Universal Energy Group Ltd.
TSX : UEG

Universal Energy Group Ltd.

December 12, 2008 06:00 ET

Universal Energy Group Releases Fiscal 2008 Financial Results and Operational Updates

TORONTO, ONTARIO--(Marketwire - Dec. 12, 2008) - Universal Energy Group Ltd. ("Universal Energy Group") (TSX:UEG) is pleased to announce the release of its financial results for the year ended September 30, 2008 including financial results of its gas and electricity marketing division, Universal Energy Corporation ("Universal"), its ethanol division, Terra Grain Fuels Inc. ("TGF") and its home services division, National Home Services ("NHS").

Highlights for the year ended September 30, 2008:

- Universal's operational revenue up 67% to $406.4 million.

- Universal's operational margin up 64% to $72.2 million.

- Universal's operational income after customer acquisition costs up 234% to $27.3 million.

- Universal's gross customer adds of 164,283 RCEs.

- Net Universal's customer additions of 85,585 RCEs with year-end customer base of 448,905 RCEs.

- TGF continues to operate at approximately 70% capacity. Planned repairs have been completed.

- NHS installed over 7,000 water heaters since commencing operations in April 2008.

- Initiation of $0.75 per common share annual dividend, payable quarterly. The first dividend payment occurred on September 30, 2008.

Universal earned revenue for the year ended September 30, 2008 of $390.8 million compared to $227.4 million for the 2007 fiscal year. Gross margin for the year ended September 30, 2008 was $115.2 million compared to $82.1 million for the 2007 fiscal year. Net income for the year ended September 30, 2008 was $26.1 million compared to a loss of $18.1 million for the 2007 fiscal year.

Universal uses the concepts of "operational revenue", "operational margin", "operational income before marketing costs" and "operational income after marketing costs" 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. Please refer to our management's discussion and analysis ("MD&A") for an explanation of how these non-GAAP measures are calculated and for a reconciliation to the most comparable GAAP measures reported in Universal's financial statements for the year ended September 30, 2008.

Universal earned operational revenue for the year ended September 30, 2008 of $406.4 million compared to $243.3 million for the 2007 fiscal year. Operational margin for the year ended September 30, 2008 was $72.2 million compared to $44.1 million for the 2007 fiscal year. Operational income before customer acquisition costs for the year ended September 30, 2008 was $47.3 million compared to $28.9 million for the 2007 fiscal year. Operational income after customer acquisition costs for the year ended September 30, 2008 was $27.3 million compared to $8.2 million for the 2007 fiscal year. Universal's gross customer additions for the year were 164,283 RCEs. Attrition during the year was 78,698 RCEs (representing an annualized attrition rate of 15.5% across all markets) for a total customer base at September 30, 2008 of 448,905 RCEs.

TGF's initial production runs of Ethanol and Dried Distillers Grains revealed that a component of the plant's evaporation system was under designed and required an upgrade. While repairs have been completed the plant continues to operate at 70% capacity as the repaired components go through their commissioning phase. The expense related to the upgrade was covered by the general contractor.

NHS continues in the start-up phase of its operations. As at September 30, 2008 NHS has installed over 7,000 water heaters in residential homes and commenced earning revenue from its installed base in Q4-2008.

The Company is pleased to announce that Gary J. Drummond, formerly Executive Chair, is now Chair of the Board of Directors, Mark L. Silver, formerly President of Gas & Electricity Marketing, is now Chief Executive Officer of the Company and Nino C. Silvestri, formerly Chief Operating Officer of Gas and Electricity Marketing, is now President and Chief Operating Officer of Gas & Electricity Marketing.

On December 11, 2008 the Company, through its wholly owned subsidiary, Commerce Gas and Electric Corp. ("CGE"), acquired all of the issued and outstanding shares of Commerce Energy, Inc. ("Commerce"), the operating subsidiary of Commerce Energy Group, Inc., for approximately US$26 million. CGE also assumed certain letter of credit obligations related to the existing natural gas and electricity supply arrangements required to serve the Commerce customer base. These obligations will unwind as current suppliers are replaced with CGE natural gas and electricity supply and credit arrangements. Through this acquisition the Company has acquired over 90,000 residential, commercial and industrial customers located in the U.S. in energy deregulated states. On an RCE equivalent basis, Commerce serves approximately 170,000 RCEs, including an industrial portfolio, with a combination of fixed term and month to month energy contracts. Mark Silver, CEO of Universal Energy Group said "This transaction positions the company for successful growth in key US markets. Commerce's platform puts us in almost every major deregulated market in the US. Leveraging our supply and credit arrangements will allow us to extract significant value from the more than $25 million in annual operational margin generated from the Commerce customer base."

Universal Energy Group's audited consolidated financial statements for the year ended September 30, 2008 and 2007 and MD&A attached hereto are part of this news release. See "Forward-looking information" and "Non-GAAP measures" in the attached MD&A for cautionary information regarding forward-looking statements and a discussion of "Non-GAAP measures".

Universal Energy Group's common shares and convertible subordinated debentures are listed on the Toronto Stock Exchange under the symbol "UEG" and "UEG.DB", respectively. Universal Energy Group through its subsidiary Universal Energy Corporation, sells electricity and natural gas in Ontario and natural gas in British Columbia to residential, small to mid-size commercial and small industrial customers. Universal Energy Group through its subsidiary Universal Gas & Electric Corporation, sells natural gas in Michigan to residential, small to mid-size commercial and small industrial customers. Universal Energy Group through its subsidiary National Energy Corporation, operating under the trade name National Home Services, sells long-term water heater rental programs to Ontario residential customers. Universal Energy Group through its subsidiary Terra Grain Fuels Inc. operates an ethanol facility near Belle Plaine, Saskatchewan. 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 12, 2008

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, 2008 and 2007 should be read in conjunction with the audited consolidated financial statements for the years ended September 30, 2008 and 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 information". Certain totals, subtotals and percentages may not reconcile due to rounding. Results are reported in Canadian dollars. Quarterly reports of, and other information related to, the Company is available on SEDAR at www.sedar.com.

The Company carries on business through three operating divisions. Universal Energy Corporation ("Universal"), a North American energy marketer, carries on the Company's retail natural gas and electricity marketing business. National Energy Corporation ("NEC"), operating under the trade name National Home Services ("NHS"), provides Ontario residential customers a long-term water heater rental program. Terra Grain Fuels Inc. ("TGF"), an ethanol producer, operates an ethanol facility in Belle Plaine, Saskatchewan.

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, the ethanol industry and the home water heater 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 "Risks and Uncertainties" 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, NEC, 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 except as expressly required by applicable securities law.

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, Operational Margin and Operational Income" 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, 2008 and 2007.



Years ended September 30
-----------------------------
2008 2007
Statement of Operations Highlights $ $
-----------------------------
(Thousands of dollars except per share amounts)

GAAP Measures
Revenue 394,240 227,379
Gross margin 115,470 82,133
Net loss (1,542) (24,245)
Basic and diluted earnings/(loss) per share (0.04) (0.83)
Cash dividends declared per share 0.1875 -

Non-GAAP Measures
Operational revenue 409,817 243,298
Operational margin 72,497 44,088
Operational income before customer acquisition
costs 16,208 26,990
Operational income/(loss) after customer
acquisition costs (4,384) 6,231

September 30
2008 2007
Balance Sheet Highlights $ $
-----------------------------
(Thousands of dollars)
Total assets 473,909 323,380
Long-term liabilities 165,815 110,232


The increase in revenue of 73% and operational revenue of 68% over the comparative year is a result of the continual increase in the number of gas and electricity customers moving from an enrolled to a flowing state and continued steady aggregation of gas and electricity customers with gross customer additions for this year of 164,283 RCEs. The Ethanol plant has commenced production and along with the Home Services division will become more significant contributors to revenues in future periods.

The reduction in the net loss from $24.2 million to a loss of $1.5 million is primarily as a result of marked to market gains on commodity contracts and recovery of income taxes, offset by increases in general and administrative expenses as the ethanol plant is brought into production and NHS continues to grow its water heater base. The net loss was also impacted by the Company's decision to close out all of the TGF's hedges and swaps at September 30, 2008 for a final settlement amount of $13.3 million.

Operational income after customer acquisition costs and before the charge for the final settlement amount on the TGF hedges and swaps amounted to $8.9 million compared to $6.2 million from the prior year, an increase of 43.5%. This increase is attributable to the continual increase in the number of flowing customers moving from an enrolled to a flowing state and maintaining our operational margins per RCE at our long-term target level. After the charge for closing out the TGF hedges and swaps, operational income declined to a loss of $4.4 million.

Total assets increased to $473.9 million from $323.4 million over the prior year, primarily as a result of increased cash holdings from the debenture issue, increases in accounts receivable and inventory, and ongoing fixed asset additions primarily for the ethanol and home services operations. The increase in long-term liabilities, including the credit facility which is included in current liabilities, results from the debenture issue offset by a reduction in the unrealized loss on commodity contracts.

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

(a) Overview

Universal's business 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'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 fairly constant throughout the year irrespective of customer consumption. As Universal receives payment from the LDCs 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 December.

(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, 2008 and 2007 and other internal financial and operational information of Universal.



Gas & Electricity Marketing
Statement of Operations Data (GAAP)
(Thousands of dollars) Three months ended Years Ended
September 30 September 30
----------------------------------------
2008 2007 2008 2007
$ $ $ $
----------------------------------------
Revenue

Canada
Gas 11,936 4,326 76,682 48,223
Electricity 48,980 41,299 178,824 134,761
----------------------------------------
Total Canada 60,916 45,625 255,506 182,984

United States
Gas 9,751 3,713 135,314 44,395
----------------------------------------
Total revenue 70,667 49,338 390,820 227,379
----------------------------------------

Gross Margin

Canada
Gas 2,170 655 12,833 8,986
Electricity 21,991 19,503 80,037 64,736
----------------------------------------
Total Canada 24,161 20,158 92,870 73,722

United States
Gas 1,518 625 22,327 8,411
----------------------------------------
Total Gross Margin 25,679 20,783 115,197 82,133
----------------------------------------

Customer acquisition costs 4,438 8,265 19,998 20,759
General and administrative 6,326 5,244 24,954 15,162
----------------------------------------
Total Expenses 10,764 13,509 44,952 35,921
----------------------------------------

Settlements under commodity
contracts (10,898) (11,615) (44,195) (39,709)

Financing charges - - - (53)
Amortization (370) (150) (907) (461)
Gain on sale of supply contracts - - 3,857 -
Unrealized gain/(loss) on commodity
contracts (54,203) (19,159) 12,057 (32,089)
Other 372 (294) 939 (570)
Income tax (expense)/recovery 16,046 7,906 (16,007) 8,618
----------------------------------------
Net income/(loss) for the period (34,138) (16,038) 25,989 (18,052)
----------------------------------------
----------------------------------------


Reconciliation of Operational Revenue, Operational Margin and Operational Income

Universal recognizes natural gas revenue based on customer consumption but delivers natural gas to the LDCs in pre-determined, fixed monthly amounts and is paid for such deliveries monthly rather than upon customer consumption. 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 and downward for swap payments, which are not included in cost of sales for accounting purposes.

