Universal Energy Group Ltd.
TSX : UEG

Universal Energy Group Ltd.

December 13, 2007 06:00 ET

Universal Energy Group Releases Fiscal 2007 Financial Results

TORONTO, ONTARIO--(Marketwire - Dec. 13, 2007) - Universal Energy Group Ltd. ("Universal Energy Group") (TSX:UEG) is pleased to announce the release of its fiscal 2007 financial results.

Universal Energy Corporation ("Universal"), Universal Energy Group's gas and electricity marketing division, earned revenue for the year ended September 30, 2007 of $227.4 million compared to $58.3 million for fiscal 2006. Gross margin for fiscal 2007 was $82.1 million compared to $22.4 million for fiscal 2006. Net loss for fiscal 2007 was $24.2 million compared to a net loss of $59.7 million for fiscal 2006. For Q4 2007, Universal earned revenue of $49.3 million compared to $28.2 million for Q4 2006. Gross margin for Q4 2007 was $20.8 million compared to $11.9 million for Q4 2006. Net loss for Q4 2007 was $17.9 million compared to a net loss of $22.9 million for Q4 2006.

Universal recognizes gas revenue based on customer consumption, but delivers, and is paid for such deliveries, on an equal monthly basis. In addition, Universal uses financial swaps to fix its operating margins in its electricity business. These swap payments are not included in cost of sales for accounting purposes although Universal treats them as such for business planning purposes. Accordingly, Universal uses the concepts of "operational revenue", "operational margin" and "operational income" to adjust for the differences between revenue recognition and delivery/payment that exist in its natural gas business and for the effect of the financial swaps used in its electricity business.

Universal earned operational revenue for the year ended September 30, 2007 of $243.3 million compared to $69.1 million for fiscal 2006. Operational margin for fiscal 2007 was $44.1 million compared to $11.5 million for fiscal 2006. Operational income before marketing costs for fiscal 2007 was $28.2 million compared to $3.4 million for fiscal 2006. Operational income/(loss) after marketing costs for fiscal 2007 was $7.5 million and ($13.4) million for fiscal 2006.

Universal's gross customer additions for the year were 206,447 RCEs for a total customer base of 402,600 RCEs before attrition and 363,320 RCEs, after attrition of 39,280 RCEs (representing an annualized attrition rate of 10.7% across all markets). Net additions during the year amounted to 167,167 RCEs.

For Q4 2007, Universal earned operational revenue of $72.8 million compared to $38.4 million for Q4 2006. Operational margin for Q4 2007 was $13.7 million compared to $7.7 million for Q4 2006. Operational income before marketing costs for Q4 2007 was $8.1 million compared to $4.7 million for Q4 2006. Operational loss after marketing costs for Q4 2007 was $0.14 million compared to $0.48 million for Q4 2006. Universal's gross customer additions for Q4 2007 were 71,147 RCEs and attrition amounted to 15,723 RCEs for net additions of 55,424 RCEs.

Terra Grain Fuels Inc. ("TGF"), Universal Energy Group's ethanol division, realized a loss of $0.51 million for the three months ended September 30, 2007 and a loss of $3.4 million for the period from acquisition, February 2, 2007, to September 30, 2007. TGF continues to advance the construction of the Belle Plaine Facility with a further addition to plant construction costs for the three months ended September 30, 2007 of $26.8 million with total construction costs to date of $114.0 million. TGF anticipates that the plant will be commissioned in fiscal Q2 2008 and reach full production by the end of that quarter (March 31, 2008).

Universal Energy Group's audited consolidated financial statements for the years ended September 30, 2007 and 2006 and management's discussion and analysis ("MD&A") of Universal Energy Group are attached to this news release. See "Forward-looking information" and "Non-GAAP measures" in the attached MD&A for cautionary information regarding forward-looking statements and discussion of "Non-GAAP measures" (including "operational revenue", "operational margin" and "operational income").

Universal Energy Group's common shares are listed on the Toronto Stock Exchange under the symbol "UEG". Universal Energy Group sells electricity and natural gas in Ontario and natural gas in British Columbia (through its subsidiary Universal) to residential, small to mid-size commercial and small industrial customers and sells natural gas in Michigan (through its subsidiary Universal Gas & Electric Corporation) to residential, small to mid-size commercial and small industrial customers. Universal Energy Group (through its subsidiary TGF) is constructing an ethanol facility near Belle Plaine, Saskatchewan that is designed to produce approximately 150 million litres of ethanol annually. Additional information about Universal Energy Group is available on SEDAR (www.sedar.com).

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

December 13, 2007

The following management's discussion and analysis ("MD&A") of Universal Energy Group Ltd's. (the "Company") financial condition and results of operations for the years ended September 30, 2007 and 2006 should be read in conjunction with the Company's audited consolidated financial statements for the year ended September 30, 2007. The financial statements of the Company are prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"), which requires estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the amount of revenue and expenses during the reporting period. Actual results could differ from those estimates as a result of various factors, including those discussed below and elsewhere in this MD&A, particularly under "Forward-looking statements". Certain totals, subtotals and percentages may not reconcile due to rounding. Quarterly reports of, and other information related to, Universal Energy Group Ltd., is available on SEDAR at www.sedar.com.

The Company carries on business through two distinct operating divisions. Universal Energy Corporation ("Universal"), a North American energy marketer, carries on the Company's retail natural gas and electricity marketing business. Terra Grain Fuels Inc. (TGF), an ethanol producer, is currently constructing an ethanol plant in Belle Plaine, Saskatchewan. TGF anticipates that the plant will be commissioned in the fiscal quarter commencing January 2008 and reach full production by the end of that quarter.

Forward-looking information

This MD&A contains "forward-looking statements". Statements other than statements of historical fact contained in this MD&A may be forward-looking statements, including, without limitation, management's expectations, intentions and beliefs concerning the retail electricity industry, the retail natural gas industry and the ethanol industry, the competitive landscape in these industries and the general economy, statements regarding the future financial position or results of the Company, business strategies, proposed acquisitions, growth opportunities, budgets, litigation, projected costs and plans and objectives of or involving the Company. Wherever possible, words such as "may", "would", "could", "will", "anticipate", "believe", "plan", "expect", "intend", "estimate", "aim", "endeavour", "project", "continue" and similar expressions have been used to identify these forward-looking statements. These statements reflect management's current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, without limitation, those listed in the "Risk Factors" section of this MD&A. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this MD&A. These factors should be considered carefully and undue reliance should not be placed on the forward-looking statements. Although the forward looking statements contained in this MD&A are based upon what management currently believes to be reasonable assumptions, actual results, performance or achievements may not be consistent with these forward-looking statements. The forward-looking statements contained in this MD&A are expressly qualified in their entirety by this cautionary statement. These forward-looking statements are made as of the date of this MD&A and none of the Company, Universal, TGF, or any other party intends to, or assumes any obligation to, update or revise these forward-looking statements to reflect new events or circumstances.

Non-GAAP measures

This MD&A makes reference to certain non-GAAP measures, namely "Operational Revenue", "Operational Margin" and "Operational Income" to assist in assessing Universal's financial performance. Non-GAAP measures do not have standard meanings prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. Universal recognizes revenue based on customer consumption, but delivers natural gas, and is paid by the local distribution companies ("LDCs") on an equal monthly basis. In addition, Universal uses financial swaps to fix its operating margins in its electricity business. These swap payments are not considered a cost of sales for accounting purposes but Universal treats them as such for business planning purposes. Accordingly, Universal uses the concepts of "Operational Revenue", "Operational Margin" and "Operational Income" to adjust for the differences between revenue recognition and delivery/payment that exist in its natural gas business and for the effect of the financial swaps used in its electricity business. For a reconciliation of Operational Revenue to revenue and Operational Margin to gross margin, see "Reconciliation of Operational Revenue and Operational Margin" in this MD&A. For a discussion of Universal's revenue recognition policies see "Critical Accounting Estimates" in this MD&A.

Selected Financial Highlights and Overall Performance of the Company

The following selected financial information has been derived from the audited consolidated financial statements of the Company for the years ended September 30, 2007 and 2006.



Statement of Operations Highlights
(Thousands of dollars except per share amounts)
Years ended September 30
2007 2006
$ $
------------ -----------

GAAP Measures
Revenue 227,379 58,292
Gross margin 82,133 22,447
Net loss (24,245) (59,702)
Basic and diluted earnings/(loss) per share (0.83) (5.89)

Non-GAAP Measures
Operational revenue 243,298 69,083
Operational margin 44,088 11,502
Operational income before marketing costs 26,557 3,297
Operational income/(loss) after marketing costs 5,798 (13,541)

Balance Sheet Highlights
(Thousands of dollars)
As at September 30
2007 2006
$ $
------------ -----------
Total assets 323,380 62,231
Long-term liabilities 111,927 61,832


On January 26, 2007, the Company filed a prospectus relating to the initial public offering of its common shares. The closing date of this initial public offering was February 2, 2007 and the Company received gross proceeds from the offering of $143.75 million which includes the over allotment proceeds of $18.75 million which was exercised on February 7, 2007. The Company incurred issue costs of $11.63 million. On closing, the Company purchased all of the issued and outstanding shares and promissory notes of TGF for cash of $37.83 million and 7,889,545 common shares of the Company at $11.00 per share. Total aggregate consideration paid for the TGF shares and promissory notes amounted to $124.61 million. Also, on closing, the Company purchased all of the issued and outstanding shares of Universal for cash of $73.43 million and 15,314,999 common shares of the Company at $11.00 per share. Total aggregate consideration paid for the Universal shares amounted to $241.89 million. The business combination was accounted for as a reverse takeover of the Company by Universal and the acquisition of TGF by Universal using the purchase method with TGF's results of operations from the date of acquisition included in the Company's consolidated financial statements for this year.

The increase in revenue and operational revenue is as a result of continuing strong aggregation of customers with year over year net customer additions of 167,167 RCEs, an increase of 85.2%. During fiscal 2007, the Company commenced marketing natural gas to residential customers in Michigan and also commenced marketing natural gas in BC to residential, small to mid-size commercial and small industrial customers.

The net loss of $24.2 million for the year is primarily a result of the charge to income of the non-cash unrealized loss on commodity contracts which amounts to $35.8 million. The increase in operational income before marketing costs from $3.3 million to $26.6 million is the result of continued strong growth in operational margins by maintaining our operational margins per RCE at our target level and continued strong growth in our customer base.

Total assets increased from $62.2 million to $323.4 million primarily as a result of increases in accounts receivable, gas delivered to LDCs in excess of customer consumption, construction costs of the ethanol plant and goodwill acquired on the acquisition of TGF.

Long-term liabilities include the unrealized loss on commodity contracts and long-term debt relating to the construction of the ethanol plant.

1. Gas & Electricity Marketing Division (Universal) - Management's Discussion and Analysis

(a) Overview

The Ontario Energy Board issued Universal its Ontario natural gas licence in February 2005 and Universal began marketing natural gas in Ontario in that month. The Ontario Energy Board issued Universal its Ontario electricity licence in May 2005 and Universal began marketing electricity in Ontario in September 2005. In December 2005, a natural gas licence was issued to Universal Gas & Electric Corp. ("UGE"), a wholly-owned subsidiary of Universal, by the Michigan Public Service Commission authorizing UGE to serve as an Alternative Gas Supplier in the State of Michigan. Universal began marketing natural gas in Michigan in March 2006 to commercial customers and in April 2007 commenced marketing natural gas to residential customers. The British Columbia Utilities Commission issued Universal its natural gas licence in November 2006 and Universal commenced marketing to British Columbia residential and commercial customers in May 2007.

Universal's business currently involves (i) the sale of electricity and natural gas in Ontario to residential, small to mid-size commercial and small industrial customers, (ii) the sale of natural gas in BC to residential, small to mid-size commercial and small industrial customers and (iii) the sale of natural gas in Michigan to residential and small to mid-size commercial and small industrial customers. Universal is also considering expansion into the New York residential, small to mid-size commercial and small industrial natural gas and electricity markets and the Texas residential, small to mid-size commercial and small industrial electricity markets.

Universal's customers purchase electricity and natural gas under long term, non-terminable (except in limited circumstances) energy contracts, typically for a term of five years. By fixing the price of natural gas under Universal's gas contracts and by obtaining price protection under its electricity contracts for a period of five years, Universal's customers eliminate or reduce their exposure to changes in natural gas and electricity prices.

It is Universal's general policy to match the estimated energy requirements of its customers by purchasing, in the case of natural gas, offsetting volumes of natural gas and, in the case of electricity, entering into offsetting electricity swaps with Sempra Energy Trading Corp. ("Sempra") at fixed prices for the term of its customers' energy contracts. Universal derives its Operational Margin from the difference between the price it pays for electricity swaps and for natural gas supply from Sempra and the price it charges its customers.

(b) Sources of Revenue

Universal earns its revenue primarily from the supply of electricity and natural gas to direct purchase customers. Universal's policy is to purchase in advance an estimate of the commodity supply required for each marketing program (either through physical supply or financial contracts). When it becomes reasonably certain that a marketing program will not exhaust the allotted commodity supply this commodity supply will generally be transferred to other marketing programs.

Universal recognizes revenue for natural gas sales based on customer consumption. Natural gas consumption by customers is typically highest in October through March and lowest in April through September. However, the natural gas delivered monthly by Universal to the LDCs in both Canada and the United States remains constant throughout the year irrespective of customer consumption. As Universal receives payment from the LDC when the natural gas is delivered, rather than consumed, this results in a reasonably predictable operational margin, unaffected by monthly fluctuations in customer consumption. For electricity, which is consumed by customers upon delivery, Universal recognizes revenue when the customer consumes the electricity and as such operational margins are highest during January through March and July through September when consumption is at its peak and lowest during April through June and October through September.

