislature. Direct access allows electricity customers to buy their power from a supplier other than the incumbent utility. The suspension of direct access permits us to keep our current customer base, allows us to continue to solicit business from other direct access customers served by other providers, but prohibits us from signing up new non-direct access customers for an undetermined period of time. We are actively seeking relief from this ruling.

Under a settlement agreement with the CPUC, Southern California Edison was authorized to recoup $3,600,000 in debt incurred during the energy crisis of 2000-2001 from all customers. This debt was to be collected under the (a) Procurement Related Obligations Account (“PROACT”) from non-direct access, or bundled, customers and (b) the Historical Procurement Charge (“HPC”) from direct access customers. The historical procurement charge is a charge only for non-utility customers in the Southern California Edison utility district. The purpose of the charge is to allow Southern California Edison to recover its past power procurement costs that were under collected during the previously mentioned California energy crisis. Wholesale costs during this period were extremely high and exceeded the regulated rate that Southern California Edison was allowed to charge retail customers.

In July 2002, the CPUC issued an order implementing the HPC sought by Southern California Edison to collect $391,000 in HPC charges from all direct access customers. This amount is currently being collected by Southern California Edison as a $0.01 per kilowatt-hours (“kWh”) surcharge as a separate line item on the retail electricity bill paid by non-utility consumers, such as our customers. Southern California Edison estimates that this amount could be paid off by early 2006. We were unable to precisely determine the actual historical procurement changes applied to our customers by Southern California Edison because there are different charges by customer type, and this charge is only on the electricity usage above the monthly baseline usage allocation. On September 5, 2003 the CPUC issued a decision granting Southern California Edison’s request to recover additional shortfalls, and authorizing the historical procurement charge balance to be revised from $391,000 to $473,000; however, the $0.01 per kWh monthly charge remained in place.

In July 2003, Southern California Edison acknowledged that the PROACT debt was paid in full by non-direct access, or bundled, customers. As a result, on August 1, 2003, all Southern California Edison rates were lowered. Consequently, to retain our customers in the Southern California Edison district, we lowered our customer rates proportionately. Our estimates of the annual financial impact of this rate reduction is a decline in sales and pretax profit during fiscal 2004, in the range of $3,000 to $3,500. This reduction is separate from, and in addition to, the historical procurement charge reduction discussed above.

These rate changes on our customers in the Southern California district will continue to cause a significant negative impact on our revenue and cash flow; however, currently, we do not expect the effect of these rate changes will preclude us from doing business in California.

In December 2003, Pacific Gas and Electric (“PG&E) and the CPUC reached a settlement in the PG&E bankruptcy. In February 2004, a decision was issued by the CPUC that approved the rate settlement agreement, requiring PG&E not only to reduce their rates, but also required PG&E to list certain charges separately on bundled service customer bills as well as on direct access customer bills. These direct access bills, which will generally decline, may negatively affect our revenue and cash flow.

Pennsylvania Operations

In accordance with our standard customer contract in Pennsylvania, we may only charge certain maximum rates for our sales of electric power which, at times, could be less than our costs of acquiring, distributing and scheduling such electric power. Energy capacity charges for delivering electric power in the Pennsylvania market varies significantly from month to month and can affect our gross profit margins. Management is currently analyzing our operations in Pennsylvania to determine the action plan necessary to achieve acceptable gross margins.

Michigan Operations

an alternative electric supplier, such as us, will pay a transition charge of 4 mills per kWh under the new order. Complete detail of these changes is expected by the end of March 2004 and have not been made public yet. These changes may adversely affect the rates of our customers in the DECO service area which may impact our revenue and cash flow. We will continue doing business in Michigan.

New Jersey Operations

In December 2003, we began marketing to new commercial customers in the Public Service Electric & Gas district of New Jersey. We began to deliver electric power to customers in January 2004.

Critical Accounting Policies and Estimates

The following discussion and analysis of our financial condition and operating results are based on our consolidated financial statements. The preparation of this Form 10-Q requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amount of revenue and expenses during the reporting period. Actual results may differ from those estimates and assumptions. In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies as disclosed in our notes to the condensed consolidated financial statements. Accounting policies discussed below are those that we consider to be critical to an understanding of our financial statements because their application places the most significant demands on our ability to judge the effect of inherently uncertain matters on our financial results. For all of these policies, we caution that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

• Independent system operator costs — Included in direct energy costs along with electric power purchased are scheduling coordination costs and other independent system operator (“ISO”) fees and charges. The actual ISO costs are not finalized until a settlement process by the ISO is performed for each day’s activities for all grid participants. Prior to the completion of settlement (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 fees resulting in the need to adjust the related costs.

• Allowance for doubtful accounts — We maintain allowances for doubtful accounts for estimated losses resulting from non-payment of customer billings. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. In addition, as a result of market conditions in California during fiscal 2001, the creditworthiness of certain participants in the marketplace with whom we conduct business have deteriorated to various degrees. For example, PG&E, which declared bankruptcy, has withheld payments of approximately $1.6 million from their remittances to us. Although we have filed a Proof of Claim in PG&E’s bankruptcy proceedings to recover these amounts, we have established an allowance for doubtful accounts in the amount of these withholdings. If other power providers declare bankruptcy, additional allowances may be required.

• Unbilled receivables — Our customers are billed monthly at various dates throughout the month. Unbilled receivables represent the amount of electric power delivered to customers at the end of a reporting period, but not yet billed. Unbilled receivables from sales are estimated by us as the number of kilowatt-hours delivered to the customer times the average current customer sales price per kilowatt-hour.

• Legal claims — From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. 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 Standards No. 5, “Accounting for Contingencies.” In addition to claims arising out of our normal operations, in prior periods we had accrued a total of $2.7 million for an initial formation litigation expense in connection with an action brought by former employees. In November 2003, we settled this litigation. In the second quarter of fiscal 2004, we reversed approximately $0.5 million of the reserve into income. 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 impact on our results of operations and financial position.

Results of Operations

In the following comparative analysis, all percentages are calculated based on dollars in thousands.

Three months ended January 31, 2004 compared to three months ended January 31, 2003.

Net revenue increased $15.2 million, or 48.1%, to $47.0 million for the three months ended January 31, 2004 compared to $31.8 million for the three months ended January 31, 2003. Gross profit declined $3.1 million, or 43.3%, to $4.1 million for the three months ended January 31, 2004 compared to $7.2 million for the same prior year period.

The Company’s operating results for the three months ended January 31, 2004 included a loss from operations of $2.8 million. There were several items that contributed to this loss. California’s gross profit reflects a reduction in the retail price of electricity (see Note 3 of Notes to Condensed Consolidated Financial Statements) combined with an increase in the average energy cost per kilowatt-hours (“kWh”), primarily due to the increase in natural gas prices, used to fuel much of California’s electric generation. Also, in California, demand was less than scheduled and as a result the ISO, the entity which manages the electric grid in California, bought our excess energy at much lower prices than we paid, causing lower gross margins as well as lower retail sales. In Pennsylvania, energy costs per kWh were higher and we sold excess energy into the spot market at price levels less than retail.

In addition, as a result of Summit Energy Ventures, LLC’s majority ownership of Power Efficiency Corporation (“PEC”), we are required to include our portion of the gain or loss attributable to PEC. For the three month period ended January 31, 2004, we recorded an operating loss of $1.1 million compared to $0.2 million during the comparable quarter in fiscal 2003. Summit Energy Ventures, LLC was formed by us as a vehicle to invest in companies that manufacture and market energy efficiency products. For the three months ended January 31, 2004, Summit’s contribution to our net loss, after minority interest and equity losses due to a provision for impairment of investments, was $5.6 million. See Note 4 of Notes to Condensed Consolidated Financial Statements and our discussion herein under the captions “Provision for impairment on investments” and “Loss on equity investments.”

Net revenue

The increase of $15.2 million in revenue resulted primarily from increased energy sales due to our increased customer base in Pennsylvania of $9.1 million and Michigan of $6.6 million offset by a slight decrease in California. In Pennsylvania, we sold 304.4 million kWh at an average retail price per kWh of $0.065 in the three months ended January 31, 2004, as compared to 169.8 million kWh sold at an average retail price per kWh of $0.057 in the same period last year. The volume increase was primarily due to the acquisition of commercial customers under the bid process discussed below, partially offset by a reduced number of residential customers. The increase in price is primarily attributed to our targeting new commercial customers with higher average rates. In Michigan, we sold 150.6 million kWh at an average retail price per kWh of $0.054 in the three months ended January 31, 2004, as compared to 8.4 million kWh at an average retail price per kWh of $0.066 during initial operations, in the same period last year.

At January 31, 2004, we had approximately 107,000 customers compared to 86,000 customers at January 31, 2003. The number of customers has increased as a result of the successful acquisition at the end of fiscal 2003 of approximately 40,000 customers in Pennsylvania under a bid process that was a part of an electric utility restructuring. Our customer count, net of this 40,000, was and continues to be reduced due to our focus on increasing our commercial and industrial customer base, which have much higher average electricity usage and generally, higher rates, while reducing the number of residential customers, which have much lower average usage and generally lower rates.

Direct energy costs

Direct energy costs, which are recognized concurrently with related energy sales, include the aggregated cost of purchased electric power, fees incurred from various energy-related service providers and energy-related taxes that cannot be passed directly through to the customer. Our direct energy costs increased to $43.0 million for the three months ended January 31, 2004, an increase of $18.4 million, or 74.9%, from $24.6 million for the three months ended January 31, 2003.

The increase in direct energy costs occurred in all states. The current year cost per kWh increase in all markets is primarily due to the increase of natural gas costs which is used to fuel much of the electric generation in our markets. In California, we purchased 319.6 million kWh for an average cost per kWh of $0.051 for the three months ended January 31, 2004, as compared to 273.3 million kWh at an average cost per kWh of $0.047 for the same period in fiscal 2003. In Pennsylvania, we purchased 334.1 million kWh at an average cost per kWh of $0.054 for the three months ended January 31, 2004, as compared to 223.4 million kWh at an average cost per kWh of $0.044 for the same period in fiscal 2003. In Michigan, we purchased 139.7 million kWh at an average cost per kWh of $0.051 for the three months ended January 31, 2004, as compared to 25.2 million kWh at an average cost per kWh of $0.044 for the same period last year.

Selling and marketing expenses

Our selling and marketing expenses of $1.0 million for the three months ended January 31, 2004 approximated the three months ended January 31, 2003. The costs primarily represents marketing activities as the Company entered into the New Jersey market in fiscal 2004 and the Michigan market in fiscal 2003.

General and administrative expenses

Our general and administrative expenses were $5.8 million for the three months ended January 31, 2004, an increase of $1.1 million, or 24.6%, compared to $4.7 million for the three months ended January 31, 2003. The increase was primarily due to the consolidation of PEC, and to a lesser extent, the settlement of our former Chief Financial Officer’s employment contract in the current fiscal quarter.

Reorganization and initial public listing expenses

We incurred $1.0 million in the second quarter of fiscal 2004 of non-operating costs related to our reorganization into a Delaware holding company structure and, the anticipated initial public listing of our company’s common stock on the American Stock Exchange. Management believes it is appropriate to classify these costs as other income and expenses, as these are non-operating costs, and include expenses such as legal, accounting and auditing, and consulting fees that are specific to these activities.

Initial formation litigation expenses

In the three months ended January 31, 2004, we incurred no initial formation litigation costs related to our formation compared to $0.8 million of such costs incurred during the three months ended January 31, 2003. Initial formation litigation expenses include legal and litigation costs associated with the initial capital raising efforts by former employees, various board member matters, and the legal complications arising from those activities. (See our Annual Report on Form 10-K for the year ended July 31, 2003 under Part I, Item 3. Legal Proceedings and Note 5 of Notes to Condensed Consolidated Financial Statements of this Form 10-Q).

Provision for impairment on investments

In the three months ended January 31, 2004, we recorded an impairment of $4.8 million on our investments, to reflect our percentage ownership in the net equity of each of Summit’s three investments: PEC, Turbocor and Envenergy, Inc., an investment accounted for on the cost basis of accounting. See Note 4 of Notes to Condensed Consolidated Financial Statements.

Loss on equity investments

In the current fiscal year, because Summit acquired a majority ownership position in PEC in May 2003, we consolidated PEC into our financial results thereby reflecting our proportionate recognition of its loss. At January 31, 2004, Summit’s investment ownership was 59.7%. In the three months ended January 31, 2003, we incurred a $0.1 million aggregate loss on equity investments which reflected our proportionate recognition of losses under the equity method of accounting relating to PEC and, to a lesser extent, Turbocor BV, (“Turbocor”). In February 2003, Summit’s ownership interest in Turbocor had been reduced to a level at which it no longer exercised significant influence; accordingly, in the current fiscal year, we are accounting for Turbocor under the cost method of accounting. Under such method, any proportionate operating losses attributable to Summit’s investment in Turbocor are excluded from our operating results.

Minority interest

Minority interests represent that portion of PEC’s post-consolidation losses that are allocated to the non-Summit investors based on their aggregate minority ownership interest in PEC.

Provision for (benefit from) income taxes

The benefit from income taxes was $0.8 million for the three months ended January 31, 2004; as compared to the provision for income taxes of $0.2 million for the three months ended January 31, 2003. The benefit from income taxes was due to the net loss before taxes of $8.1 million for the three months ended January 31, 2004 compared to a net income before taxes of $0.8 million for the

three months ended January 31, 2003. Our effective income tax rate was 9% for the three months ended January 31, 2004, compared to 24% for the same period last year. The decrease in the effective tax rate is primarily due to the impact of our annualized losses being adjusted in the three months ended January 31, 2004, to reflect not benefiting losses for state income taxes and investment impairment losses.

Six months ended January 31, 2004 compared to six months ended January 31, 2003.

Net revenue increased $40.0 million, or 61.1%, to $105.4 million for the six months ended January 31, 2004 compared to $65.4 million for the six months ended January 31, 2003. Gross profit declined $6.3 million, or 42.7%, to $8.4 million for the three months ended January 31, 2004 compared to $14.7 million for the same prior year period.