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

Operational income after customer acquisition costs - 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 Three months ended Years Ended
September 30 September 30
----------------------------------------
2008 2007 2008 2007
(Thousands of dollars) $ $ $ $
----------------------------------------
Revenue

Canada
Gas revenue 11,936 4,326 76,682 48,223
Revenue adjustment for gas over
delivered 13,021 9,808 4,535 3,462
----------------------------------------
Gas operational revenue 24,957 14,134 81,217 51,685
Electricity revenue 48,980 41,299 178,824 134,761
----------------------------------------
Total Canada 73,937 55,433 260,041 186,446

United States
Gas revenue 9,751 3,713 135,314 44,395
Revenue adjustment for gas over
delivered 28,104 13,659 11,042 12,457
----------------------------------------
Gas operational revenue 37,855 17,372 146,356 56,852
----------------------------------------
Total operational revenue 111,792 72,805 406,397 243,298
----------------------------------------

Operational Margin

Canada
Gas gross margin 2,170 655 12,833 8,986
Margin adjustment for gas over
delivered 2,182 1,688 696 212
----------------------------------------
Gas operational margin 4,352 2,343 13,529 9,198

Electricity gross margin 21,991 19,503 80,037 64,736
Settlements under commodity
contracts (10,898) (11,615) (44,195) (39,709)
----------------------------------------
Electricity operational margin 11,093 7,888 35,842 25,027

Total Canada 15,445 10,231 49,371 34,225

United States
Gas gross margin 1,518 625 22,327 8,411
Margin adjustment for gas over
delivered 4,223 2,877 526 1,453
----------------------------------------
Gas operational margin 5,741 3,502 22,853 9,864

----------------------------------------
Total operational margin 21,186 13,733 72,224 44,089
----------------------------------------

Customer acquisition costs 4,438 8,265 19,998 20,759
General and administrative 6,326 5,244 24,954 15,162
----------------------------------------

Operational income after customer
acquisition costs 10,422 224 27,272 8,168
----------------------------------------
----------------------------------------


The following operational data for the years ended September 30, 2008 and 2007 and the three months ended September 30, 2008 and 2007 has been prepared by management based on Universal's records.



Selected Operational Three months ended Years ended
Data September 30 September 30
-----------------------------------------------------
2008 2007 2008 2007
-----------------------------------------------------
Operational margin per
unit (dollars)
Canada - Gas (Cdn$/m3) 0.0700 0.0681 0.0670 0.0745
Canada - Electricity
(Cdn$/kWh) 0.0212 0.0175 0.0182 0.0170
United States - Gas
(US$/Mcf) 1.5930 2.1077 1.6392 1.8449
United States - Gas
(Cdn$/m3) 0.0604 0.0687 0.0592 0.0684

Operational margin per
RCE (dollars)
Canada - Gas 197.05 191.70 188.61 209.72
Canada - Electricity 212.00 175.00 182.00 170.00
United States - Gas 170.93 194.47 167.55 193.58

Delivered Volume
Canada - Gas (m3) 62,151,726 34,392,228 201,851,685 123,550,871
Canada - Electricity
(kWh) 523,928,130 450,633,644 1,968,436,390 1,469,452,705
United States - Gas
(Mcf) 3,358,640 1,800,756 13,639,223 5,094,981

Consumed Volume
Canada - Gas (m3) 30,542,806 10,280,868 190,715,560 114,655,395
Canada - Electricity
(kWh) 523,928,130 450,633,644 1,968,436,390 1,469,452,705
United States - Gas
(Mcf) 841,687 394,034 12,733,202 3,805,710

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.


(d) Results of Operations

Year ended September 30, 2008 compared to year ended September 30, 2007

(i) Revenue and Margin - Canada

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

For the year ended September 30, 2008 Canadian natural gas revenue was $76.7 million up 59% from the prior year of $48.2 million. Canadian natural gas for the year accounted for 19.6% of total revenue on customer consumption of 190.7 million m3 of natural gas. Gross margin for the year was $12.8 million, an increase of 42.8% from the prior year.

Gas operational revenue for the year ended September 30, 2008 was $81.2 million up 57% from the prior year amount of $51.7 million on delivered volume of 201.9 million m3. Gas operational margin for the year was $13.5 million, an increase of 47.1% from the prior year. This resulted in a unit operational margin for the year of $0.0670 per m3 or $188.61 per RCE.

For the year ended September 30, 2008 Canadian electricity revenue was $178.8 million up 32.7% from $134.8 million in the prior year. Canadian electricity for the year accounted for 45.8% of total revenue on customer consumption of 1,968 million kWh. Gross margin for the year was $80.0 million, an increase of 23.6% from $64.7 million in the prior year.

As required by GAAP, the electricity gross margin has not been reduced by swap payments totaling $44.2 million for the year ended September 30, 2008. The electricity operational margin, which adjusts for swap payments, for the year ended September 30, 2008 was $35.8 million, up 43.2% from $25.0 million in the prior year. This resulted in a unit operational margin for the year of $0.0182 per kWh or $182.00 per RCE.

(ii) Revenue and Margin - United States

For the year ended September 30, 2008 U.S. natural gas revenue was $135.3 million up 205% from $44.4 million in the prior year. U.S. natural gas for the period accounted for 34.6% of total revenue on customer consumption of 12.7 million Mcf of natural gas. Gross margin for the year was $22.3 million up 165% from $8.4 million in the prior year.

Gas operational revenue for the year ended September 30, 2008 was $146.4 million up 157% from $56.9 million in the prior year. Operational margin for the year ended September 30, 2008 was $22.9 million up 132% from $9.9 million in the prior year. This resulted in a unit operational margin for the year of $1.639 per Mcf ($0.0592 per m3) or $167.55 per RCE. Operational margin adjusted for the gain of $3.9 million realized on sale of excess gas supply previously procured for the Michigan market amounted to $195.83 per RCE.

(iii) Revenue and Margin - Combined

On a combined basis (Canada and the United States), Universal's total revenue earned for the year ended September 30, 2008 was $390.8 million up 72% from $227.4 million in the prior year. Gross margin for the year was $115.2 million up 40.3% from $82.1 million in the prior year.

Total operational revenue earned for the year ended September 30, 2008 was $406.4 million up 67% from $243.3 million in the prior year. Operational margin for the year was $72.2 million up 64% from $44.1 million in the prior year.

(iv) Selling, General and Administrative Expenses - Combined

Customer acquisition costs are commissions paid to independent sales agents for enrolling new customers, direct mail marketing costs and other direct selling expenses. For the year ended September 30, 2008 these costs amounted to $20.0 million and $18.2 million excluding direct mail marketing costs. For the prior year, customer acquisition costs were $20.8 million and $18.6 million excluding direct mail marketing costs. 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 the average acquisition cost excluding direct mail costs was $127 per RCE and including direct mail costs was $139 per RCE.

General and administrative expense for the year ended September 30, 2008 amounted to $25.0 million. The significant components of general and administrative expenses for the year were processing charges (principally LDC processing and other third party processing and data entry fees) - $4.4 million, salaries and benefits - $12.0 million, consulting (principally for management services and systems development) - $0.964 million, printing and design - $1.3 million and rent - $1.2 million, together totaling $19.9 million and accounting for 80% of general and administrative expenses.

(v) Other Income/(Expense)

The settlements under commodity contracts of $44.2 million are payments made under electricity swap contracts during the year ended September 30, 2008. The non-cash unrealized gain on commodity contracts of $12.1 million recognized in income arises from the marked to market revaluation of the electricity swaps and results from the narrowing of the spread between the fixed and variable electricity swap prices compared to the immediately preceding revaluation. See "Financial Instruments" in this MD&A. The gain on sale of gas supply of $3.8 million resulted from the sale of excess gas previously procured for the Michigan market.

(e) Customer Aggregation

The following table summarizes Universal's customer aggregation in the Canadian and United States markets for the year ended September 30, 2008.



Opening
RCEs
Sep 30, Additions Additions Additions Additions Total
2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Additions
---------------------------------------------------------------
Canada - Gas 69,774 11,911 11,053 6,664 24,445 54,073
Canada -
Electricity 183,725 19,505 14,497 9,725 15,385 59,112
---------------------------------------------------------------
Total Canada 253,499 31,416 25,550 16,389 39,830 113,185
United States
- Gas 109,821 32,629 13,182 3,760 1,527 51,098
---------------------------------------------------------------
Combined 363,320 64,045 38,732 20,149 41,357 164,283
---------
---------
Less:
Attrition (14,731) (22,141) (22,243) (19,583) (78,698)
------------------------------------------------------
Net new RCE
additions 49,314 16,591 (2,094) 21,774 85,585
------------------------------------------------------

Cumulative
net RCEs 412,634 429,225 427,131 448,905 448,905
------------------------------------------------------
------------------------------------------------------


Closing RCEs
Attrition Sep 30, 2008
--------------------------
Canada - Gas (12,075) 111,772
Canada - Electricity (28,426) 214,411
--------------------------
Total Canada (40,501) 326,183
United States - Gas (38,197) 122,722
--------------------------
Combined (78,698) 448,905
--------------------------
--------------------------


Note:
Q4 2008 additions include 17,252 gas and 3,605 electricity RCEs acquired
from Wholesale Energy Group.


Total additions for the year ended September 30, 2008 amounted to 164,283 RCEs. Canadian gas additions accounted for 54,073 RCEs or 32.9% of additions for the year. Canadian electricity additions accounted for 59,112 RCEs or 36.0% of additions for the year. In total, Canadian additions accounted for 113,185 RCEs or 68.9% of additions for the year. United States gas additions accounted for 51,098 RCEs or 31.1% of additions for the year.

Combined attrition for all markets for the year ended September 30, 2008 amounted to 78,698 RCEs or 15.5%. The Canadian market experienced attrition of 11.7% for the year and the United States market experienced attrition of 23.8% for the year. Largely as the result of negative media coverage, increased customer complaint levels over last winter's heating season have led to a review of UGE's sales and marketing practices by the Michigan Public Service Commission ("MPSC"). United States attrition in the past three quarters have exceeded management's forecasts, however, management believes that attrition rates and sales will improve in future reporting periods. Universal has been able to substantially offset the financial impact of the higher United States attrition by realizing a gain of $3.8 million on the saleback of excess gas previously procured for the Michigan market. In response to both Universal's and the MPSC staff's request, the MPSC ordered a unified contested hearing to review complaints and concerns raised by Universal and MPSC staff which is still ongoing. Universal continues to monitor all markets to minimize attrition and follows a policy of diligently enforcing collection of liquidated damages from customers attempting to exit their contracts.

At September 30, 2008 Universal's total customer base amounted to 448,905 RCEs, net of attrition. Geographically, Canada accounts for 73% of total RCEs and the United States accounts for 27% of total RCEs. In Canada, residential customers account for 73% of RCEs and commercial customers account for 27% of RCEs. In the United States, residential customers account for 68% of RCEs and commercial customers account for 32% of RCEs. On a product distribution basis, gas customers account for 52% of total RCEs and electricity customers account for 48% of total RCEs.