(c) Selected Consolidated Financial and Operational Data

The following selected financial information has been derived from the audited consolidated financial statements of Universal for the years ended September 30, 2007 and 2006:



Gas & Electricity Marketing
Income Statement Data (GAAP)
(Thousands of dollars)
Years ended September 30
-------------------------
2007 2006
$ $
------------ -----------

Revenue
Canada
Gas 48,223 10,708
Electricity 134,761 44,109
------------ -----------
Total Canada 182,984 54,817
United States
Gas 44,395 3,475
------------ -----------
Total revenue 227,379 58,292
------------ -----------

Gross Margin
Canada
Gas 8,986 1,321
Electricity 64,736 20,056
------------ -----------
Total Canada 73,722 21,377
United States
Gas 8,411 1,070
------------ -----------
Total Gross Margin 82,133 22,447
------------ -----------

Customer acquisition costs 20,759 16,838
General and administrative 15,876 8,109
------------ -----------
Total Expenses 36,635 24,947
------------ -----------

Realized loss on swap contracts (39,709) (14,259)

Interest income 144 21
Interest expense (53) (95)
Amortization (461) (236)
Unrealized loss on commodity contracts (32,089) (73,883)
Income tax recovery 8,618 31,250
------------ -----------
Net loss for the year (18,052) (59,702)
------------ -----------


(d) Reconciliation of Operational Revenue, Operational Margin and Operational Income

Universal recognizes revenue based on customer consumption, but delivers natural gas, and is paid by the LDCs on an equal monthly basis. In addition, Universal uses financial swaps to fix its operating margins in its electricity business. These swap payments are not included in cost of sales for accounting purposes although Universal treats them as such for business planning purposes. Accordingly, Universal uses the concepts of "operational revenue", "operational margin" and "operational income" to adjust for the differences between revenue recognition and delivery/payment that exist in its natural gas business and for the effect of the financial swaps used in its electricity business.

Operational revenue, operational margin and operational income are not earnings measures recognized by GAAP and do not have standardized meanings prescribed by GAAP. Universal's method of calculating operational revenue, operational margin and operational income may differ from the methods used by other issuers and, accordingly, Universal's operational revenue, operational margin and operational income may not be comparable to similar measures presented by other issuers. Investors are cautioned that operational revenue, operational margin and operational income should not be construed as alternatives to revenue, gross margin or net income determined in accordance with GAAP as indicators of Universal's performance or to cash flows from operating activities as measures of Universal's liquidity, cash flows or profitability. Universal believes that these are useful measures as they allow Universal to assess its ongoing business and are indicators of Universal's ability to invest in its businesses and continue operations. Universal calculates operational revenue, operational margin and operational income as follows:

Operational revenue - For natural gas, operational revenue is revenue adjusted upward by the dollar amount of "gas delivered in excess of consumption" (natural gas that has been delivered by Universal to LDCs in excess of customer consumption) and adjusted downward by the dollar amount of "gas under delivered" (natural gas that has been consumed by Universal's customers in excess of that delivered by Universal to the LDCs). For electricity, operational revenue is revenue without adjustment.

Operational margin - For natural gas, operational margin is gross margin adjusted upward for the excess of "deferred revenue" over "gas delivered in excess of consumption" or adjusted downward for the excess of "unbilled revenues" over "gas under delivered". For electricity, operational margin is gross margin adjusted upward for swap receipts (realized gain on swaps contracts) and downward for swap payments (realized loss on swap contracts), which are not included in cost of sales for accounting purposes.

Operational income - Is operational margin reduced by customer acquisition costs and general and administrative expenses.

The effect of making the above operational adjustments to revenue and gross margin is presented below.



Gas & Electricity Marketing
Operational Revenue, Margin & Income
(Thousands of dollars)
Years ended September 30
-------------------------
2007 2006
$ $
------------ -----------

Revenue
Canada
Gas revenue 48,223 10,708
Revenue adjustment for gas over delivered 3,462 3,957
------------ -----------
Gas operational revenue 51,685 14,665
Electricity revenue 134,761 44,109
------------ -----------
Total Canada 186,446 58,774
United States
Gas revenue 44,395 3,475
Revenue adjustment for gas over delivered 12,457 6,834
------------ -----------
Gas operational revenue 56,852 10,309
------------ -----------
Total operational revenue 243,298 69,083
------------ -----------

Operational Margin
Canada
Gas gross margin 8,986 1,321
Margin adjustment for gas over delivered 212 967
------------ -----------
Gas operational margin 9,198 2,288

Electricity gross margin 64,736 20,056
Realized loss on swap contracts (39,709) (14,259)
------------ -----------
Electricity operational margin 25,027 5,797

Total Canada 34,225 8,085

United States
Gas gross margin 8,411 1,070
Margin adjustment for gas over delivered 1,452 2,347
------------ -----------
Gas operational margin 9,863 3,417
------------ -----------
Total operational margin 44,088 11,502
------------ -----------
Customer acquisition costs 20,759 16,838
General and administrative 15,876 8,109
------------ -----------
Total expenses 36,635 24,947
------------ -----------

Operational income/(loss) 7,453 (13,445)
------------ -----------


The following operational data for the years ended September 30, 2007 and
2006 has been prepared by management based on Universal's records.


Selected Operational Data
Years ended September 30
-------------------------
2007 2006
------------ -----------
Operational margin per unit (dollars)
Ontario - Gas (Cdn$/m3) 0.0745 0.0632
Ontario - Electricity (Cdn$/kWh) 0.0170 0.0119
Michigan - Gas (US$/Mcf) 1.8449 3.5865
Michigan - Gas (Cdn$/m3) 0.0684 0.1415

Operational margin per RCE (dollars)
Ontario - Gas 209.59 178.02
Ontario - Electricity 170.32 118.68
Michigan - Gas 193.58 400.65

Delivered Volume
Ontario - Gas (m3) 123,550,871 36,180,525
Ontario - Electricity (kWh) 1,469,452,705 488,474,693
Michigan - Gas (Mcf) 5,094,981 852,870

Consumed Volume
Ontario - Gas (m3) 114,655,395 26,348,407
Ontario - Electricity (kWh) 1,469,452,705 488,474,693
Michigan - Gas (Mcf) 3,805,710 288,314

Note:
"RCE" means a residential customer equivalent, which is a unit of
measurement equivalent to 10,000 kWh of electricity on an annual basis or
2,815 m3 of natural gas on an annual basis, which quantities management
believes to represent the approximate amounts of electricity and natural
gas used annually by a typical residential customer.


(e) Results of Operations

Year ended September 30, 2007 compared to year ended September 30, 2006

(i) Revenue and Margin - Canada

Universal continues to experience strong customer growth and continued strong growth in revenue and operational margin as the number of flowing customers increase with each successive reporting year. This is clearly demonstrated by the significant increases in the current period financial ratios in comparison to prior periods.

For the year ended September 30, 2007 Canadian natural gas revenue was $48.2 million up 350% from the prior year of $10.7 million. Canadian natural gas for the year accounted for 21.2% of total revenue on customer consumption of 114.7 million m3 of natural gas. Gross margin for the year was $9.0 million, an increase of 580% from the prior comparative year.

Gas operational revenue was $51.7 million up 252% from the prior year amount of $14.7 million on delivered volume of 123.6 million m3. Operational margin for the year was $9.2 million, an increase of 302% from the prior year. This resulted in a unit operational margin for the year of $0.0745 or $209.59 per RCE.

No revenue has been recorded for the BC market as the gas accounts aggregated to date do not commence flow until November 2007 as part of the terms of the BC market deregulation.

For the year ended September 30, 2007 Canadian electricity revenue was $134.8 million up 206% from the prior year of $44.1 million. Canadian electricity for the year accounted for 59.3% of total revenue on customer consumption of 1,469.5 million kWh. Gross margin for the year ended September 30, 2007 was $64.7 million up from the prior year amount of $20.1 million.

In accordance with GAAP, the electricity gross margin has not been reduced by swap payments totaling $39.7 million for the year ended September 30, 2007. The electricity operational margin, which adjusts for swap payments, for the year ended September 30, 2007 was $25.0 million up from the prior year of $5.8 million. This resulted in a unit operational margin for the year of $0.0170 per kWh or $170.32 per RCE.

(ii) Revenue and Margin - United States

For the year ended September 30, 2007 U.S. natural gas revenue was $44.4 million up from the prior year of $3.5 million. U.S. natural gas for the year accounted for 19.5% of total revenue on customer consumption of 3.8 million Mcf of natural gas. Gross margin for the year was $8.4 million up from the prior year amount of $1.1 million.

Gas operational revenue for the year ended September 30, 2007 was $56.9 million up 451% from the prior year amount of $10.3 million. Operational margin for the year was $9.9 million, an increase of 189% from the prior year amount of $3.4 million. This resulted in a unit operational margin for the year of $1.94 per Mcf ($0.0684 per m3) or $193.58 per RCE.

(iii) Revenue and Margin - Combined

On a combined basis (Canada and the United States), Universal's total operational revenue earned for the year ended September 30, 2007 was $243.3 million up 252% from the prior year amount of $69.1 million. Operational margin for the year ended September 30, 2007 was $44.1 million up 283% from the prior year amount of $11.5 million.

(iv) Selling, General and Administrative Expenses - Combined

Customer acquisition costs, are commissions paid to independent contractors for enrolling new customers, direct mail marketing costs and other direct selling expenses. For the year ended September 30, 2007 these costs amounted to $18.6 million excluding direct mail marketing costs and $20.8 million including direct mail marketing costs. For the prior year, customer acquisition costs excluding direct mail marketing costs were $16.3 million and $16.8 million including direct mail marketing costs for the prior year. Universal's sales and marketing programs take a North American focus and program costs incurred are for the benefit of both the Canadian and US markets. For the year ended September 30, 2007 the average acquisition costs excluding direct mail costs was $90 per RCE and including direct mail costs was $100 per RCE compared to the prior year's equivalent amounts of $85 per RCE and $88 per RCE, respectively. Also included in customer acquisition costs are commissions and other direct marketing costs in the amount of $2.6 million relating to accounts aggregated in BC and which accounts did not commence flow, and earn revenue, until November 2007.

General and administrative expenses for the year ended September 30, 2007 increased by $7.7 million to $15.9 million from the prior year's amount of $8.1 million. The increase in general and administrative expenses over the prior year was primarily driven by the additional staff, infrastructure and data processing expenses incurred to support Universal's rapidly growing customer base. The significant components of general and administrative expenses for the year are processing charges (principally LDC processing and other third party processing and data entry fees) - $3.4 million, salaries and benefits - $8.3 million, consulting (principally for management services and systems development) - $0.7 million and rent - $0.9 million, together totaling $13.3 million or 83.6% of general and administrative expenses.

(v) Other Income/(Expense)

The realized loss on swap contracts are payments made under electricity swap contracts during the year of $39.7 million. The unrealized loss on commodity contracts arises from the remaining notional volumes of the electricity swap contracts and crude oil hedges. This represents the estimated amount that Universal would have to pay to dispose of these supply contracts in the market if the swaps and hedges were to be terminated at the respective period end. See "Financial Instruments" in this MD&A.

(f) Customer Aggregation

The following table summarizes Universal's customer aggregation for the year ended September 30, 2007 in the Ontario, BC and Michigan markets.



Opening Additions Additions Additions Additions
RCEs Q1-2007 Q2-2007 Q3-2007 Q4-2007
----------------------------------------------------

Canada - Gas 42,944 7,147 5,088 13,507 9,127
Canada - Electricity 116,900 26,083 23,676 25,061 12,330
----------------------------------------------------
Total Canada 159,844 33,230 28,764 38,568 21,457
United States - Gas 36,309 6,769 4,108 23,861 49,690
----------------------------------------------------

Combined 196,153 39,999 32,872 62,429 71,147
---------
---------
Less: Attrition (5,653) (6,910) (10,994) (15,723)
------------------------------------------
Net new RCE additions 34,346 25,962 51,435 55,424
------------------------------------------

Cumulative net RCEs 230,499 256,461 307,896 363,320
------------------------------------------
------------------------------------------


Total Closing
Additions Attrition RCEs
---------------------------------
Canada - Gas 34,869 (8,039) 69,774
Canada - Electricity 87,150 (20,325) 183,725
---------------------------------
Total Canada 122,019 (28,364) 253,499
United States - Gas 84,428 (10,916) 109,821
---------------------------------
Combined 206,447 (39,280) 363,320
---------------------------------
---------------------------------


Total customer additions for the year were 206,447 RCEs resulting in a total customer base of 402,600 RCEs before attrition for the current year. Canadian gas additions accounted for 34,869 RCEs or 16.9% of additions for the year. Canadian electricity additions accounted for 87,150 RCEs or 42.2% of additions for the year. In total, Canadian additions accounted for 122,019 RCEs or 59.1% of additions for the year. United States gas additions accounted for 84,428 RCEs or 40.9% of additions for the year. As Universal strengthens its United States presence we expect to see a larger proportion of our customer additions originating from markets in the United States while maintaining a stable customer base in Canada.

Combined attrition for all markets over the year ended September 30, 2007 amounted to 39,280 RCEs or 10.7%. The Canadian market experienced attrition of 10.5% and the United States market experienced attrition of 11.4%. The United States attrition rate is benefiting from the current strong aggregation of Michigan gas customers, however, we expect this rate to trend over time to the more typical attrition rate of 15% for this market. Attrition experienced in all markets over a 12-month rolling basis were within the targets used by management for internal planning purposes which is currently at 12% for the Canadian market and 15% for the United States market. Universal continues to monitor all markets to minimize attrition and follows a strict policy of enforcing collection of liquidated damages from customers attempting to exit their contracts.