The Company’s operating results for the six months ended January 31, 2004 included a loss from operations of $4.9 million across all states. California’s gross profit reflects a reduction in the retail price of electricity combined with an increase in the average energy cost per kWh, primarily due to the increase in natural gas prices. In the first quarter of fiscal 2004, in California, we incurred a one-time charge of $0.4 million from the ISO, the entity which manages the electric grid in California. This charge was for various deferred settlement charges. Also in California, demand was less than scheduled and, as a result, the ISO bought our excess energy at much lower prices than we paid, causing lower gross margins as well as lower retail sales. In Pennsylvania, an abnormally cool summer in the Mid-Atlantic region resulted in less retail sales than expected through the first fiscal quarter of 2004, with excess energy being sold into the spot market at price levels less than retail.

In addition, for the six months ended January 31, 2004, our operating loss included an operating loss of $2.3 million attributable to Summit’s majority ownership of PEC compared to an operating loss of $0.4 million for the six months ended January 31, 2003. Summit’s contribution to our net loss, after minority interest and equity losses due to provision for impairment of investments, was $6.2 million.

Net revenue

The increase of $40.0 million in net revenue resulted primarily from increased energy sales due to our increased customer base in Pennsylvania of $22.1 million and Michigan of $16.1 million with the remaining slight increase occurring in California. In Pennsylvania, we sold 698.7 million kWh at an average retail price of $0.062 in the six months ended January 31, 2004, as compared to 375.0 million kWh sold at an average retail price of $0.055 in the six months ended January 31, 2003. In Michigan, we sold 329.6 million kWh at an average retail price per kWh of $0.056 in the six months ended January 31, 2004, as compared to 8.7 million kWh at an average retail price per kWh of $0.066 in the same period last year.

Direct energy costs

Our direct energy costs increased to $97.0 million for the six months ended January 31, 2004, an increase of $46.2 million, or 91.1%, from $50.8 million for the six months ended January 31, 2003. The increase in direct energy costs occurred in all states. The current year increase is primarily due to the increase in natural gas costs in all markets. In addition, factors in each of our markets also contributed to the increase in direct energy costs. In California, the one-time ISO charge referenced above. In Pennsylvania, direct energy costs increased primarily due to additional costs relating to the expansion of our customer base. We also incurred additional direct energy costs as we continued to grow in the Michigan market. In California, we purchased 689.9 million kWh of an average price per kWh of $0.051 for the six months ended January 31, 2004, as compared to 589.6 million kWh at an average price per kWh of $0.045 for the same period last year. In Pennsylvania, we purchased 749.2 million kWh at an average price per kWh of $0.057 for the six months ended January 31, 2004, as compared to 458.4 million kWh at an average price per kWh of $0.046 for the six months ended January 31, 2003. In Michigan, we purchased 310.7 million kWh at an average price per kWh of $0.050 for the six months ended January 31, 2004, as compared to 27.6 million kWh at an average price per kWh of $0.043 for the same period last year.

Selling and marketing expenses

Our selling and marketing expenses were $2.0 million for the six months ended January 31, 2004; a decrease of $0.3 million, or 15.2%, compared to $2.3 million for the six months ended January 31, 2003. The decrease is attributable to the fact that our marketing expenses incurred in connection with entering the New Jersey market in December 2003 were less than the marketing expenses we incurred in entering the Michigan market in fiscal 2003. As part of our strategy of expanding into new markets, we expect to continue to incur marketing and advertising costs.

General and administrative expenses

Our general and administrative expenses were $11.3 million for the six months ended January 31, 2004; an increase of $2.3 million, or 26.5%, compared to $9.0 million for the six months ended January 31, 2003. The increase was primarily the result of the consolidation of PEC of $2.1 million in the current fiscal year. The remaining increase was due to additional bad debt expense and insurance costs, and the settlement of our former Chief Financial Officer’s employment contract.

Initial formation litigation expenses

In the six months ended January 31, 2004, we incurred $0.6 million of initial formation litigation costs compared to $3.3 million in such costs incurred during the comparable period in fiscal 2003. We incurred a $2.7 million loss on a litigation award through fiscal 2003, in connection with a lawsuit filed by several of our former employees who were employed during 1998 and 1999 exclusively to raise capital for us from outside investors. These former employees had no responsibilities relating to our ongoing operations. In the first quarter of fiscal 2003, we accrued $2.2 million and in prior fiscal years, we accrued $0.5 million. In November 2003, we settled this litigation and the settlement resulted in a reduction of the accrual of $0.5 million, after final payments were made to the plaintiffs in January 2004.

Loss on equity investments

In the six months ended January 31, 2004, we recorded an impairment of $4.8 million on our investments, to reflect our percentage ownership in the net equity of each of Summit’s investments. In the six months ended January 31, 2003, we incurred a $0.4 million aggregate loss on equity investments which reflected our proportionate recognition of losses under the equity method of accounting relating to PEC and Turbocor.

Interest income, net

Interest income, net was $0.3 million, a decrease of $0.1 million, or 37.4%, for the six months ended January 31, 2004 from $0.4 million for the six months ended January 31, 2003. The decrease was primarily attributable to lower yields on short-term investments.

Provision for (benefit from) income taxes

The benefit from income taxes was $1.8 million for the six months ended January 31, 2004, as compared to a provision for income taxes of $44 thousand for the six months ended January 31, 2003. The benefit from income taxes was due to the net loss before taxes of $10.3 million for the six months ended January 31, 2004 compared to net income of $0.1 million for the six months ended January 31, 2003. Our effective income tax rate was 18% for the six months ended January 31, 2004 compared to 42% for the same period last year. The decrease in the effective tax rate is primarily due to the impact of our annualized losses for the fiscal year ending July 31, 2004, to reflect not benefiting losses for state income taxes and investment impairment losses.

Liquidity and Capital Resources

As of January 31, 2004, our unrestricted cash and cash equivalents were $54.4 million, compared to $40.9 million at July 31, 2003 and our restricted cash and cash equivalents were $12.2 million, compared to $20.8 million at July 31, 2003. Our principal sources of liquidity to fund ongoing operations were cash provided by operations and existing cash and cash equivalents.

Cash flow provided by operations for the six months ended January 31, 2004 was $5.4 million, compared to $5.8 million in the six months ended January 31, 2003. In the six months ended January 31, 2004 cash was provided primarily by a decrease in accounts receivable primarily due to the green power credit payment of $5.6 million received in October 2003, the reduction of sales and the provision for losses due to the impairment on Summit’s investments, which were non-cash items; offset by a decrease in accounts payable of $6.7 million.

Cash flow used in investing activities for the six months ended January 31, 2004 was $0.6 million, an increase of $0.2 million compared with cash used in investing activities of $0.4 million for the six months ended January 31, 2003. Cash used in investments for the current fiscal quarter consisted of higher capital expenditures, compared to expenditures for property and intangibles, and Summit’s share of losses in Turbocor and PEC in the prior period.

Cash flow provided by financing activities for the six months ended January 31, 2004 was $8.6 million, compared to $0.6 million in the six months ended January 31, 2003. The $8.0 million increase is due to a decrease in restricted cash primarily due to the cancellation of the required security for an appeals bond of $4.1 million related to a now settled litigation and the $3.5 million reduction of the required letters of credit secured by cash related to energy suppliers in the current fiscal year.

The Company does not have open lines of credit for direct unsecured borrowings or for letters of credit. Credit terms from our suppliers of electricity often require us to post collateral against our energy purchases and against our mark-to-market exposure with certain of our counterparties. We currently finance these collateral obligations with our available cash. If we are required to post such security, a portion of our cash would become restricted, which could adversely affect our liquidity. As of January 31, 2004, we had $8.2 million in restricted cash to secure letters of credit required by our suppliers.

Based upon our current plans, level of operations and business conditions, we believe that our cash and cash equivalents, and cash generated from operations will be sufficient to meet our capital requirements and working capital needs for the foreseeable future. However, there can be no assurance that we will not be required to seek other financing in the future or that such financing, if required, will be available on terms satisfactory to us.

Contractual Obligations

For the three and six months ended January 31, 2004, we have entered into additional electricity purchase contracts for $1.9 million and $25.1 million, respectively. These contracts are for less than one year and are with various suppliers.

Factors That May Affect Future Results

If competitive restructuring of the electric markets is delayed, reversed or does not result in viable competitive market rules, our business will be adversely affected.

The Federal Energy Regulatory Commission (“FERC”) has maintained a strong commitment over the past several years to the deregulation of electricity markets. This movement would seem to indicate the continuation and growth of a competitive electric retail industry. As of February 2003, 24 states and the District of Columbia have either enacted enabling legislation or issued a regulatory order to implement retail access. In 18 of these states, retail access is either currently available to some or all customers, or will soon be available. However, in many of these markets the market rules adopted have not resulted in energy service providers being able to compete successfully with the incumbent utilities and customer switching rates have been low. Only recently have a small number of markets opened to competition under rules that we believe may offer attractive competitive opportunities. Our business model depends on other favorable markets opening under viable competitive rules in a timely manner. In any particular market, there are a number of rules that will ultimately determine the attractiveness of any market. Markets that we enter may have both favorable and unfavorable rules. If the trend towards competitive restructuring of retail energy markets does not continue or is delayed or reversed, our business prospects and financial condition could be materially adversely impaired.

Retail energy market restructuring has been and will continue to be a complicated regulatory process, with competing interests advanced not only by relevant state and federal utility regulators, but also by state legislators, federal legislators, incumbent utilities, consumer advocacy groups and potential market participants. As a result, the extent to which there are legitimate competitive opportunities for alternative energy suppliers in a given jurisdiction may vary widely and we cannot assure shareholders that regulatory structures will offer us competitive opportunities to sell energy to consumers on a profitable basis. The regulatory process could be negatively impacted by a number of factors, including interruptions of service and significant or rapid price increases. The legislative and regulatory processes in some states take prolonged periods. In a number of jurisdictions, it may be many years from the date legislation is enacted until the retail markets are open for competition.

In addition, although most retail energy market restructuring has been conducted at the state and local levels, bills have been proposed in Congress in the past that would preempt state law concerning the restructuring of the retail energy markets. Although none of these initiatives has been successful, we cannot assure shareholders that federal legislation will not be passed in the future that could materially adversely affect our business.

We face many uncertainties that may cause substantial operating losses and we cannot assure shareholders that we will be profitable.

We have recognized significant revenue and our ability to generate such revenue is subject to uncertainty. In addition, we intend to increase our operating expenses to develop our business, including brand development, marketing and other promotional activities and

the continued development of our billing, customer care and power procurement infrastructure. Our ability to sustain profitability will depend on, among other things:

• Our ability to attract and to retain a critical mass of customers at a reasonable cost;

• Our ability to develop internal corporate organization and systems;

• The continued competitive restructuring of retail energy markets with viable competitive market rules; and

• Our ability to manage effectively our energy requirements and to sell our energy at a sufficient profit margin.

We may have difficulty obtaining a sufficient number of customers.

We anticipate that we will incur significant costs as we enter new markets and pursue customers by utilizing a variety of marketing methods. In order for us to recover these expenses, we must attract and retain a large number of customers to our service.

We may experience difficulty attracting customers because many customers may be reluctant to switch to a new company for the supply of a commodity as critical to their well-being as electric power. A major focus of our marketing efforts will be to convince customers that we are a reliable provider with sufficient resources to meet our commitments. If our marketing strategy is not successful, our business, results of operations, and financial condition will be materially adversely affected.

We depend upon internally developed systems and processes to provide several critical functions for our business, and the loss of these functions could materially adversely impact our business.

We have developed our own systems and processes to operate our back-office functions, including customer enrollment, metering, forecasting, settlement and billing. Problems that arise with the performance of our back-office functions could result in increased expenditures, delays in the launch of our commercial operations into new markets, or unfavorable customer experiences that could materially adversely affect our business strategy. Also, any interruption of these services could be disruptive to our business.

Substantial fluctuations in electricity prices or the cost of transmitting and distributing electricity could have a material adverse affect on us.

To provide electricity to our customers, we must, from time to time, purchase electricity in the short-term or “spot” wholesale energy markets, which can be highly volatile. In particular, the wholesale electric power market can experience large price fluctuations during peak load periods. Furthermore, to the extent that we enter into contracts with customers that require us to provide electricity at a fixed price over an extended period of time, and to the extent that we have not purchased electricity to cover those commitments, we may incur losses caused by rising wholesale electricity prices. Periods of rising electricity prices may reduce our ability to compete with incumbent utilities because their regulated rates may not immediately increase to reflect these increased costs. Energy Service Providers like us take on the risk of purchasing power for an uncertain load and if the load does not materialize it leaves us in a “long” position that would be resold by us into the wholesale electricity market. Sales of this surplus electricity may be at prices below our cost. Conversely, if there is an unanticipated demand for electricity, we would need to purchase the additional supply. These purchases could be at prices that are higher than our sales price to our customers. Either situation could create losses for us as we are exposed to the price volatility of the wholesale spot markets. Any of these contingencies could substantially increase our costs of operation. Such factors could have a material adverse effect on our financial condition.

We are dependent on local utilities for distribution of electricity to our customers over their distribution networks. If these local utilities are unable to properly operate their distribution networks, or if the operation of their distribution networks is interrupted for periods of time, we will be unable to deliver electricity to our customers during those interruptions. This would result in lost revenue to us, which would adversely impact the results of our operations.

Some suppliers of electricity have been experiencing deteriorating credit quality.

We purchase electricity from electric utility companies and merchant electricity generation companies with both investment grade and below investment grade ratings. In addition to the requirements on our part to post collateral with electricity generation companies in accordance with the terms of certain contracts, we also incur performance risk on the part of our counterparties. Should a counterparty fail to perform on its contract to deliver electricity, we would have to replace that supply in the open market on terms which could be less favorable to us than the contract terms. These ratings are subject to change at any time and with no advance warning. This situation could have an adverse impact on the source of our electricity purchases.

If the energy price of electricity decreases, we may be required to post letters of credit to secure our obligations under our long term energy contracts.

Since the price of the electricity we purchase under long-term contracts is generally fixed over the term of the contracts, if the market price of wholesale electricity decreases below the contract price, the power generator may require us to post security in the form of a letter of credit to hedge against our potential default on the contract. If we are required to post such security, a portion of our cash would become restricted, which could adversely affect our liquidity.

We are required to rely on utilities with whom we will be competing to perform some functions for our customers.

Under the regulatory structures adopted in most jurisdictions, we will be required to enter into agreements with local incumbent utilities for use of the local distribution systems, and for the creation and operation of functional interfaces necessary for us to serve our customers. Any delay in these negotiations or our inability to enter into reasonable agreements with those utilities could delay or negatively impact our ability to serve customers in those jurisdictions. This could have a material negative impact on our business, results of operations and financial condition.