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

(a) Overview

The ethanol plant has been running at a capacity rate of approximately 70%, although the plant has experienced significant interruption and downtime since commencing operations this past summer. The main cause of the reduced operating time has been as a result of a design error with one of the vessels in the evaporation system and had to be re-engineered and repaired. The cumulative effect of the repairs of non-critical items in the plant's operations, which was addressed, also negatively affected runtime. The evaporator system has recently been put into service and is currently running through its commissioning phase. In all instances TGF did not incur any expense for these corrective repairs. In spite of operational challenges, TGF has met all of its contractual obligations for ethanol and is developing a solid market following for its unique high protein distillers dried grain ("DDG").



(b) Selected Financial Information

(Unaudited - thousands of dollars) Year ended February 2, 2007 to
September 30, 2008 September 30, 2007

Revenue $ 3,352 -
Cost of sales 3,147 -
-----------------------------------------
Gross margin 205 -

General and administrative 9,152 $1,240
Financing charges 1,727 371
Amortization of property, plant
and equipment 997 51
Investment income (1,281) (38)
Settlements under commodity
contracts 19,296 -
Unrealized (gain)/loss on
commodity contracts (3,729) 3,729
Income tax recovery (7,269) (1,943)
-----------------------------------------
Net loss $ (18,688) $ (3,410)
-----------------------------------------
-----------------------------------------


(c) Results of Operations

Total construction costs incurred to September 30, 2008 amounted to $147.1 million, net of investment tax credits. For the year ended September 30, 2008 TGF realized a net loss of $18.7 million and incurred financing charges of $1.7 million on wheat growers' loan obligations, and general and administrative expenses of $9.2 million which relate primarily to compensation and other administration costs. The settlements under commodity contracts represent the net settlement payments on TGF's hedges and swaps during the year. At September 30, 2008 the TGF hedges and swaps were closed out for a final settlement amount of $13.3 million.

3. Home Services Division (NHS)- Management's Discussion and Analysis

(a) Overview

In April 2008 the Company entered the home services market operating under the trade name National Home Services. NHS provides Ontario residential customers long-term water heater rental programs offering conventional and power vented tanks in a variety of sizes. NHS is in the start-up phase of its operations. As at September 30, 2008 NHS has installed over 7,000 water heaters in residential homes and commenced earning revenue from its installed base in Q4-2008.



(b) Selected Financial Information

(Unaudited - thousands of dollars) Period ended
September 30, 2008
--------------------

Revenue $ 68
--------------------

Customer acquisition costs 594
General and administrative 1,283
Amortization 147
Income tax recovery (608)
--------------------
Net loss for the period $ (1,348)
--------------------
--------------------


(c) Results of Operations

For the period ended September 30, 2008 NHS realized a net loss of $1.3 million. Customer acquisition costs relate to sales commissions paid to independent agents. General and administrative expenses relate primarily to staff compensation, advertising and uniforms. Capital expenditures, including installation costs, during the period amounted to $3.8 million.

4. Summary of Quarterly Results

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



(Thousands of dollars) 2008 2008 2008 2008
Q4 Q3 Q2 Q1
$ $ $ $
--------------------------------------
GAAP Measures
Revenue 74,087 91,483 148,568 80,102
Gross margin 25,952 28,209 36,467 24,842
Net income/(loss) (29,061) 10,853 18,170 (1,504)
Basic earnings/(loss) per share (0.80) 0.30 0.50 (0.04)
Diluted earnings/(loss) per share (0.80) 0.29 0.49 (0.04)

Non-GAAP Measures
Operational revenue 115,212 104,017 103,039 87,549
Operational margin 21,459 18,168 17,611 15,260
Operational income/(loss) before
customer acquisition costs (4,525) 7,839 9,301 8,981
Operational income/(loss) after
customer acquisition costs (9,346) 4,560 4,497 663


2007 2007 2007 2007
Q4 Q3 Q2 Q1
$ $ $ $
--------------------------------------
GAAP Measures
Revenue 49,338 52,385 79,085 46,571
Gross margin 20,783 20,798 22,047 18,505
Net income/(loss) (17,915) (24,108) 10,983 6,796
Basic earnings/(loss) per share (0.61) (0.66) 0.38 0.44
Diluted earnings/(loss) per share (0.61) (0.66) 0.38 0.44

Non-GAAP Measures
Operational revenue 72,805 59,607 58,966 51,920
Operational margin 13,734 10,445 10,246 9,664
Operational income before marketing
costs 7,655 6,014 6,598 6,591
Operational income/(loss) after
marketing costs (610) 119 3,570 3,138


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. The Ethanol plant has commenced production and along with the Home Services division will become more significant contributors to revenues in future periods.

Analysis of the Fourth Quarter - Q4 2008

The increase in revenue of 50% and operational revenue of 58% over the prior comparable quarter is a result of the continual increase in the number of customers moving from an enrolled to a flowing state.

The increase in net loss to $29.1 million from the prior comparable quarter of a loss of $17.9 million is primarily as a result of marked to market losses on commodity contracts, increases in general and administrative expenses as the ethanol plant is brought into production, NHS continues to grow its water heater base and the cost to close out all of the TGF's hedges and swaps at September 30, 2008 for a final settlement amount of $13.3 million.

Operational income after customer acquisition costs and before the charge for the final settlement amount on the TGF hedges and swaps amounted to $4.0 million compared to a loss of $0.610 million from the prior comparable quarter. This increase is attributable to the continual increase in the number of flowing customers moving from an enrolled to a flowing state and maintaining our operational margins per RCE at our long-term target level. After the charge for closing out the TGF hedges and swaps, operational income declined to a loss of $9.3 million.

5. Liquidity and Capital Resources

At September 30, 2008 the Company had cash of $97.1 million of which $18.0 million is restricted cash. Excluding restricted cash, 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, the Company had net working capital of $28.0 million. 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 $110.0 million available to TGF to be used primarily toward the Ethanol plant construction, wheat growers advances and working capital. As at September 30, 2008, $99.2 million was drawn under the TGF credit facilities. As the number of Universal customers moving from an enrolled to flowing state continue 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. TGF has commenced production and will become a cash contributor in future quarters as it maintains a stable operating capacity and receive continued support from its lenders.

(a) Cash Flows from Operating Activities

Cash used in operations for the year ended September 30, 2008 amounted to $12.4 million compared to cash provided by operations of $18.2 million in the prior year. This is primarily due to increases in grain inventory plus normal increases in trade receivables and offset by increases in trade payables resulting from our increasing customer base and the closing out of TGF hedges and swaps.

(b) Cash Flows Used in Investing Activities

Cash used in investing activities for the year ended September 30, 2008 amounted to $52.1 million compared to $187.0 million in the prior year. The investing activities relate primarily to the Ethanol plant construction.

(c) Cash Flows from Financing Activities

During the year ended September 30, 2008 the Company completed a convertible debenture issue for net proceeds of $86.7 million and made further draws on the TGF credit facilities of $49.8 million for the Ethanol plant construction. In addition, the Company made dividend payments of $6.8 million pursuant to its recently implemented dividend policy.

(d) Long-Term Liabilities

The unrealized loss on commodity contracts of $93.9 million (current portion - $42.7 million) is the estimated amount that Universal and TGF would pay as at September 30, 2008 to dispose of these contracts in the market. 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 $177.8 million (current portion - $63.2 million) includes $40 million of advances under the TGF debenture facility and $45.5 million of advances under the TGF $50 million credit facility. These funds were used for the Ethanol plant construction. The wheat production financing of $3.8 million relates to advances made by TGF to wheat growers under contract and the term loan of $10 million was used for working capital purposes. Also included in long-term debt is the liability portion of the convertible debenture issue of $78.6 million.

(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 1-3 4-5 After
Contractual obligations Total 1 year years years 5 years
----------------------------------------------------------------------------
Long-term debt 177,840 63,221 7,997 28,005 78,617
Premises and vehicles under lease 9,182 2,658 4,501 2,023 -
Natural gas purchase commitments 693,752 208,924 347,633 136,674 521
Production contracts financing 58,307 36,207 19,924 2,176 -
-------------------------------------------
Total 939,081 311,010 380,055 168,878 79,138
-------------------------------------------
-------------------------------------------


TGF has received a formal request for a scope change under the fixed price EPC contract from Ellis Don/VCM in Joint Venture of approximately $30 million in respect of which the Ellis Don/VCM Joint Venture has filed a claim for lien against the ethanol plant in the amount of approximately $41 million. Management has rejected the Joint Venture's claim for the entire request and will vigorously defend any legal claims made by the Joint Venture to assert a claim under the contract or in respect of the lien. Based on advice from TGF's external counsel, management is of the view that the claim is without merit and that TGF has a claim for damages against the Joint Venture relating to delays in commissioning the plant which it will pursue at the appropriate time.

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 October 2, 2007, the Company issued convertible unsecured subordinated debentures with a face value of $90 million. The debentures mature on September 30, 2014 unless converted prior to that date and bear interest at an annual rate of 6% payable semi-annually on March 31 and September 30 of each year. Each $1,000 principal amount of the debentures is convertible at any time prior to maturity or on 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. During the year, interest expense amounted to $5.4 million.

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 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.

The conversion feature of the debentures has been accounted for as a separate component of shareholders' equity in the amount of $9.5 million. The remainder of the net proceeds of the debentures of $77.2 million has been recorded as long-term debt, which will be accreted up to the face value of $90.0 million over the term of the debentures. Accretion and interest paid are recorded as finance charges on the consolidated statement of operations. If the debentures are converted into common shares, the value of the conversion feature will be reclassified to share capital along with the principal amount converted.



(Thousands of dollars) $
----------------------------------------------------------------------------
Convertible debentures initially recognized, less issue costs of
$3,304 77,189
Accretion to September 30, 2008 1,428
----------------------------------------------------------------------------
Balance as at September 30, 2008 78,617
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(g) Capital Disclosure

The capital structure of the Company is as follows:

2008 2007 Change
(Thousands of dollars) $ $ %
----------------------------------------------------------------------------

Total shareholders' equity 96,061 92,595 4%
----------------------------------------------------------------------------
Total shareholders' equity as a % of total
capital 35% 65%

Short-term debt 63,221 9,555
Long-term debt 114,619 39,906
----------------------------------------------------------------------------
Total debt 177,840 49,461 260%
----------------------------------------------------------------------------
Total debt as a % of total capital 65% 35%
----------------------------------------------------------------------------

Total capital 273,901 142,056 93%
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Equity is defined as share capital, contributed surplus, equity component of convertible debentures and deficit. During the year, total equity increased by $3.5 million to $96.1 million. The increase resulted from the equity component of the convertible debentures in the amount of $9.5 million, amortization of stock option and RSU compensation expense of $2.0 million, exercise of stock options in the amount of $0.291 million and offset by a net loss of $1.5 million and a dividend paid of $6.8 million.

Total debt increased during the year by $128.4 million to $177.8 million. The increase resulted from the convertible debenture issue, which had a year end carrying value of $78.6 million, draw downs on the TGF credit facility in the amount of $43.7 million, increase in the working capital operating facility of $10 million and offset by a repayment of the wheat production facility in the amount of $3.9 million.