At September 30, 2007 our total customer base amounted to 363,320 RCEs, net of attrition. Geographically, Canada accounts for 70% of total RCEs and the United States accounts for 30% of total RCEs. In Canada, residential customers account for 74% of RCEs and commercial customers account for 26% of RCEs. In the United States, residential customers account for 58% of RCEs and commercial customers account for 42% of RCEs. On a product distribution basis, gas customers account for 49% of total RCEs and electricity customers account for 51% of total RCEs.

2. Ethanol Division (TGF) - Management's Discussion and Analysis

(a) Overview

TGF is one year into the construction phase of building its ethanol production facility (the "Belle Plaine Facility") located in Belle Plaine, Saskatchewan. The Belle Plaine Facility's designed annual capacity is 150 million litres, although management expects to exceed design capacity once operational, in addition to a production capacity of 65,000 tonnes of dried distillers grains ("DDG"). TGF anticipates that the plant will be commissioned in the fiscal quarter commencing January 2008 and reach full production by the end of that quarter. TGF has made arrangements to sell ethanol to gasoline producers and marketers throughout Canada and the United States, primarily as a gasoline additive to fulfill jurisdictional blending requirements. TGF also intends to sell distillers grains to the livestock industry throughout Western Canada and the US Pacific Northwest. Distribution of the ethanol and distillers grains will primarily be by rail and truck. The Belle Plaine Facility will require approximately 400,000 metric tonnes of wheat per year.



(b) Selected Financial Information

February 2, 2007 to
September 30, 2007
(Thousands of dollars)

Investment income $ 38
------------------------

General and administrative 1,240
Interest expense 371
Amortization of property, plant and equipment 51
Unrealized loss on commodity contracts 3,729
Future taxes (1,943)
------------------------
Net loss $ (3,410)
------------------------


(c) Results of Operations

TGF is in the construction phase of its Belle Plaine Facility which began in September 2006. Total construction costs incurred to September 30, 2007 amount to $114.0 million, net of investment tax credits.

For the period from February 2, 2007 to September 30, 2007, TGF realized a net loss of $3.4 million. TGF incurred interest expense of $0.371 million on wheat growers' loan obligations, and general and administrative expenses of $1.2 million which relate primarily to professional fees and other administration costs. The unrealized loss on commodity contracts arises from the remaining notional volumes of the crude oil hedges. This represents the estimated amount that TGF would have to pay to dispose of these hedge contracts in the market if the hedges were to be terminated at September 30, 2007. See "Financial Instruments" in this MD&A. Prior to completion, operating revenues, if any, generated by TGF will be used to offset construction and development costs.

3. Summary of Quarterly Results

The following selected financial information has been derived from the audited and interim unaudited consolidated financial statements of the Company for each of the eight most recently completed quarters.



(Thousands of dollars)
Q1 Q2 Q3 Q4 Total
2007 $ $ $ $ $
---- -------- -------- -------- -------- --------
GAAP Measures
Revenue 46,571 79,085 52,385 49,338 227,379
Gross margin 18,505 22,047 20,798 20,783 82,133
Net income/(loss) 6,796 10,983 (24,109) (17,915) (24,245)
Basic and diluted
earnings/(loss) per share 0.44 0.38 (0.66) (0.61) (0.83)

Non-GAAP Measures
Operational revenue 51,920 58,966 59,607 72,805 243,298
Operational margin 9,664 10,246 10,445 13,734 44,089
Operational income before
marketing costs 6,620 6,751 5,621 7,565 26,557
Operational income/(loss) after
marketing costs 3,167 3,605 (274) (700) 5,798

2006 Q1 Q2 Q3 Q4 Total
---- $ $ $ $ $
GAAP Measures -------- -------- -------- -------- --------
Revenue 1,378 11,662 17,004 28,248 58,292
Gross margin 7 3,323 7,226 11,891 22,447
Net income/(loss) (8,888) (8,722) (19,211) (22,881) (59,702)
Basic and diluted n/a
earnings/(loss) per share (0.88) (1.25) (1.49) (5.89)

Non-GAAP Measures
Operational revenue 1,637 9,722 19,358 38,366 69,083
Operational margin (81) 738 3,126 7,719 11,502
Operational income/(loss)
before marketing costs (1,308) (815) 846 4,670 3,393
Operational loss after
marketing costs (4,043) (3,936) (4,986) (480) (13,445)


The Company's gas and electricity operations are seasonal. Natural gas consumption by customers is typically highest in Q1 (fall) and Q2 (winter) and lowest in Q3 (spring) and Q4 (summer). Electricity consumption is typically highest in Q2 (winter) and Q4 (summer) and is lowest in Q1 (fall) and Q3 (spring). While year over year quarterly comparisons are appropriate, comparison of sequential quarters is affected by seasonality.

Analysis of the Fourth Quarter - Q4 2007

Revenue increased from $28.2 million in Q4 2006 to $49.3 million in Q4 2007 and operational revenue increased from $38.4 million to $72.8 million over the same period. This is due to continued strong aggregation of new accounts and from the continual conversion of customers from an enrolled to a flowing state. Gross margin increased from $11.9 million in Q4 2006 to $20.8 million in Q4 2007 and operational margin increased from $7.7 million to $13.7 million over the same period. Customer aggregation continued at a strong pace this quarter with Universal successfully enrolling 71,147 new RCEs. Customer acquisition costs in Q4 2007 amounted to $8.3 million and general and administrative expenses amounted to $5.6 million.

The net loss in Q4 2007 is primarily as a result of the charge to income of the non-cash unrealized loss on commodity contracts which amounted to $20.1 million for this quarter. Operational income before marketing costs increased by 62% to $7.6 million from $4.7 million in Q4 2006. After adjusting for marketing expenses, the operational loss for the quarter was $0.7 million. This loss is as a result of upfront commission and other expenses paid for accounts enrolled in BC and which accounts do not commence flow and earn revenue until November 2007, upfront commission for gas customers enrolled in Michigan many of which commenced flow after year-end and significant spending for direct mail campaigns as Universal continues to lay the foundation for its growth strategy.

4. Liquidity and Capital Resources

At September 30, 2007 the Company had cash of $20.4 million of which $7.0 million is restricted cash. Excluding restricted cash and together with other working capital items the Company had net working capital of $27.8 million, excluding accounts payable to be paid from the proceeds of long-term debt, future taxes and the current portion of the unrealized loss on commodity contracts. In addition to its cash resources, the Company has credit facilities amounting to $5.0 million available to Universal for trade financing on commodity purchases and approximately $100 million available to TGF to be used primarily toward the ethanol plant construction and wheat growers advances. As at September 30, 2007, $41.8 million was drawn against the TGF credit facilities. As the number of Universal customers moving from an enrolled to flowing state continues to increase, Universal will start to receive larger amounts of cash from the underlying margins on these contracts and this will further contribute to the Company's cash resources.

(a) Cash Provided by Operations

Cash provided by operations for the year ended September 30, 2007 amounted to $18.2 million compared to cash used for the comparable year of $19.4 million. This is primarily due to operating margin earned, customer receivable payments, and increases in accounts payable.

(b) Cash Used in Investing Activities

A portion of the cash proceeds from the initial public offering was used to purchase Universal and TGF as discussed under "Selected Financial Highlights and Overall Performance" in this MD&A. The property, plant and equipment of $74.5 million for the year ended September 30, 2007, was primarily expenditures relating to the ethanol plant construction.

(c) Financing Activities

The financing activities for the year ended September 30, 2007 relate to the Company's initial public offering and acquisition of Universal and TGF. This is discussed under "Selected Financial Highlights and Overall Performance" in this MD&A. In addition, TGF issued debentures under the debenture purchase agreement.

(d) Long-Term Liabilities

The unrealized loss on commodity contracts of $109.7 million (current portion - $39.4 million) is the estimated amount that Universal and TGF would pay to dispose of their commodity and hedge contracts in the market as at September 30, 2007. These liabilities are marked to market and any changes to the fair value are recorded in other income/(expense). See "Financial Instruments" in this MD&A for further details. The long-term debt of $49.5 million (current portion - $7.9 million) includes $40 million of advances under the TGF debenture facility, $1.8 million of advances under the TGF $50 million credit facility. These funds are specifically used towards the facility construction. The commodity financing facility of $7.7 million (current portion $5.8 million), included in long-term debt, relates to advances made by TGF to the wheat growers under contract.

(e) Contractual Obligations

In the normal course of business, the Company is obligated to make future payments under various non-cancellable contracts and other commitments. The payments due by period are set out in the following table.



(Thousands of dollars) Less than After
Contractual obligations Total 1 year 1-3 years 4-5 years 5 years
----------------------- ------- --------- --------- --------- ----------
Premises and vehicles under
lease 4,430 1,347 3,032 51 -
Natural gas purchase
commitments 636,678 164,410 404,002 68,266 -
EPC and Delta-T contracts 25,488 25,488 - - -
Production contracts 52,922 21,179 31,743 - -
------------------------------------------------
Total 719,518 212,424 438,777 68,317 -
------------------------------------------------
------------------------------------------------


For a description of the Company's obligations under electricity swap contracts and other hedging instruments see "Financial Instruments" in this MD&A.

(f) Debenture Offering

On September 24, 2007, the Company filed a prospectus related to the issue of Convertible Unsecured Subordinated Debentures. The closing date of the Offering was October 2, 2007 and the Company received gross proceeds from the issue of $90.0 million. The Company incurred issue costs of $3.3 million and a future tax benefit in the amount of $1.1 million will be recorded on such costs. It is the Company's intention that one or more of its subsidiaries will use a majority of the net proceeds of the Offering to provide an available source of funding for potential future acquisition opportunities in the retail energy business.

The Debentures are due September 30, 2014 and have a coupon rate of 6.00% per annum payable semi-annually on March 31 and September 30 commencing on March 31, 2008. Each $1,000 principal amount of the Debentures is convertible at any time prior to maturity or the date fixed for redemption, at the option of the holder, into approximately 41.67 common shares of the Company representing a conversion price of $24.00 per common share.

The Debentures are not redeemable prior to October 1, 2010. On and after October 1, 2010, but prior to September 30, 2012, the Debentures are redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at the Company's sole option on not more than 60 days' and not less than 30 days' prior notice, provided that the current market price on the date on which notice of redemption is given is not less than 125% of the conversion price. On and after September 30, 2012, but prior to the maturity date, the Debentures will be redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at the Company's sole option on not more than 60 days' and not less than 30 days' prior notice.

5. Related Party Transactions and Balances

During the year, the Company entered into various transactions with related parties as follows:

(a) Universal has entered into the following agreements with Sempra, a significant shareholder of the company:

(i) Gas purchase agreements

Universal entered into the natural gas purchase and sale agreement with Sempra on July 14, 2005 (amended and restated February 2, 2007). On February 2, 2007 UGE and Sempra also entered into an agreement pursuant to which Sempra will supply natural gas to UGE in connection with UGE's gas marketing business in Michigan ("Gas Purchase Agreements"). Pursuant to the Gas Purchase Agreements, Universal engaged Sempra to act as Universal's exclusive supplier of natural gas, subject to certain limited circumstances.

Universal's obligations to Sempra under the Gas Purchase Agreements are secured by the grant of a first priority security interest on substantially all of Universal's current and future assets, including all cash and cash equivalents, all accounts receivable and all deposit accounts. In addition, all payments received by Universal from its customers and the LDCs are paid to a specified lockbox or by wire transfer to specified Universal blocked bank accounts under the control of Sempra, from which amounts are first paid to Sempra in satisfaction of payments due to Sempra under the Gas Purchase Agreements, and all excess amounts are then paid to Universal.

If Sempra defaults in its obligations to deliver natural gas to Universal, or if Universal defaults in its obligation to accept delivery of natural gas, subject to force majeure, the Gas Purchase Agreements contains provisions requiring the payment of various amounts by the non-performing party to the performing party.

During the year, Universal made natural gas purchases under the agreements totaling $90.3 million (2006 - $18.9 million). Included in accounts payable at September 30, 2007 is an amount owing of $9.5 million (2006 - $2.1 million).

(ii) Electricity swap agreement

Universal entered into the electricity swap master agreement ("Electricity Swap Agreement") with Sempra on July 14, 2005 (amended and restated February 2, 2007). Pursuant to the Electricity Swap Agreement, Universal engaged Sempra to act as Universal's exclusive supplier of electricity swaps.

Universal's obligations to Sempra under the Electricity Swap Agreement are secured by the grant of a first priority security interest on substantially all of Universal's current and future assets, including all cash and cash equivalents, all accounts receivable and all deposit accounts. In addition, all payments received by Universal from its customers and the LDCs are paid to a specified lockbox or by wire transfer to specified Universal blocked bank accounts under the control of Sempra, from which amounts are first paid to Sempra in satisfaction of payments due to Sempra under the Electricity Swap Agreement, and all excess amounts are then paid to Universal.

Upon the occurrence of a contract termination event, the non-defaulting party has the right to immediately, for so long as the contract termination event is continuing: suspend its performance under electricity swaps then outstanding; or liquidate and terminate the electricity swaps then outstanding and accelerate the payment of any amounts due. Upon any such liquidation and termination, the non-defaulting party must calculate a net settlement amount in accordance with the formula contained in the Electricity Swap Agreement. The party with the net settlement amount payment obligation must pay such amount to the other party within one business day of receipt from the non-defaulting party of notice of such calculation.

During the year, Universal entered into electricity swaps under the agreement totaling $39.7 million (2006 - $18.0 million). Included in accounts payable as at September 30, 2007 is an amount owing of $3.7 million (2006 - $3.3 million).

In addition, the Gas Purchase Agreements and the Electricity Swap Agreement contain margin requirements that commence on February 2, 2009 as well as other covenants. These agreements terminate on June 30, 2010. As at September 30, 2007, the balance in the blocked account amounted to $2.0 million.