We are dependent on local utilities for maintenance of the infrastructure through which electricity is delivered to our customers. We are limited in our ability to control the level of service the utilities provide to our customers. Any infrastructure failure that interrupts or impairs delivery of electricity to our customers could have a negative effect on the satisfaction of our customers with our service, which could have a material adverse effect on our business.

Regulations in many markets require that the services of reading our customers’ energy meters and the billing and collection process be retained by the local utility. In those states, we will be required to rely on the local utility to provide us with our customers’ energy usage data and to pay us for our customers’ usage based on what the local utility collects from our customers. We may be limited in our ability to confirm the accuracy of the information provided by the local utility and we may not be able to control when we receive payment from the local utility. The local utility’s systems and procedures may limit or slow down our ability to create a supplier relationship with our customers that would delay the timing of when we can begin to provide electricity to our new customers. If we do not receive payments from the local utility on a timely basis, our working capital may be impaired.

In some markets, we are required to bear credit risk and billing responsibility for our customers.

In some markets, we are responsible for the billing and collection functions for our customers. In these markets, we may be limited in our ability to terminate service to customers who are delinquent in payment. Even if we terminate service to customers who fail to pay their utility bill in a timely manner, we may remain liable to our suppliers of electricity for the cost of the electricity and to the local utilities for services related to the transmission and distribution of electricity to those customers. The failure of our customers to pay their bills in a timely manner or our failure to maintain adequate billing and collection programs could materially adversely affect our business.

We face strong competition from incumbent utilities and other competitors.

In some markets, our principal competitor may be the local incumbent utility company or unregulated utility affiliates. The incumbent utilities have the advantage of long-standing relationships with their customers and they may have longer operating histories, greater financial and other resources and greater name recognition in their markets than we do. In addition, incumbent utilities have been subject to regulatory oversight and thus have a significant amount of experience regarding the regulators’ policy preferences as well as a critical economic interest in the outcome of proceedings concerning their revenues and terms and conditions of service. Incumbent utilities may seek to decrease their tariffed retail rates to limit or to preclude the opportunities for competitive energy suppliers and otherwise seek to establish rates, terms and conditions to the disadvantage of competitive energy suppliers.

Some of our competitors, including incumbent utilities, have formed alliances and joint ventures in order to compete in the restructured retail electricity industry. Many customers of these incumbent utilities may decide to stay with their long-time energy provider if they have been satisfied with their service in the past. Therefore, it may be difficult for us to compete against incumbent utilities and their affiliates for customers who are satisfied with their historical utility provider.

In addition to competition from the incumbent utilities and their affiliates, we may face competition from a number of other energy service providers, and other energy industry participants who may develop businesses that will compete with us in both local and

national markets. We also may face competition from other nationally branded providers of consumer products and services. Some of these competitors or potential competitors may be larger and better capitalized than us.

Our revenue and results of operations are subject to market risks that are beyond our control.

We sell electricity that we purchase from third-party power generation companies to our retail customers on a contractual basis. We are not guaranteed any rate of return through mandated rates, and our revenue and results of operations are likely to depend, in large part, upon prevailing market prices for electricity in our regional markets and other competitive markets. These market prices may fluctuate substantially over relatively short periods of time. These factors could have an adverse impact on our revenue and results of operations.

Volatility in market prices for electricity results from multiple factors, including:

• weather conditions;

• seasonality;

• unexpected changes in customer usage;

• transmission or transportation constraints or inefficiencies;

• demand for electricity;

• natural gas, crude oil and refined products, and coal supply availability to generators from whom we purchase electricity;

• natural disasters, wars, embargoes and other catastrophic events; and

• federal, state and foreign energy and environmental regulation and legislation.

Our results of operation and financial condition could be affected by pending and future litigation.

We are currently a defendant in several pending lawsuits. We believe our substantive and procedural defenses in each of these cases are meritorious, but we cannot predict the outcome of any such litigation. In addition, we may become subject to additional lawsuits in the future. If we are held liable for significant damages in any lawsuit, our operations and financial condition may be harmed. In addition, we could incur substantial expenses in connection with any such litigation, including substantial fees for attorneys and other professional advisors. These expenses could adversely affect our operations and cash position if they are material in amount. See Note 5 of our Notes to Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes to information called for by this Item 3 from the disclosures set forth in Part II, Item 7A in the Company’s Annual Report on Form 10-K for the year ended July 31, 2003.

Item 4. Controls and Procedures.

a) Evaluation of Disclosure Controls and Procedures.

Our Chairman and Chief Executive Officer and Chief Accounting Officer, who is currently serving in the capacity as both the principal financial and accounting officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of January 31, 2004. Based on such evaluation, they have concluded that our disclosure controls and procedures are effective.

b) Changes in Internal Controls.

There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Reference is made to the Company’s Report on Form 10-K for the period ended July 31, 2003 (the “10-K”) for a summary the Company’s legal proceedings previously reported. Since the date of the 10-K, there have been no material developments in previously reported legal proceedings, except as set forth below.

In November 2003, we entered into a settlement in connection with the lawsuit filed on February 23, 2001 by several former employees filed against us in the Superior Court of the State of California in the County of Orange (case number 01CC02611). Under the settlement, the prior judgments in the case have been vacated, and we made final payments to the plaintiffs in January 2004 in an aggregate amount of $1.8 million.

On January 15, 2003, we filed a complaint in the United States District Court for the Central District of California entitled Commonwealth Energy Corporation v. Wayne Moseley, et al. (Case number CV03-00402-NM (RNBx)) against several dissident shareholders who we believed had illegally solicited proxies in connection with the annual meeting of shareholders on January 21, 2003. On February 6, 2003, we filed an amended complaint in this lawsuit asking the court to confirm that the our board of directors had been legally elected by the shareholders and validating the inspector’s determination at the annual meeting that the proxy materials sent by defendants had violated several SEC rules and regulations and that the resulting proxies were invalid. On June 9, 2003, the court issued a judgment against certain defendants, finding that our board of directors was properly elected, that we properly conducted the election at our annual meeting and that the inspectors were correct in rejecting the proxies solicited by the group. Moreover, the court found that the proxies violated Securities and Exchange Act section 14A and Securities and Exchange Commission Rules 14a-4 and 14a-9, and were therefore invalid. Three members of the group, and all persons acting in concert with them, were ordered by the court to comply with all federal securities laws and SEC rules in any future attempts to solicit proxies.

However, two additional defendants, who were not subject to the court’s earlier ruling, brought a counterclaim against us alleging that our board of directors was not properly elected at the annual meeting. This action, filed on November 14, 2003, is currently pending and seeks an order voiding the results of the board of directors election at the 2003 annual meeting and compelling us to seat certain other persons whom they allege should have been elected to the board. We intend to vigorously defend the counterclaim.

On November 25, 2003, several shareholders filed a lawsuit against us in the United States District Court for the Central District of California entitled Coltrain, et al. v. Commonwealth Energy Corporation, et al. (Case number CV03-8560-FMC (RNBx)). The complaint purports to be a class action against us for violations of section 709 of the California Corporations Code. The plaintiffs allege that we failed to correctly count approximately 39,869,704 votes cast at the 2003 annual meeting and, as a result, the board of directors was not properly elected. Instead, the plaintiffs allege that four different persons would have been seated on the board had the votes been tabulated in the manner advocated by the plaintiffs. This case involves identical issues of law and fact as the counterclaim discussed above in Commonwealth Energy Corporation v. Wayne Moseley, et al. and is currently pending. We intend to vigorously defend this action.

On November 15, 2003, the Orange County Superior Court entered an order approving our request for dismissal of the action Commonwealth had filed against Sylvia Bates. The case was dismissed following a confidential settlement entered into between Commonwealth and Mrs. Bates. The settlement had no financial impact on Commonwealth.

On November 20, 2003, Commonwealth filed a Notice of Appeal from the Court’s September 24, 2003 order in Mr. Saline’s case against the Company, Case No. 01CC13887. The Company subsequently filed a Petition for Writ of Supersedeas seeking a stay of the Court’s September 24, 2003 order and Phase II of the trial pending completion of the appeal, which Petition was denied by the Court on January 22, 2004. In March 2004, Mr. Saline’s counsel requested leave of the Court to seek damages from Ian Carter personally in this case. The Court is expected to rule on the legal sufficiency of their request on April 21, 2004. Pursuant to the terms of the indemnification agreement between Commonwealth and Mr. Carter, the Company is required to indemnify Mr. Carter to the fullest extent permitted by law. The indemnification agreement covers any expenses and/or liabilities reasonably incurred in connection with the investigation, defense, settlement or appeal of legal proceedings. The obligation to provide indemnification does not apply if the officer or director is found to be liable for fraudulent or criminal conduct. Pursuant to the indemnification agreement, the Company is currently advancing Mr. Carter’s legal expenses in defending this case. The appeal and the second phase of the trial are still pending.

On February 3, 2004, Commonwealth filed a motion seeking reinstatement of the Protective Order against Mr. Saline in the Company’s case against Mr. Saline, Case No. 01CC10657. The motion seeks to restrict Mr. Saline’s access as a member of the Board

of Directors to books and records of the Company, and to enforce his confidentiality agreement with the Company. The motion is based upon new evidence that has come to light in the case in the form of a declaration made under oath by one of the plaintiffs in a lawsuit against the Company that Mr. Saline disclosed confidential information that was helpful to the plaintiffs in their case against the Company. The Court has not yet ruled on the above motion, and the Company’s case against Mr. Saline remains pending.

Item 5. Other Information.

Annual Meeting

The Board of Directors has set June 15, 2004 as the date for the Company’s 2004 annual meeting of shareholders. A shareholder proposal must be submitted to the Company’s principal executive offices located at Commonwealth Energy Corporation, Investor Relations, 15901 Red Hill Avenue, Suite 100, Tustin, California 92780, Attention: Corporate Secretary, by March 26, 2004, for inclusion in the proxy materials related to the 2004 annual meeting. Any such proposal must also comply with the proxy rules under the Exchange Act, including Rule 14a-8. For any proposal that is not submitted for inclusion in the Company’s proxy material for the 2004 annual meeting of stockholders, but is instead sought to be presented directly at that meeting, Rule 14a-4(c) under the Securities Exchange Act of 1934 permits the Company’s management to exercise discretionary voting authority under proxies it solicits unless the Company is notified about the proposal on or before March 26, 2004, and the stockholder satisfies the other requirements of Rule 14a-4(c). In addition, except with respect to stockholder proposals included in the Company’s proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, the Company’s Bylaws provide that, to be considered at the 2004 annual meeting, a stockholder proposal must be submitted in writing and received by the Corporate Secretary at the principal executive offices of the Company not later than March 26, 2004, and must contain the information specified by and otherwise comply with the Company’s Bylaws. Any stockholder wishing to receive a copy of the Company’s Bylaws should direct a written request to the Corporate Secretary at the Company’s principal executive offices.

To be considered at the 2004 annual meeting, shareholder nominations of persons for election to the Board of Directors of the Company must be submitted in writing and received by the Corporate Secretary at the principal executive offices of the Company not later than March 26, 2004, and must contain the information specified by and otherwise comply with the Company’s Bylaws. Notwithstanding the foregoing, the Board of Directors is not required to solicit proxies for the election of any person the shareholder intends to nominate at the annual meeting.

Amendment of Ian B. Carter’s Employment Agreement

On March 16, 2004, we agreed with Ian Carter to amend his employment agreement. Under the amendment, the amount that the Company would be required to pay to Mr. Carter in the event that Mr. Carter’s employment is terminated as a result of change of control or upon termination of the agreement without cause or by Mr. Carter for good reason was reduced from eight time his annual base salary plus the amount of taxes payable by Mr. Carter to three times the sum of Mr. Carter’s then-current base salary and the average of the two highest bonuses paid to Mr. Carter plus the amount of taxes payable by Mr. Carter.

Resignation of Certain Officers and Directors

Effective March 8, 2003, Junona Jonas resigned as a director of the Company due to the demands of her full-time professional commitments. Ms. Jonas submitted a letter of resignation, which is attached hereto as Exhibit 99.1.

James L. Oliver resigned his position as our chief financial officer, effective February 20, 2004, to pursue other opportunities. Mr. Oliver executed a confidential severance agreement and general release in connection with his resignation and the termination of his employment. Pursuant to the terms of such agreement, we paid Mr. Oliver $72,000, less required tax deductions, and will continue to pay Mr. Oliver an amount equal to his former salary until August 2005. Mr. Oliver continues to hold a fully vested option to purchase 500,000 shares of Commonwealth’s common stock with an exercise price of $2.75 per share and a final termination date of November 1, 2007. Until a successor is identified, Kenneth L. Robinson, our Vice President, Finance and Corporate Controller, will serve as our principal financial and accounting officer.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits.

The exhibit listed below is hereby filed with the Commission as part of this Report.


Exhibit
Number		Description
10.1		Consent and Waiver dated March 12, 2004 given by Ian B. Carter to Commonwealth Energy Corporation.

10.2		Second Amendment to Employment Agreement dated March 16, 2004, between Ian B. Carter and Commonwealth Energy Corporation.

10.3		Confidential Severance Agreement and General Release dated as of February 21, 2004 between James L. Oliver and Commonwealth Energy Corporation.

31.1		Chief Executive Officer Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Principal Financial Officer Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1		Chief 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.

99.1		Letter of Resignation of Junona Jonas dated March 3, 2004.

(b) Reports on Form 8-K.

On December 29, 2003, we furnished to the Securities and Exchange Commission, a Current Report on Form 8-K, which contains information required under “Item 12. Results of Operations and Financial Condition.” The Current Report on Form 8-K includes a copy of our press release dated December 23, 2003, reporting our results of operations and financial condition for the first quarter fiscal year ending July 31, 2004.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COMMONWEALTH ENERGY CORPORATION

Date: March 16, 2004 By:   /s/ IAN B. CARTER
Ian B. Carter
Chairman and Chief Executive Officer
(Principal Executive Officer)

Date: March 16, 2004 By:   /s/ KENNETH L. ROBINSON
Kenneth L. Robinson
Vice President, Finance and Corporate Controller (Principal Financial and Accounting Officer)

EXHIBIT INDEX


Exhibit
Number		Description
10.1		Consent and Waiver dated March 12, 2004 given by Ian B. Carter to Commonwealth Energy Corporation.

