Universal Energy Group Ltd.
TSX : UEG

Universal Energy Group Ltd.

May 14, 2008 06:00 ET

Universal Energy Group Releases Second Quarter Financial Results and Operational Updates

TORONTO, ONTARIO--(Marketwire - May 14, 2008) - Universal Energy Group Ltd. ("Universal Energy Group") (TSX:UEG) is pleased to announce the release of its financial results for the three and six month period ended March 31, 2008.

Universal Energy Corporation ("Universal"), Universal Energy Group's gas and electricity marketing division, earned revenue for the three and six months ended March 31, 2008 of $148.6 million and $228.7 million compared to $79.1 million and $125.7 million for the 2007 period. Gross margin for the three and six months ended March 31, 2008 was $36.5 million and $61.3 million compared to $22.0 million and $40.6 million for the 2007 period. Net income for the three and six months ended March 31, 2008 was $18.2 million and $16.7 million compared to $11.0 million and $17.8 million for the 2007 period.

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 three and six months ended March 31, 2008.

Universal earned operational revenue for the three and six months ended March 31, 2008 of $103.0 million and $190.6 million compared to $59.0 million and $110.5 million for the 2007 period. Operational margin for the three and six months ended March 31, 2008 was $17.6 million and $32.9 million compared to $10.2 million and $19.8 million for the 2007 period. Operational income before marketing costs for the three and six months ended March 31, 2008 was $9.3 million and $18.3 million compared to $6.6 million and $13.1 million for the 2007 period. Operational income after marketing costs for the three and six months ended March 31, 2008 was $4.5 million and $5.2 million compared to $3.6 million and $6.6 million for the 2007 period. Universal's gross customer additions for the quarter were 38,732 RCEs. Attrition during the quarter was 22,141 RCEs (representing an annualized attrition rate of 13.4% across all markets) for a total customer base at March 31, 2008 of 429,225 RCEs.

Terra Grain Fuels Inc. ("TGF"), Universal Energy Group's ethanol division, reported a loss of $5.0 million and $11.3 million for the three and six months ended March 31, 2008. TGF is fully staffed and is in the final stages of construction and commissioning of its ethanol facility in Belle Plaine, Saskatchewan. The plant is expected to be operational in May 2008.

In April 2008 Universal Energy Group entered the home services market through its wholly owned subsidiary, National Energy Corporation, operating under the trade name National Home Services ("NHS"). NHS provides Ontario residential customers a long-term water heater rental program offering conventional and power vented tanks in a variety of sizes. Funding for NHS is initially being provided from Universal Energy Group's existing cash resources. The NHS product offering is being well received among prospective customers and sales since program launch have exceeded management expectations.

With TGF commencing ethanol production later this month and Universal generating cash flow in excess of its capital requirements, Universal Energy Group is exploring ways in which it could enhance shareholder value through the use of alternative capital structures. Universal Energy Group has retained National Bank Financial as its advisor to assist in this review. There is no assurance that this review will result in any changes to Universal Energy Group's current business model or capital structure. Universal Energy Group does not intend to disclose developments with respect to this process until its Board of Directors has received the findings of this review and made a final determination.

Universal Energy Group's unaudited interim consolidated financial statements for the three and six months ended March 31, 2008 and 2007 and MD&A are attached to this news release. See "Forward-looking information" and "Non-GAAP measures" in the attached MD&A for cautionary information regarding forward-looking statements and discussion of "Non-GAAP measures".

Universal Energy Group's common shares are listed on the Toronto Stock Exchange under the symbol "UEG". 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, offers Ontario residential customers a long term water heater rental program. Universal Energy Group through its subsidiary Terra Grain Fuels Inc., is constructing an ethanol facility near Belle Plaine, Saskatchewan that is designed to produce approximately 150 million litres of ethanol annually. Additional information about Universal Energy Group is available on SEDAR (www.sedar.com).

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 14, 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 three and six months ended March 31, 2008 and 2007 should be read in conjunction with the unaudited interim consolidated financial statements for the three and six months ended March 31, 2008 as well as the Company's audited consolidated financial statements for the year ended September 30, 2007. The financial statements of the Company are prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"), which requires estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the amount of revenue and expenses during the reporting period. Actual results could differ from those estimates as a result of various factors, including those discussed below and elsewhere in this MD&A, particularly under "Forward-looking statements". Certain totals, subtotals and percentages may not reconcile due to rounding. Quarterly reports of, and other information related to, Universal Energy Group Ltd., is available on SEDAR at www.sedar.com.

The Company carries on business through 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, operating through 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, is currently in the final stages of construction and commissioning of its 150 million litre facility in Belle Plaine, Saskatchewan. The plant is expected to be operational in May 2008.