(b) During the year, Universal incurred expenses amounting to $0.882 million (2006 - $0.258 million) for direct mail marketing services to Market Connections Inc. in which certain shareholders hold an equity interest. Included in accounts payable as at September 30, 2007 is an amount owing of $0.049 million (2006 - $0.010 million).

(c) TGF has entered into a credit support agreement with a related party that allows TGF to enter into hedges to mitigate risk exposure to the volatility of ethanol pricing while the Belle Plaine Facility is under construction. The facility will be phased out shortly after the plant is commissioned and operational. At September 30, 2007 the amount owing under this facility is $0.136 million (2006 - $Nil).

These transactions were conducted in the normal course of business on terms and rates agreed to by the related parties.

6. Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management of the Company to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. These estimates are based on assumptions and judgments that may be affected by commercial, economic and other factors. Actual results could differ from those estimates. The following assessment of critical accounting estimates is not meant to be exhaustive.

(a) Electricity revenue recognition

Based on a customer's historical usage and other parameters, Universal estimates the customer's current monthly electricity consumption using a computer driven model for the purpose of recognizing revenue and for assessing supply commitments. The estimates are adjusted monthly to reflect actual consumption which is generally available within three months. If this estimate of consumption is not reliable Universal could overstate or understate its electricity revenue.

Universal's estimate of its customers' current monthly electricity consumption is used to determine electricity revenue, which is disclosed in the Company's audited consolidated statements of operations as "Revenue - Electricity". The estimate is also used to determine Universal's cost of sales, which is disclosed on the Company's audited consolidated statements of operations as "Cost of Sales - Electricity". The net amount of electricity revenue less the cost of sales is recorded on the Company's audited consolidated balance sheet as "Current Assets - Accounts Receivable". This accounting estimate was first implemented for the period ended December 31, 2005.

(b) Fair value of derivative financial instruments

Universal enters into contracts with customers to provide electricity at fixed prices. These contracts expose Universal to changes in market prices to supply these commodities. To reduce the exposure to the commodity market price changes, Universal uses derivative financial contracts to secure fixed prices in respect of commodity supply matching its delivery obligations. Universal will hedge the estimated consumption requirements of its customers with offsetting volumes of electricity at fixed prices for terms equal to those of the customer contracts. The value of electricity contracts requires judgment and is based on market prices or management's best estimates if there is no market and/or if the market is illiquid.

The fair value of Universal's derivative financial instruments (which is currently limited to Electricity Swaps) is significantly influenced by the variability of forward spot prices for electricity. Period to period changes in forward spot prices for electricity could cause significant changes in the marked-to-market valuation of these derivatives. This accounting estimate was first implemented for the period ended December 31, 2005.

TGF has entered into crude oil hedges to mitigate the risk exposure of the company to the volatility of ethanol pricing while the Belle Plaine Facility is under construction. The fair value of TGF's hedges is influenced by the variability of forward spot prices for West Texas Intermediate ("WTI") traded on NYMEX. Period to period changes in forward spot prices for WTI could cause significant changes in the marked-to-market valuation of these derivatives transaction that have been entered into. This accounting estimate was implemented in the current fiscal year.

7. Controls and Procedures

(a) Disclosure Controls and Procedures

Management has designed disclosure controls and procedures, as defined by Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filing ("MI 52-109"), to provide reasonable assurance that material information relating to the Company, including its consolidated subsidiaries, is made known to the President, Electricity and Gas Marketing, in the capacity of Chief Executive Officer for these purposes ("CEO") and the Chief Financial Officer ("CFO") by others within those entities, particularly during the period in which the interim filings are being prepared. Our CEO and CFO caused an evaluation under their direct supervision of the design of our disclosure controls and procedures as at September 30, 2007 and have concluded that such disclosure controls and procedures are suitably designed.

(b) Internal Control over Financial Reporting

There have been no changes in the Company's internal controls over financial reporting, as defined under MI 52-109, that occurred during the quarter ended September 30, 2007, that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. The Company's subsidiary, TGF, is a development stage enterprise, currently engaged in the development and construction of an ethanol plant in Belle Plaine, Saskatchewan and as such is still in the process of establishing its systems and internal controls.

(c) Limitations on the Effectiveness of Disclosure Controls and Internal Control over Financial Reporting

The Company's management, including the CEO and CFO, do not expect that the Company's disclosure controls and procedures and internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of some persons, by collusion of two or more people or by management override of the controls. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

8. Changes in Accounting Policies and Recent Accounting Pronouncements

Effective October 1, 2006, the Company adopted the recommendations of the Canadian Institute of Chartered Accountants (CICA) Handbook Section 1530, Comprehensive Income; Section 3251, Equity; Section 3855, Financial Instruments - Recognition and Measurement; Section 3861, Financial Instruments - Disclosure and Presentation; and Section 3865, Hedges. These sections apply to fiscal years beginning on or after October 1, 2006 and provide standards for recognition, measurement, disclosure and presentation of financial assets, financial liabilities, non-financial derivatives and embedded derivatives, and describe when and how hedge accounting may be applied. Section 1530 establishes standards for reporting and presenting comprehensive income, which is defined as the change in equity from transactions and other events from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with generally accepted accounting principles.

Under the new standards, policies followed for periods prior to the effective date generally are not reversed and therefore, the comparative figures have not been restated. Under these new standards, financial instruments must be classified into one of these five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments are initially recorded on the balance sheet at fair value. After initial recognition, the financial instruments are measured at their fair values, except for held-to-maturity investments, loans and receivables and other financial liabilities, which are measured at amortized cost. The effective interest related to the financial liabilities and the gain or loss arising from the change in the fair value of a financial asset or liability classified as held-for-trading is included in net income for the period in which it arises. If a financial asset is classified as available-for-sale, the gain or loss is recognized in other comprehensive income until the financial asset is derecognized and all cumulative gain or loss is then recognized in net income.

As of October 1, 2007, the Company will be required to adopt the recommendations of the CICA Handbook Section 1535, "Capital Disclosures", which will require disclosure of information related to the objectives, policies and processes for managing capital. In addition, disclosures will include whether externally imposed capital requirements have been complied with. The new standard is effective for fiscal years beginning on or after October 1, 2007 and as this standard only addresses disclosure requirements, there will be no impact on the Company's operating results.

As of October 1, 2007, the Company will be required to adopt the recommendations of the CICA Handbook Sections 3862, "Financial Instruments Disclosures" and Section 3863, "Financial Instruments - Presentation", which will replace Section 3861 "Financial Instruments - Disclosure and Presentation". The new disclosure standards increase the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standards carry forward the former presentation requirements and are effective for years beginning on or after October 1, 2007. As these standards only address presentation and disclosure requirements, there will be no impact to the Company's operating results.

9. Financial Instruments

Universal has entered into electricity contracts with customers to provide electricity at fixed prices. The electricity contracts expose Universal to changes in market prices of electricity and consumption as Universal is obligated to the electricity LDC at the floating rate paid by the LDC for the electricity consumed by its customers. To reduce its exposure to movements in commodity prices arising from the acquisition of electricity at floating or indexed rates, Universal uses electricity derivative financial contracts ("electricity derivative contracts"). These electricity derivative contracts are fixed-for-floating swaps whereby Universal agrees with a counterparty to cash settle the difference between the floating or indexed price and the fixed price on a notional quantity of electricity for a specified time frame. The cash flow from these contracts is expected to be effective in offsetting Universal's electricity price exposure and serves to fix Universal's acquisition cost of electricity to be delivered under the fixed price customer Electricity Contracts.

The fair value of derivative financial instruments is the estimated amount that Universal would pay or receive to dispose of these supply contracts in the market in the unlikely event that Universal was required to dispose of its electricity swap contracts. Universal has estimated the value of electricity swap contracts using a discounted cash flow method which employs market forward price curves.



At September 30, 2007, Universal had electricity fixed-for-floating swap
contracts in Ontario which it has committed with the following terms:

(Thousands of dollars except where indicated)
----------------------------------------------------------------------------
Notional volumes 2.0 to 40.0 MW/h
Total remaining notional
volume 7,003,858 MWh
Maturity dates October 1, 2007 to December 31, 2012
Fixed price per MWh (dollars) $60.77 to $86.79
Fair value $105,972 unfavourable
Remaining notional value $507,853
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The realized loss on swap contracts during the year ended September 30, 2007 of $39,709 (2006 - $14,259) represents the net settlement payments recognized in income on that portion of swap contracts that matured during the year.

TGF has entered into hedges to mitigate risk exposure to the volatility of ethanol pricing while the Belle Plaine Facility is under construction. Transactions entered into for the reporting period are summarized below:



(Thousands of dollars except
where indicated)
Floor Price Cap Price Fair
$US/bbl $US/bbl Settlement Value
Transaction Term (dollars) (dollars) Volume Mechanism $
----------------------------------------------------------------------------
West Texas
Intermediate
average of
500 the month's
Costless Calendar barrels/ daily
Collar 2008 $60.00 $74.00 day settlements (1,035)
----------------------------------------------------------------------------
West Texas
Intermediate
average of
500 the month's
Costless Calendar barrels/ daily
Collar 2008 $55.00 $71.00 day settlements (1,410)
----------------------------------------------------------------------------
West Texas
Intermediate
average of
1,000 the month's
Costless Calendar barrels/ daily
Collar 2009 $65.00 $73.50 day settlements (1,284)
----------------------------------------------------------------------------

Total (3,729)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The current and non-current components of the unrealized loss on commodity
contracts are shown below:

2007 2006
(Thousands of dollars) $ $
----------------------------------------------------------------------------

Current portion of unrealized loss
on commodity contracts 39,375 12,051
Non-current portion of unrealized loss
on commodity contracts 70,326 61,832
----------------------------------------------------------------------------

Total unrealized loss on commodity contracts 109,701 73,883
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The carrying value of cash, accounts receivable, accounts payable and
accrued liabilities, and commodity trade financing approximate their fair
values due to their short-term liquidity.


The carrying value of cash, accounts receivable, accounts payable and accrued liabilities, and commodity trade financing approximate their fair values due to their short-term liquidity.

10. Outstanding Share Data

As at December 12, 2007, there were 36,272,728 common shares of the Company outstanding. In addition, the Company has outstanding $90,000,000 principal amount of 6% convertible unsecured subordinated debentures that are convertible into a total of 3,750,000 common shares and has a total of 2,355,500 common shares reserved for issuance on exercise of outstanding options and restricted share units.

11. Risks and Uncertainties

The Company is subject to a number of risk and uncertainties that could have a material adverse effect on the results of operations, business prospects, financial condition, and the trading price of the Company's securities. A comprehensive discussion of these risks can be found in the Company's prospectus dated January 26, 2007 which is available from SEDAR through its website at www.sedar.com. There have been no material changes for the period January 26, 2007 to September 30, 2007 that requires an update to the discussion of the applicable risks found in the Company's prospectus. These risks include:

(i) risks relating to the Company's retail electricity and natural gas business, including risks relating to: Universal's inability to contract for supply of natural gas and electricity swap agreements; Universal's reliance on Sempra; hedging, balancing and market risks relating to matching the estimated electricity and natural gas requirements of Universal's customers; volatility of commodity prices; the enforcement of Universal's energy supply contracts; the availability of credit; changes in the legislative and regulatory environment; energy trading inherent risks; Universal's dependence on its management information system; Universal's dependence on LDCs; competition; Universal's reliance on its independent contractors; Universal's ability to renew energy supply contracts at the expiration of their terms; customer attrition; customers choosing other energy sources; exposure to fluctuations in currency exchange rates; dependence on key personnel; and Universal's limited operating history;

(ii) risks relating to the Company's ethanol business, including risks relating to: the possibility that there are inaccurate assumptions in TGF's business plan; TGF's reliance on the contractor retained to construct the Belle Plaine Facility; defective material, workmanship or process engineering affecting the Belle Plaine Facility; construction or operational delays; the condition of the construction site on which the Belle Plaine Facility is being constructed; TGF's dependence on the Belle Plaine Facility; TGF's reliance on intellectual property rights and proprietary technology; third party claims for infringement in respect of certain proprietary technology to be used by TGF; cost overruns at the Belle Plaine Facility; TGF's limited operating history; TGF's dependence on commodity prices, including the spread between ethanol and wheat prices, TGF's sensitivity to wheat prices and supply, TGF's sensitivity to natural gas prices and supply, TGF's sensitivity to gasoline prices and demand, sensitivity of distillers grain prices to the price of other commodity products and seasonal fluctuations affecting commodity prices; TGF's reliance on third party service providers; TGF's dependence on federal and provincial legislation and regulations; the uncertainty regarding the long term use of ethanol; the existence of excess supplies of ethanol; competition; TGF's inability to execute its expansion strategy; TGF's inability to execute future acquisitions successfully or at all; TGF's use of hedging transactions and other risk management strategies; changes to environmental, health and safety laws and regulations and potential exposure to environmental, health and safety liabilities; disruptions to infrastructure on which TGF relies or to the supply of fuel or natural gas; TGF's dependence on its key personnel; technological advances that may make the Belle Plaine Facility less efficient or obsolete; TGF's use of leverage and obligation to comply with restrictive covenants; TGF's obligation to service its debt and exposure to variations in interest rates; and TGF's exposure to fluctuations in currency exchange rates; and

(iii) general risks, including risks relating to: the Company's obligation and potential inability to comply with financial reporting and other continuous disclosure requirements and securities legislation; the Company's inability to secure financing in the future; the existence of conflicts of interest pertaining to the Company's directors and officers; income tax matters; the Company's dependence on its subsidiaries; increases in operating costs; the existence of potential unknown liabilities in connection with the acquisitions pursuant to which it acquired Universal and TGF; the Company's limited operating history as a public company; future sales of common shares by significant shareholders negatively affecting the market price of the common shares; the issuance of common shares from treasury in the future diluting investors' interest in the Company; the limited ability of the Company to recover from the selling shareholders for breaches of the acquisition agreements pursuant to which it acquired Universal and TGF; and the possibility that the market price of the common shares will be unpredictable and volatile.