10.2		Second Amendment to Employment Agreement dated March 16, 2004, between Ian B. Carter and Commonwealth Energy Corporation.

10.3		Confidential Severance Agreement and General Release dated as of February 21, 2004 between James L. Oliver and Commonwealth Energy Corporation.

31.1		Chief Executive Officer Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Principal Financial Officer Certification required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1		Chief 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.

99.1		Letter of Resignation of Junona Jonas dated March 3, 2004.

EX-10.1 3 a97391exv10w1.txt EXHIBIT 10.1 Exhibit 10.1 CONSENT AND WAIVER AGREEMENT THIS CONSENT AND WAIVER is given by Ian B. Carter (the "Employee") to Commonwealth Energy Corporation, a California corporation (the "Company") effective as of March 12, 2004. RECITALS A. The Employee and the Company are parties to an Employment Agreement dated as of January 1, 2000, as amended by an Addendum dated November 1, 2000 (the "Employment Agreement"). B. Pursuant to Section 3.2(a) of the Employment Agreement, upon the occurrence of certain change of control transactions of the Company, the Employee has the right to receive certain bonus payments. Pursuant to Section 3.9 of the Employment Agreement, upon the occurrence certain sales of assets and change of control events, the Employee shall have the right to require the Company to repurchase from the Employee all capital stock and stock options then owned by or owing to Employee at an aggregate repurchase price equal to two (2) times the then aggregate price value (as defined in the Employment Agreement) of the Company's capital stock. C. Pursuant to Section 7.3 of the Employment Agreement, the Employee may terminate the Employment Agreement for cause and receive certain severance payments upon the occurrence of certain change of control events without the Employee's prior written consent. D. The Company intends to complete a reorganization transaction (the "Transaction") pursuant to which to (a) a newly-formed California subsidiary ("Newco") of Commerce Energy Group, Inc., one of the Company's wholly-owned Delaware subsidiaries (the "Holding Company") would be merged with and into the Company; (b) the Company would be the surviving corporation in the merger; and (c) the Company would become a wholly-owned subsidiary of the Holding Company. E. In order to facilitate the Transaction, the Employee is willing to consent to the Transaction and in connection with the Transaction waive (a) any right to the payment of a bonus under Section 3.2(a) of the Employment Agreement, (b) the Employee's right to exercise the stock repurchase option under Section 3.9 of the Employment Agreement and (c) any right to terminate the Employment Agreement for cause under Section 7.3 of the Employment Agreement. NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, the Employee hereby agrees as follows: CONSENT AND WAIVER 1. The Employee hereby expressly consents in writing to the Transaction. 2. The Employee hereby waives any rights he may have under Sections 3.2(a), 3.9 and 7.3 of the Employment Agreement in connection with the Transaction. 3. The consent and waivers contained in Paragraphs 1 and 2 above shall only apply to the Transaction, not other future transactions. Except as amended or modified by this Consent and Waiver, the Employment Agreement shall continue in full force and effect in accordance with its terms. By: /s/ IAN B. CARTER ---------------------------------- Ian B. Carter -2- EX-10.2 4 a97391exv10w2.txt EXHIBIT 10.2 Exhibit 10.2 SECOND AMENDMENT TO EMPLOYMENT AGREEMENT THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT is entered into as of March 16, 2004 (the "Amendment") by and among Commonwealth Energy Corporation, a California corporation (the "Company"), and Ian B. Carter ("Employee"). WHEREAS, the parties entered into a certain Employment Agreement dated as of January 1, 2000, as amended by an Addendum to Employment Agreement dated as of November 1, 2000 (collectively, the "Employment Agreement," the defined terms of which shall be used in this Amendment unless otherwise defined herein); WHEREAS, the parties now desire to amend the Employment Agreement to modify certain of the terms thereof; NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by each of the parties hereto, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. Amendment of Paragraph 3.2(a). Paragraph 3.2(a) of the Employment Agreement is hereby amended and restated in its entirety to read as follows: "(a) Bonus Upon Sale of Assets or Control of the Company. If during the term of the Agreement (i) all or substantially all of the assets of the Company or more than fifty percent (50%) of the issued and outstanding voting shares of the Company are, in any transaction or series of transactions, acquired by any one person or entity not then affiliated with the Company, or (ii) control of the Company is taken over by a group of shareholders when no significant change of ownership has taken place, or (iii) a liquidity event such as a merger, acquisition, strategic alliance or any other event that could bring substantial capital into the company and any of these events listed require that the Employee be terminated, leave the company, replaced or any other event that no longer allows or requires the Employee to remain with the Company, then the Company shall pay to the Employee a bonus equal to three (3) times the Employee's Annual Compensation (for purposes of this Paragraph 3.2(a), "Annual Compensation" shall be defined as the sum of the Employee's then-current Base Salary and the average of the two (2) highest bonuses paid to the Employee by the Company) plus the amount of I.R.S. Code 280 G taxes payable by the Employee. In addition, all stock options referred to in this Agreement, whether earned or unearned, shall be deemed to be valued at two (2) times the then aggregate price value of the Company's capital stock (See Paragraph 3.9). The bonus shall be paid to the Employee and the options purchased from the Employee prior to the Closure date of such an event taking place. The bonus shall be payable to the Employee whether or not the Employee elects to terminate this Agreement pursuant to Paragraph 7.3 below." 2. Amendment of Paragraph 7.3. Paragraph 7.3 of the Employment Agreement is hereby amended and restated in its entirety to read as follows: "7.3 Termination by Employee for Cause. Employee may terminate this Agreement only for cause, which shall be limited to any one of the following: "(a) The sale of all or substantially all of the Company's assets to a person unaffiliated with the Company or the occurrence of a Change of Control, in either case without Employee's prior written consent, which consent may be given or withheld by Employee in his sole and arbitrary discretion. "(b) The Company's material breach of any of the terms and conditions of this Agreement, provided that termination pursuant to this subsection (b) shall not constitute a valid termination for cause unless the Board shall have first received written notice from Employee stating with specificity the nature of such material breach and affording the Company at least thirty (30) days to cure the material breach alleged. "Upon any termination of this Agreement by Employee for cause, Employee shall not be required to render or to provide any further services pursuant to this Agreement and shall be entitled to receive in one lump sum within fifteen (15) days following notice of such termination, a termination payment equal, in the case of termination under (a) above, three (3) times the Employee's Annual Compensation (as defined in Paragraph 3.2(a) of this Agreement) and equal, in the case of termination under (b) above, to the monetary value (not discounted to present value) of all of the compensation, including all the options, and other benefits payable to Employee pursuant to this Agreement for the remainder of the term hereof. Such compensation shall be in addition to, and not in lieu of, any other damages to which Employee may otherwise be entitled." 3. Effect of Amendment. Except as specifically amended herein, the Employment Agreement shall remain in full force and effect without any other changes, amendments or modifications. 4. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 5. Further Acts. The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Amendment. 6. Entire Agreement. This Amendment and the Employment Agreement, as amended by this Amendment, sets forth the entire understanding of the parties with respect to the subject matter of the Employment Agreement, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. -2- IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first above written. "Company" COMMONWEALTH ENERGY CORPORATION By: /s/ ROBERT C. PERKINS ------------------------------------- Name: Robert C. Perkins Title: Chairman of the Compensation Committee By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- "Employee" /s/ IAN B. CARTER ----------------------------------------- Ian B. Carter -3- EX-10.3 5 a97391exv10w3.txt EXHIBIT 10.3 EXHIBIT 10.3 CONFIDENTIAL SEVERANCE AGREEMENT AND GENERAL RELEASE This Confidential Severance Agreement and General Release (this "Agreement") is hereby entered into by and between James L. Oliver, an individual (the "Executive"), and Commonwealth Energy Corporation, a California corporation (the "Company"). RECITALS A. The Executive has been employed by the Company pursuant to an Employment Agreement by and between the Company and the Executive dated as of November 1, 2000 (the "Employment Agreement"), serving as Chief Financial Officer of the Company; B. The Executive and the Company determined that it is in their mutual best interests that the Executive resign his employment with the Company on the terms and conditions set forth in this Agreement; and C. On October 8, 2001, Commonwealth's Board of Directors approved the grant to the Executive of options to purchase 500,000 shares of Commonwealth's Common Stock with an exercise price of $2.75 per share (the "Options"). No option agreement has been executed by both the Company and the Executive with respect to the Options. AGREEMENT In consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Effective Date. Except as otherwise provided herein, this Agreement shall be effective on the date that it has been executed by both of the parties, and if the parties hereto execute this Agreement on different dates, the latter of such dates (the "Effective Date"). 2. Resignation. The Executive hereby voluntarily, unconditionally and irrevocably resigns as an employee, officer and director of the Company and any of its parents, direct or indirect subsidiaries, affiliates, divisions or related entities (collectively referred to herein as the "Company and its Related Entities"), effective as of 11:59 p.m. on February 20, 2004 (the "Resignation Date"). The Company accepts such resignation, and the Executive is relieved of all duties after the Resignation Date. 3. Continuation of Benefits After the Resignation Date. Except as expressly provided in this Agreement or in the plan documents governing the Company's employee benefit plans, after the Resignation Date, the Executive will no longer be eligible for, receive, accrue, or participate in any other benefits or benefit plans provided by the Company and its Related Entities, including, without limitation, medical, dental and life insurance benefits, and the Company's 401(k) retirement plan; provided, however, that nothing in this Agreement shall waive the Executive's right to any vested amounts in the Company's 401(k) retirement plan, which amounts shall be handled as provided in the plan 4. COBRA Benefits. Nothing in this Agreement is intended to alter the Executive's availability to purchase continuation coverage under the terms of COBRA, and the Executive shall retain all rights afforded under that law. 5. Normal Salary Through Resignation Date. The Company shall pay Executive all wages earned through the Resignation Date and Executive's earned but unused vacation (89.67 hours, totaling $10,346.32, less applicable withholdings), on the Resignation Date. 6. Special Payments and Benefits. In return for Executive's promises in this Agreement, if Executive does not revoke the Agreement as provided in Section 12(c), below, the Company will provide Executive with the following special payments and benefits: (a) A payment in the amount of $72,000, less deductions required by law, by check mailed to Executive eight days after the Effective Date, or if the eighth day falls on a day which is not a business day, the next business day after such eighth day. (b) Eighteen payments of $20,000 per month, less legally required deductions, commencing on the Company's first regular payday in March, 2004, that is at least eight days after the Effective Date, and ending in August, 2005, by checks directly deposited or (at his option) mailed to Executive on the Company's first regular payday each month during the 18-month payment period. (c) The Company shall execute and deliver to the Executive a stock option agreement in the form attached hereto as Exhibit A with respect to the Options (the "Option Agreement"). 7. Acknowledgement of Total Compensation and Indebtedness. The Executive acknowledges and agrees that the cash payments and the issuance of the Option Agreement under Sections 5 and 6 of this Agreement extinguish any and all obligations for monies, or other compensation or benefits that the Executive claims or could claim to have earned or claims or could claim is owed to him as a result of his employment by the Company through the Resignation Date, under the Employment Agreement or otherwise. 8. Status of Related Agreements and Future Employment. (a) Agreements Between the Executive and the Company. The Executive and the Company agree that, in addition to this Agreement and the Option Agreement, the Employment Agreement attached hereto as Exhibit B and the Indemnification Agreement dated as of November 1, 2000, attached hereto as Exhibit C (the "Indemnification Agreement") are the only other executed agreements between the Company and the Executive. (b) Employment Agreement. Except as otherwise provided herein, the parties agree that the Employment Agreement shall be terminated as of the Resignation Date. Notwithstanding the termination of the Employment Agreement, the Executive acknowledges that the duties and obligations set forth in Section 5 of the Employment Agreement extend beyond the Resignation Date. In the event that any provision of this Agreement conflicts with -2- Section 5 of the Employment Agreement, the terms and provisions of Section 5 of the Employment Agreement shall control. (c) Option Agreements. The parties agree that the Option Agreement shall constitute the only valid and effective stock option agreement between the Executive and the Company and that any and all other stock option agreements between the Executive and the Company are terminated and are of no effect as of the Effective Date. (d) Indemnification Agreement. Notwithstanding the termination of the Employment Agreement, the Executive and the Company acknowledge and agree that the terms of the Indemnification Agreement shall remain in effect with respect to claims against the Executive based on actions arising prior to the Resignation Date and in connection with any services provided pursuant to Section 18 of this Agreement. 9. Release by the Executive. Except as otherwise expressly provided in this Agreement, the Executive, for himself and his heirs, executors, administrators, assigns, affiliates, successors and agents (collectively, the "Executive's Affiliates") hereby fully and without limitation releases and forever discharges the Company and its Related Entities, and each of their respective agents, representatives, shareholders, owners, officers, directors, employees, consultants, attorneys, auditors, accountants, investigators, affiliates, successors and assigns (collectively, the "Company Releasees"), both individually and collectively, from any and all rights, claims, demands, liabilities, actions, causes of action, damages, losses, costs, expenses and compensation, of whatever nature whatsoever, known or unknown, fixed or contingent, which the Executive or any of the Executive's Affiliates has or may have or may claim to have against the Company Releasees by reason of any matter, cause, or thing whatsoever, from the beginning of time to the Effective Date ("Claims"), including, without limiting the generality of the foregoing, any Claims arising out of, based upon, or relating to the recruitment, hiring, employment, relocation, remuneration, investigation, or termination of the Executive by any of the Company Releasees, the Executive's tenure as an employee and/or an officer of any of the Company Releasees, any agreement or compensation arrangement between the Executive and any of the Company Releasees (including, without limitation, the Employment Agreement), or any act or occurrence in connection with any actual, existing, proposed, prospective or claimed ownership interest of any nature of the Executive or the Executive's Affiliates in equity capital or rights in equity capital or other securities of any of the Company Releasees to the maximum extent permitted by law. The Executive specifically and expressly releases any Claims arising out of or based on: the California Fair Employment and Housing Act, as amended; Title VII of the Civil Rights Act of 1964, as amended; the Americans With Disabilities Act; the National Labor Relations Act, as amended; the Equal Pay Act; ERISA; any provision of the California Labor Code; the California common law on fraud, misrepresentation, negligence, defamation, infliction of emotional distress or other tort, breach of contract or covenant, violation of public policy or wrongful termination; state or federal wage and hour laws; or any other state or federal law, rule, or regulation dealing with the employment relationship. 10. Waiver of Civil Code Section 1542. (a) The Executive understands and agrees that the release provided herein extends to all Claims released above whether known or unknown, suspected or -3- unsuspected. The Executive expressly waives and relinquishes any and all rights he may have under California Civil Code Section 1542, which provides as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." (b) The Executive expressly waives and releases any rights and benefits which he has or may have under any similar law or rule of any other jurisdiction. It is the intention of each party through this Agreement and with the advice of counsel to fully, finally and forever settle and release the Claims as set forth above. In furtherance of such intention, the release herein given shall be and remain in effect as a full and complete release of such matters notwithstanding the discovery of any additional Claims or facts relating thereto. 