The Company is not subject to any statutory requirements or any other externally imposed capital requirements. Commitments exist to issue common shares in connection with established stock option and RSU compensation plans and pursuant to the convertible debentures with such share issuances to occur from treasury.

6. Related Party Transactions and Balances

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

(a) Universal is party to 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 supplies 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 contain 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 $191.4 million (2007 - $90.3 million). Included in accounts payable at September 30, 2008 is an amount owing of $17.5 million.

(ii) Electricity swap agreement

Universal entered into an 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 incurred net settlement payments under the electricity swap agreements totaling $44.2 million (2007 - $39.7 million). Included in accounts payable as at September 30, 2008 is an amount owing of $3.6 million.

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, 2008 the balance in the blocked account which is included in restricted cash amounted to $3.0 million.

(b) During the year, the Company incurred expenses amounting to $1.0 million (2007 - $0.882 million) for direct mail marketing services and rental expense to Market Connections Inc. and Ajax Estates Holdings Inc. in which certain officers and directors hold an equity interest. Included in accounts payable as at September 30, 2008 is an amount owing of $0.098 million.

(c) TGF has entered into a credit support agreement with Vertex Oil & Gas Ltd., a company controlled by an officer and director, that allows TGF to enter into hedges and swaps to mitigate risk exposure to the volatility of ethanol pricing. At September 30, 2008 the TGF hedges and swaps were closed out and this credit support agreement was cancelled. Included in accounts payable as at September 30, 2008 is an amount owing of $16.9 million which includes the final settlement amount of $13.3 million for the hedges and swaps that were closed out.

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

7. 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.

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 year ended September 30, 2006.

8. 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 Chief Executive Officer ("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, 2008 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, 2008, that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

(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.

9. Changes in Accounting Policies and Recent Accounting Pronouncements

Effective October 1, 2007, the Company adopted the recommendations of the CICA Handbook Section 1535, "Capital Disclosures", which requires disclosure of information related to the objectives, policies and processes for managing capital. In addition, the disclosures 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 is no impact on the Company's operating results.

Effective October 1, 2007, the Company adopted the recommendations of the CICA Handbook Sections 3862, "Financial Instruments Disclosures" and Section 3863, "Financial Instruments - Presentation", which replaces 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 fiscal years beginning on or after October 1, 2007. As these standards only address presentation and disclosure requirements, there is no impact on the Company's operating results.

In June 2007, the CICA issued Handbook Section 3031, "Inventories", which replaces Section 3030 and harmonizes the Canadian standard related to inventories with International Financial Reporting Standards ("IFRS"). This Section provides more extensive guidance on the determination of cost, including allocation of overhead; narrows the permitted cost formulas; requires impairment testing; and expands the disclosure requirements to increase transparency. The new section is effective for fiscal years beginning on or after January 1, 2008. This standard will not materially impact the Company's operating results.

In February 2008, the CICA issued Handbook Section 3064, "Goodwill and Intangible Assets". Section 3064 states that upon their initial identification, intangible assets are to be recognized as assets only if they meet the definition of an intangible asset and the recognition criteria. This section also provides further information on the recognition of internally generated intangible assets (including research and development costs). For subsequent measurement of intangible assets, goodwill, and disclosure, Section 3064 carries forward the requirements of the old Section 3062, "Goodwill and Other Intangible Assets". The new section will become effective on October 1, 2008.

The CICA Accounting Standards Board ("AcSB") has adopted a strategic plan for the direction of accounting standards in Canada. The AcSB has recently confirmed that accounting standards in Canada for public companies are to converge with IFRS effective for fiscal periods beginning on or after January 1, 2011. The Company has launched an internal initiative to manage the conversion process and is currently evaluating the potential impact of the conversion to IFRS on its financial statements. At this time, the impact on the Company's future financial position and results of operations is being evaluated.

10. Financial Instruments

(a) Fair value

(i) 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 effectively fix Universal's acquisition cost of electricity to be delivered under the fixed price customer contracts. The fair value of derivative financial instruments is the estimated amount that Universal would pay or receive to settle 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, 2008, Universal had electricity fixed-for-floating swap contracts to 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 5,848,560 MWh
Maturity dates October 1, 2008 to March 31, 2013
Fixed price ($/MWh) $54.85 to $80.50
Fair value $93,915 unfavourable
Remaining notional value $414,855
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(ii) The settlements under commodity contracts of $63.5 million (2007 - $39.7 million) represent the net settlement payments on Universal's electricity swaps and TGF's hedges and swaps during the year. At September 30, 2008 the TGF hedges and swaps were closed out for a final settlement amount of $13.3 million.

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




2008 2007
(Thousands of dollars) $ $
----------------------------------------------------------------------------

Current portion of unrealized loss on commodity
contracts 42,719 39,375
Non-current portion of unrealized loss on commodity
contracts 51,196 70,326
----------------------------------------------------------------------------

Total unrealized loss on commodity contracts 93,915 109,701
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

(b) Additional financial instruments disclosure

The following table represents the fair values and carrying amounts of financial assets and liabilities measured at fair value or amortized cost.



(Thousands of dollars) 2008 2007
Carrying Carrying
Fair value amount Fair value amount
Asset/Liability $ $ $ $
---------------------------------------------

Cash and cash equivalents 79,162 79,162 13,378 13,378
Restricted cash 17,984 17,984 6,972 6,972
Accounts receivable 52,015 52,015 40,155 40,155
Production contract advances 3,796 3,796 7,162 7,162
Accounts payable and accrued
liabilities 63,131 63,131 44,562 44,562
Long-term debt 173,023 177,840 49,461 49,461


The fair values of cash and cash equivalents, restricted cash, accounts receivable, production contract advances, accounts payable and accrued liabilities approximate their carrying amounts due largely to the short-term maturities of these financial instruments. The fair value of the convertible debentures is based on the market price at the balance sheet date. The carrying amount of the convertible debenture does not include the equity component of the convertible debenture in the amount of $9.5 million.

(i) Credit risk

The LDCs provide collection services and assume the risk of any bad debts owing from Universal's and NHS' customers. Universal and NHS receive 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. However, there is a likelihood that the NHS billing arrangement may not be renewed when it expires in June 2009. If that were to occur, and NHS could not enter into an alternative collection services agreement, NHS would have to implement direct billing to its customers which could result in increased levels of bad debt.

TGF entered into agreements with wheat producers to supply suitable grain for ethanol production and provided production advances to the farmers. The default rate from these advances is expected to be in line with that of the industry and an appropriate provision has been recorded.

(ii) Liquidity risk

Universal purchases its natural gas and enters into offsetting electricity swaps with its exclusive supplier Sempra. Universal is reliant upon the ongoing revenues from its customer base to maintain its contractual commitment under these agreements. Management believes that the potential loss of revenue from customer attrition can be managed to ensure that Universal meets its contractual commitments under its commodity supply contract.

Universal has interest and debt repayment obligations under the convertible debenture issue and TGF has interest and debt repayment obligations under the credit facilities and debentures. Universal and TGF are reliant on the cash flows generated from its operations to fund its debt repayment obligations and TGF is reliant on the continued support of its lenders.

(iii) Market risk

The fair value of Universal's electricity supply contracts are 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 ("MTM valuation") of these contracts. For example, assuming that all other variables remained constant at September 30, 2008 (i) a 1% increase in forward spot prices for electricity would decrease the MTM valuation by approximately 3.2%, while a 1% decrease in forward spot prices for electricity would increase the MTM valuation by approximately 3.2%; and (ii) a 5% increase in forward spot prices for electricity would decrease the MTM valuation by approximately 15.8%, while a 5% decrease in the forward spot prices for electricity would increase the MTM valuation by approximately 15.8%.

(iv) Foreign currency risk

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

(v) Interest rate risk

At September 30, 2008 the Company had variable rate debt in the amount of $59.2 million and the effect of a 1% change in the interest rate charged on its variable debt will impact interest expense in the amount of $0.592 million per annum.

11. Outstanding Share Data

As at September 30, 2008 and as at December 11, 2008, there were 36,299,228 common shares of the Company outstanding. In addition, as at those dates the Company had outstanding $90.0 million principal amount of 6% convertible unsecured subordinated debentures that are convertible into a total of 3,750,000 common shares and had a total of 2,513,500 common shares reserved for issuance on exercise of outstanding options and restricted share units.

12. Risks and Uncertainties

The Company is subject to a number of risks 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 most recently filed Annual Information Form which is available from SEDAR through its website at www.sedar.com. There have been no material changes that require an update to the discussion of the applicable risks found in the Company's most recently filed Annual Information Form. These risks include:

(a) 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;

(b) 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 ethanol plant; defective material, workmanship or process engineering affecting the ethanol plant; construction or operational delays; the condition of the construction site on which the ethanol plant is being constructed; TGF's dependence on the ethanol plant; 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 ethanol plant; 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 grains 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 ethanol plant 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

(c) risks relating to the Company's water heaters rental business, including risks relating to:

(i) Billing Arrangements

As a result of the billing agreements, NHS is reliant on the personnel, expertise, technical resources, proprietary information and judgment of Enbridge Gas Distribution Inc. ("EGD") in providing the billing and collection services to NHS. NHS is therefore exposed to adverse developments in the business and affairs of EGD and to its management and financial strength. Although EGD is required, under the Open Bill Agreement ("OBA"), to make the payment to NHS, thereby effectively guaranteeing NHS's collection of 99.5% of the amount invoiced by NHS on the EGD bill, there can be no assurance that EGD will have the financial capability to honour such obligation.

The OBA and New Receivables Trust Agreement are scheduled to expire on June 30, 2009. Unless alternative arrangements are put in place on or before that date, consolidated billing with EGD would cease on that date.

The regulatory basis on which the OBA and New Receivables Trust Agreement have been entered into is interim and falls under EGD's comprehensive "Open Bill" solution as proposed by EGD and approved by the OEB in 2007. EGD will be making further representations to the OEB with respect to confirming this billing solution before the end of 2008. Despite EGD's regulatory commitment to do so, there can be no assurance that the long-term solution to be put forth by EGD will include open bill access and/or that the OEB will approve any long-term solution.

In the event that the long-term solution to be put forth by EGD either does not contemplate continued billing and collection services being provided to NHS, or the proposal is rejected by the OEB, NHS will have to perform the billing and collection services and issue stand-alone bills in the EGD billing territory, either itself or through contracts with other third parties. There can be no assurance that the customer services delivered by NHS, or other third parties, will be of the same standard as those delivered under the OBA and stand-alone billing may result in increased levels of bad debt. Bad debt experience may also increase if any arrangement relating to stand-alone billing and collection services does not include a collection guarantee. It is also possible that transitional issues may arise following a termination of the interim or any comprehensive consolidated billing solution and associated arrangements, and those issues may have a material adverse impact on the profitability of NHS.

(ii) Regulatory Changes

Changes to any of the laws, rules, regulations or policies respecting the installation, servicing or billing practices in relation to water heaters could have a significant impact on NHS' business. There can be no assurance that NHS will be able to comply with any future laws, rules, regulations and policies. Failure by NHS to comply with applicable laws, rules, regulations and policies may be subject to civil or regulatory proceedings, including fines, injunctions, recalls or seizures, which may have a material adverse effect on the profitability of the operations.