12. Outlook

(a) Universal

The operational margins which Universal has secured with existing customers over the next five-year period are expected to exceed its projected selling and administrative costs and to generate pretax profits. Operational margins are substantially fixed based on the contracted price in the energy contracts against the price payable under the natural gas supply and electricity swaps arranged by Universal. Universal must manage natural gas balancing arising from the difference between its hedged supply and actual usage and electricity usage in excess of the amounts that it balances under the electricity contracts. Further, it must manage customer attrition to allow it to maintain expected operational margin per RCE. Management believes that balancing and attrition can be managed so as not to materially affect operational margin per RCE. Furthermore, through marketing programs Universal expects to add new customers and accordingly increase its revenues and aggregate operational margins. Universal expects that the funding requirements related to new growth including planned expansion into new markets and acquisitions will firstly be funded by cash flow from operations and working capital and as required by raising funds from the financial markets.

Universal continues to expand into new and profitable markets. In April 2007, Universal commenced marketing to residential natural gas customers in Michigan. Thus far sales to Michigan customers are strong, having netted 73,512 RCEs for this year. In May 2007, Universal commenced marketing in British Columbia. With the introduction of the Gas Customer Choice Program, effective May 1, 2007, residential and small commercial customers in British Columbia are now able to acquire natural gas for their premises directly from energy marketers. Sales in BC continue as expected with a total of 13,738 RCEs aggregated to September 30, 2007. Universal continues to assess customer growth opportunities by looking at new markets such as Texas and New York and possible acquisitions.

(b) TGF

Plant construction continues on its scheduled path and has reached the one year milestone of such efforts. In late August 2007, TGF commissioned the main administration office at Belle Plaine Facility as well as the grain receiving and storage facilities. First deliveries of grain commenced on August 27, 2007 fulfilling TGF's commitment to take grain from its large producer supply group. TGF has made considerable progress in recruiting key personnel. TGF anticipates that the plant will be commissioned in the fiscal quarter commencing January 2008 and reach full production by the end of that quarter.

13. Additional Information

Additional information relating to the Company, including the Company's Annual Information Form, when filed, is available on SEDAR (www.sedar.com) and on the Company's website at www.universalenergygroup.ca.



UNIVERSAL ENERGY GROUP LTD.

Consolidated Financial Statements
For the years ended September 30, 2007 and 2006

Consolidated Balance Sheets
As at September 30
(Thousands of dollars)

2007 2006
$ $
----------------------------------------------------------------------------
ASSETS

Current Assets
Cash 13,378 2,847
Restricted cash Note 8, 12 3,972 128
Accounts receivable 31,981 17,202
Holdbacks and deposits Note 6 8,755 1,412
Gas over delivered 21,904 7,649
Current portion of production contract
advances 5,453 -
Current portion of future taxes Note 13 15,508 5,556
----------------------------------------------------------------------------
100,951 34,794

Restricted cash Note 8 3,000 -
Property, plant and equipment Note 7 116,858 1,519
Production contract advances Note 8 1,709 -
Future taxes Note 13 29,372 25,918
Intangible assets Note 2 1,030 -
Goodwill Note 2 70,460 -
----------------------------------------------------------------------------

323,380 62,231
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES

Current Liabilities
Accounts payable and accrued liabilities 44,562 9,999
Deferred gas revenues 26,850 10,931
Current portion of unrealized loss on Note 15
commodity contracts 39,375 12,051
Current portion of long-term debt Note 8 7,860 2,515
----------------------------------------------------------------------------
118,647 35,496
Unrealized loss on commodity contracts Note 15 70,326 61,832
Long-term debt Note 8 41,601 -
----------------------------------------------------------------------------
230,574 97,328
----------------------------------------------------------------------------
SHAREHOLDERS' EQUITY

Share capital Note 9 247,794 25,001
Contributed surplus Note 9 2,568 -
Deficit (157,767) (60,097)
Accumulated other comprehensive
income/(loss) 211 (1)
----------------------------------------------------------------------------
92,806 (35,097)
----------------------------------------------------------------------------
Commitments Note 14
Subsequent events Note 18
323,380 62,231
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

Approved on behalf of the Board:

(Signed) "Gary J. Drummond" Director (Signed) "Tim J. LaFrance" Director


Consolidated Statements of Deficit
For the years ended September 30
(Thousands of dollars)



2007 2006
$ $
----------------------------------------------------------------------------

Deficit, beginning of year (60,097) (395)
Deemed distribution on acquisition of
Universal Note 2 (73,425) -
Net loss for the year (24,245) (59,702)
----------------------------------------------------------------------------

DEFICIT, END OF YEAR (157,767) (60,097)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


Consolidated Statements of Comprehensive Income/(Loss)
and Accumulated Other Comprehensive Income/(Loss)
For the years ended September 30
(Thousands of dollars)

2007 2006
$ $
----------------------------------------------------------------------------

Net loss for the year (24,245) (59,702)
----------------------------------------------------------------------------

Other comprehensive income:
Unrealized gains and losses on translating financial
statements of self-sustaining foreign operations 212 (1)
----------------------------------------------------------------------------

Other comprehensive income/(loss) 212 (1)
----------------------------------------------------------------------------

Comprehensive income/(loss) (24,033) (59,703)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Accumulated other comprehensive income/(loss), beginning
of year (1) -
Other comprehensive income/(loss) 212 (1)
----------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS),
END OF YEAR 211 (1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


Consolidated Statements of Operations
For the years ended September 30

(Thousands of dollars except per share amounts)

2007 2006
$ $
----------------------------------------------------------------------------
REVENUE
Gas 92,618 14,183
Electricity 134,761 44,109
----------------------------------------------------------------------------
227,379 58,292
----------------------------------------------------------------------------

COST OF SALES
Gas 75,221 11,792
Electricity 70,025 24,053
----------------------------------------------------------------------------
145,246 35,845
----------------------------------------------------------------------------

GROSS MARGIN 82,133 22,447
----------------------------------------------------------------------------

EXPENSES
Customer acquisition costs 20,759 16,838
General and administrative 17,534 8,109
Stock-based compensation Note 10 2,568 -
Interest expense 424 95
Amortization of property, plant and
equipment 512 236
----------------------------------------------------------------------------
41,797 25,278
----------------------------------------------------------------------------

Income/(loss) before other income/(expense) 40,336 (2,831)

OTHER INCOME/(EXPENSE)
Investment income 629 21
Realized loss on swap contracts Note 15 (39,709) (14,259)
Unrealized loss on commodity contracts Note 15 (35,818) (73,883)
----------------------------------------------------------------------------
(74,898) (88,121)
----------------------------------------------------------------------------

Loss before income taxes (34,562) (90,952)
Income tax recovery Note 13 (10,317) (31,250)
----------------------------------------------------------------------------

NET LOSS FOR THE YEAR (24,245) (59,702)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Basic earnings/(loss) per share Note 11 (0.83) (5.89)
Diluted earnings/(loss) per share Note 11 (0.83) (5.89)

See accompanying notes to consolidated financial statements.


Consolidated Statements of Cash Flows
For the years ended September 30
(Thousands of dollars)

2007 2006
$ $
----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the year (24,245) (59,702)
Items not affecting cash:
Amortization of property, plant and
equipment 512 236
Stock-based compensation 2,568 -
Unrealized loss on commodity contracts 35,818 73,883
Future taxes (10,203) (31,250)
----------------------------------------------------------------------------
4,450 (16,833)
----------------------------------------------------------------------------

Changes in non-cash working capital items:
Accounts receivable (5,566) (16,914)
Holdbacks and deposits (2,819) (1,263)
Gas over delivered (14,254) (7,477)
Deferred gas revenues 15,919 10,791
Accounts payable and accrued liabilities 20,513 12,256
----------------------------------------------------------------------------
Cash provided by/(used in) operating
activities 18,243 (19,440)
----------------------------------------------------------------------------

CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of TGF, net Note 2 (32,222) -
Acquisition of Universal Note 2 (73,425) -
Restricted cash Note 8, 12 (6,844) (128)
Property, plant and equipment (74,499) (1,439)
----------------------------------------------------------------------------
Cash used in investing activities (186,990) (1,567)
----------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Class C and special shares issued - 22,157
Proceeds from initial public offering Note 2 143,750 -
Share issue costs Note 2 (11,630) -
Advances under debt facilities, net Note 8 46,946 -
----------------------------------------------------------------------------
Cash provided by financing activities 179,066 22,157
----------------------------------------------------------------------------

Unrealized gain/(loss) on foreign exchange
translation 212 (5)
----------------------------------------------------------------------------

NET INCREASE IN CASH 10,531 1,145
CASH, BEGINNING OF YEAR 2,847 1,702
----------------------------------------------------------------------------

CASH, END OF YEAR 13,378 2,847
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental information:
Property, plant and equipment in accounts
payable 25,561 -
Interest paid 473 92
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


UNIVERSAL ENERGY GROUP LTD.

Notes to Consolidated Financial Statements
For the years ended September 30, 2007 and 2006
(Thousands of dollars except as indicated and per share amounts)


1. Organization

Universal Energy Group Ltd. (the "Company") is incorporated under the Canada Business Corporations Act. The Company was formed to participate in the retail electricity and natural gas industries and the ethanol industry through the acquisition of Universal Energy Corporation and Terra Grain Fuels Inc ("TGF").

Universal Energy Corporation ("Universal") is incorporated under the laws of the Province of Ontario and is licensed by the Ontario Energy Board as an electricity retailer and natural gas marketer and by the British Columbia Utilities Commission as a gas marketer. Universal's wholly owned subsidiary, Universal Gas & Electric Corporation ("UGE"), is incorporated pursuant to the General Corporation Law of the State of Delaware. UGE is licensed as an alternative gas supplier by the Michigan Public Service Commission. TGF is incorporated under the Canada Business Corporations Act.

2. Initial public offering and business acquisition

On January 26, 2007, the Company filed a prospectus relating to the initial public offering of its common shares. The closing date of this initial public offering was February 2, 2007 and the Company received gross proceeds from the offering of $143,750 which includes the over allotment proceeds of $18,750 which was exercised on February 7, 2007. The Company incurred issue costs of $11,630 and a future tax benefit in the amount of $3,888 has been recorded on such costs.

On closing, the Company purchased all of the issued and outstanding shares and promissory notes of TGF for cash of $37,825 and 7,889,545 common shares of the Company issued at $11.00 per share. Total aggregate consideration paid for the TGF shares and promissory notes amounted to $124,610.

Also, on closing, the Company purchased all of the issued and outstanding shares of Universal for cash of $73,425 and 15,314,999 common shares of the Company issued at $11.00 per share. Total aggregate consideration paid for the Universal shares amounted to $241,890.

The business combination has been accounted for as a reverse takeover of the Company by Universal and the acquisition of TGF by Universal using the purchase method as follows:

(a) The acquisition of TGF by Universal recorded at the exchange amount of $124,610 which is the fair value of the consideration given to acquire the TGF shares and promissory notes. The purchase price less the cash portion thereof has been added to the capital stock of Universal. In accordance with the purchase method the results of operations in these consolidated financial statements are from the date of acquisition. The allocation of the excess of fair value over net book value has been attributed as follows:



Net assets acquired: $
--------------------- --------

Net working capital (includes cash of $5,603) 12,589
Property, plant and equipment 41,352
Production contract advances 1,185
Intangible assets 1,030
Goodwill 70,460
--------
126,616

Less: Production contract financing (1,322)
Less: Future tax liability (684)
--------
124,610
--------
--------
Consideration:
---------------
Cash 37,825
Issuance of 7,889,545 common shares at $11.00 per share 86,785
--------
124,610
--------
--------


(b) The net equity of the Company was effectively exchanged for equity issued by Universal and accordingly represents an increase to Universal's share capital.

(c) The payment to the then existing Universal shareholders of $73,425 has been recorded as a deemed distribution and charged directly to the deficit.

3. Operations

The Company operates its electricity and gas marketing business through its wholly-owned subsidiary, Universal, and its ethanol business through its wholly-owned subsidiary, TGF. Universal sells price protected electricity and fixed price natural gas contracts to Ontario residential, small to mid-sized commercial and small industrial customers and fixed price natural gas to British Columbia residential, small to mid-sized commercial and small industrial customers. Through its subsidiary, UGE, Universal sells fixed priced natural gas contracts to residential, small to mid-sized commercial and small industrial customers in Michigan. Universal's customers reduce or eliminate their exposure to price volatility for electricity and natural gas by fixing their commodity cost under fixed price contracts for a period of up to five years. Universal's policy is to match the estimated commodity requirements of its customers by purchasing offsetting notional or physical volumes of electricity and natural gas at fixed prices for the term of its related customer contracts.

TGF is currently constructing an ethanol production facility in Belle Plaine, Saskatchewan (the "Belle Plaine Facility"). The Belle Plaine Facility's planned annual capacity is approximately 150 million litres of ethanol and 65,000 tonnes of dried distillers grains ("DDG"). TGF anticipates that the plant will be commissioned in the fiscal quarter commencing January 2008 and reach full production by the end of that quarter.

4. Summary of significant accounting policies

(a) Change in accounting policies and recent accounting pronouncements

Effective October 1, 2006, the Company adopted the recommendations of the Canadian Institute of Chartered Accountants (CICA) Handbook Section 1530, "Comprehensive Income"; Section 3251, "Equity"; Section 3855, "Financial Instruments - Recognition and Measurement"; Section 3861, "Financial Instruments - Disclosure and Presentation"; and Section 3865, "Hedges". These sections apply to fiscal years beginning on or after October 1, 2006 and provide standards for recognition, measurement, disclosure and presentation of financial assets, financial liabilities, non-financial derivatives and embedded derivatives, and describe when and how hedge accounting may be applied. Section 1530 establishes standards for reporting and presenting comprehensive income, which is defined as the change in equity from transactions and other events from non-owner sources. Other comprehensive income refers to items recognized in comprehensive income that are excluded from net income calculated in accordance with generally accepted accounting principles.