11. Release of Federal Age Discrimination Claims by the Executive. The Executive hereby knowingly and voluntarily waives and releases all rights and claims, known or unknown, arising under the Age Discrimination In Employment Act of 1967, as amended, which he might otherwise have had against the Company or any of the Company Releasees regarding any actions which occurred prior to the Effective Date. 12. Rights Under the Older Workers Benefit Protection Act. In accordance with the Older Workers Benefit Protection Act of 1990, the Executive hereby is advised of the following: (a) The Executive has the right to consult with an attorney before signing this Agreement and is encouraged by the Company to do so; (b) The Executive has twenty-one (21) days from his receipt of this Agreement to consider it; and (c) The Executive has seven (7) days after signing this Agreement to revoke Sections 7, 9 and 11 of this Agreement (which must be revoked in their entirety and as a group), and such Sections of this Agreement (as a group) will not be effective until that revocation period has expired without exercise ("Settlement Date"). The Executive agrees that in order to exercise his right to revoke this Agreement within such seven (7) day period, he must do so in a signed writing delivered to the Company's Chief Executive Officer before the close of business on the seventh calendar day after the Effective Date. 13. Confidentiality of Agreement. After the execution of this Agreement by the Executive, neither the Executive, his attorney, nor any person acting by, through, under or in concert with them, shall disclose any of the terms of or amount paid under this Agreement (other than to state that the Company has filed this Agreement and/or agreements related thereto as public documents) or the negotiation thereof to any individual or entity; provided, however, that the foregoing shall not prevent such disclosures by Executive to his attorney, tax advisors and/or immediate family members, or as may be required by law. -4- 14. No Filings. The Executive represents that he has not filed any lawsuits, claims, charges or complaints against the Company or the Company Releasees with any local, state or federal agency or court from the beginning of time to the date of execution of this Agreement; that he will not do so at any time hereafter based upon events prior to the date of execution of this Agreement; that he will not induce, encourage, solicit or assist any other person or entity to file or pursue any proceeding of any kind against the Company or the Company Releasees; and that, if any such agency or court ever assumes jurisdiction over any such lawsuit, claim, charge or complaint and/or purports to bring any legal proceeding, in whole or in part, on behalf of the Executive based upon events occurring prior to the execution of this Agreement, the Executive will request such said agency or court to withdraw from and/or to dismiss the lawsuit, claim, charge or complaint with prejudice. 15. Proprietary Information. The Executive acknowledges that certain information, observations and data obtained by him during the course of or related to his employment with the Company and its Related Entities (including, without limitation, projection programs, business plans, business matrix programs (i.e., measurement of business), strategic financial projections, certain financial information, shareholder information, product design information, marketing plans or proposals, personnel information, customer lists and other customer information) are the sole property of the Company and its Related Entities and constitute Confidential Information of the Company and its Related Entities as defined in Section 5 of the Employment Agreement. The Executive represents and warrants that he has returned all files, customer lists, financial information and other property of the Company and its Related Entities that were in the Executive's possession or control without retaining copies thereof. The Executive further represents and warrants that he does not have in his possession or control any files, customer lists, financial information or other property of the Company and its Related Entities. In addition to his promises in Section 5 of the Employment Agreement, the Executive agrees that he will not disclose to any person or use any such information, observations or data without the written consent of the Company's Board of Directors or the Board of Directors of the Company's parent. If the Executive is served with a deposition subpoena or other legal process calling for the disclosure of such information, or if he is contacted by any third person requesting such information, he will notify the Company's Chief Executive Officer as soon as is reasonably practicable after receiving notice and will cooperate with the Company and its Related Entities in minimizing the disclosure thereof. 16. No Solicitation. During the period of the severance pay under Section 6(b), above, the Executive agrees that he will not solicit or attempt to solicit any customer or supplier of the Company to do business with any person or entity other than the Company, and will not solicit for employment any person who is an officer, manager, employee or consultant of the Company. 17. Equitable Remedies. The Executive acknowledges that any unfair competition or misuse of trade secret or Confidential Information belonging to the Company and its Related Entities, or any violation of Section 5 of the Employment Agreement or Sections 13, 15 and 16 of this Agreement, will result in irreparable harm to the Company and/or its Related Entities, and therefore, the Company and its Related Entities shall, in addition to any other remedies, be entitled to immediate injunctive relief. -5- 18. Cooperation Clause. (a) To facilitate the orderly conduct of the Company's and its Related Entities' businesses, during the period of the severance pay under Section 6(b), above, the Executive agrees to cooperate, at no charge, with the Company's and its Related Entities' reasonable requests for information or assistance related to the time of his employment, including, without limitation (i) assisting the Company and its Related Entities to insure that the projection program, business plans, business matrix program (i.e., measurement of business) and strategic financial projections are transitioned to the Company and its Related Entities; (ii) assisting the Company and its Related Entities in connection the reorganization and the strategic plan described in the Registration Statement on Form S-4 filed by American Energy Group, Inc. with the Securities and Exchange Commission in January 2004; and (iii) otherwise assist the new Chief Financial Officer of the Company and its Related Entities in connection with his transition. (b) During the period of the severance pay under Section 6(b), above, the Executive agrees to cooperate, at no charge, with the Company and its Related Entities and its or their counsel (i) in any investigations (including internal investigations) and audits of the Company's or any of its Related Entities' management's current and past conduct and business and accounting practices and (ii) in the Company's defense of, or other participation in, any administrative, judicial, or other proceeding arising from any charge, complaint or other action which has been or may be filed relating to the period during which the Executive was engaged in employment with the Company and/or its Related Entities. Except as required by law or authorized in advance by the Company's Board of Directors or the Board of Directors of the Company's parent, the Executive will not communicate, directly or indirectly, with any third party concerning the management or governance of the Company and/or its Related Entities, the operations of the Company and its Related Entities, the legal positions taken by the Company and/or its Related Entities, or the financial status of the Company and/or its Related Entities. The Executive shall direct inquiries from third parties on these issues to the Company. The Executive acknowledges that any violation of this Section 18 will result in irreparable harm to the Company and its Related Entities and will give rise to an immediate action by the Company and/or its Related Entities for injunctive relief. 19. No Future Employment. Except for any requests for assistance under Section 18, above, the Executive understands that his employment with the Company and its Related Entities will irrevocably end as of the Resignation Date and will not be resumed at any time in the future. Executive agrees that he will not apply for, seek or accept employment by the Company or its Related Entities at any time, unless invited to do so by the Company or any of its Related Entities. 20. Non-disparagement. The Executive agrees not to disparage or otherwise publish or communicate derogatory statements about the Company and/or its Related Entities, its/their respective management, products and services to any third party. It shall not be a breach of this Section 20 for the Executive to testify truthfully in any judicial or administrative proceeding, or to make factually accurate statements in legal or public filings. -6- 21. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to principles of conflict of laws. 22. Venue. The parties hereby agree that all actions or proceedings arising directly or indirectly hereunder, whether instituted by the Executive or the Company, shall be litigated in courts having situs within the State of California, County of Orange, and the each of the parties hereby expressly consents to the jurisdiction of any local, state or Federal court located within said state and county, and consent that any service of process in such action or proceeding may be made by personal service upon the parties wherever such parties may be located, respectively, or by certified or registered mail directed to the Executive at his/its last known address. The parties hereby waive trial by jury in connection with any future dispute between them, any objection based on forum non conveniens, and any objection to venue of any action instituted hereunder. 23. Attorneys' Fees. Except as otherwise provided herein, in any action, litigation or proceeding between the parties arising out of or in relation to this Agreement or the attachments hereto, including any purported breach of any of them, each party shall bear its own costs and expenses, including reasonable attorneys' fees. 24. Non-Admission of Liability. The parties understand and agree that neither the payment of any sum of money nor the execution of this Agreement by the parties will constitute or be construed as an admission of any wrongdoing or liability whatsoever by any party. 25. Severability. If any one or more of the provisions contained herein (or parts thereof), or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity and enforceability of any such provision in every other respect and of the remaining provisions hereof will not be in any way impaired or affected, it being intended that all of the rights and privileges shall be enforceable to the fullest extent permitted by law. 26. Entire Agreement. This Agreement, together with the attachments hereto, represents the sole and entire agreement among the parties and, except as expressly stated herein, supersedes all prior agreements, negotiations and discussions among the parties with respect to the subject matters contained herein. 27. Waiver. No waiver by any party hereto at any time of any breach of, or compliance with, any condition or provision of this Agreement to be performed by any other party hereto may be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time. 28. Amendment. This Agreement may be modified or amended only if such modification or amendment is agreed to in writing and signed by duly authorized representatives of the parties hereto, which writing expressly states the intent of the parties to modify this Agreement. -7- 29. Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original as against any party that has signed it, but all of which together will constitute one and the same instrument. 30. Assignment. This Agreement inures to the benefit of and is binding upon the Company and its successors and assigns, but the Executive's rights under this Agreement are not assignable, except to his estate. 31. Notice. All notices, requests, demands, claims and other communications hereunder shall be in writing and shall be deemed to have been duly given (a) if personally delivered; (b) if sent by telecopy or facsimile; or (c) if mailed by overnight or by first class, certified or registered mail, postage prepaid, return receipt requested, and properly addressed as follows: If to the Executive: James L. Oliver 2548 East Hilda Place Anaheim, California 92806 Fax: (714) 535-8360 with a copy to: Fisher & Phillips LLP 18400 Von Karman Avenue, Suite 400 Irvine, California 92612-1597 Attn: Karl Lindegren, Esq. Fax: (949) 851-0152 If to the Company: Commonwealth Energy Corporation 15901 Red Hill Avenue, Suite 100 Tustin, CA 92780 9390 Gateway Drive Attn: Chief Executive Officer Fax: (714) 259-2538 with a copy to: Paul, Hastings, Janofsky and Walker, LLP 695 Town Center Drive, 17th Floor Costa Mesa, California 92626 Attn: John F. Della Grotta, Esq. Fax: (714) 979-1921 Such addresses may be changed, from time to time, by means of a notice given in the manner provided above. Notice will conclusively be deemed to have been given when personally delivered (including, but not limited to, by messenger or courier); or if given by mail, on the third day after being sent by first class, certified or registered mail; or if given by Federal Express or other similar overnight service, on the date of delivery; or if given by telecopy or facsimile machine during normal business hours on a business day, when confirmation of transmission is indicated by the sender's machine; or if given by telecopy or facsimile machine at any time other than during normal business hours on a business day, the first business day following when confirmation of transmission is indicated by the sender's machine. Notices, requests, demands and other communications delivered to legal counsel of any party hereto, -8- whether or not such counsel shall consist of in-house or outside counsel, shall not constitute duly given notice to any party hereto. 32. Miscellaneous Provisions. (a) The parties represent that they have read this Agreement and fully understand all of its terms; that they have conferred with their attorneys, or have knowingly and voluntarily chosen not to confer with their attorneys about this Agreement; that they have executed this Agreement without coercion or duress of any kind; and that they understand any rights that they have or may have and sign this Agreement with full knowledge of any such rights. (b) Both parties have been represented by counsel who have participated in the drafting of this Agreement. The language in all parts of this Agreement must be in all cases construed simply according to its fair meaning and not strictly for or against any party. Whenever the context requires, all words used in the singular must be construed to have been used in the plural, and vice versa, and each gender must include any other gender. The captions of the Sections of this Agreement are for convenience only and must not affect the construction or interpretation of any of the provision herein. (c) Each provision of this Agreement to be performed by a party hereto is both a covenant and condition, and is a material consideration for the other party's performance hereunder, and any breach thereof by the party will be a material default hereunder. All rights, remedies, undertakings, obligations, options, covenants, conditions and agreements contained in this Agreement are cumulative and no one of them is exclusive of any other. Time is of the essence in the performance of this Agreement. (d) Each party acknowledges that no representation, statement or promise made by any other party, or by the agent or attorney of any other party, except for those in this Agreement, has been relied on by him or it in entering into this Agreement. (e) Each party understands that the facts with respect to which this Agreement is entered into may be materially different from those the parties now believe to be true. Except in the case where the existence of any additional or different facts constitutes the breach of a representation or warranty, each party accepts and assumes this risk and agrees that this Agreement and the releases in it shall remain in full force and effect, and legally binding, notwithstanding the discovery or existence of any additional or different facts, or of any claims with respect to those facts. (f) Unless expressly set forth otherwise, all references herein to a "day" are deemed to be a reference to a calendar day. All references to "business day" mean any day of the year other than a Saturday, Sunday or a public or bank holiday in Orange County, California. Unless expressly stated otherwise, cross-references herein refer to provisions within this Agreement and are not references to the overall transaction or to any other document. (g) Each party to this Agreement will cooperate fully in the execution of any and all other documents and in the completion of any additional actions that may be necessary or appropriate to give full force and effect to the terms and intent of this Agreement. -9- EACH OF THE PARTIES ACKNOWLEDGES THAT HE/IT HAS READ THIS AGREEMENT, UNDERSTANDS IT AND IS VOLUNTARILY ENTERING INTO IT, AND UNDERSTANDS THAT THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS . IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the dates indicated below. "EXECUTIVE" /s/ JAMES L. OLIVER ------------------------------------ JAMES L. OLIVER Dated: February 20, 2004 ------------------------------- "COMPANY" COMMONWEALTH ENERGY CORPORATION, a California corporation By: /s/ IAN B. CARTER --------------------------------- Printed Name: Ian B. Carter ----------------------- Title: Chairman and CEO ------------------------------ Dated: February 21, 2004 ------------------------------ -10- EXHIBIT A AMENDED AND RESTATED STOCK OPTION AGREEMENT (INCENTIVE STOCK OPTION) This Amended and Restated Stock Option Agreement (this "Agreement"), is entered into effective as of the Grant Date (as defined in paragraph 1), by and between Commonwealth Energy Corporation, a California corporation (the "Company"), and the employee, director or officer of the Company listed in paragraph 1 (the "Optionee"). RECITALS WHEREAS, the Company maintains the 1999 Equity Incentive Plan, as amended (the "Plan"), which is incorporated into and forms a part of this Agreement; WHEREAS, the Compensation Committee of the Company's Board of Directors (the "Committee") administers the Plan; WHEREAS, the Optionee has previously been granted an incentive stock option to purchase shares of the Company's common stock under the Plan; WHEREAS, the Optionee has previously been issued a stock option agreement dated November 1, 2000 (the "Original Agreement"); and WHEREAS, the Company and the Optionee desire to amend and restate the Option Agreement in its entirety in the manner set forth in this Agreement. -1- AGREEMENT 1. Terms of Award. (a) The following terms used in this Agreement shall have the meanings set forth in this paragraph 1: (i) The "Optionee" is James L. Oliver. (ii) The "Grant Date" is November 1, 2000. (iii) The number of "Option Shares" shall be 500,000 shares of Common Stock. (iv) The "Exercise Price" is $2.75 per share. (b) Other terms used in this Agreement are defined pursuant to paragraph 14 or elsewhere in this Agreement. 2. Award and Exercise Price. This Agreement specifies the terms of the option (the "Option") granted to the Optionee to purchase the number of Option Shares of Common Stock at the Exercise Price per share as set forth in paragraph 1. The Option is intended to constitute an "incentive stock option" as that term is used in section 422 of the Code, to the maximum extent permitted by the Code. 3. Date of Exercise and Vesting. (a) Subject to the limitations of this Agreement, the Option shall be exercisable according to the following schedule, with respect to each installment shown in the schedule on and after the Vesting Date applicable to such installment:

-2- (b) An installment shall not become exercisable on the otherwise applicable vesting date if the Optionee's Termination Date (as defined in paragraph 14) occurs on or before such vesting date; provided, however, that such Option Shares may become fully vested and exercisable in the discretion of the Board. Subject to the provisions of paragraph 4, the Option may be exercised on or after the Termination Date only as to that portion of the Option Shares as to which it was exercisable immediately prior to the Termination Date, or as to which it became exercisable on the Termination Date in accordance with this paragraph 3. (c) Notwithstanding any other provision of this Agreement, in the event of a Change in Control (as defined below), which is determined by the Board to be a hostile takeover, the right to exercise the Option shall be accelerated as to all of the remaining shares then covered by the Option which have not otherwise vested under the schedule set forth in this paragraph 3. For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, other than a trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of (A) the outstanding shares of common stock of the Company, or (B) the combined voting power of the Company's then-outstanding securities entitled to vote generally in the election of directors; (ii) during any period of not more than two consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (iii) below) whose election by the Board or nomination by the Company's shareholders was approved by a vote of at least a majority of the directors still in office who either were in office at the beginning of such period or whose election or nomination for election was previously so approved, ceases for any reason to constitute a majority of the Board; or (iii) the Company is a party to a merger or consolidation which results in the holders of voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the Company sells or disposes of all or substantially all of the Company's assets or any transaction having similar effect is consummated. 4. Expiration. (a) The Option shall not be exercisable after the Company's close of business on the last business day that occurs prior to the Expiration Date. (b) The "Expiration Date" shall be the seven-year anniversary of the Grant Date. (c) Notwithstanding subparagraphs (a) and (b) of this paragraph 4, the Optionee acknowledges the Option will cease to qualify as an incentive stock option and will be treated as nonqualified stock option under the Plan if (i) the Optionee's employment is Terminated for due to death or disability within the meaning of Section 22(e)(3) of the Code and the Option is exercised more than one year after the date of such death or disability; or (ii) the Optionee is Terminated for any reason other than death or disability within the meaning of Section 22(e)(3) of the Code and the Option is exercised more than three months year after the Termination Date. 5. Method of Option Exercise. (a) Subject to the terms of this Agreement and the Plan, the Option may be exercised in whole or in part by filing a written notice, in the form attached hereto as Exhibit A, with the Secretary of the Company at its corporate headquarters prior to the Company's close of business on the last business day that occurs prior to the Expiration Date. Such notice shall specify the number of shares of Common Stock which the Optionee elects to purchase, and shall be accompanied by payment of the Exercise Price for such shares of Common Stock indicated by the Optionee's election. Payment shall be by cash or by check payable to the Company or, where expressly approved for the Optionee by the Board and where permitted by law: (i) by cancellation of indebtedness of the Company to the Optionee; (ii) by surrender of shares that either: (A) have been owned by the Optionee for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (B) were obtained by the Optionee in the public market; (iii) by waiver of compensation due or accrued to Optionee for services rendered; (iv) with respect only to purchases upon exercise of the Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from the Optionee and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby the Optionee irrevocably elects to exercise the Option and to sell a portion of the Option Shares so purchased to pay for the Exercise Price, and whereby the NASD -3- Dealer irrevocably commits upon receipt of such Option Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from the Optionee and a NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and to pledge the Option Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Option Shares to forward the Exercise Price directly to the Company; or (v) by any combination of the foregoing. 6. Transferability of Option. The Option granted hereunder may not be transferred by the Optionee except upon death by will or the laws of descent and distribution. Unless the context otherwise requires, references herein to the Optionee are deemed to include any permitted transferee under this paragraph 5. During the Optionee's lifetime, only the Optionee (or his or her guardian or legal representative) may exercise the Option. In the event of the Optionee's death, the Option (to the extent still held by the Optionee at such time) may be exercised only (i) by the executor or administrator of the Optionee's estate or the person or persons to whom his or her rights under the Option shall pass by will or the laws of descent and distribution and (ii) to the extent that the Optionee was entitled hereunder at the date of the Optionee's death. 7. Withholding of Taxes. (a) Withholding Generally. Upon exercise of this Option, the Company may require the Optionee to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for the Option Shares. (b) Stock Withholding. When, under applicable tax laws, the Optionee incurs tax liability in connection with the exercise or vesting of this Option that is subject to tax withholding and the Optionee is obligated to pay the Company the amount required to be withheld, the Committee may in its sole discretion allow the Optionee to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Option Shares to be issued that number of shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by the Optionee to have Option Shares withheld for this purpose will be made in accordance with the requirements established by the Board and be in writing in a form acceptable to the Board. 8. Compliance With Securities Laws. This Option shall not be exercisable if such exercise would involve a violation of any applicable Federal or state securities law. 9. No Rights As Shareholder. The Optionee shall not have any rights of a shareholder with respect to the shares subject to the Option, until a stock certificate has been duly issued following exercise of the Option as provided herein. 10. Plan Governs. Notwithstanding anything in this Agreement to the contrary, the terms of this Agreement shall be subject to the terms of the Plan, a copy of which may be obtained by the Optionee from the office of the Secretary of the Company; and this Agreement is subject to all interpretations, amendments, rules and regulations promulgated by the Board from time to time pursuant to the Plan. 11. Not An Employment Contract. The Option will not confer on the Optionee any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate or modify the terms of such Optionee's employment or other service at any time. -4- 12. Adjustments. In the event that the number of outstanding shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then the Exercise Prices of and number of Option Shares subject to this Option will be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Board. 13. Amendment. Except as otherwise provided herein, any provision of this Agreement may be amended or waived only with the prior written consent of the Optionee and the Board. 14. Certain Definitions. For the purposes of this Agreement, the following terms shall have the meanings set forth below: (a) "Board" means the Board of Directors of the Company, or if the Board has delegated responsibility for any matter with respect to the Plan to the Committee, the Compensation Committee of the Board. (b) "Code" shall mean the Internal Revenue Code of 1986, as amended, and any successor statute. (c) "Common Stock" shall mean the Common Stock, no par value per share, of the Company, and any other shares into which such stock may be changed by reason of a recapitalization, reorganization, merger, consolidation or any other change in the corporate structure or capital stock of the Company. (d) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and any successor statute. (e) "Fair Market Value" of a share of Common Stock of the Company shall mean, as of any date, the value of a share of the Company's Common Stock determined as follows: (1) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in The Wall Street Journal; (2) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal; (3) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal; or (4) if none of the foregoing is applicable, by the Board in good faith. (f) "Securities Act" shall mean the Securities Act of 1933, as amended, and any successor statute. (g) "Subsidiary" shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (h) "Termination" or "Terminated" means that the Optionee has for any reason ceased to provide services as an employee, officer, director, consultant, independent contractor, or advisor to the Company or a Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (1) sick leave, (2) military leave, or (3) any other leave of absence approved by the Board, provided, that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave of absence, the Board may make such provisions respecting suspension of vesting of the Option while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in this agreement. (i) "Termination Date" shall mean the effective date on which the Optionee ceased to provide services, as determined by the Board in its sole discretion. -5- 15. Registration Rights. Optionee shall be entitled to include the shares purchased or purchasable upon the exercise of the Option in any registration statement hereafter filed by the Company under the Securities Act on a basis no less favorable to the Optionee than the basis on which any other shareholder of the Company is entitled to include such shareholder's shares in the registration statement. 16. Employment Agreement. The parties agree that this Agreement satisfies the Company's obligations under, and supercedes, Section 3.4 of the Employment Agreement dated November 1, 2000 between the Optionee and the Company. Notwithstanding anything in this Agreement, all other provisions of the Employment Agreement, including but not limited to Sections 3.3 and 3.10, remain in full force and effect. 17. Original Agreement. The parties hereby agree that the Original Agreement is hereby amended and restated in its entirety as set forth herein. -6- SIGNATURE PAGE TO STOCK OPTION AGREEMENT IN WITNESS WHEREOF, the parties have executed this Agreement to reflect the grant which was authorized on the Grant Date as first above written. COMMONWEALTH ENERGY CORPORATION By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- OPTIONEE: -------------------------------------------- James L. Oliver -7- EXHIBIT A FORM OF LETTER TO BE USED TO EXERCISE NONQUALIFIED STOCK OPTION - --------------- Date Commonwealth Energy Corporation 15901 Red Hill Avenue, Suite 100 Tustin, CA 92780 Attention: Chief Financial Officer I wish to exercise the stock option granted on November 1, 2000 and evidenced by an Amended and Restated Stock Option Agreement to acquire __________ shares of Common Stock of Commonwealth Energy Corporation, at an option price of $2.75 per share. In accordance with the provisions of the Stock Option Agreement, I wish to make payment of the exercise price (please check all that apply): [ ] in cash [ ] by delivery of shares of Common Stock held by me [ ] by simultaneous sale through a broker of Option Shares [ ] by authorizing the Company to withhold Option Shares Please issue a certificate for these shares in the following name: - ----------------------------------- Name - ----------------------------------- Address Very truly yours, ---------------------------------------- Signature ---------------------------------------- Typed or Printed Name ---------------------------------------- Social Security Number -1- EXHIBIT B EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of November 1, 2000 between Commonwealth Energy Corporation, a California corporation (the "Company") and James L. Oliver ("Employee"), with reference to the following: A. Employee has heretofore acted as the Chief Financial Officer to the Company and its affiliated companies, and in that capacity has rendered valuable services to the Company. B. The Company and Employee desire that Employee continue to provide services to the Company as an employee of the Company on the terms provided herein. NOW, THEREFORE, in consideration of the various covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Term of Employment. The Company hereby employs Employee and Employee accepts such employment for a term of fifty-two (52) months, commencing on November 1, 2000 and terminating on December 31, 2004 (the "Initial Term"); notwithstanding the foregoing, however, the term of this Agreement is subject to earlier termination as provided in Section 7 below. 2. Title and Responsibilities. During the term of this Agreement, Employee shall serve as Chief Financial Officer of the Company. In the performance of such duties Employee shall report directly to (and only to) the Chief Executive Officer of the Company (the "CEO") and shall, subject to the reasonable supervision and control of the CEO, have the duties, responsibilities and authority commensurate with such positions in companies comparable to the Company. Employee's office location shall at all times be in offices of the Company located in Orange County, California. Employee may be required to travel from time to time to the extent reasonably necessary to the performance of his duties hereunder. Employee shall in good faith and consistent with his ability, experience and talent perform the duties set forth in this Section 2, and shall devote substantially all of his productive time and efforts to the performance of such duties; provided, however, that Employee may participate in civic, charitable, and other not-for-profit activities and manage personal and family investments to the extent that the same does not materially conflict with the discharge of his duties hereunder. 3. Compensation and Benefits. The Company shall pay and/or provide the following compensation and benefits to Employee during the term hereof, and Employee shall accept the same as payment in full for all services rendered by Employee to or for the benefit of the Company: 3.1 Base Salary. The Company shall pay Employee a salary of $150,000 per annum for the first twelve months of the term of this Agreement, $180,000 per annum for the second twelve months of the term, $210,000 per annum for the third twelve months of the term, and $240,000 per annum thereafter (the "Base Salary"). Notwithstanding the foregoing, the Base Salary shall be subject to review from time to time (not less frequently than at the end of each fiscal year of the Company) and, as a result thereof, may be increased (but not decreased) at the discretion of the CEO and the Compensation Committee of the Company's Board of Directors. In determining such increases in the Base Salary, if any, the CEO and the Compensation Committee of the Company's Board of Directors shall take into account, among other things, the Company's achievement of the objectives set forth in its business plan and the Company's results of operations. The Base Salary shall be payable in accordance with -1- the payroll practices of the Company in effect from time to time. 3.2 Bonus. Employee shall be paid a cash bonus of thirty percent of the Employee's annual salary at that time with respect to each calendar year ending December 31st of each year provided that the Company or the Company together with its affiliated companies has met or exceeded the projections in its annual business plan for pretax profit for the time period in question or the board of directors determines that either external or internal factors significantly change the business environment beyond the control of the Employee and said factors adversely influence the achievement of the pretax profit objective of the business plan. The bonus with respect to each calendar year shall be due and payable no later than thirty (30) days following the last day of that year. In addition, the Company has to show net income from operations for the year in which the bonus was earned, except in the case of an expansion year, in which case the bonus will be at the discretion of the Company's Board of Directors. 3.3 Bonus Upon Change in Control of the Company. If during the term of this Agreement there is a Change in Control (as defined below), then the Company shall pay to Employee, concurrently with such Change in Control, a cash bonus in an amount equal to the sum of (a) four times the Employee's then current annual Base Salary; and (b) the amount of taxes payable by Employee under Internal Revenue Code Section 280G with respect to the bonus contemplated by this Section 3.3. The bonus contemplated by this Section 3.3 shall be paid to Employee whether or not Employee elects to terminate this Agreement pursuant to any of the terms of this Agreement. For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of (A) the outstanding shares of common stock of the Company, or (B) the combined voting power of the Company's then-outstanding securities entitled to vote generally in the election of directors; (ii) during any period of not more than two consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (iii) below) whose election by the Board or nomination by the Company's shareholders was approved by a vote of at least a majority of the directors still in office who either were in office at the beginning of such period or whose election or nomination for election was previously so approved, ceases for any reason to constitute a majority of the Board; or (iii) the Company is a party to a merger or consolidation which results in the holders of voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the Company sells or disposes of all or substantially all of the Company's assets or any transaction having similar effect is consummated; or the Company is subject to a hostile takeover in the form of a proxy fight or any other means that allows the company to be controlled by a material change in the Board of Directors. In the event the company is taken over, whether hostile or otherwise, all financial payments and options, earned or otherwise, shall be considered due and owing and shall be considered earned as shown in the following paragraphs 3.1, 3.2, 3.3, 3.4, and 3.7. All payments shall be made to the Employee prior to the changeover date of the event that would take over the company. 3.4 Stock Option Plan. Concurrently herewith, the Company shall grant to Employee stock options entitling Employee to purchase 500,000 shares of the Company's common stock, with an exercise price of $2.75 per share (the "Options"). The right to exercise the Options shall be vested as to 125,000 shares covered thereby immediately upon the grant of the Options. The Options shall vest as to an additional 125,000 shares on each of December 31, 2001, December 31, 2002 and December 31, 2003. The Options shall have a term of seven years (regardless of any termination of Employee's -2- employment, except as required by Section 422 of the Internal Revenue Code with respect to those of the Options that are "incentive" stock options within the meaning of that Section), and shall, to the maximum extent permitted by law, be "incentive" stock options within the meaning of Section 422 of the Internal Revenue Code. Employee shall be entitled to include the shares purchased or purchasable upon exercise of the Options in any registration statement hereafter filed by the Company under the Securities Act of 1933, as amended, on a basis which is no less favorable to Employee than the basis on which any other shareholder of the Company is entitled to include such shareholder's shares in such registration statement. 3.5 Stock Repurchase Option: In the event the company is taken over through any event that takes control of the company itself or by taking control of the Board of Directors, or a sale of assets as defined herein. Whether such a takeover is considered non-consensual or not; hostile or not: all financial payments due to the Employee and all options due to the Employee, at the sole discretion of the employee, shall be considered due and owing and shall be considered earned as shown in the following paragraphs 3.1, 3.2, 3.3, and 3.4. Employee shall have the absolute right, subject to applicable State and Federal securities laws, to be exercised in his sole discretion and in addition to any other compensation or benefits payable to Employee hereunder, to require the Company to repurchase from Employee all capital stock and stock options of the Company then earned or to be earned by Employee at an aggregate repurchase price (see definition below) equal to two (2) times the then aggregate price value of the Company's capital stock; not to exceed a total price of $10.00 per share. The employee, in the employee's sole and absolute discretion, may exercise such right twenty-four (24) hours prior to the closing of such an event. Prior to the closing, as defined herein, the Employee may elect to sell all or some of the Employee's stocks and/or stock options and the Company shall agree to purchase the same capital stock and stock options earned or to be earned by the Employee, at the Employee's sole discretion. The Employee without any representation or warranty by Employee may exercise this option; other than the Employee has good title thereto free of all liens, encumbrances and adverse interests. By Employee delivering to the Company a certificate or certificates representing such capital stock and stock options, or this employment agreement, in each case duly endorsed for transfer or accompanied by appropriate stock powers, and or notice of the exercise of the right to have the Company repurchase the Employee's options and or stock. In which case the Company shall be obligated to immediately deliver to the Employee certified funds representing payment of the purchase price in full for all of the stock, and with regard to the options an amount equal to the difference between the exercise price owed by the Employee for the options and the above referenced repurchase price payable by the Company for the shares that would otherwise be issued in relation to the Employee's options being repurchased by the Company. The term "aggregate price value" shall mean the value of the optioned shares as set forth by the Company for the purposes of calculating the withholding taxes for the applicable issuance period of the options being repurchased. It is acknowledged that any options which vest due to the Change of Control shall be deemed to have been issued on the date of vesting and thus the latest stock price for such options shall be the price used to determine the value for such accelerated vested options. This clause may be invoked by the Employee in the case of any takeover or any Change of Control. 3.6 Other Fringe Benefits. Employee shall be entitled to participate in all of the Company's incentive and benefit plans and arrangements, including, without limitation, all bonus, compensation and other incentive and benefit plans or arrangements made available now or in the future by the Company to its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements, but on a basis no less favorable than that afforded to any other director, officer or employee of the Company. The Company shall also provide to Employee at the Company's expense all health, medical, hospitalization, life and disability insurance provided to other senior executives of the Company. 3.7 Expenses. The Company shall promptly reimburse Employee for all out-of-pocket expenses actually incurred by him in connection with the performance of his duties hereunder, subject to Employee's furnishing the Company with evidence in the -3- form of receipts satisfactory to the Company substantiating the claimed expenditures (such expenses being commensurate with the office and executive position of Employee hereunder, and including first class hotel and travel arrangements). Employee's right to be reimbursed for expenses incurred prior to the termination of this Agreement shall survive termination of this Agreement. 3.8 Vacation. Employee shall be entitled to the number of paid vacation days in each calendar year determined by the Board from time to time for the Company's senior executive officers, but not less than fifteen (15) business days in any calendar year. Employee shall also be entitled to all paid holidays given to the Company's senior executive officers. 3.9 Automobile; Telephone; Etc. During the term hereof the Company shall provide Employee $600 per month for the purposes of the Employee paying for an automobile and related expenses. In addition, the Company shall provide a cell phone and shall reimburse Employee for all charges incurred by him in connection with the use thereof related to the performance of his duties hereunder. 