Forward-looking information

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

Non-GAAP measures

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

Selected Financial Highlights and Overall Performance of the Company
The following selected financial information has been derived from the unaudited interim consolidated financial statements of the Company for the three and six months ended March 31, 2008 and 2007.



Three months ended Six months ended
----------------------------------------
March 31 March 31 March 31 March 31
2008 2007 2008 2007
Statement of Operations Highlights $ $ $ $
----------------------------------------
(Thousands of dollars except per
share amounts)

GAAP Measures
Revenue 148,568 79,085 228,670 125,656
Gross margin 36,467 22,047 61,309 40,552
Net income 18,170 10,983 16,666 17,779
Basic earnings per share 0.50 0.38 0.46 0.81
Diluted earnings per share 0.49 0.38 0.45 0.81

Non-GAAP Measures
Operational revenue 103,039 58,966 190,588 110,481
Operational margin 17,611 10,246 32,871 19,802
Operational income before marketing
costs 9,301 6,598 18,282 13,096
Operational income after marketing
costs 4,497 3,571 5,160 6,615


March 31 September 30
2008 2007
Balance Sheet Highlights $ $
-------------------------
(Thousands of dollars)
Total assets 422,336 323,380
Long-term liabilities 209,682 111,927


The increase in revenue of 88% and operational revenue of 75% for the comparative quarter is as a result of the continual increase in the number of customers moving from an enrolled to a flowing state and continued steady aggregation of customers with gross customer additions for this quarter of 38,732.

The net income of $18.2 million for the three months ended March 31, 2008 is primarily a result of seasonally higher customer energy consumption, and an increase in the unrealized gain on commodity contracts. The increase in operational income before marketing costs from $6.6 million to $9.3 million, over the comparative quarter, is the result of continued strong growth in operational margins by maintaining our operational margins per RCE at our long-term target level and continued steady growth in our customer base.

Total assets increased from $323.4 million to $422.3 million, over the prior quarter, primarily as a result of increased cash holdings from the recent debenture issue, increases in accounts receivable and unbilled gas revenues, and continuing construction costs of the ethanol plant. The increase in long-term liabilities arose from the debenture issue and the continuing draw down of the debt facilities relating to the construction of the ethanol plant.

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

(a) Overview

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

Universal's business currently involves (i) the sale of electricity and natural gas in Ontario to residential, small to mid-size commercial and small industrial customers, (ii) the sale of natural gas in BC to residential, small to mid-size commercial and small industrial customers and (iii) the sale of natural gas in Michigan to residential and small to mid-size commercial and small industrial customers.

Universal'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 unaudited interim consolidated financial statements of Universal for the three and six months ended March 31, 2008 and 2007:



Gas & Electricity Marketing
Statement of Operations Data (GAAP)
(Thousands of dollars) Three months ended Six months ended
March 31 March 31
----------------------------------------------------------------------------
2008 2007 2008 2007
$ $ $ $
--------------------------------------
Revenue
Canada
Gas 31,144 23,399 46,216 33,139
Electricity 46,638 32,858 86,703 59,927
--------------------------------------
Total Canada 77,782 56,257 132,919 93,066
United States
Gas 70,786 22,828 95,751 32,590
--------------------------------------
Total revenue 148,568 79,085 228,670 125,656
--------------------------------------

Gross Margin
Canada
Gas 4,689 4,121 7,031 6,277
Electricity 19,931 13,781 37,753 27,593
--------------------------------------
Total Canada 24,620 17,902 44,784 33,870
United States
Gas 11,847 4,145 16,525 6,682
--------------------------------------
Total Gross Margin 36,467 22,047 61,309 40,552
--------------------------------------

Customer acquisition costs 4,804 3,027 13,122 6,481
General and administrative 5,880 2,978 11,253 6,037
--------------------------------------
Total Expenses 10,684 6,005 24,375 12,518
--------------------------------------

Realized loss on swap contracts (10,971) (7,620) (21,511) (16,746)

Interest income 122 8 214 (3)
Financing charges - (21) - (51)
Amortization (143) (102) (268) (194)
Unrealized gain on commodity
contracts 25,658 12,210 35,282 19,258
Income tax (13,858) (7,317) (18,176) (10,302)
--------------------------------------
Net income for the period 26,591 13,200 32,475 19,996
--------------------------------------
--------------------------------------


(d) 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 (realized gain on swaps contracts) and downward for swap payments (realized loss on swap contracts), which are not included in cost of sales for accounting purposes.

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

Operational income after marketing 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.