Under the new standards, policies followed for periods prior to the effective date generally are not reversed and therefore, the comparative figures have not been restated. Under these new standards, financial instruments must be classified into one of five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets or other financial liabilities. All financial instruments are initially recorded on the balance sheet at fair value. After initial recognition, the financial instruments are measured at their fair values, except for held-to-maturity investments, loans and receivables and other financial liabilities, which are measured at amortized cost. The effective interest related to the financial liabilities and the gain or loss arising from the change in the fair value of a financial asset or liability classified as held for trading is included in net income for the year in which it arises. If a financial asset is classified as available-for-sale, the gain or loss is recognized in other comprehensive income until the financial asset is derecognized and all cumulative gain or loss is then recognized in net income.

The Company has classified its cash and cash equivalents as held-for-trading, which are measured at fair value. Accounts receivable, holdbacks and deposits and production contract advances are classified as loans and receivables, which are measured at amortized cost. Accounts payable, accrued liabilities, commodity financing facilities and debentures are classified as other financial liabilities, which are measured at amortized cost, using the effective interest method. The Company had neither available-for-sale, nor held-to-maturity instruments during the year.

The foreign currency translation adjustment on self-sustaining, foreign operations as at September 30, 2006 presented in the consolidated balance sheet has been reclassified to accumulated other comprehensive income/(loss).

To reduce its exposure to changes in commodity prices arising from the acquisition of electricity at floating or indexed rates, Universal uses electricity derivative financial contracts. These electricity derivative financial contracts are fixed-for-floating swaps whereby Universal agrees with a counterparty to cash settle the difference between the floating or indexed price and the fixed price on a notional quantity of electricity for a specified time frame. The cash flow from these contracts is expected to be effective in offsetting Universal's electricity price exposure and serves to fix Universal's acquisition cost of electricity to be delivered under the fixed price customer electricity contracts. The contracts to manage electricity price exposure are treated as derivatives and are measured at fair value. The gains or losses in fair value relating to these fixed-for-floating swaps are recognized as unrealized gain/(loss) on commodity contracts in the consolidated statement of operations.

To reduce its exposure to downward movement in oil prices, TGF agrees with a counterparty to use financial derivative contracts which include caps and collars with a floor, where for every price of West Texas Intermediate ("WTI") in the range, the market price of WTI is received. These contracts are treated as derivatives and are measured at fair value. The gains or losses in fair value relating to these derivatives are recognized as unrealized gain/(loss) on commodity contracts in the consolidated statement of operations.

CICA Handbook Section 3855 requires that the Company identify embedded derivatives that require separation from the related host contract and measure those embedded derivatives at fair value. Currently there are no identified embedded derivatives that require any changes in fair value to be recognized in the consolidated financial statements of the Company.

As of October 1, 2007, the Company will be required to adopt the recommendations of the CICA Handbook Section 1535, "Capital Disclosures", which will require disclosure of information related to the objectives, policies and processes for managing capital. In addition, disclosures will include whether externally imposed capital requirements have been complied with. The new standard is effective for fiscal years beginning on or after October 1, 2007 and as this standard only addresses disclosure requirements, there will be no impact on the Company's operating results.

As of October 1, 2007, the Company will be required to adopt the recommendations of the CICA Handbook Sections 3862, "Financial Instruments Disclosures" and Section 3863, "Financial Instruments - Presentation", which will replace Section 3861 "Financial Instruments - Disclosure and Presentation". The new disclosure standards increase the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. The new presentation standards carry forward the former presentation requirements and are effective for years beginning on or after October 1, 2007. As these standards only address presentation and disclosure requirements, there will be no impact to the Company's operating results.

(b) Principles of consolidation

The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles, and include the accounts of the Company and its subsidiaries, Universal and TGF. Intercompany balances and transactions are eliminated on consolidation.

(c) Use of estimates

The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. In particular, valuation techniques such as those used in the preparation of fair values are significantly affected by the assumptions used and the amount and timing of estimates. The aggregate fair value amounts represent point in time estimates only and should not be interpreted as being realizable in an immediate settlement.

(d) Cash

Cash comprises cash on hand and cash equivalents. Cash investments with an original maturity of three months or less when purchased are considered to be cash equivalents.

(e) Gas over delivered/Deferred gas revenues and Unbilled revenues/Gas under delivered

Natural gas is delivered to local distribution companies ("LDCs") in equal monthly amounts. Natural gas delivered to LDCs in excess of consumption by customers (gas over delivered) is stated as an asset at the lower of cost and net realizable value. Collections from LDCs in advance of customer consumption of natural gas result in a liability shown as deferred gas revenues.

Unbilled revenues result in an asset when customers consume more natural gas than has been delivered to LDCs and is stated at realizable value. Gas under delivered represents Universal's obligation to the LDCs with respect to natural gas consumed by customers in excess of that delivered to the LDCs. Natural gas under delivered is valued at the average cost of natural gas purchases made during the year in which the under delivery occurs.

Due to the seasonality of operations, during the winter months, customers typically consume more natural gas than the amount of natural gas that Universal delivers to the LDCs, resulting in the recognition of unbilled revenues/gas under delivered. However, in the summer months, customers consume less natural gas than Universal delivers to LDCs, resulting in the recognition of natural gas over delivered/deferred gas revenues.

(f) Property, plant and equipment

Property, plant and equipment are recorded at cost less accumulated amortization. Amortization is provided for over the estimated useful lives of the assets, as follows:



Asset Basis Rate
----------------------- ------------------- ---------------
Computer hardware Declining balance 30%
Computer software Straight line 5 years
Furniture and fixtures Declining balance 20%
Office equipment Declining balance 20%
Leasehold improvements Straight line Term of lease


In the year of acquisition, amortization is taken at one-half of the above rates.

Property, plant and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its fair value, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value, less costs to sell, and are no longer amortized. The assets and liabilities of a group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet.

All direct costs, including interest, related to development of the Belle Plaine Facility to date are considered pre-operating and are capitalized, including construction financing costs and the costs of consulting for the design and engineering for the Belle Plaine Facility. When commercial production begins, these capitalized costs will be amortized over the estimated useful life of the Belle Plaine Facility.

(g) Goodwill

Goodwill represents the price paid for acquisitions in excess of the fair market value of net tangible and intangible assets acquired. Goodwill is carried at cost, less impairment losses if any. The Company uses a two-step impairment test on an annual basis, or when significant business changes have occurred that may have had an adverse impact on the fair value of goodwill. To determine whether impairment has occurred, the fair value of the reporting unit is compared to its carrying amounts, including goodwill. When the fair value is in excess of its carrying amount, goodwill is not considered to be impaired, and the second step of the impairment test is not necessary. When the carrying amount of the reporting unit as determined in the first step exceeds the fair value, then the fair value of goodwill is determined in the same manner as followed on a business combination. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the fair value of goodwill. An impairment loss is recognized when the carrying amount of the goodwill of a reporting unit exceeds its fair value. It is not reversed in the event that the fair value subsequently increases.

(h) Intangible assets

The Company uses the provisions of the CICA Handbook Section 1581, "Business Combinations" and Section 3062, "Goodwill and other Intangible Assets" to determine the value of intangible assets acquired in an acquisition. In determining the value, the Company considers the expected impact on cash flows of the asset, the inherent uncertainty of estimates, and the time value of money. Intangible assets that have a definite life are amortized on a straight line basis over the life of the underlying asset and are further tested for impairment if events or circumstances indicate that the assets might be impaired.

(i) Derivative instruments

(i) Electricity

Universal has entered into contracts with customers to provide electricity at fixed prices ("customer electricity contracts"). The customer electricity contracts expose Universal to changes in market prices of electricity and consumption levels as Universal is obligated to pay the LDCs the floating rate for electricity supplied by the LDCs to Universal's customers. To reduce its exposure to changes in commodity prices arising from the acquisition of electricity at floating or indexed rates, Universal uses electricity derivative financial contracts ("electricity derivative contracts"). These electricity derivative contracts are fixed-for-floating swaps whereby Universal agrees with a counterparty to cash settle the difference between the floating or indexed price and the fixed price on a notional quantity of electricity for a specified time frame. The cash flow from these contracts is expected to be effective in offsetting Universal's electricity price exposure and serves to fix Universal's acquisition cost of electricity to be delivered under the fixed price customer contracts.

(ii) Gas

Universal has entered into contracts with customers to provide natural gas at fixed prices ("customer gas contracts"). The customer gas contracts expose Universal to changes in market prices of natural gas and consumption levels. To reduce its exposure to changes in commodity prices, Universal purchases matching quantities of natural gas at fixed prices for equivalent terms to offset its delivery requirements under its customer gas contracts.

(iii) Ethanol

TGF has entered into crude oil hedges to mitigate risk exposure to the volatility of ethanol pricing while the Belle Plaine Facility is under construction.

Realized and unrealized changes in the fair value of the electricity swaps and crude oil hedges, generally referred to as marked to market gains/(losses), are recognized as unrealized gain/(loss) on commodity contracts in the consolidated statement of operations. The gas purchase contracts and the gas and electricity customer contracts are accounted for as executory contracts.

(j) Foreign currency translation

The Company's currency of measurement in its consolidated financial statements is the Canadian dollar. Its United States subsidiary is considered a self-sustaining foreign operation. Assets and liabilities are translated into the reporting currency at the exchange rate in effect at the consolidated balance sheet date. Revenue and expense items are translated into the reporting currency at the average rates of exchange in effect for the year. Gains or losses on translation are deferred and reported as a component of accumulated other comprehensive income.

(k) Revenue recognition

Universal delivers electricity and/or natural gas to end-use customers who have entered into long-term fixed price or price protected contracts. Universal recognizes revenue when the electricity and/or natural gas is consumed by the end-use customer.

(l) Customer acquisition costs

Universal incurs commissions and other direct selling expenses to acquire customers. Commissions are charged to income in the year in which the customer is acquired. Other direct selling expenses are charged to income as incurred.

(m) Stock-based compensation

(i) Stock options

The Company follows the CICA Handbook Section 3870 "Stock-Based Compensation and Other Stock-Based Payments" and uses the fair value method to account for the cost of the stock options granted to employees and officers. The Company determines the fair value of the stock options on their grant date and records the fair value as compensation expense on a straight line basis over the period the stock options vest, with a corresponding increase to contributed surplus. When these stock options are exercised, the amounts of the proceeds, together with the amounts recorded in contributed surplus, are recorded in share capital. The fair value of these stock options is determined using the Black-Scholes options-pricing model.

(ii) Restricted share units

For equity-settled restricted share units ("RSUs"), stock-based compensation, representing the underlying value of the common shares of the Company at the date of grant of the RSUs, is recognized on a straight line basis over the vesting period. The measurement of the compensation costs for these awards is based on the fair value of the award at the grant date and is recorded as a charge to operating income over the vesting period of the award.

(n) Income taxes

The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the year of enactment or substantive enactment of such tax rates.

5. Seasonality of operations

Universal's operations are seasonal. Natural gas consumption by customers is typically highest in October through March and lowest in April through September. Electricity consumption is typically highest in December through March and June through August and is lowest in April through May and September through November. The seasonality of natural gas customers' consumption does not create any variability in cash flows as Universal purchases for delivery to the utilities a pre-determined fixed amount of natural gas per month and receives payment for the delivered amount irrespective of actual customer consumption. Natural gas pools are rebalanced annually. The seasonality of customers' electricity consumption creates variability in monthly cash flow as electricity is consumed upon delivery and payments received from LDCs are based on consumption.

6. Holdbacks and deposits

Universal's monthly remittance from the Michigan utilities is the lesser of 110% of the utilities' Gas Cost Recovery factor ("GCR") and Universal's contracted selling price to its customers. In the event that Universal's contracted selling price is greater than 110% of the GCR a holdback account for the differential will be maintained for Universal by the utility. Universal will receive a refund of the amount accumulated in the holdback account, without interest, to the end of the most recently completed program year. As at September 30, 2007, the accumulated amount of the Michigan utilities holdback was $5,512 (2006 - $1,263). In addition, Universal is required to provide a cash deposit in the amount of $10.00 per MCF for 10/365ths of the estimated total annual load of all new enrolled customers. The Michigan utilities pay interest on such deposits held. As at September 30, 2007, the security deposits held by the Michigan utilities along with letters of credit amounted to $2,132 (2006 - $149).

As part of the engineering, procurement, and construction ("EPC") contract, TGF paid Ellis Don/VCM a mobilization deposit in the amount of $6,490. TGF recovers this deposit as a credit against monthly construction progress invoices. As at September 30, 2007, the balance of this deposit was $1,111 (2006 - $Nil).