3.10 Withholding and other Deductions. All compensation payable to Employee hereunder shall be subject to such deductions as the Company is from time to time required to make pursuant to law, governmental regulation or order. 4. Representations and Warranties. Employee represents and warrants to the Company that (a) Employee is under no contractual or other restriction or obligation which is inconsistent with the execution of this Agreement, the performance of his duties hereunder, or the other rights of the Company hereunder; and (b) Employee is under no physical or mental disability that would hinder the performance of his duties under this Agreement. The Company represents and warrants to Employee that (i) the execution and delivery of this Agreement by the Company and the performance of its obligations hereunder have been duly authorized by the Board and no further corporate action on the Company's part is necessary to authorize this Agreement and the performance of such obligations; and (ii) this Agreement constitutes the valid and binding obligation of the Company, enforceable by Employee against the Company strictly in accordance with its terms (subject to laws in effect with respect to creditors' rights generally and applicable principles relating to equitable remedies). 5. Confidential Information. Employee acknowledges that the nature of Employee's engagement by the Company is such that Employee will have access to Confidential Information (as hereinafter defined) which has value to the Company. During the term of this Agreement and at all times thereafter, Employee shall keep all of the Confidential Information in confidence and shall not disclose any of the same to any other person, except the Company's personnel entitled thereto and other persons designated in writing by the Company or except as otherwise required by law. Employee shall not use the Confidential Information for Employee's personal gain or benefit outside the scope of Employee's engagement by the Company. The term "Confidential Information," as used herein, means all information or material not generally known by non-Company personnel which (a) gives the Company some competitive business advantage or the opportunity of obtaining such advantage or the disclosure of which could be materially detrimental to the interests of the Company; (b) which is owned by the Company or in which the Company has an interest; and (c) which is either (i) marked "Confidential Information," "Proprietary Information" or other similar marking, (ii) known by Employee to be considered confidential and proprietary by the Company, or (iii) from all the relevant circumstances should reasonably be assumed by Employee to be confidential and proprietary to the Company. 6. "Key Man" Insurance. The Company shall have the right to purchase "key-man" life insurance covering Employee, in the name and for the benefit of the Company and at the Company's expense in any amount not exceeding $2,000,000. Employee shall cooperate in all reasonable respects with the Company's efforts to obtain such insurance and shall submit to any required medical or other examination; provided; however, that if such medical or other examination cannot be conducted by Employee's personal physician, then Employee shall have the right to have his personal physician attend the examination. Upon the termination of his employment hereunder, Employee may acquire -4- any such life insurance policy upon paying the Company an amount equal to the insurance policy's cash surrender value, if any, at the time of termination and reimbursing the Company for the pro rata portion of any premium paid applicable to periods subsequent to the termination. 7. Termination; Separation Compensation. 7.1 Termination. Notwithstanding Section 1 above, Employee's employment with the Company shall terminate upon the earliest to occur of any of the following: the death of Employee; the "total disability" of Employee (as hereinafter defined); the expiration of ten (10) days after the receipt by Employee of written notice of termination executed by the Company if Employee willfully breaches or habitually neglects the duties which he is required to perform under the terms of this Agreement (unless caused by Employee's disability), provided that such termination is approved by not less than a majority of the then current members of the Company's Board of Directors; the expiration of ten (10) days after the receipt by Employee of written notice of termination executed by the Company if Employee shall make any intentional material misrepresentation to the Company's Board of Directors, commit fraud, embezzlement, misappropriation or any felony or other criminal act with respect to Company, and/or any affiliates thereof, whether or not a criminal or civil charge is filed in connection therewith, provided that such termination is approved by not less than a majority of the then current members of the Company's Board of Directors; the expiration of one hundred eighty (180) days after receipt by the Company of written notice of termination executed by Employee; the expiration of ten (10) days after receipt by the Company of written notice of termination executed by Employee if, without Employee's written consent, there shall have been any adverse change in Employee's status, title, position, duties, responsibilities or authorities contemplated by this Agreement; or the expiration of ten (10) days after receipt by the Company of written notice of termination executed by Employee if there shall have been a material breach by the Company of any of its obligations under this Agreement, which default is not cured within such ten day period. 7.2 Definition of Total Disability. For purposes of this Agreement, Employee shall be deemed to have suffered a "total disability" if he is unable to perform substantially all of the duties theretofore performed by him under this Agreement by reason of any medically determinable physical or mental impairment which has lasted for not less than one hundred twenty (120) consecutive calendar days or for one hundred fifty (150) calendar days (whether or not consecutive) in any one hundred eighty (180) calendar days. Prior to termination of this Agreement as a result of total disability, and notwithstanding any failure or inability of Employee to render services hereunder, the Company shall continue to pay and/or provide to Employee the compensation and benefits specified in Section 3 hereof. 7.3 Separation Compensation. If Employee's employment terminates pursuant to Section 7.1(a), (b), (c), (d) or (e) of this Agreement, Employee shall be entitled to receive the Base Salary and other compensation and benefits provided for under this Agreement through the date of termination, but shall not be entitled to receive any severance pay or non-vested employment benefits or options, or any other termination benefits, except to the extent otherwise required to be paid under applicable California law. If Employee's employment terminates for any reason other than pursuant to the provisions of this Agreement referred to in the immediately preceding sentence, then Employee shall be entitled to receive (i) the Base Salary and other compensation and benefits provided for under this Agreement through the date of termination, and -5- (ii) an amount equal to one and one-half times Employee's then current annual Base Salary. The amount specified in clause (ii) above shall be payable in eighteen (18) equal monthly installments, commencing immediately following the termination of Employee's employment. The Company and Employee both agree that the amount of the severance payment specified by the immediately preceding sentence is reasonable under the circumstances existing at the time of the execution of this Agreement. 7.4 Mitigation. Employee shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, and the amount of any payment or benefit provided in this Section 7 shall not be reduced by any compensation earned by Employee as a result of employment by another employer or by any other benefits. 8. General Relationship. Employee shall be considered an employee of the Company within the meaning of all federal, state and local laws and regulations including, but not limited to, laws and regulations governing unemployment insurance, workers' compensation, industrial accident, labor and taxes. 9. Indemnification Agreement. As a material inducement to Employee to execute and deliver this Agreement, concurrently with the execution and delivery of this Agreement, the Company and Employee have executed and delivered an Indemnification Agreement in the form attached to this Agreement as Exhibit A. 10. Miscellaneous. 10.1 Entire Agreement. This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof, supersedes all existing agreements between them concerning such subject matter, and may be modified only by a written instrument duly executed by each party. 10.2 No Assignment. This Agreement may not be assigned by the Company or Employee without the prior written consent of the other (which consent may be granted or withheld by such party in its sole and absolute discretion), and any attempt to assign rights and duties without such written consent shall be null and void and of no force and effect. Subject to the preceding sentence, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 10.3 Survival. The covenants, agreements, representations and warranties contained in or made pursuant to this Agreement shall survive Employee's termination of employment, irrespective of any investigation made by or on behalf of any party. 10.4 Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement. 10.5 Waiver. The failure of either party hereto at any time to enforce performance by the other party of any provision of this Agreement shall in no way affect such party's rights thereafter to enforce the same, nor shall the waiver by either party of any breach of any provision hereof be deemed to be a waiver by such party of any other breach of the same or any other provision hereof. 10.6 Section Headings. The headings of the several sections in this Agreement are inserted solely for the convenience of the parties and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof. 10.7 Notices. All notices and other communications required or permitted under this Agreement shall be in writing, served personally on, telecopied, sent by courier or other express private mail service, or mailed by certified, registered or express United States mail postage prepaid, and shall be deemed given upon receipt if delivered personally, telecopied, or sent by -6- courier or other express private mail service, or if mailed when actually received as shown on the return receipt. Notices shall be addressed as follows: If to the Company, to: Commonwealth Energy Corporation 15901 Red Hill Avenue Suite 100 Tustin, CA 92780 If to Employee, to: James L. Oliver 2548 East Hilda Place Anaheim, CA 92806 Either party may change its address for purposes of this Section by giving to the other, in the manner provided herein, a written notice of such change. 10.8 Severability. All sections, clauses and covenants contained in this Agreement are severable, and in the event any of them shall be held to be invalid by any court, this Agreement shall be interpreted as if such invalid sections, clauses or covenants were not contained herein. 10.9 Applicable Law. This Agreement is made with reference to the laws of the State of California, shall be governed by and construed in accordance therewith, and any court action brought under or arising out of this Agreement shall be brought in any competent court within the State of California, County of Orange. 10.10 Attorneys' Fees. If any legal action, arbitration or other proceeding is brought for the enforcement of this Agreement, or because of any alleged dispute, breach, default or misrepresentation in connection with this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys' fees and other costs it incurred in that action or proceeding, in addition to any other relief to which it may be entitled. 10.11 Gender. Where the context so requires, the use of the masculine gender shall include the feminine and/or neuter genders and the singular shall include the plural, and vice versa, and the word "person" shall include any corporation, firm, partnership or other form of association. 10.12 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date hereinabove set forth. COMMONWEALTH ENERGY CORP. EMPLOYEE By: /s/ Ian B. Carter /s/ James L. Oliver ------------------------------ -------------------------- Ian B. Carter, Chairman of the James L. Oliver Board and CEO By: /s/ Robert C. Perkins ------------------------------ Robert C. Perkins, Director Compensation Committee -7- EXHIBIT C INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered into and is effective as of November 1, 2000, by and between COMMONWEALTH ENERGY CORPORATION, A California corporation (the "Corporation"), and JAMES L. OLIVER, an individual ("Indemnitee"). RECITALS: A. Indemnitee performs a valuable service to the Corporation in his capacity as an officer of the Corporation. B. The shareholders of the Corporation have adopted Bylaws (the "Bylaws") providing for the indemnification of the officers, directors, employees and other agents of the Corporation as authorized by the California Corporations Code, as amended (the "Code"). C. The Bylaws and the Code, by their non-exclusive nature, permit contracts between the Corporation and its directors, officers, employees and other agents with respect to indemnification of such persons. D. In accordance with the authorization provided by the Bylaws and the Code, the Corporation is entitled to purchase a policy or policies of Directors' and Officers' Liability Insurance ("Insurance") covering certain liabilities which may be incurred by its directors and officers in the performance of their duties to the Corporation. E. As a result of developments affecting the terms, scope and availability of Insurance, there exists general uncertainty as to the extent of protection afforded such persons by such Insurance and by statutory and bylaw indemnification provisions. F. In order to induce Indemnitee to continue to serve as an officer of the Corporation, the Corporation has determined and agreed to enter into this Agreement with Indemnitee. NOW, THEREFORE, the parties hereto agree as follows: 1. SERVICES TO THE CORPORATION. Indemnitee will serve, at the will of the Corporation or under separate contract, if any such contract exists, as an officer of the Corporation or as a director, officer or other fiduciary of the Corporation or an affiliate of the Corporation (including any employee benefit plan of the Corporation) faithfully and to the best of his ability so long as he is duly elected and qualified in accordance with the provisions of the Bylaws, other applicable constitutive documents of the Corporation or such affiliate, or other separate contract, if any such contract exists; provided, however, that Indemnitee may at any time and for any reason resign from such position (subject to any contractual obligation that Indemnitee may have assumed apart from this Agreement) and that the Corporation or any affiliate shall have no obligation under this Agreement to continue Indemnitee in any such position. 2. INDEMNITY OF INDEMNITEE. The Corporation shall hold harmless, indemnify and advance expenses to Indemnitee as provided in this Agreement and to the fullest extent authorized, permitted or required by the provisions of the Bylaws and the Code, as the same may be amended from time to time (but, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than were permitted by the Bylaws or the Code prior to adoption of such amendment). The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the rights set forth in the other sections of this Agreement. -8- 3. ADDITIONAL INDEMNITY. In addition to and not in limitation of the indemnification otherwise provided for herein, and subject only to the exclusions set forth in Section 4 hereof, the Corporation hereby further agrees to hold harmless and indemnify Indemnitee: (a) Against any and all expenses (including reasonable attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Indemnitee becomes legally obligated to pay because of any claim or claims made against or by him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrative, administrative or investigative (including an action by or in the right of the Corporation) to which Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Indemnitee is, was or at any time becomes a director, officer, employee or other agent of the Corporation, or is or was serving or at any time serves at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and (b) Otherwise to the fullest extent as may be provided to Indemnitee by the Corporation under the non-exclusivity provisions of the Code. 4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section 3 hereof shall be paid by the Corporation: (a) On account of any claim against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (b) On account of Indemnitee's conduct that was knowingly fraudulent or deliberately dishonest, or that constituted willful misconduct; (c) On account of Indemnitee's conduct that constituted a breach of Indemnitee's duty of loyalty to the Corporation or resulted in any personal profit or advantage to which Indemnitee was not legally entitled; (d) For which payment has actually been made to Indemnitee under a valid and collectible insurance policy or under a valid and enforceable indemnity clause, bylaw or agreement, except in respect of any excess beyond payment under such insurance, clause, bylaw or agreement; (e) If indemnification is not lawful (and, in this respect, both the Corporation and Indemnitee have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication) or is prohibited by any applicable state securities laws with respect to any violation of applicable federal or state securities laws; or (f) In connection with any proceeding (or part thereof) initiated by Indemnitee, or any proceeding by Indemnitee against the Corporation or its directors, officers, employees or other agents, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the Corporation, (iii) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Code, or (iv) the proceeding is initiated pursuant to Section 9 hereof. 5. CONTINUATION OF INDEMNITY. All agreements and obligations of the Corporation contained herein shall continue during the period Indemnitee is a director, officer, employee or other agent of the Corporation (or is or was severing at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, -9- whether civil, criminal, arbitrative, administrative or investigative, by reason of the fact that Indemnitee was a director of the Corporation or serving in any other capacity referred to herein. 6. PARTIAL INDEMNIFICATION. Indemnitee shall be entitled under this Agreement to indemnification by the Corporation for a portion of the expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Indemnitee becomes legally obligated to pay in connection with any action, suit or proceeding referred to in Section 3 hereof even if not entitled hereunder to indemnification for the total amount thereof, and the Corporation shall indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. 7. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days after receipt by Indemnitee of notice of the commencement of any action, suit or proceeding, Indemnitee will, if a claim in respect thereto is to be made against the Corporation under this Agreement, notify the Corporation of the commencement thereof; but the omission so to notify the Corporation will not relieve it from any liability which is may have to Indemnitee otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Indemnitee notifies the Corporation of the commencement thereof: (a) The Corporation will be entitled to participate therein at its own expense; (b) Except as otherwise provided below, the Corporation may, at its option and jointly with any other indemnifying party similarly notified and electing to assume such defense, assume the defense thereof, with counsel reasonably satisfactory to Indemnitee. After notice from the Corporation to Indemnitee of its election to assume the defense thereof, the Corporation will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof except for reasonable costs of investigation or otherwise as provided below. Indemnitee shall have the right to employ separate counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by the Corporation, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and Indemnitee in the conduct of the defense of such action, or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Indemnitee's separate counsel shall be at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Corporation or as to which Indemnitee shall have made the conclusion provided for in (ii) above; and (c) The Corporation shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent, which shall not be unreasonably withheld. The Corporation shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent which may be given or withheld in Indemnitee's sole discretion. 8. EXPENSES. The Corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by Indemnitee in connection with such proceeding upon receipt of an undertaking by or on behalf of Indemnitee to repay said amounts it if shall be determined ultimately that Indemnitee is not entitled to be indemnified under the provisions of this Agreement, the Bylaws, the Code or otherwise. 9. ENFORCEMENT. Any right to indemnification or advances granted by this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in any -10- court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Indemnitee, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under Section 3 hereof (other than an action brought to enforce a claim for advancement of expenses pursuant to Section 8 hereof, provided that the required undertaking has been tendered to the Corporation) that Indemnitee is not entitled to indemnification because of the limitations set forth in Section 4 hereof, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors or its shareholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Indemnitee is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors or its shareholders) that such indemnification is improper, shall be a defense to the action or create a presumption that Indemnitee is not entitled to indemnification under this Agreement or otherwise. 10. SUBROGATION. In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Corporation effectively to bring suit to enforce such rights. 11. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Indemnitee by this Agreement shall not be exclusive of any other right which Indemnitee may have or hereafter acquire under any statute, provision of the Articles of Incorporation, the Bylaws, agreement, vote of shareholders or directors or otherwise, both as to action in his/her official capacity and as to action in another capacity while holding office. 12. SURVIVAL OF RIGHTS. (a) The rights conferred on Indemnitee by this Agreement shall continue after Indemnitee has ceased to be a director, officer, employee or other agent of the Corporation or to serve at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and shall inure to the benefit of Indemnitee's heirs, executors and administrators. (b) The Corporation shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Corporation, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession had taken place. 13. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. Furthermore, if this Agreement shall be invalidated in its entirety on any ground, then the Corporation shall nevertheless indemnify Indemnitee to the fullest extent provided by the Bylaws, the Code or any other applicable law. 14. GOVERNING LAW. This Agreement shall be interpreted and enforced in accordance with the laws of the State of California. 15. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 16. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all -11- of which together shall constitute but one and the same Agreement. Only one such counterpart need be produced to evidence the existence of this Agreement. 17. HEADINGS. The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 18. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) upon delivery if delivered by hand to the party to whom such notice or other communication shall have been directed, or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to: Mr. James L. Oliver 2548 East Hilda Place Anaheim, CA. 92806 (b) If to the Corporation, to: Commonwealth Energy Corporation 15901 Redhill Avenue Tustin, CA 92780 Attn: Chairman of the Board or to such other address(es) as may have been furnished to/by Indemnitee to/by the Corporation. IN WITNESS WHEREOF, the parties hereto have duly executed this Indemnification Agreement as of the day and year first above written. CORPORATION COMMONWEALTH ENERGY CORPORATION, a California corporation By: /s/ IAN B. CARTER ------------------------------------- Ian Carter, Chairman of the Board and Chief Executive Officer INDEMNITEE /s/ JAMES L. OLIVER ---------------------------------------- James L. Oliver -12- EX-31.1 6 a97391exv31w1.htm EXHIBIT 31.1 exv31w1