Three months Six months
Gas & Electricity Marketing ended ended
Operational Revenue, Margin & Income March 31 March 31
---------------------------------------
(Thousands of dollars) 2008 2007 2008 2007
$ $ $ $
---------------------------------------
Revenue
Canada
Gas revenue 31,144 23,399 46,216 33,139
Revenue adjustment for gas under
delivered (13,593) (10,671) (11,874) (8,962)
---------------------------------------
Gas operational revenue 17,551 12,728 34,342 24,177
Electricity revenue 46,638 32,858 86,703 59,927
---------------------------------------
Total Canada 64,189 45,586 121,045 84,104
United States
Gas revenue 70,786 22,828 95,751 32,590
Revenue adjustment for gas under
delivered (31,936) (9,448) (26,208) (6,213)
---------------------------------------
Gas operational revenue 38,850 13,380 69,543 26,377

---------------------------------------
Total operational revenue 103,039 58,966 190,588 110,481
---------------------------------------

Operational Margin
Canada
Gas gross margin 4,689 4,121 7,031 6,277
Margin adjustment for gas under
delivered (2,255) (1,899) (2,021) (1,710)
---------------------------------------
Gas operational margin 2,434 2,222 5,010 4,567

Electricity gross margin 19,931 13,781 37,753 27,593
Realized loss on swap contracts (10,971) (7,620) (21,511) (16,746)
---------------------------------------
Electricity operational margin 8,960 6,161 16,242 10,847

Total Canada 11,394 8,383 21,252 15,414
United States
Gas gross margin 11,847 4,145 16,525 6,682
Margin adjustment for gas under
delivered (5,630) (2,282) (4,906) (2,294)
---------------------------------------
Gas operational margin 6,217 1,863 11,619 4,388

---------------------------------------
Total operational margin 17,611 10,246 32,871 19,802
---------------------------------------

Customer acquisition costs 4,804 3,027 13,122 6,481
General and administrative 5,880 2,978 11,253 6,037
---------------------------------------
Total expenses 10,684 6,005 24,375 12,518
---------------------------------------

Operational income after marketing
costs 6,927 4,241 8,496 7,284
---------------------------------------
---------------------------------------


The following operational data for the three and six months ended March 31,
2008 and 2007 has been prepared by management based on Universal's records.


Selected Operational Data Three months ended Six months ended
March 31 March 31
---------------------------------------------
2008 2007 2008 2007
---------------------------------------------
Operational margin per unit
(dollars)
Canada - Gas (Cdn$/m3) 0.0539 0.0746 0.0579 0.0806
Canada - Electricity
(Cdn$/kWh) 0.0171 0.0173 0.0167 0.0166
United States - Gas
(US$/Mcf) 1.6839 1.4675 1.7547 1.7815
United States - Gas
(Cdn$/m3) 0.0603 0.0612 0.0619 0.0728

Operational margin per RCE
(dollars)
Canada - Gas 151.73 210.02 162.99 226.87
Canada - Electricity 171.00 173.26 167.00 165.54
United States - Gas 170.63 173.41 175.38 206.12

Delivered Volume
Canada - Gas (m3) 45,145,258 29,782,480 86,530,442 56,666,149
Canada - Electricity (kWh) 523,622,857 355,598,536 970,846,629 655,295,556
United States - Gas (Mcf) 3,643,578 1,074,358 6,625,089 2,128,898

Consumed Volume
Canada - Gas (m3) 78,284,161 55,296,342 115,524,126 78,486,987
Canada - Electricity (kWh) 523,622,857 355,598,536 970,846,629 655,295,556
United States - Gas (Mcf) 6,671,099 1,817,660 9,093,211 2,610,188

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 m(3) of natural gas on an annual basis, which quantities management
believes to represent the approximate amounts of electricity and natural gas
used annually by a typical residential customer.


(e) Results of Operations

Three and six months ended March 31, 2008 compared to three and six months ended March 31, 2007

(i) Revenue and Margin - Canada

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

For the three and six months ended March 31, 2008 Canadian natural gas revenue was $31.1 million and $46.2 million, up 33.1% and 39.5% from the prior comparable period of $23.4 million and $33.1 million. Canadian natural gas for the quarter accounted for 21.0% of total revenue on customer consumption of 78.3 million m3 of natural gas. Gross margin for the quarter was $4.7 million, an increase of 13.8% from the prior comparative quarter. Gross margin for the six months ended March 31, 2008 was $7.0 million, an increase of 12.0% from the prior comparative period.