New regulatory requirements have resulted in water heater design changes in order to incorporate flammable vapour ignition resistant ("FVIR") technology. This technology is intended to prevent the ignition of flammable vapours introduced from external sources in proximity to the water heater. Certain household items, such as gasoline, paint thinner, aerosol cans, floor treatments and lighter fluid can emit invisible vapours which can catch fire if they come in contact with a flame. This is not a current design flaw with water heaters as this risk applies equally to other sources of ignition such as furnaces, fireplaces and light switches. FVIR technology also applies equally whether the water heater is rented or owned. FVIR product design modifications have now been approved for conventional water heaters. FVIR technology is required on all conventional water heaters of up to 50 U.S. gallons manufactured after July 1, 2004. FVIR technology is required for power vented water heaters of up to 50 U.S. gallons effective on July 1, 2005. Effective August 2007, all newly installed power vented water heaters in Ontario, including replacements, must be installed with plastic piping that meets the ULC S636 piping standard, NHS is in compliance with the new standard.

(iii) Competition

NHS operates in a competitive environment and hence its growth and sustainability may be negatively impacted by loss of market share to new competition or due to change in consumers' behaviour.

(iv) Social or Technological Changes

Within Canada, the Province of Ontario marketplace is unique in that the vast majority of homeowners rent their water heaters. There can be no assurance that homeowners will continue to rent their water heaters for an indefinite period. It is also possible that more economical or efficient water heating technology than that which is currently used by customers will be developed or that the economic conditions in which the current technology is applied will change resulting in a reduction in the number of installed water heaters. Any material change in homeowners' rental practices or in technology may have a material adverse effect on the profitability of NHS.

(v) Useful Life of Water Heaters

Past experience indicates that the average useful life of a water heater is approximately 16 years. However, there can be no assurance that water heaters will continue to have a useful life of that length.

(vi) Concentration of Suppliers and Product Faults

Although there are a number of manufacturers of water heaters outside Canada, NHS relies principally on GSW Inc. for its supply of water heaters. Should this supplier fail to deliver in a timely manner, delays or disruptions in the supply and installation of water heaters could result. In addition, as many of the installed water heaters are of the same or similar type manufactured by this manufacturer, defects or product recalls relating to a particular production model or type of water heater could affect a material portion of the portfolio of water heater assets. Furthermore, different water heater manufacturers may, from time to time, source components from the same manufacturers for use in their water heaters. As a result, a parts defect relating to a commonly sourced component could affect water heaters produced by more than one manufacturer. NHS does not insure against this risk of product defects or product recalls. All water heaters manufactured by GSW Inc. that are purchased by NHS are currently made in Canada. If GSW Inc. moved production out of Canada, the capital cost of their water heaters may increase. NHS' business will expose it to potential product liability and product defect risks that are inherent in the ownership of water heaters. While NHS currently maintains what it believes to be suitable product liability insurance, there can be no assurance that NHS will be able to maintain such insurance on acceptable terms or that any such insurance will provide adequate protection against potential liabilities. In the event of a successful claim against NHS, a lack of sufficient insurance coverage could have a material adverse effect on the profitability of NHS. Moreover, even if NHS maintains adequate insurance, any successful claim could have a material adverse effect on the profitability of NHS. NHS does not insure against the risk of product defects or product recalls.

(vii) Geographic Concentration

All of NHS' assets are located in the province of Ontario. In addition, the Canadian water heater rental market is primarily limited to the province of Ontario. A prolonged downturn in the Ontario economy and a corresponding slowdown in new home construction could have an adverse effect on the demand for additional water heaters. Consequently, NHS will be particularly reliant on the economy of the province of Ontario to maintain and to grow the portfolio of water heater assets.

(d) general risks, including risks relating to: 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.

13. 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 experience steady growth in revenue and operational margin as the number of flowing customers increase with each successive reporting period. Canadian attrition continues to be within the target level of 12% and United States attrition is expected to stabilize close to 20%. Universal continues to assess growth opportunities by looking at new energy markets and will favour markets that fit with our existing sales, supply and technology infrastructure and provide collection services. In November 2008, Universal entered the New York electricity and natural gas markets with a variable rate offering to residential and small commercial customers. Sales during the test marketing period are encouraging.

(b) TGF

TGF is optimistic that the capacity rate and runtime of the ethanol plant will increase over the next several months. TGF still enjoys a cost effective grain supply portfolio that provides it with acceptable operating margins. TGF looks forward to continuing its marketing efforts to seek premium value for its Terra Premium DDG both in the North American and export markets.

(c) National Home Services

The NHS long-term water heater program continues in a start-up phase. NHS expects to see a steady increase in installation trends as it looks to expand its installation capacity through the addition of field representatives and the recruitment of installation and service technicians.

(d) Capital structure review

The Company conducted an extensive review of its capital structure supported by the analysis of its financial advisors, National Bank Financial, and concluded that the Company's financial position and prospects allows it to implement a quarterly cash dividend policy. On an annual basis, the cash dividend is expected to be $0.75 per common share. The dividend policy underscores the Company's maturation and strong cash flow generation profile while still allowing us to aggressively pursue value creating growth opportunities. The Company's first dividend payment was paid on September 30, 2008 to shareholders of record on September 15, 2008 and the second dividend payment, payable on December 31, 2008, was approved by the Board of Directors on December 11, 2008. While the Board of Directors currently expects to declare dividends quarterly and has determined that this level of dividend is appropriate based on the Company's current financial performance, liquidity and outlook, the declaration and payment of future dividends is subject to the discretion of the Board of Directors after considering the Company's financial results and condition, and other factors it determines to be relevant at the time.

(e) Repurchase of shares

The Company has received approval from the Toronto Stock Exchange (the "TSX") to acquire for cancellation, by way of normal course issuer bid up to 1,814,961 common shares of the Company, which represents approximately 5% of the Company's issued and outstanding common shares. The bid commenced on September 25, 2008 and will terminate on the earlier of September 24, 2009 or the date upon which the Company acquires the maximum number of common shares to be purchased pursuant to the bid. As at September 30, 2008 the Company had 36,299,228 common shares issued and outstanding and has not repurchased and cancelled any common shares under this normal course issuer bid.

(f) Commerce Energy Group, Inc.

On December 11, 2008 the Company, through its wholly owned subsidiary, Commerce Gas and Electric Corp. ("CGE"), acquired all of the issued and outstanding shares of Commerce Energy, Inc. ("Commerce"), the operating subsidiary of Commerce Energy Group, Inc., for approximately US$26 million. CGE also assumed certain letter of credit obligations related to the existing natural gas and electricity supply arrangements required to serve the Commerce customer base. These obligations will unwind as current suppliers are replaced with CGE natural gas and electricity supply and credit arrangements.

14. Additional Information

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

Universal Energy Group Ltd.

Consolidated Financial Statements

Years ended September 30, 2008 and 2007

Management's Responsibility for Financial Reporting

The accompanying consolidated financial statements of Universal Energy Group Ltd. and all the information in this annual report are the responsibility of management and have been approved by the Board of Directors.

The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. The consolidated financial statements include some amounts that are based on estimates and judgments. Management has determined such amounts on a reasonable basis in order to ensure that the consolidated financial statements are presented fairly, in all material respects.

Universal Energy Group Ltd. maintains systems of internal accounting and administrative controls. These systems are designed to provide reasonable assurance that the financial information is relevant, reliable and accurate and that the Company's assets are properly accounted for and adequately safeguarded.

The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the consolidated financial statements. The Board carries out this responsibility principally through its Audit Committee.

The Audit Committee is appointed by the Board of Directors and is comprised entirely of non-management directors. The Audit Committee meets periodically with management and the external auditors, to discuss auditing, internal controls, accounting policy and financial reporting matters. The committee reviews the consolidated financial statements with both management and the external auditors and reports its findings to the Board of Directors before such statements are approved by the Board.

The consolidated financial statements have been audited by KPMG LLP in accordance with Canadian generally accepted auditing standards on behalf of the shareholders. The external auditors have full and free access to the Audit Committee, with and without the presence of management, to discuss their audit and their findings as to the integrity of the financial reporting and the effectiveness of the system of internal controls.



(Signed) "Mark L. Silver" (Signed) "Stephen Plummer, CA"
Chief Executive Officer Chief Financial Officer


Auditors' Report to the Shareholders

We have audited the consolidated balance sheets of Universal Energy Group Ltd. as at September 30, 2008 and 2007 and the consolidated statements of deficit, comprehensive income/(loss) and accumulated other comprehensive income, operations and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at September 30, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.



(Signed) KPMG LLP
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
December 12, 2008

UNIVERSAL ENERGY GROUP LTD.

Consolidated Balance Sheets
As at September 30
(Thousands of dollars)
2008 2007
$ $
----------------------------------------------------------------------------
ASSETS
Current Assets
Cash 79,162 13,378
Restricted cash Note 8, 13 4,984 3,972
Accounts receivable Note 5 52,015 40,155
Inventory Note 6 14,848 581
Gas over delivered 36,259 21,904
Current portion of production
contract advances 3,796 5,453
Current portion of future taxes 15,673 15,508
----------------------------------------------------------------------------
206,737 100,951

Restricted cash Note 8 13,000 3,000
Property, plant and equipment Note 7 152,660 116,858
Production contract advances Note 8 - 1,709
Future taxes Note 14 27,071 29,372
Intangible assets 3,981 1,030
Goodwill Note 2 70,460 70,460
----------------------------------------------------------------------------
473,909 323,380
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
Current Liabilities
Accounts payable and accrued
liabilities 63,131 44,562
Deferred gas revenues 42,427 26,850
Current portion of unrealized loss
on commodity contracts Note 17 42,719 39,375
Current portion of long-term debt Note 8 63,221 9,555
----------------------------------------------------------------------------
211,498 120,342
Unrealized loss on commodity contracts Note 17 51,196 70,326
Long-term debt Note 8 114,619 39,906
----------------------------------------------------------------------------
377,313 230,574
----------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital Note 9 248,204 247,794
Contributed surplus Note 9 4,465 2,568
Equity component of convertible
debenture Note 8 9,507 -
Deficit (166,115) (157,767)
Accumulated other comprehensive income 535 211
----------------------------------------------------------------------------
96,596 92,806
----------------------------------------------------------------------------
Commitments and contingencies Note 15
Subsequent event Note 20
473,909 323,380
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.

Approved on behalf of the Board:

(signed) "Gary J. Drummond" Director (signed) "Mark L. Silver" Director
------------------------------------ -----------------------------------


UNIVERSAL ENERGY GROUP LTD.