Exhibit 31.1

CERTIFICATIONS

I, Ian B. Carter, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Commonwealth Energy Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal controls over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 16, 2004 By: /s/ IAN B. CARTER
Ian B. Carter
Chairman and Chief Executive Officer

EX-31.2 7 a97391exv31w2.htm EXHIBIT 31.2 exv31w2

Exhibit 31.2

CERTIFICATIONS

I, Kenneth L. Robinson, certify that:

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: March 16, 2004 By: /s/ KENNETH L. ROBINSON
Kenneth L. Robinson
Vice President, Finance and Corporate Controller (Principal Financial and Accounting Officer)

EX-32.1 8 a97391exv32w1.htm EXHIBIT 32.1 exv32w1

Exhibit 32.1

CERTIFICATION PURSUANT TO
RULE 13(a)-14(b) AND 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Commonwealth Energy Corporation (the “Company”) on Form 10-Q for the quarterly period ending October 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Ian B. Carter, Chairman and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: March 16, 2004 By: /s/ IAN B. CARTER
Ian B. Carter
Chairman and Chief Executive Officer
(Principal Executive Officer)

A signed original of this written statement required by Section 906 has been provided to Commonwealth Energy Corporation and will be retained by Commonwealth Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 9 a97391exv32w2.htm EXHIBIT 32.2 exv32w2

Exhibit 32.2

CERTIFICATION PURSUANT TO
RULE 13(a)-14(b) AND 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Commonwealth Energy Corporation (the “Company”) on Form 10-Q for the quarterly period ending October 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Kenneth L. Robinson, Vice President, Finance and Corporate Controller of the Company, hereby certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: March 16, 2004 By: /s/ KENNETH L. ROBINSON
Kenneth L. Robinson
Vice President, Finance and Corporate Controller (Principal Financial and Accounting Officer)

EX-99.1 10 a97391exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 March 3, 2004 Mr. Ian B. Carter Chairman and CEO Commonwealth Energy Corporation 15901 Red Hill Avenue, Suite 100 Tustin, CA 92780 Dear Ian, It is with a heavy heart that I write this letter. As you know, I will be leaving Alameda Power and Telecom to take a new job as the Electric Utility Director at Silicon Valley Power for the City of Santa Clara. The City Attorney for Santa Clara has indicated that he does not advise that I continue as a Board member for Commonwealth Energy Corporation. Additionally, I have found that is very difficult as a city employee to dedicate the time that is necessary for Board and committee membership because work time cannot be utilized for meetings or phone calls. It was difficult enough at Alameda, but, because I had Fridays off, the Board was generous in accommodating my schedule on many, many occasions. Recently, however, the need for a great number of additional meetings has made it impossible for me to be involved at the required level. At Santa Clara, I will have a five day work week and so will be unable to be an active participant at meetings and phone calls during the week, especially those that need to be called at short notice. Therefore, I am submitting this as my resignation effective March 8, 2004. The timing, I realize, is very difficult but the opportunity at Santa Clara is one that I can neither pass up nor delay. I have truly enjoyed my association with Commonwealth and appreciate the hard work that you have put into the company. Because of your efforts and dedication, Commonwealth has been able to survive at a time when the majority of Energy Service Providers have disappeared from the energy industry. You have been a true champion for the company and its shareholders. I will continue to follow the fortunes of Commonwealth with great interest, but it will have to be from more of a distance than now. Thank you for the opportunity to serve on the Board with so many dedicated and highly professional individuals. Sincerely, /s/ JUNONA A. JONAS - --------------------------- Junona A. Jonas CC. Robert Perkins John F. Della Grotta -----END PRIVACY-ENHANCED MESSAGE-----

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

•		regulatory changes in the states in which we operate that could adversely affect our operations;

•		our continued ability to obtain and maintain licenses from the states in which we operate;

•		the competitive restructuring of retail marketing may prevent us from selling electricity in certain states;

•		our dependence upon a limited number of third parties to generate and supply to us electricity;

•		fluctuations in market prices for electricity;

•		our ability to obtain credit necessary to support future growth and profitability; and

•		our dependence upon a limited number of utilities to transmit and distribute the electricity we sell to our customers.


	COMMONWEALTH ENERGY CORPORATION
Date: March 16, 2004	By:	/s/ IAN B. CARTER
		Ian B. Carter
		Chairman and Chief Executive Officer (Principal Executive Officer)



Date: March 16, 2004	By:	/s/ KENNETH L. ROBINSON
		Kenneth L. Robinson
		Vice President, Finance and Corporate Controller (Principal Financial and Accounting Officer)

1.		I have reviewed this quarterly report on Form 10-Q of Commonwealth Energy Corporation;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)		disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the registrant’s internal controls over financial reporting; and

a)		all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

1.		The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.		The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.