Gas operational revenue for the three and six months ended March 31, 2008 was $17.6 million and $34.3 million, up 37.9% from $12.7 million and 42.0% from $24.2 million in the prior comparable periods on delivered volume of 45.1 million m3 and 86.5 million m3. Gas operational margin for the three and six months ended March 31, 2008 was $2.4 million and $5.0 million, an increase of 9.5% and 9.7% from the prior comparable period. This resulted in a unit operational margin for the quarter of 0.0539 or $151.73 per RCE and for the six months ended March 31, 2008 a unit operational margin of $0.0579 or $162.99 per RCE. The gas operational margins are temporarily impacted by time-limited first year discounts and rebates offered to our Ontario and B.C. customers. Over the full contract term our margins will be within our target levels once the discount period expires.

For the three and six months ended March 31, 2008 Canadian electricity revenue was $46.6 million and $86.7 million, up 41.9% from $32.9 million and 44.7% from $59.9 million in the prior comparable periods. Canadian electricity for the quarter accounted for 31.3% of total revenue on customer consumption of 523.6 million kWh. Gross margin for the three and six months ended March 31, 2008 was $19.9 million and $37.8 million, an increase of 44.6% from $13.8 million and 36.8% from $27.6 million in the prior comparable periods.

In accordance with GAAP, the electricity gross margin has not been reduced by swap payments totaling $11.0 million for the quarter and $21.5 million for the six months ended March 31, 2008. The electricity operational margin, which adjusts for swap payments, for the three and six months ended March 31, 2008 was $9.0 million and $16.2 million, up 45.4% from $6.2 million and 49.7% from $10.8 million in the prior comparable periods. This resulted in a unit operational margin for the quarter of $0.0171 per kWh or $171 per RCE and for the six months ended March 31, 2008 of $0.0167 per kWh or $167.00 per RCE.

(ii) Revenue and Margin - United States

For the three and six months ended March 31, 2008 U.S. natural gas revenue was $70.8 million and $95.8 million, up 210% from $22.8 million and 194% from $32.6 million in the prior comparable periods. U.S. natural gas for the period accounted for 47.5% of total revenue on customer consumption of 6.7 million Mcf of natural gas. Gross margin for the three and six months ended March 31, 2008 was $11.8 million and $16.5 million, up 186% from $4.1 million and 147% from $6.7 million in the prior comparable periods.

Gas operational revenue for the three and six months ended March 31, 2008 was $38.9 million and $69.5 million, up 190% from $13.4 million and 164% from $26.4 million in the prior comparable periods. Operational margin for the three and six months ended March 31, 2008 was $6.2 million and $11.6 million, up 234% from $1.9 million and 165% from $4.4 million in the prior comparable periods. This resulted in a unit operational margin for the quarter of $1.7057 per Mcf ($0.0602 per m3) or $170.57 per RCE and for the six months ended March 31, 2008 of $1.7538 per Mcf ($0.0619 per m3) or $175.38 per RCE.

(iii) Revenue and Margin - Combined

On a combined basis (Canada and the United States), Universal's total revenue earned for the three and six months ended March 31, 2008 was $148.6 million and $228.7 million, up 88% from $79.1 million and 82% from $125.7 million in the prior comparable period. Gross margin for the three and six months ended March 31, 2008 was $36.5 million and $61.3 million, up 65% from $22.0 million and 51% from $40.6 million in the prior comparable periods.

Total operational revenue earned for the three and six months ended March 31, 2008 was $103.0 million and $190.6 million, up 75% from $59.0 million and 73% from $110.5 million in the prior comparable periods. Operational margin for the three and six months ended March 31, 2008 was $17.6 million and $32.9 million, up 72% from $10.2 million and 66% from $19.8 million in the prior comparable periods.

(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 three and six months ended March 31, 2008 these costs amounted to $4.4 million and $12.0 million excluding direct mail marketing costs and $4.8 million and $13.1 million including direct mail marketing costs. For the prior comparable period, customer acquisition costs were $2.8 million and $6.2 million excluding direct mail marketing costs and $3.0 million and $6.5 million including 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 three and six months ended March 31, 2008 the average acquisition cost excluding direct mail costs was $114 per RCE and $116 per RCE and including direct mail costs was $124 per RCE and $128 per RCE.

General and administrative expense for the three and six months ended March 31, 2008 amounted to $5.9 million and $11.3 million. General and administrative expense increased by $0.51 million from the immediately preceding quarter as a result of increases in compensation expense and rent offset by reductions in processing expenses. The significant components of general and administrative expenses for the three and six months ended March 31, 2008 are processing charges (principally LDC processing and other third party processing and data entry fees) - $0.653 million and $1.5 million, salaries and benefits - $3.3 million and $6.0 million, consulting (principally for management services and systems development) - $0.399 million and $0.799 million and rent - $0.240 million and $0.461 million, together totaling $4.6 million and $8.8 million and accounting for 78% of general and administrative expenses.