7. Property, plant and equipment


Accumulated Net
Cost Amortization Book Value
2007 $ $ $
----------------------------------------------------------------------------
Computer hardware 922 281 641
Computer software 278 59 219
Furniture and fixtures 1,145 262 883
Office equipment 455 97 358
Leasehold improvements 524 106 418
Land 299 - 299
----------------------------------------------------------------------------
3,623 805 2,818
Belle Plaine Facility under Note 14
development 114,040 - 114,040
----------------------------------------------------------------------------
117,663 805 116,858
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Accumulated Net
Cost Amortization Book Value
2006 $ $ $
----------------------------------------------------------------------------
Computer hardware 456 105 351
Computer software 150 15 135
Furniture and fixtures 676 98 578
Office equipment 274 30 244
Leasehold improvements 235 24 211
----------------------------------------------------------------------------
1,791 272 1,519
----------------------------------------------------------------------------
----------------------------------------------------------------------------


8. Financing facilities
2007 2006
$ $
----------------------------------------------------------------------------
Credit facility (a)(i) 1,800 -
Debentures (a)(ii) 40,000 -
Wheat production financing (a)(iii) 7,661 -
Commodity trade financing (b) - 2,515
----------------------------------------------------------------------------
49,461 2,515
Less: current portion (7,860) (2,515)
----------------------------------------------------------------------------

Long-term debt 41,601 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(a) TGF has arranged the following credit facilities to finance the
construction of the Belle Plaine Facility and to provide advances to
wheat growers under production contracts:

(i) Credit facility

A credit facility of up to $50,000 with a syndicate of Canadian lenders.
The term of the facility is the construction period (up to 16 months) plus
a term of up to 5 years starting the earlier of (i) the date on which a
certificate of substantial performance is issued by TGF and the Contractor
or (ii) six months from last drawdown (the "Term Conversion Date").
Interest only will be charged on the loan during the construction period
until the Term Conversion Date. Blended monthly principal and interest
payments will be made thereafter sufficient to amortize the loan over 10
years. The interest rate is prime plus 2% during the construction period
and prime plus 1% after construction. TGF has the right to convert to a
fixed rate of interest. Security for the credit facility includes a first
priority security interest on all assets and undertakings of TGF plus a
general security interest on all other current and after acquired assets of
TGF. The credit facility includes certain financial covenants the more
significant of which relate to working capital, debt to equity ratio, debt
service coverage and minimum shareholders' equity. As at September 30,
2007, $1,800 has been drawn against this facility and interest expense for
the year in the amount of $10 has been capitalized as part of property,
plant and equipment under development. Subsequent to year-end an additional
$20,733 has been drawn against this facility. The facility also provides for
$5,000 of cash to be held for cost overruns related to construction of the
Belle Plaine Facility and debt servicing shortfalls. Upon issuance of a
certificate of substantial performance by TGF and the Contractor related to
the Belle Plaine Facility, the restriction will be reduced to $3,000 for
debt servicing requirements.

(ii) Debentures

A debenture purchase agreement with a number of private parties providing
for the issuance of up to $40,000 aggregate principal amount of debentures.
The interest rate is 10.5% per annum, compounded annually and payable
quarterly. Interest is to be paid quarterly over the first year and
quarterly principal and interest payments made beginning on completion of
the Belle Plaine Facility (or August 25, 2008 if earlier) in the amount of
$24.99 per $1,000 of principal advanced with a lump sum payment of all
outstanding amounts payable sixty months after the date of the initial
advance. Security for the credit facility includes a security interest in
all of TGF's present and after acquired property, second in priority to the
lenders in Note 8(a)(i). The credit facility includes certain financial
covenants the more significant of which relate to working capital, debt
service coverage and minimum shareholder's equity. As at September 30, 2007,
debentures in the amount of $40,000 were issued under this agreement and
interest expense for the year in the amount of $860 has been capitalized as
part of property, plant and equipment under development.

(iii) Wheat production financing

A credit facility under which wheat growers receive a cash advance under the
production contracts, (see Note 14(f)). Each wheat grower is limited to
advances totaling $300 per signed production contract. On direction by the
grower, TGF will repay the cash advances to the lender upon delivery of
wheat to TGF by the grower. Should the grower fail to deliver the wheat as
specified in the production contract, TGF has guaranteed the payment of any
outstanding cash advances plus interest to the lender. As at September 30,
2007, $7,661 was outstanding under this facility. TGF is also required to
pay the interest cost of the advances at a rate of prime plus 3%. During the
year interest expense under this facility amounted to $382.

(b) Sempra Energy Trading Corp. ("Sempra"), a related party, provides
commodity trade financing to Universal. The commodity financing includes a
facility of $5,000 for amounts deemed due for payment, which bears interest
at LIBOR plus 2%. Interest during the year amounted to $37 (2006 - $92). The
amount owing under this facility as at September 30, 2007 is $Nil (2006 -
$2,515).

9. Share capital

(a) Authorized

An unlimited number of common shares and an unlimited number of first
preferred and second preferred shares issuable in series and one special
share.

(b) Issued

2007 Special share Common shares $
----------------------------------------------------------------------------
Share capital at November 1,
2006 1 -
Acquisition of TGF Note 2 7,889,545 86,785
Acquisition of Universal Note 2 15,314,999 25,001
Initial public offering, less Note 2
issue costs 13,068,183 136,008
Special share issued 1 -
----------------------------------------------------------------------------
1 36,272,728 247,794
----------------------------------------------------------------------------
----------------------------------------------------------------------------


2006 Class C shares Common shares $
----------------------------------------------------------------------------
Class C shares issued 25,000,000 25,000
Common shares issued 100,000 1
----------------------------------------------------------------------------
25,000,000 100,000 25,001
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(c) Contributed surplus

During the year, a total of $2,568 (2006 - $Nil) was added to contributed
surplus, $1,322 (2006 - $Nil) relates to the amortization of stock option
compensation expense and $1,246 (2006 - $Nil) relates to the RSU
compensation expense.


Stock-based compensation plans

(a) Stock option plan

In February 2007 the Company adopted a stock option plan for the benefit of officers, directors, employees and other eligible service providers. The maximum number of common shares issuable on exercise of outstanding stock options at any time is limited to 7% of the issued and outstanding common shares, less the number of common shares issuable pursuant to outstanding restricted share units ("RSUs") pursuant to the restricted share unit plan (the "RSU Plan"). Any increase in the issued and outstanding common shares will result in an increase in the number of common shares that may be issued on exercise of stock options outstanding at any time and any increase in the number of stock options granted, upon exercise, makes new grants available under the stock option plan. Stock options that are cancelled, terminated or expire prior to the exercise of all or a portion thereof shall result in the common shares that were reserved for issuance thereunder being available for a subsequent grant of stock options pursuant to the stock option plan to the extent of any common shares issuable thereunder that are not issued under such cancelled, terminated or expired stock options. Stock options granted pursuant to the stock option plan have a term not exceeding five years and vest in such manner as determined by the Board. The exercise price of stock options granted is determined by the Board at the time of grant and may not be less than the closing price of the common shares on the TSX on the last trading day prior to the date of grant.

A summary of the changes in the Company's stock option plan since inception on February 2, 2007 and status as at September 30, 2007 is shown below:



Weighted Weighted
Stock Range of Average Average
Options Exercise Exercise Grant Date
Outstanding Prices $ Price $ Fair Value $
----------------------------------------------------------------------------
(dollars) (dollars) (dollars)
Balance, beginning
of year - - -
Granted 11.00 to
1,868,000 17.85 11.61 4.67
Cancelled (47,500) 11.00 11.00
Exercised - - -
----------------------------------------------------------------------------

Balance, end of year 11.00 to
1,820,500 17.85 11.62
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at September 30, 2007, the range of exercise prices for stock options
outstanding and exercisable (vested) are as follows:

Options Outstanding Options Exercisable
------------------------------------------------ --------------------------
Weighted
average Weighted Weighted
Range of Stock remaining average average
Exercise Options contractual exercise Number exercise
Prices $ Outstanding life price $ exercisable price $
------------------------------------------------- --------------------------
(dollars) (dollars)

11.00 1,629,500 4.33 years 11.00 - n/a
14.28 to
17.85 191,000 4.24 years 16.92 - n/a
------------------------------------------------- --------------------------
------------------------------------------------- --------------------------


The fair value of each stock option granted was estimated as at the grant date using the Black-Scholes options-pricing model. The following weighted average assumptions were used in arriving at the grant-date fair value associated with stock options for which compensation costs were recognized.



----------------------------------------------------------------------------
Risk-free interest rate 3.95 % to 4.55%
Expected dividend yield 0%
Expected forfeitures per year 1%
Expected share price volatility 40%
Expected option life 3.75 to 5.0 years
----------------------------------------------------------------------------


Stock option compensation expense is recognized during the year in which entitlement to the compensation vests. During the year, compensation expense of $1,322 (2006 - $Nil) was recognized as a result of stock options granted under the plan.

(b) Restricted Share Units

In February 2007, the Company established the RSU Plan as a discretionary incentive compensation plan to provide officers, directors, employees and other eligible service providers of the Company with the opportunity to acquire common shares of the Company through an award of RSUs. Each RSU represents a right to receive one common share. Each RSU awarded conditionally entitles the participant to the delivery of one common share upon attainment of the RSU vesting period. RSUs awarded to participants vest in accordance with terms determined by the Board from time to time, which terms may include certain performance criteria in which the number of common shares to be delivered to a participant in respect of each RSU awarded is dependent upon the Company's performance and/or market price of the common shares, as determined by the Board. The RSU Plan provides that the maximum number of common shares reserved for issuance from time to time pursuant to outstanding RSUs shall not exceed a number of common shares equal to 7% of the aggregate of the number of issued and outstanding common shares, less the number of common shares issuable on exercise of outstanding stock options pursuant to the stock option plan. To the extent that RSUs are terminated or cancelled prior to the issuance of any common shares, such common shares underlying such award shall be added back to the number of shares reserved for issuance under the RSU Plan and will become available for grant again under the RSU Plan.

During the year, the Company granted 535,000 RSUs, vesting over a three year period from the date of grant, to be settled through the issuance of common shares from treasury. The RSUs granted are subject to certain performance criteria in which the number of common shares to be delivered to a participant in respect of each RSU awarded is dependent upon the Company's performance and/or market price of the common shares. As at September 30, 2007 there were 535,000 RSUs awarded and outstanding. The total compensation expense incurred for the year was $1,246 (2006 - $Nil).



(c) Stock options and RSUs available for grant

----------------------------------------------------------------------------
Stock options and RSUs available for grant 2,539,091
Less: stock options granted during the period (1,868,000)
Less: RSUs granted during the period (535,000)
Add: stock options cancelled/forfeited during the period 47,500
----------------------------------------------------------------------------

Balance, end of year 183,591
----------------------------------------------------------------------------
----------------------------------------------------------------------------


11. Earnings Per Share


2007 2006
----------------------------------------------------------------------------

Net loss for the year ($24,245) ($59,702)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average common shares outstanding - Basic 29,152,842 10,132,825
Dilutive effect of RSUs 117,749 -
----------------------------------------------------------------------------
Weighted average common shares outstanding - Diluted 29,270,591 10,132,825
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Basic earnings/(loss) per share ($0.83) ($5.89)
Diluted earnings/(loss) per share ($0.83) ($5.89)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The effect of the conversion of the stock options into the Company's shares was not included in the computation of fully diluted earnings per share as the effect of conversion would be anti-dilutive.

12. Related party transactions and balances

During the year, the Company entered into various transactions with related parties as follows:

(a) Universal has entered into the following agreements with Sempra, a significant shareholder of the company:

(i) Gas purchase agreements

Universal entered into the natural gas purchase and sale agreement with Sempra on July 14, 2005 (amended and restated February 2, 2007). On February 2, 2007 UGE and Sempra also entered into an agreement pursuant to which Sempra will supply natural gas to UGE in connection with UGE's gas marketing business in Michigan ("Gas Purchase Agreements"). Pursuant to the Gas Purchase Agreements, Universal engaged Sempra to act as Universal's exclusive supplier of natural gas, subject to certain limited circumstances.

Universal's obligations to Sempra under the Gas Purchase Agreements are secured by the grant of a first priority security interest on substantially all of Universal's current and future assets, including all cash and cash equivalents, all accounts receivable and all deposit accounts. In addition, all payments received by Universal from its customers and the LDCs are paid to a specified lockbox or by wire transfer to specified Universal blocked bank accounts under the control of Sempra, from which amounts are first paid to Sempra in satisfaction of payments due to Sempra under the Gas Purchase Agreements, and all excess amounts are then paid to Universal.

If Sempra defaults in its obligations to deliver natural gas to Universal, or if Universal defaults in its obligation to accept delivery of natural gas, subject to force majeure, the Gas Purchase Agreements contains provisions requiring the payment of various amounts by the non-performing party to the performing party.

During the year, Universal made natural gas purchases under the agreements totaling $90,263 (2006 - $18,894). Included in accounts payable at September 30, 2007 is an amount owing of $9,506 (2006 - $2,141).

(ii) Electricity swap agreement

Universal entered into the electricity swap master agreement ("Electricity Swap Agreement") with Sempra on July 14, 2005 (amended and restated February 2, 2007). Pursuant to the Electricity Swap Agreement, Universal engaged Sempra to act as Universal's exclusive supplier of electricity swaps.

Universal's obligations to Sempra under the Electricity Swap Agreement are secured by the grant of a first priority security interest on substantially all of Universal's current and future assets, including all cash and cash equivalents, all accounts receivable and all deposit accounts. In addition, all payments received by Universal from its customers and the LDCs are paid to a specified lockbox or by wire transfer to specified Universal blocked bank accounts under the control of Sempra, from which amounts are first paid to Sempra in satisfaction of payments due to Sempra under the Electricity Swap Agreement, and all excess amounts are then paid to Universal.

Upon the occurrence of a contract termination event, the non-defaulting party has the right to immediately, for so long as the contract termination event is continuing: suspend its performance under electricity swaps then outstanding; or liquidate and terminate the electricity swaps then outstanding and accelerate the payment of any amounts due. Upon any such liquidation and termination, the non-defaulting party must calculate a net settlement amount in accordance with the formula contained in the Electricity Swap Agreement. The party with the net settlement amount payment obligation must pay such amount to the other party within one business day of receipt from the non-defaulting party of notice of such calculation.

During the year, Universal entered into electricity swaps under the agreement totaling $39,709 (2006 - $17,987). Included in accounts payable as at September 30, 2007 is an amount owing of $3,710 (2006 - $3,264).