Consolidated Statements of Deficit
For the years ended
September 30
(Thousands of dollars)
2008 2007
$ $
----------------------------------------------------------------------------

Deficit, beginning of year (157,767) (60,097)
Deemed distribution on acquisition of
Universal Note 2 - (73,425)
Net loss for the year (1,542) (24,245)
----------------------------------------------------------------------------
(159,309) (157,767)

Dividends paid (6,806) -
----------------------------------------------------------------------------

DEFICIT, END OF YEAR (166,115) (157,767)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


UNIVERSAL ENERGY GROUP LTD.
Consolidated Statements of Comprehensive Income/(Loss)
and Accumulated Other Comprehensive Income
For the years ended September 30
(Thousands of dollars)
2008 2007
$ $
----------------------------------------------------------------------------

Net loss for the year (1,542) (24,245)
----------------------------------------------------------------------------

Other comprehensive income:
Unrealized gains on translating financial statements
of self-sustaining foreign operations 324 212
----------------------------------------------------------------------------

Other comprehensive income 324 212
----------------------------------------------------------------------------

Comprehensive income/(loss) (1,218) (24,033)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Accumulated other comprehensive income/(loss),
beginning of year 211 (1)
Other comprehensive income 324 212
----------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME,
END OF YEAR 535 211
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


UNIVERSAL ENERGY GROUP LTD.
Consolidated Statements of Operations
For the years ended September 30
(Thousands of dollars except per share amounts)

2008 2007
$ $
----------------------------------------------------------------------------

REVENUE
Gas 211,996 92,618
Electricity 178,824 134,761
Ethanol 3,352 -
Home services 68 -
----------------------------------------------------------------------------
394,240 227,379
----------------------------------------------------------------------------

COST OF SALES
Gas 176,836 75,221
Electricity 98,787 70,025
Ethanol 3,147 -
----------------------------------------------------------------------------
278,770 145,246
----------------------------------------------------------------------------

GROSS MARGIN 115,470 82,133
----------------------------------------------------------------------------

EXPENSES
Customer acquisition costs 20,592 20,759
General and administrative 36,993 17,098
Financing charges 8,534 424
Stock-based compensation 2,016 2,568
Amortization 2,324 512
----------------------------------------------------------------------------
70,459 41,361
----------------------------------------------------------------------------

Income before other income/(expense) 45,011 40,772

OTHER INCOME/(EXPENSE)
Gain on sale of supply contracts 3,857 -
Settlements under commodity contracts Note 17 (63,491) (39,709)
Unrealized gain/(loss) on commodity
contracts Note 17 15,786 (35,818)
Other Note 11 5,242 193
----------------------------------------------------------------------------
(38,606) (75,334)
----------------------------------------------------------------------------

Income/(loss) before income tax 6,405 (34,562)
Income tax expense/(recovery) 7,947 (10,317)
----------------------------------------------------------------------------

NET LOSS FOR THE YEAR (1,542) (24,245)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Basic and diluted earnings/(loss)
per share Note 12 (0.04) (0.83)

See accompanying notes to consolidated financial statements.


UNIVERSAL ENERGY GROUP LTD.
Consolidated Statements of Cash Flows
For the years ended September 30
(Thousands of dollars)

2008 2007
$ $
----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the year (1,542) (24,245)
Items not affecting cash:
Amortization 2,324 512
Stock-based compensation 2,016 2,568
Financing charges, non-cash portion 1,428 -
Unrealized gain/(loss) on commodity contracts (15,786) 35,818
Future taxes 2,136 (10,203)
----------------------------------------------------------------------------
(9,424) 4,450
Changes in non-cash working capital items:
Accounts receivable and production contract
advances (8,494) (8,385)
Inventory (14,267) -
Gas over delivered (14,355) (14,254)
Deferred gas revenues 15,577 15,919
Accounts payable and accrued liabilities 18,569 20,513
----------------------------------------------------------------------------
Cash provided by/(used in) operating activities (12,394) 18,243
----------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of TGF, net - (32,222)
Acquisition of Universal - (73,425)
Intangible assets (4,317) -
Restricted cash (11,012) (6,844)
Property, plant and equipment (36,760) (74,499)
----------------------------------------------------------------------------
Cash used in investing activities (52,089) (186,990)
----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares 291 -
Proceeds from initial public offering, net of issue
costs - 132,120
Issuance of convertible debenture, net of issue
costs 86,696 -
Advances under debt, net 49,762 46,946
Dividends paid (6,806) -
----------------------------------------------------------------------------
Cash provided by financing activities 129,943 179,066
----------------------------------------------------------------------------
Unrealized gain on foreign exchange translation 324 212
----------------------------------------------------------------------------
NET INCREASE IN CASH 65,784 10,531
CASH, BEGINNING OF YEAR 13,378 2,847
----------------------------------------------------------------------------
CASH, END OF YEAR 79,162 13,378
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental information:
Property, plant and equipment in accounts payable 9,663 25,561
Interest paid 12,331 473
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


Consolidated Financial Statements
Years ended September 30, 2008 and 2007


UNIVERSAL ENERGY GROUP LTD.

Notes to Consolidated Financial Statements

For the years ended September 30, 2008 and 2007

(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 through its subsidiary Universal Energy Corporation ("Universal") operates a retail electricity and natural gas business in Canada, through its subsidiary Terra Grain Fuels Inc. ("TGF") operates an ethanol business and through its subsidiary National Energy Corporation ("NEC") operates a long-term water heater rental business in Ontario under the trade name National Home Services ("NHS"). Universal's wholly owned subsidiary, Universal Gas & Electric Corporation ("UGE"), operates a retail natural gas business in the United States.

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. Summary of significant accounting policies

(a) Change in accounting policies and recent accounting pronouncements

Effective October 1, 2007, the Company adopted the recommendations of the CICA Handbook Section 1535, "Capital Disclosures", which requires disclosure of information related to the objectives, policies and processes for managing capital. In addition, the disclosures 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 is no impact on the Company's operating results.

Effective October 1, 2007, the Company adopted the recommendations of the CICA Handbook Section 3862, "Financial Instruments Disclosures" and Section 3863, "Financial Instruments - Presentation", which replaces 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 fiscal years beginning on or after October 1, 2007. As these standards only address presentation and disclosure requirements, there is no impact on the Company's operating results.

In June 2007, the CICA issued Handbook Section 3031, "Inventories", which replaces Section 3030 and harmonizes the Canadian standard related to inventories with International Financial Reporting Standards ("IFRS"). This section provides more extensive guidance on the determination of cost, including allocation of overhead; narrows the permitted cost formulas; requires impairment testing; and expands the disclosure requirements to increase transparency. The new section is effective for fiscal years beginning on or after January 1, 2008. This standard will not materially impact the Company's operating results.

In February 2008, the CICA issued Handbook Section 3064, "Goodwill and Intangible Assets". Section 3064 states that upon their initial identification, intangible assets are to be recognized as assets only if they meet the definition of an intangible asset and the recognition criteria. This section also provides further information on the recognition of internally generated intangible assets (including research and development costs). For subsequent measurement of intangible assets, goodwill, and disclosure, Section 3064 carries forward the requirements of the old Section 3062, "Goodwill and Other Intangible Assets". The new section will become effective on October 1, 2008.

The CICA Accounting Standards Board ("AcSB") has adopted a strategic plan for the direction of accounting standards in Canada. The AcSB has recently confirmed that accounting standards in Canada for public companies are to converge with IFRS effective for fiscal periods beginning on or after January 1, 2011. The Company has launched an internal initiative to manage the conversion process and is currently evaluating the potential impact of the conversion to IFRS on its financial statements. At this time, the impact on the Company's future financial position and results of operations is being evaluated.

(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, TGF and NEC. 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) Inventory

Ethanol, ethanol in process and grain inventory are valued at the lower of cost and net realizable value with cost being determined on a weighted average basis. Water heaters held for installation are valued at the lower of cost and net realizable value, with cost determined on a first in, first out basis.

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

Natural gas is delivered to local distribution companies ("LDCs") in pre-determined fixed 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 arise when customers consume more natural gas than has been delivered to LDCs and is stated as an asset 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 period in which the under delivery occurs.

(g) 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
Ethanol plant Straight line 15 to 25 years
Water heaters Straight line 14 years


Property, plant and equipment are 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 and start-up costs, including interest costs, incurred in the construction of the ethanol plant to August 1, 2008 were capitalized.

Water heaters are carried at cost less accumulated depreciation. Cost includes the purchase price of the equipment and the cost of installation. For water heaters, the Company applies the group depreciation method and determines depreciation based on the original installed cost of the rental asset on a straight-line basis over the estimated remaining useful life of the group of assets.

(h) 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.

(i) Intangible assets

The Company uses the provisions of 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.

Intangible assets represent the fair value of customer natural gas and electricity contracts acquired by Universal. These contracts are amortized over their average estimated remaining life. The intangible assets acquired on the acquisition of TGF were amortized during the year as the wheat supply relating to these intangible assets has now been used in production.

(j) Convertible debenture

Convertible debentures are classified as long-term debt and equity at their respective fair values. The fair value of the debt component has been determined based on the Company's incremental borrowing cost for similar debt without a conversion feature. The amount of the equity component is the residual after deducting the amount of the debt component from the face value of the issue.

(k) Derivative instruments

Unrealized changes in the fair value of 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, the gas and electricity customer contracts and the ethanol sales contracts are accounted for as executory contracts.

(l) 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.

(m) 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. TGF recognizes revenue of ethanol and dried distillers grain upon delivery to customers at terminals or other locations. NEC recognizes revenue on water heater rentals based on monthly rental income.

(n) 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.

(o) Stock-based compensation

(i) Stock options

The Company uses the fair value method to account for the cost of stock options granted. The fair value of these stock options is determined using the Black-Scholes options-pricing model. The Company determines the fair value of 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.

(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 income on a straight line basis over the vesting period of the award.

(p) 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.

4. 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 January through March and July through September and is lowest in April through June and October through December. 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.



5. Accounts receivable

2008 2007
$ $
---------------------------------------------------------------------------
Trade receivables 41,784 25,813
Utility holdbacks 2,705 5,512
Security deposits 3,696 3,243
Other accounts receivable 3,830 5,587
---------------------------------------------------------------------------

52,015 40,155
---------------------------------------------------------------------------
---------------------------------------------------------------------------



6. Inventory
2008 2007
$ $
---------------------------------------------------------------------------
Grain inventory 11,867 581
Ethanol and ethanol in process 2,333 -
Water heaters held for installation 648 -
---------------------------------------------------------------------------

14,848 581
---------------------------------------------------------------------------
---------------------------------------------------------------------------



7. Property, plant and equipment
Accumulated Net
Cost amortization book value
2008 $ $ $
---------------------------------------------------------------------------
Computer hardware 1,135 509 626
Computer software 813 171 642
Furniture and fixtures 1,238 448 790
Office equipment 517 175 342
Leasehold improvements 615 221 394
Water heaters 3,585 128 3,457
Ethanol plant 147,091 981 146,110
Land 299 - 299
---------------------------------------------------------------------------

155,293 2,633 152,660
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

Ethanol plant under development 114,040 - 114,040
---------------------------------------------------------------------------

117,663 805 116,858
---------------------------------------------------------------------------
---------------------------------------------------------------------------



8. Financing facilities
2008 2007
$ $
---------------------------------------------------------------------------
Credit facility (a)(i) 45,457 1,800
Debentures (a)(ii) 40,000 40,000
Wheat production financing (a)(iii) 3,766 7,661
Operating facilities (b) 10,000 -
Convertible debentures (c) 78,617 -
Commodity trade financing (d) - -
---------------------------------------------------------------------------
177,840 49,461
Less: current portion (63,221) (9,555)
---------------------------------------------------------------------------

114,619 39,906
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(a) TGF has arranged the following credit facilities to finance the construction of the ethanol plant 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. The credit facility is secured by a demand debenture agreement in addition to 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 has been reclassified to current liabilities due to the demand nature of this facility. 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 shareholder's equity. As at September 30, 2008 the amount owing under this facility amounted to $45,457 (2007 - $1,800). Interest for the year in the amount of $1,795 (2007 - $10) has been capitalized as part of the ethanol plant. The facility also provides for $5,000 of cash to be held for cost overruns related to construction of the ethanol plant and debt servicing shortfalls. Upon issuance of a certificate of substantial performance by TGF and Ellis Don/VCM in Joint Venture (the "Contractor") 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 ethanol plant (or October 1, 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, 2008 the amount owing under this facility amounted to $40,000 (2007 - $40,000). Interest for the year in the amount of $3,498 (2007 - $860) has been capitalized as part of property, plant and equipment under development.