(v) Other Income/(Expense)

The realized loss on swap contracts of $11.0 million and $21.5 million are payments made under electricity swap contracts during the three and six months ended March 31, 2008. The non-cash unrealized gain on commodity contracts of $25.7 million and $35.3 million recognized in income arises from the quarterly 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 quarterly revaluation. See "Financial Instruments" in this MD&A.

(f) Customer Aggregation

The following table summarizes Universal's customer aggregation in the Canadian and United States markets for the three and six months ended March 31, 2008.



Closing
RCEs
Opening RCEs Additions Additions Total Mar 31,
Sep 30, 2007 Q1 2008 Q2 2008 Additions Attrition 2008
----------------------------------------------------------------
----------------------------------------------------------------
Canada - Gas 69,774 11,911 11,053 22,964 (4,384) 88,354
Canada -
Electricity 183,725 19,505 14,497 34,002 (12,287) 205,440
----------------------------------------------------------------
Total Canada 253,499 31,416 25,550 56,966 (16,671) 293,794
United States
Gas 109,821 32,629 13,182 45,811 (20,201) 135,431
----------------------------------------------------------------

Combined 363,320 64,045 38,732 102,777 (36,872) 429,225
------------- -------------------
------------- -------------------
Less:
Attrition (14,731) (22,141) (36,872)
--------------------------------
Net new RCE
additions 49,314 16,591 65,905
--------------------------------
Cumulative
net RCEs 412,634 429,225 429,225
--------------------------------
--------------------------------


Notwithstanding that during the winter quarter our customer additions are generally at a seasonal low our total customer additions for the quarter were 38,732 RCEs which significantly exceeds our customer additions in the comparable Q2-2007 quarter of 32,872 RCEs. Total additions for the six months ended March 31, 2008 amounted to 102,777 RCEs. Canadian gas additions accounted for 11,053 RCEs or 28.5% of additions for the quarter. Canadian electricity additions accounted for 14,497 RCEs or 37.4% of additions for the quarter. In total, Canadian additions accounted for 25,550 RCEs or 66% of additions for the quarter. United States gas additions accounted for 13,182 RCEs or 34.0% of additions for the three months ended March 31, 2008.

Combined attrition for all markets over the three months ended March 31, 2008 amounted to 22,141 RCEs or 13.4% on an annualized basis. The Canadian market experienced annualized attrition of 11.4% and the United States market experienced annualized attrition of 17.6%. Largely as the result of negative media coverage, increased customer complaint levels over this winter's heating season have led to a review of UGE's sales and marketing practices by the Michigan Public Service Commission. US attrition in the quarter exceeded Management's forecasts, however, Management forecasts that attrition levels will return to usual levels by Q4-2008.

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 March 31, 2008 our total customer base amounted to 429,225 RCEs, net of attrition. Geographically, Canada accounts for 68% of total RCEs and the United States accounts for 31.6% of total RCEs. In Canada, residential customers account for 73% of RCEs and commercial customers account for 27.3% of RCEs. In the United States, residential customers account for 72% of RCEs and commercial customers account for 28.3% of RCEs. On a product distribution basis, gas customers account for 52% of total RCEs and electricity customers account for 47.9% of total RCEs.

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

(a) Overview

TGF is in the final stages of construction and commissioning its 150 million litre facility located in Belle Plaine, Saskatchewan which is expected to be operational in May 2008. In addition to ethanol, the Belle Plaine Facility will also produce 165,000 tonnes of dried distillers grains ("DDG"). TGF has made arrangements to sell ethanol to gasoline producers and marketers throughout Canada and the United States, primarily as a gasoline additive to fulfill jurisdictional blending requirements. TGF also will sell distillers grains to the livestock and dairy industry throughout Western Canada and the US Pacific Northwest. Distribution of the ethanol and distillers grains will be primarily by rail and truck. The Belle Plaine Facility will require approximately 400,000 metric tonnes of wheat per year.