In addition, the Gas Purchase Agreements and the Electricity Swap Agreement contain financial margin requirements that commence on February 2, 2009 as well as other covenants. These agreements terminate on June 30, 2010. As at September 30, 2007, the balance in the blocked account amounted to $1,972.

(b) During the year, Universal incurred expenses amounting to $882 (2006 - $258) for direct mail marketing services to Market Connections Inc. in which certain shareholders hold an equity interest. Included in accounts payable as at September 30, 2007 is an amount owing of $49 (2006 - $10).

(c) TGF has entered into a credit support agreement with a related party that allows TGF to enter into hedges to mitigate risk exposure to the volatility of ethanol pricing while the Belle Plaine Facility is under construction. The facility will be phased out shortly after the plant is commissioned and operational. At September 30, 2007 the amount owing under this facility is $136 (2006 - $Nil).

These transactions were conducted in the normal course of business on terms and rates agreed to by the related parties.



13. Income taxes

The future tax recovery comprises:

(a) Summary of the major components of the future tax recovery:

2007 2006
$ $
----------------------------------------------------------------------------
Loss before income taxes (34,562) (90,952)
----------------------------------------------------------------------------
Tax at statutory rates 12,250 32,834
Tax effect of expenses that are not deductible for
income purposes (1,168) (6)
Reduction in future taxes resulting from reduction
in tax rates (765) (1,578)
----------------------------------------------------------------------------

Future tax recovery 10,317 31,250
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(b)Tax rate reconciliation:
2007 2006
----------------------------------------------------------------------------
Tax at statutory rates 35.44% 36.10%
Tax effect of expenses that are not deductible for
income tax purposes (3.38)% (0.01)%
Effect on opening future tax of reduction
in income tax rates (2.21)% (1.73)%
----------------------------------------------------------------------------

Average effective income tax 29.85% 34.36%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(c) Components of the Company's future taxes are as follows:

2007 2006
$ $
----------------------------------------------------------------------------
Unrealized loss on commodity contracts 37,008 25,442
Share issue costs 3,792 -
Deferred financing charges (366) -
Property, plant and equipment (641) -
Non-capital loss carryforwards 5,087 6,032
----------------------------------------------------------------------------

Future taxes - current and long-term 44,880 31,474
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at September 30, 2007, the Company has Canadian operating loss carryforwards of $11,968 available to reduce future years' taxable income, which will expire as follows:



Year Amount $
----------------------------------------------------------------------------
2025 8,901
2026 407
2027 2,660
----------------------------------------------------------------------------

11,968
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at September 30, 2007, the Company has US operating loss carryforwards of $3,184 available to reduce future year's taxable income, which will expire as follows:



Year Amount $
----------------------------------------------------------------------------
2026 1,672
2027 1,512
----------------------------------------------------------------------------

3,184
----------------------------------------------------------------------------
----------------------------------------------------------------------------


14. Commitments

(a) The Company's commitments for premises and vehicles under lease
obligations for each of the next five years are as follows:

Year Amount $
----------------------------------------------------------------------------
2008 1,347
2009 1,563
2010 857
2011 612
2012 51
----------------------------------------------------------------------------

4,430
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(b) The Company's commitments under long-term natural gas contracts with
Sempra for each of the next five years and thereafter are as follows:

Year Amount $
----------------------------------------------------------------------------
2008 164,410
2009 153,176
2010 139,216
2011 111,610
2012 63,719
Thereafter 4,547
----------------------------------------------------------------------------

636,678
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The above commitments have been entered into to meet delivery requirements for currently enrolled and flowing natural gas customers under long-term natural gas supply contracts.

(c) Universal is also committed under long-term contracts with customers to supply electricity and natural gas. These contracts have various expiry dates and renewal options.

(d) TGF has entered into an EPC contract with Ellis Don/VCM in Joint Venture for a sum of $141,529 to perform and complete all design, engineering, procurement, construction and commissioning work in connection with the development of the Belle Plaine Facility. As at September 30, 2007 total expenditures incurred under the EPC contract amount to $117,339.

(e) TGF has entered into a license agreement with Delta-T Corporation ("Delta-T") for the right to use in perpetuity Delta-T's technology for the purpose of construction, operation, enhancement and optimization of the Belle Plaine Facility for a fee of US $2,610 of which US $1,305 has been paid as at September 30, 2007.

(f) TGF entered into a number of contracts with various growers (the "production contracts") to purchase wheat at fixed prices. The production contracts are for one or two year periods and provide the grower with the option to extend the production contract for a further one year term upon proper written notice. Total commitments under these production contracts to September 30, 2007 are:



Year Amount $
----------------------------------------------------------------------------
2008 21,179
2009 31,700
2010 43
----------------------------------------------------------------------------

52,922
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Financial instruments

(a) Fair value

(i) Universal has a variety of electricity supply contracts that are considered derivative financial instruments. The fair value of derivative financial instruments is the estimated amount that Universal would pay or receive to dispose of these supply contracts in the market. Universal has estimated the value of these contracts using a discounted cash flow method which employs market forward curves.

At September 30, 2007, Universal had electricity fixed-for-floating swap contracts in Ontario which it has committed with the following terms:



----------------------------------------------------------------------------
Notional volumes 2.0 to 40.0 MW/h
Total remaining notional volume 7,003,858 MWh
Maturity dates October 1, 2007 to December 31, 2012
Fixed price per MWh (dollars) $60.77 to $86.79
Fair value $105,972 unfavourable
Remaining notional value $507,853
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The realized loss on swap contracts during the year of $39,709 (2006 - $14,259) represents the net settlement payments recognized in income on that portion of swap contracts that matured during the year.

(ii) TGF has entered into hedges to mitigate risk exposure to the volatility of ethanol pricing while the Belle Plaine Facility is under construction. Transactions entered into during the year are summarized below:




Floor Cap
Price Price
$US/bbl $US/bbl Settlement Fair
Transaction Term (dollars) (dollars) Volume Mechanism Value $
----------------------------------------------------------------------------
Costless Calendar 500 barrels West Texas
Collar 2008 $60.00 $74.00 /day Intermediate (1,035)
average of
the month's
daily
settlements
----------------------------------------------------------------------------
Costless Calendar West Texas
Collar 2008 $55.00 $71.00 500 barrels Intermediate (1,410)
/day average of
the month's
daily
settlements
----------------------------------------------------------------------------
Costless Calendar
Collar 2009 $65.00 $73.50 1,000 barrels West Texas
/day Intermediate (1,284)
average of
the month's
daily
settlements
----------------------------------------------------------------------------
Total (3,729)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(iii) The current and non-current components of the unrealized loss on
commodity contracts are shown below:

2007 2006
$ $
----------------------------------------------------------------------------
Current portion of unrealized loss on commodity
contracts 39,375 12,051
Non-current portion of unrealized loss on commodity
contracts 70,326 61,832
----------------------------------------------------------------------------

Total unrealized loss on commodity contracts 109,701 73,883
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The carrying value of cash, accounts receivable, holdbacks and deposits, accounts payable and accrued liabilities, and commodity financing facility approximate their fair values due to their short-term liquidity.

(b) Customer credit risk

In Ontario and Michigan, the LDCs provide collection services and assume the risk of any bad debts owing from Universal's customers. Therefore, Universal receives the collection of customer account balances directly from the LDCs. Management believes that the risk of the LDCs failing to deliver payment to Universal is minimal.

(c) Supplier risk

Universal purchases its natural gas delivered to its customers through long-term contracts entered into with its exclusive supplier, Sempra. It also enters into electricity swaps with Sempra to swap its floating rate payments to the electricity LDCs for a fixed rate. Universal has an exposure to supplier and counterparty risk as the ability to continue to deliver natural gas and fulfill its obligations to the electricity LDCs for electricity delivery to its customers is reliant upon the ongoing operations of Sempra and its ability to fulfill its contractual obligations. Management believes that the risk of Sempra being unable to deliver the contracted amounts of natural gas and fulfill the financial obligations under the electricity swaps is minimal.

(d) Foreign currency risk

Universal has an exposure to foreign currency exchange rates, as a result of its investment in its United States operations.

Reportable business segments

The Company operates in two geographic segments, Canada and the United States. The Canadian operations include electricity, natural gas and ethanol and the United States operations include natural gas. In addition, the Company also has two reportable business segments - gas and electricity marketing and ethanol. The Company evaluates segment performance based on gross margin.

The following table presents the Company's results from continuing operations by geographic segment for the year.



Year ended September 30, 2007
Canada United States Consolidated
$ $ $
----------------------------------------------------------------------------
GAS AND ELECTRICITY MARKETING
Revenue
Gas 48,223 44,395 92,618
Electricity 134,761 - 134,761
----------------------------------------------------------------------------
182,984 44,395 227,379
----------------------------------------------------------------------------
Cost of Sales
Gas 39,237 35,984 75,221
Electricity 70,025 - 70,025
----------------------------------------------------------------------------
109,262 35,984 145,246
----------------------------------------------------------------------------
Gross Margin 73,722 8,411 82,133
----------------------------------------------------------------------------
Expenses
Customer acquisition costs 14,124 6,635 20,759
General and administrative 12,586 3,290 15,876
Interest expense 51 2 53
Amortization of property, plant and
equipment 461 - 461
Other (income)/expense
Investment income (141) (3) (144)
Realized loss on swap contracts 39,709 - 39,709
Unrealized loss on commodity contracts 32,089 - 32,089
----------------------------------------------------------------------------

98,879 9,924 108,803
----------------------------------------------------------------------------
ETHANOL
Expenses
General and administrative 1,240 - 1,240
Interest expense 371 - 371
Amortization of property, plant and
equipment 51 - 51
Other (income)/expense
Investment income (38) - (38)
Unrealized loss on commodity contracts 3,729 - 3,729
----------------------------------------------------------------------------

5,353 - 5,353
----------------------------------------------------------------------------
CORPORATE
Expenses
General and administrative 418 - 418
Stock-based compensation 2,568 - 2,568
Other (income)/expense
Investment income (447) - (447)
----------------------------------------------------------------------------

2,539 - 2,539
----------------------------------------------------------------------------
Loss before income taxes (33,049) (1,513) (34,562)
Income tax recovery (9,788) (529) (10,317)
----------------------------------------------------------------------------

NET LOSS FOR THE YEAR (23,261) (984) (24,245)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Property, plant and equipment 116,858 - 116,858
----------------------------------------------------------------------------

Total assets 292,789 30,591 323,380
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Year ended September 30, 2006
Canada United States Consolidated
$ $ $
----------------------------------------------------------------------------
GAS AND ELECTRICITY MARKETING
Revenue
Gas 10,708 3,475 14,183
Electricity 44,109 - 44,109
----------------------------------------------------------------------------

54,817 3,475 58,292
----------------------------------------------------------------------------
Cost of Sales
Gas 9,387 2,405 11,792
Electricity 24,053 - 24,053
----------------------------------------------------------------------------

33,440 2,405 35,845
----------------------------------------------------------------------------

Gross Margin 21,377 1,070 22,447
----------------------------------------------------------------------------
Expenses
Customer acquisition costs 14,400 2,438 16,838
General and administrative 7,754 355 8,109
Interest expense 92 3 95
Amortization of property, plant and
equipment 236 - 236
Other (income)/expense
Investment income - (21) (21)
Realized loss on swap contracts 14,259 - 14,259
Unrealized loss on commodity contracts 73,883 - 73,883
----------------------------------------------------------------------------
110,624 2,775 113,399
----------------------------------------------------------------------------
ETHANOL
Expenses
General and administrative - - -
Interest expense - - -
Amortization of property, plant and
equipment - - -
Other (income)/expense
Investment income - - -
Unrealized loss on commodity contracts - - -
----------------------------------------------------------------------------
- - -
----------------------------------------------------------------------------
CORPORATE
Expenses
General and administrative - - -
Stock-based compensation - - -
Other (income)/expense
Investment income - - -
----------------------------------------------------------------------------
- - -
----------------------------------------------------------------------------
Loss before income taxes (89,247) (1,705) (90,952)
Income tax recovery (30,653) (597) (31,250)
----------------------------------------------------------------------------

NET LOSS FOR THE YEAR (58,594) (1,108) (59,702)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Property, plant and equipment 1,519 - 1,519
----------------------------------------------------------------------------
Total assets 51,288 10,943 62,231
----------------------------------------------------------------------------
----------------------------------------------------------------------------


17. Comparative figures

Certain of the comparative figures have been reclassified to conform to the current year's presentation.

18. Subsequent events

On September 24, 2007, the Company filed a prospectus related to the issue of Convertible Unsecured Subordinate Debentures. The closing date of the Offering was October 2, 2007 and the Company received gross proceeds from the issue of $90,000. The Company incurred issue costs of $3,300 and a future tax benefit in the amount of $1,105 will be recorded on such costs. It is the Company's intention that one or more of its subsidiaries will use a majority of the net proceeds of the Offering to provide an available source of funding for potential future acquisition opportunities in the retail energy business.

The Debentures are due September 30, 2014 and have a coupon rate of 6.00% per annum payable semi-annually on March 31 and September 30 commencing on March 31, 2008. Each $1,000 principal amount of the Debentures is convertible at any time prior to maturity or the date fixed for redemption, at the option of the holder, into approximately 41.67 common shares of the Company representing a conversion price of $24.00 per common share.

The Debentures will not be redeemable prior to October 1, 2010. On and after October 1, 2010, but prior to September 30, 2012, the Debentures will be redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at the Company's sole option on not more than 60 days' and not less than 30 days' prior notice, provided that the current market price on the date on which notice of redemption is given is not less than 125% of the conversion price. On and after September 30, 2012, but prior to the maturity date, the Debentures will be redeemable, in whole or in part, at a price equal to the principal amount thereof, plus accrued and unpaid interest, at the Company's sole option on not more than 60 days' and not less than 30 days' prior notice.

Contact Information