TGF was in compliance with financial covenants at September 30, 2008 for the credit facility and the debentures. TGF, however, does not expect to be in full compliance with the existing covenants during fiscal 2009. Management expects that the lenders will agree to modify the covenants so that TGF remains in compliance with them.

(iii) Wheat production financing

A credit facility under which wheat growers receive a cash advance under the production contracts from a third party lender (see Note 15(f)). Each wheat grower is limited to advances totaling $300 per signed production contract. 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 is obligated to repay any outstanding cash advances plus interest to the lender. As at September 30, 2008, $3,766 (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 $512 (2007 - $382).

(b) A demand working capital facility for $10,000 with a third party lender bearing interest at prime plus 1%. This facility is secured by liquid investments on deposit with the lender. As at September 30, 2008 the amount owing under the facility amounted to $10,000. During the year, $1,700 of unsecured letters of credit were issued by the third party lender on behalf of TGF. In addition, TGF arranged a further operating facility of $7,000 which is secured by inventory and accounts receivable. No amounts have been drawn against this facility as at September 30, 2008.

(c) On October 2, 2007, the Company issued convertible unsecured subordinated debentures with a face value of $90,000. The debentures mature on September 30, 2014 unless converted prior to that date and bear interest at an annual rate of 6% payable semi-annually on March 31 and September 30 of each year. Each $1,000 principal amount of the debentures is convertible at any time prior to maturity or on 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. During the year, interest expense amounted to $5,378 (2007 - $Nil).

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 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.

The conversion feature of the debentures has been accounted for as a separate component of shareholders' equity in the amount of $9,507. The remainder of the net proceeds of the debentures of $77,189 has been recorded as long-term debt, which will be accreted up to the face value of $90,000 over the term of the debentures. Accretion and interest paid are recorded as finance charges on the consolidated statement of operations. If the debentures are converted into common shares, the value of the conversion feature will be reclassified to share capital along with the principal amount converted.



$
---------------------------------------------------------------------------
Convertible debentures initially recognized,
less issue costs of $3,304 77,189
Accretion to September 30, 2008 1,428
---------------------------------------------------------------------------

Balance as at September 30, 2008 78,617
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(d) On April 1, 2008, the Royal Bank of Scotland plc acquired a controlling ownership interest in Sempra Commodities, now called RBS Sempra Commodities, the parent of Sempra Energy Trading Corp. ("Sempra"). Sempra is a related party through which Universal purchases its natural gas supply and enters into electricity swap agreements. In addition, Sempra 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 $Nil (2007 - $37). The amount owing under this facility as at September 30, 2008 is $Nil (2007 - $Nil).

9. Share capital and contributed surplus

(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
Common shares $
---------------------------------------------------------------------------
Share capital at September 30, 2007 36,272,728 247,794
Stock options exercised 26,500 410
---------------------------------------------------------------------------

Share capital at September 30, 2008 36,299,228 248,204
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(c) Contributed surplus

The net increase in contributed surplus of $1,897 relates to the amortization of stock option and RSU compensation expense and transfers to share capital on the exercise of stock options.

(d) Repurchase of shares

The Company has received approval from the Toronto Stock Exchange (the "TSX") to acquire for cancellation, by way of normal course issuer bid up to 1,814,961 common shares of the Company, which represents approximately 5% of the Company's issued and outstanding common shares. The bid commenced on September 25, 2008 and will terminate on the earlier of September 24, 2009 or the date upon which the Company acquires the maximum number of common shares to be purchased pursuant to the bid. As at September 30, 2008 the Company had 36,299,228 common shares issued and outstanding and has not repurchased and cancelled any common shares under this normal course issuer bid.

10. Stock-based compensation plans

(a) Stock option plan

The Company provides a stock option plan (amended February 13, 2008), 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 10% of the issued and outstanding common shares, less the number of common shares issuable pursuant to outstanding 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. The status of the Company's stock option plan as at September 30, 2008 is shown below.



Weighted Weighted
Range of average average
exercise exercise grant date
Stock options prices price fair value
outstanding $ $ $
---------------------------------------------------------------------------
(dollars) (dollars) (dollars)
Balance, beginning
of year 1,820,500 11.00 to 18.60 11.63
Granted 342,000 8.88 to 18.05 15.91 5.93
Cancelled (191,375) 11.00 to 18.60 14.68
Exercised (26,500) 11.00 11.00
---------------------------------------------------------------------------

Balance, end of year 1,944,625 8.88 to 18.05 12.09
---------------------------------------------------------------------------
---------------------------------------------------------------------------


As at September 30, 2008, the range of exercise prices for stock options outstanding and exercisable (vested) are as follows:



Stock options Stock options
outstanding 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) (dollars)

8.88 to 11.00 1,582,125 3.40 years 10.94 361,906 11.00
14.28 to 17.85 181,500 3.62 years 16.21 33,125 16.69
18.05 181,000 4.28 years 18.05 33,250 18.05
--------------------------------------------------- ----------------------
1,944,625 3.50 years 12.09 428,281 11.99
--------------------------------------------------- ----------------------
--------------------------------------------------- ----------------------


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 3.02 % to 4.55%
Expected dividend yield 0% to 5.02%
Expected forfeitures per year 0% to 1%
Expected share price volatility 40%
Expected option life 3.34 to 4.97 years
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Stock option compensation expense is recognized during the year in which entitlement to the compensation vests. During the year, compensation expense of $2,227 (2007 - $1,322) was recognized as a result of stock options granted under the plan.

(b) Restricted Share Units

The Company's RSU Plan (amended February 13, 2008) is 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 operational performance, market price of the common shares and/or other performance measures, 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 10% 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.

RSUs granted generally vest over a three year period from the date of grant and are 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. In the fourth quarter, management changed its estimate of RSU expense as it became doubtful that the performance criteria for certain tranches of RSUs would be met. The Company made a prospective cumulative adjustment in the fourth quarter which resulted in a net reversal of RSU expense for the year in the amount of $211. As at September 30, 2008 there were 565,000 RSUs awarded and outstanding.



(c) Stock options and RSUs available for grant

---------------------------------------------------------------------------
Stock options and RSUs available for grant, beginning of year 183,591
Add: increase in stock options and RSUs from plan amendment 1,089,556
Less: stock options granted during the year (342,000)
Less: RSUs granted during the year (55,000)
Add: stock options exercised during the year 26,500
Add: stock options and RSUs cancelled/forfeited during the year 216,375
---------------------------------------------------------------------------

Stock options and RSUs available for grant, end of year 1,119,022
---------------------------------------------------------------------------
---------------------------------------------------------------------------



11. Other income/(expense)
2008 2007
$ $
---------------------------------------------------------------------------
Investment income 3,708 993
Foreign exchange gain/(loss) 1,207 (437)
Unrealized gain/(loss) on production contracts 327 (363)
---------------------------------------------------------------------------

5,242 193
---------------------------------------------------------------------------
---------------------------------------------------------------------------



12. Earnings per share
2008 2007
---------------------------------------------------------------------------
Net loss for the year ($1,542) ($24,245)
---------------------------------------------------------------------------
Weighted average common shares
outstanding - Basic 36,283,366 29,152,842
Dilutive effect of RSUs 170,000 117,749
---------------------------------------------------------------------------
Weighted average common shares
outstanding - Diluted 36,453,366 29,270,591
---------------------------------------------------------------------------

Basic and diluted earnings/(loss) per share ($0.04) ($0.83)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The effect of the conversion of stock options and convertible debentures 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.

13. Related party transactions and balances

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

(a) Universal is party to 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 supplies 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 contain 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 $191,425 (2007 - $90,263). Included in accounts payable at September 30, 2008 is an amount owing of $17,516.

(ii) Electricity swap agreement

Universal entered into an 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 incurred net settlement payments under the electricity swap agreements totaling $44,195 (2007 - $39,709). Included in accounts payable as at September 30, 2008 is an amount owing of $3,584.

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, 2008 the balance in the blocked account which is included in restricted cash amounted to $2,984.

(b) During the year, the Company incurred expenses amounting to $1,019 (2007 - $882) for direct mail marketing services and rental expense to Market Connections Inc. and Ajax Estates Holdings Inc. in which certain officers and directors hold an equity interest. Included in accounts payable as at September 30, 2008 is an amount owing of $98.

(c) TGF has entered into a credit support agreement with Vertex Oil & Gas Ltd., a company controlled by an officer and director, that allows TGF to enter into hedges and swaps to mitigate risk exposure to the volatility of ethanol pricing. At September 30, 2008 the TGF hedges and swaps were closed out and this credit support agreement was cancelled. Included in accounts payable as at September 30, 2008 is an amount owing of $16,922 which includes the final settlement amount of $13,266 for the hedges and swaps that were closed out.

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

14. Income taxes

Income tax expense differs from the provision computed at the statutory rate as follows:

(a) Summary of the major components of the income tax expense:



2008 2007
$ $
---------------------------------------------------------------------------
Income/(loss) before income taxes 6,405 (34,562)
---------------------------------------------------------------------------
Combined Canadian federal and provincial
statutory tax rates 33.8% 35.4%
Tax at statutory rates 2,165 (12,250)
Increase resulting from:
Tax effect of expenses that are not deductible
for income purposes 1,030 1,168
Adjustment for differences between current and future
enacted rates on temporary difference 4,752 765
---------------------------------------------------------------------------

Income tax/(recovery) 7,947 (10,317)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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



2008 2007
$ $
---------------------------------------------------------------------------
Unrealized loss on commodity contracts 30,033 37,008
Share issuance and financing cost 2,416 3,426
Property, plant and equipment (10,779) (641)
Non-capital loss carryforwards 21,461 5,087
Future tax liability (387) -
---------------------------------------------------------------------------

Future taxes - current and long-term 42,744 44,880
---------------------------------------------------------------------------
---------------------------------------------------------------------------


As at September 30, 2008, the Company had Canadian operating loss carryforwards of $77,757 available to reduce future years' taxable income, which will expire as follows:



Year $
-----------------------------------------------------------------
2026 429
2027 3,255
2028 74,073
-----------------------------------------------------------------

77,757
-----------------------------------------------------------------
-----------------------------------------------------------------


15. Commitments and contingencies

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



Year $
-----------------------------------------------------------------
2009 2,658
2010 2,396
2011 2,105
2012 1,116
2013 907
-----------------------------------------------------------------

9,182
-----------------------------------------------------------------
-----------------------------------------------------------------


(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 $
-----------------------------------------------------------------
2009 208,924
2010 188,292
2011 159,341
2012 114,361
2013 22,313
Thereafter 521
-----------------------------------------------------------------

693,752
-----------------------------------------------------------------
-----------------------------------------------------------------


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 natural gas and electricity. 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 $143,777 to perform and complete all design, engineering, procurement, construction and commissioning work in connection with the development of the ethanol plant. As at September 30, 2008 total expenditures incurred under the EPC contract, excluding recovery of investment tax credits, amounted to $142,169.