(b) Selected Financial Information
(Thousands of dollars) Three months Six months
ended ended
March 31, March 31,
2008 2008

Investment income $ 392 $ 777
------------------------------

General and administrative 1,949 2,645
Financing charges 145 313
Amortization of property, plant and equipment 43 61
Realized loss on commodity contracts 1,842 1,842
Unrealized loss on commodity contracts 3,026 11,820
Future taxes (1,577) (4,562)
------------------------------
Net loss $ (5,036) $ (11,342)
------------------------------
------------------------------


(c) Results of Operations

Total construction costs incurred to March 31, 2008 amounted to $139.6 million, net of investment tax credits. For the three and six months ended March 31, 2008 TGF realized a net loss of $5.0 million and $11.3 million. For the three and six months ended March 31, 2008 TGF incurred financing charges of $0.145 million and $0.313 million on wheat growers' loan obligations, and general and administrative expenses of $1.9 million and $2.6 million which relate primarily to compensation and other administration costs. The unrealized loss on commodity contracts arises from the marked to market valuation of the remaining notional volumes of the crude oil hedges and swaps. This represents the estimated amount that TGF would have to pay to settle these commodity contracts in the market if the hedges and swaps were to be terminated at March 31, 2008. See "Financial Instruments" in this MD&A.

3. Summary of Quarterly Results

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



(Thousands of dollars) 2008 2008 2007 2007
Q2 Q1 Q4 Q3
$ $ $ $
---------------------------------------
GAAP Measures
Revenue 148,568 80,102 49,338 52,385
Gross margin 36,467 24,842 20,783 20,798
Net income/(loss) 18,170 (1,504) (17,915) (24,109)
Basic earnings/(loss) per share 0.50 (0.04) (0.49) (0.66)
Diluted earnings/(loss) per share 0.49 (0.04) (0.49) (0.66)

Non-GAAP Measures
Operational revenue 103,039 87,549 72,805 59,607
Operational margin 17,611 15,260 13,734 10,445
Operational income before marketing
costs 9,301 8,981 7,565 5,621
Operational income/(loss) after
marketing costs 4,497 663 (700) (274)

2007 2007 2006 2006
Q2 Q1 Q4 Q3
GAAP Measures $ $ $ $
---------------------------------------
Revenue 79,085 46,571 28,248 17,004
Gross margin 22,047 18,505 11,891 7,226
Net income/(loss) 10,983 6,796 (22,881) (19,211)
Basic earnings/(loss) per share 0.38 0.44 (1.49) (1.25)
Diluted earnings/(loss) per share 0.38 0.44 (1.49) (1.25)

Non-GAAP Measures
Operational revenue 58,966 51,920 38,366 19,358
Operational margin 10,246 9,664 7,719 3,126
Operational income before marketing
costs 6,598 6,591 4,670 846
Operational income/(loss) after
marketing costs 3,570 3,138 (480) (4,986)


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

Analysis of the Second Quarter - Q2 2008

The increase in revenue of 88% and operational revenue of 75% over the prior comparable quarter is as a result of the continual increase in the number of customers moving from an enrolled to a flowing state and continued steady aggregation of customers with gross customer additions for this quarter of 38,732. Revenue is also impacted by seasonally higher customer energy consumption during the winter quarter.

The increase in net income to $18.2 million from the prior comparable quarter of $11.0 million and operational income to $4.5 million from the prior comparable quarter of $3.6 million is primarily as a result of continued strong growth in operational margins and lower customer acquisition costs.

4. Liquidity and Capital Resources

At March 31, 2008 the Company had cash of $85.0 million of which $9.6 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 $115.0 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 $100.0 million available to TGF to be used primarily toward the ethanol plant construction and wheat growers advances. As at March 31, 2008, $75.4 million was drawn against 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.

(a) Cash Flows from Operating Activities

Cash used in operations for the three and six months ended March 31, 2008 amounted to $15.9 million and $26.1 million compared to cash provided by operations of $21.9 million and $20.3 million in the prior comparable periods. This is primarily due to an increases in unbilled gas revenues, increases in grain inventory plus normal increases in trade receivables and accounts payable resulting from our increasing customer base.

(b) Cash Flows Used in Investing Activities

Cash used in investing activities for the three and six months ended March 31, 2008 amounted to $10.1 million and $30.6 million compared to $121.0 million and $122.5 million in the prior period. The investing activities relate to the continuing costs of constructing the ethanol plant.

(c) Cash Flows from Financing Activities

During the six months ended March 31, 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 $31.9 million for the ethanol plant construction.

(d) Long-Term Liabilities

The unrealized loss on commodity contracts of $86.2 million (current portion - $26.4 million) is the estimated amount that Universal and TGF would pay as at March 31, 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 $159.2 million (current portion - $9.4 million) includes $40 million of advances under the TGF debenture facility and $35.4 million of advances under the TGF $50 million credit facility. These funds are specifically used towards the ethanol plant construction. The commodity financing facility of $5.9 million (current portion $5.2 million), included in long-term debt, relates to advances made by TGF to the wheat growers under contract. Also included in long-term debt is the liability portion of the convertible debenture issue of $77.9 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)
Remainder After
Contractual obligations Total of year 1 1-3 years 4-5 years 5 years
----------------------- ----- --------- --------- --------- -------
Financing facilities 159,247 5,916 20,206 17,997 115,128
Premises and vehicles
under lease 3,361 642 2,667 52 -
Natural gas purchase
commitments 713,971 98,067 503,297 112,607 -
EPC and Delta-T contracts 5,065 5,065 - - -
Production contracts 46,771 18,308 28,463 - -
---------------------------------------------------
Total 928,415 127,998 554,633 130,656 115,128
---------------------------------------------------


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 subordinate debentures with a face value of $90.0 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 commencing on March 31, 2008. 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 three and six months ended March 31, 2008 interest expense amounted to $1.3 million (2007 - $Nil) and $2.7 million (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 debenture 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 debenture 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 debenture. 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 March 31, 2008 700
----------------------------------------------------------------------------

Balance as at March 31, 2008 77,889
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(g) Additional Capital Disclosure

The Company continues to optimize its capital structure with a view to
ensuring a strong financial position to support its growth strategies. The
capital structure of the Company is as follows:

March 31 September 30
2008 2007 Change
(Thousands of dollars) $ $ %
----------------------------------------------------------------------------

Total shareholders' equity 120,800 92,595 30%
----------------------------------------------------------------------------
Total shareholders' equity as a % of
total capital 43% 65%

Short-term debt 9,359 7,860
Long-term debt 149,888 41,601
----------------------------------------------------------------------------
Total debt 159,247 49,461 222%
----------------------------------------------------------------------------
Total debt as a % of total capital 57% 35%

----------------------------------------------------------------------------
Total capital 280,047 142,056 97%
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Equity is defined as share capital, contributed surplus, equity component of convertible debenture and deficit. During the six months ended March 31, 2008, total equity increased by $28.2 million to $120.8 million. The increase resulted from the equity component of the convertible debenture 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 $0.0138 million and a net income for the period of $16.7 million.

Total debt increased during the six months ended March 31, 2008 by $109.8 million to $159.2 million. The increase resulted from the convertible debenture issue, which had a period end carrying value of $77.9 million, draw downs on the TGF credit facility in the amount of $33.6 million and offset by repayments of the wheat production facility in the amount of $1.7 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 with such share issuances to occur from treasury.

5. Related Party Transactions and Balances

During the three and six months ended March 31, 2008, the Company entered into various transactions with related parties as follows:

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

(i) Gas purchase agreements

Universal entered into the natural gas purchase and sale agreement with Sempra on July 14, 2005 (amended and restated February 2, 2007). On February 2, 2007 UGE and Sempra also entered into an agreement pursuant to which Sempra 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 three and six months ended March 31, 2008, Universal made natural gas purchases under the agreements totaling $48.3 million (2007 - $21.8 million) and $87.9 million (2007 - $41.5 million). Included in accounts payable at March 31, 2008 is an amount owing of $16.6 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 three and six months ended March 31, 2008, Universal made net settlement payments under the electricity swap agreements totaling $11.0 million (2007 - $7.6 million) and $21.5 million (2007 - $16.8 million). Included in accounts payable as at March 31, 2008 is an amount owing of $2.5 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 March 31, 2008 the balance in the blocked account amounted to $4.6 million.

(b) During the three and six months ended March 31, 2008, Universal incurred expenses amounting to $0.308 million (2007 - $0.118 million) and $0.476 million (2007 - $0.175 million) for direct mail marketing services to Market Connections Inc. in which certain officers and directors hold an equity interest. Included in accounts payable as at March 31, 2008 is an amount owing of $0.019 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 while the Belle Plaine Facility is under construction. The credit support facility will be phased out shortly after the plant is commissioned and operational. Included in accounts payable as at March 31, 2008 is an amount owing of $0.219 million.

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

6. Critical Accounting Estimates

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

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.

TGF has entered into crude oil hedges and swaps to mitigate the risk exposure of the company to the volatility of ethanol pricing while the Belle Plaine Facility is under construction. The fair value of TGF's hedges and swaps is influenced by the variability of forward spot prices for West Texas Intermediate ("WTI") traded on NYMEX. Period to period changes in forward spot prices for WTI could cause significant changes in the marked to market valuation of these derivatives. This accounting estimate was implemented for the year ended September 30, 2007.

7. Controls and Procedures

(a) Disclosure Controls and Procedures

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

(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 three months ended March 31, 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.