(e) 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 written notice. Total commitments under these production contracts to September 30, 2008 are as follows:



Year $
-----------------------------------------------------------------
2009 36,207
2010 16,893
2011 3,031
2012 2,176
-----------------------------------------------------------------

58,307
-----------------------------------------------------------------
-----------------------------------------------------------------


(f) TGF has received a formal request for a scope change under the fixed price EPC contract from Ellis Don/VCM in Joint Venture of approximately $30,000 in respect of which the Ellis Don/VCM Joint Venture has filed a claim for lien against the ethanol plant in the amount of approximately $41,000. Management has rejected the Joint Venture's claim for the entire request and will vigorously defend any legal claims made by the Joint Venture to assert a claim under the contract or in respect of the lien. Based on advice from TGF's external counsel, management is of the view that the claim is without merit and that TGF has a claim for damages against the Joint Venture relating to delays in commissioning the plant which it will pursue at the appropriate time.

16. Capital disclosure

The capital structure of the Company is as follows:



2008 2007 Change
$ $ %
---------------------------------------------------------------------------

Total shareholders' equity 96,061 92,595 4%
---------------------------------------------------------------------------
Total shareholders' equity
as a % of total capital 35% 65%

Short-term debt 63,221 9,555
Long-term debt 114,619 39,906
---------------------------------------------------------------------------
Total debt 177,840 49,461 260%
---------------------------------------------------------------------------
Total debt as a % of total capital 65% 35%
---------------------------------------------------------------------------

Total capital 273,901 142,056 93%
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Equity is defined as share capital, contributed surplus, equity component of convertible debentures and deficit. During the year, total equity increased by $3,466 to $96,061. The increase resulted from the equity component of the convertible debentures in the amount of $9,507, amortization of stock option and RSU compensation expense of $2,016, exercise of stock options in the amount of $291 and offset by a net loss of $1,542 and dividends paid of $6,806.

Total debt increased during the year by $128,379 to $177,840. The increase resulted from the convertible debenture issue, which had a year end carrying value of $78,617, draw downs on the TGF credit facility in the amount of $43,657, increase in the working capital operating facility of $10,000 and offset by a repayment of the wheat production facility in the amount of $3,895.

The Company is not subject to any statutory requirements or any externally imposed capital requirements. Commitments exist to issue common shares in connection with established stock option and RSU compensation plans and pursuant to the convertible debenture with such share issuances to occur from treasury.

17. Financial instruments

(a) Fair value

(i) 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 effectively fix Universal's acquisition cost of electricity to be delivered under the fixed price customer contracts. The fair value of derivative financial instruments is the estimated amount that Universal would pay or receive to settle 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, 2008, Universal had electricity fixed-for-floating swap contracts to which it has committed with the following terms:



---------------------------------------------------------------------------
Notional volumes 2.0 to 40.0 MW/h
Total remaining notional volume 5,848,560 MWh
Maturity dates October 1, 2008 to March 31, 2013
Fixed price ($/MWh) $54.85 to $80.50
Fair value $93,915 unfavourable
Remaining notional value $414,855
---------------------------------------------------------------------------
---------------------------------------------------------------------------


(ii) The settlements under commodity contracts of $63,491 (2007 - $39,709) represent the net settlement payments on Universal's electricity swaps and TGF's hedges and swaps during the year. At September 30, 2008 the TGF hedges and swaps were closed out for a final settlement amount of $13,266.

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



2008 2007
$ $
---------------------------------------------------------------------------
Current portion of unrealized loss on
commodity contracts 42,719 39,375
Non-current portion of unrealized loss on
commodity contracts 51,196 70,326
---------------------------------------------------------------------------

Total unrealized loss on commodity contracts 93,915 109,701
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

(b) Additional financial instruments disclosure

The following table represents the fair values and carrying amounts of financial assets and liabilities measured at fair value or amortized cost.



2008 2007
Carrying Carrying
Fair value amount Fair value amount
Asset/Liability $ $ $ $
---------------- ----------------------------------------------
Cash and cash equivalents 79,162 79,162 13,378 13,378
Restricted cash 17,984 17,984 6,972 6,972
Accounts receivable 52,015 52,015 40,155 40,155
Production contract advances 3,796 3,796 7,162 7,162
Accounts payable and
accrued liabilities 63,131 63,131 44,562 44,562
Long-term debt 173,023 177,840 49,461 49,461


The fair values of cash and cash equivalents, restricted cash, accounts receivable, production contract advances, accounts payable and accrued liabilities approximate their carrying amounts due largely to the short-term maturities of these financial instruments. The fair value of the convertible debentures is based on the market price at the balance sheet date. The carrying amount of the convertible debenture does not include the equity component of the convertible debenture in the amount of $9,507.

(i) Credit risk

The LDCs provide collection services and assume the risk of any bad debts owing from Universal's and NHS' customers. Universal and NHS receive 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. However, there is a likelihood that the NHS billing arrangement may not be renewed when it expires in June 2009. If that were to occur, and NHS could not enter into an alternative collection services agreement, NHS would have to implement direct billing to its customers which could result in increased levels of bad debt.

TGF entered into agreements with wheat producers to supply suitable grain for ethanol production and provided production advances to the farmers. The default rate from these advances is expected to be in line with that of the industry and an appropriate provision has been recorded.

(ii) Liquidity risk

Universal purchases its natural gas and enters into offsetting electricity swaps with its exclusive supplier Sempra. Universal is reliant upon the ongoing revenues from its customer base to maintain its contractual commitment under these agreements. Management believes that the potential loss of revenue from customer attrition can be managed to ensure that Universal meets its contractual commitments under its commodity supply contract.

Universal has interest and debt repayment obligations under the convertible debenture issue and TGF has interest and debt repayment obligations under the credit facilities and debentures. Universal and TGF are reliant on the cash flows generated from its operations to fund its debt repayment obligations and TGF is reliant on the continued support of its lenders.

(iii) Market risk

The fair value of Universal's electricity supply contracts are 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 ("MTM valuation") of these contracts. For example, assuming that all other variables remained constant at September 30, 2008 (i) a 1% increase in forward spot prices for electricity would decrease the MTM valuation by approximately 3.2%, while a 1% decrease in forward spot prices for electricity would increase the MTM valuation by approximately 3.2%; and (ii) a 5% increase in forward spot prices for electricity would decrease the MTM valuation by approximately 15.8%, while a 5% decrease in the forward spot prices for electricity would increase the MTM valuation by approximately 15.8%.

(iv) Foreign currency risk

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

(v) Interest rate risk

At September 30, 2008 the Company had variable rate debt in the amount of $59,223 and the effect of a 1% change in the interest rate charged on its variable debt will impact interest expense in the amount of $592 per annum.

18. Reportable business segments

The Company has three reportable business segments, gas and electricity marketing, ethanol, and home services. The Company evaluates segment performance based on gross margin. The following tables present the Company's results from continuing operations by business segment for the years ended September 30, 2008 and 2007.



Gas and
Electricity Home
Marketing Ethanol Services Corporate Total
2008 $ $ $ $ $
---------------------------------------------------------------------------
Revenue 390,820 3,352 68 - 394,240
Cost of sales 275,623 3,147 - - 278,770
---------------------------------------------------------------------------

Gross margin 115,197 205 68 - 115,470
---------------------------------------------------------------------------

Income/(loss) before
under-noted items 74,020 (10,592) (1,818) (10,418) 51,192

Amortization (907) (997) (147) (273) (2,324)
Settlements under
commodity contracts (44,195) (19,296) - - (63,491)
Unrealized gain on
commodity contracts 12,057 3,729 - - 15,786
Other 939 1,281 9 3,013 5,242
Income tax (expense)
/recovery (15,925) 7,187 608 183 (7,947)
---------------------------------------------------------------------------

Net income/(loss) 25,989 (18,688) (1,348) (7,495) (1,542)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Capital expenditures 748 32,241 3,771 - 36,760
---------------------------------------------------------------------------


Gas and
Electricity Home
Marketing Ethanol Services Corporate Total
2007 $ $ $ $ $
---------------------------------------------------------------------------
Revenue 227,379 - - - 227,379
Cost of sales 145,246 - - - 145,246
---------------------------------------------------------------------------

Gross margin 82,133 - - - 82,133
---------------------------------------------------------------------------

Income/(loss) before
under-noted items 46,159 (1,907) - (2,968) 41,284

Amortization (461) (51) - - (512)
Settlements under
commodity contracts (39,709) - - - (39,709)
Unrealized loss on
commodity contracts (32,089) (3,729) - - (35,818)
Other (570) 334 - 429 193
Income tax (expense)
/recovery 8,618 1,943 - (244) 10,317
---------------------------------------------------------------------------

Net loss (18,052) (3,410) - (2,783) (24,245)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Capital expenditures 964 73,535 - - 74,499
---------------------------------------------------------------------------


Gas and
Electricity Home
Marketing Ethanol Services Corporate Total
Total assets $ $ $ $ $
---------------------------------------------------------------------------
2008 140,793 180,696 7,068 145,352 473,909
2007 104,071 139,948 - 79,361 323,380
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The Company operates in two geographic segments, Canada and the United States. The Canadian operations include electricity, natural gas, ethanol, and home services and the United States operations include natural gas.



2008 2007
Revenue $ $
---------------------------------------------------------------------------
Canada 258,926 182,984
United States 135,314 44,395
---------------------------------------------------------------------------

394,240 227,379
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Property, plant and equipment, 2008 2007
intangible assets, and goodwill $ $
---------------------------------------------------------------------------
Canada 227,101 188,348
United States - -
---------------------------------------------------------------------------

227,101 188,348
---------------------------------------------------------------------------
---------------------------------------------------------------------------


19. Comparative figures

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

20. Subsequent event

On December 11, 2008 the Company, through its wholly owned subsidiary, Commerce Gas and Electric Corp. ("CGE"), acquired all of the issued and outstanding shares of Commerce Energy, Inc. ("Commerce"), the operating subsidiary of Commerce Energy Group, Inc., for approximately US$26 million. CGE also assumed certain letter of credit obligations related to the existing natural gas and electricity supply arrangements required to serve the Commerce customer base. These obligations will unwind as current suppliers are replaced with CGE natural gas and electricity supply and credit arrangements.

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