8. 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 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 January 2006, the CICA Accounting Standards Board ("AcSB") 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 International Financial Reporting Standards ("IFRS") effective for fiscal periods beginning on or after January 1, 2011. The Company continues to monitor and assess the impact of the convergence of Canadian GAAP and IFRS.

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). As 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 January 1, 2009. The Company is currently evaluating the effect of the adoption of this new section on the consolidated financial statements.

9. 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 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 March 31, 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 6,644,400 MWh
Maturity dates April 1, 2008 to February 28, 2013
Fixed price ($/MWh) $57.42 to $80.50
Fair value $70,691 unfavourable
Remaining notional value $473,559
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(ii) TGF has entered into hedges and swaps to mitigate risk exposure to changes in ethanol pricing while the Belle Plaine Facility is under construction. At March 31, 2008, TGF had hedges and swaps to which it had committed with the following terms:



(Thousands of dollars except where
indicated)
----------------------------------------------------------------------------
Notional volumes - Owned puts 500 to 1,000 bbl/d
Total remaining notional volume 641,000 bbl
Maturity dates April 1, 2008 to December 31, 2009
Option Strike Price (US$/bbl) $55.00 to $65.00
Fair value $327 favourable
Remaining notional value $39,538
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Notional volumes - Sold calls 500 to 1,000 bbl/d
Total remaining notional volume 641,000 bbl
Maturity dates April 1, 2008 to December 31, 2009
Option Strike Price (US$/bbl) $71.00 to $74.00
Fair value $17,327unfavourable
Remaining notional value $46,765
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Notional volumes - Swaps 750 bbl/d
Total remaining notional volume 236,500 bbl
Maturity dates April 1, 2008 to December 31, 2008
Fixed price per bbl (US$/bbl) $71.00 to $93.70
Fair value $1,853favourable
Remaining notional value $18,717
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(iii) The realized loss on Universal's electricity swap contracts and TGF's hedges and swaps during the three and six months ended March 31, 2008 of $12.8 million (2007 - $7.6 million) and $23.4 million (2007 - $16.7 million) represents the net settlement payments recognized in income on that portion of commodity contracts that matured during the period.

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



March 31 September 30
2008 2007
(Thousands of dollars) $ $
----------------------------------------------------------------------------

Current portion of unrealized loss on commodity
contracts 26,445 39,375
Non-current portion of unrealized loss on
commodity contracts 59,794 70,326
----------------------------------------------------------------------------

Total unrealized loss on commodity contracts 86,239 109,701
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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) March 31, 2008 September 30, 2007
Fair Carrying Fair Carrying
value amount value amount
Asset/Liability $ $ $ $
---------------- --------------------------------------
--------------------------------------

Cash and cash equivalents 75,401 75,401 13,378 13,378
Restricted cash 9,591 9,591 6,972 6,972
Accounts receivable 63,210 63,210 40,155 40,155
Production contract advances 6,181 6,181 7,162 7,162
Accounts payable and accrued
liabilities 46,492 46,492 44,562 44,562
Long-term debt 164,608 159,247 49,461 49,461


The fair values of cash and cash equivalents, restricted cash, accounts receivables, 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 customers. Therefore, Universal receives the collection of customer account balances directly from the LDCs. Management believes that the risk of the LDCs failing to deliver payment to Universal is minimal.

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 attrition of the customers can be managed to meet these supply obligations.

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.

(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 March 31, 2008 (i) a 1% increase in forward spot prices for electricity would decrease the MTM valuation by approximately 5.3%, while a 1% decrease in forward spot prices for electricity would increase the MTM valuation by approximately 5.3%; and (ii) a 5% increase in forward spot prices for electricity would decrease the MTM valuation by approximately 26.4%, while a 5% decrease in the forward spot prices for electricity would increase the MTM valuation by approximately 26.4%.

TGF has entered into crude oil hedges to mitigate the risk exposure to the volatility of ethanol pricing while the Belle Plaine Facility is under construction. Market changes in the NYMEX price of West Texas Intermediate ("WTI") could cause significant changes in the MTM valuation of these derivatives. For example, assuming that all other variables remained constant at March 31, 2008 (i) a one dollar increase in WTI spot prices would decrease the MTM valuation by approximately 2.6%, while a one dollar decrease in spot prices for WTI would increase the MTM valuation by approximately 2.5% and (ii) a five dollar increase in WTI would decrease the MTM valuation by approximately 13.0%, while a five dollar decrease in the WTI spot prices would increase the MTM valuation by approximately 12.6%.

(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

As at March 31, 2008 the Company has variable rate debt in the amount of $41.4 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 $0.41 million per annum.

10. Outstanding Share Data

As at March 31, 2008 and as at May 14, 2008, there were 36,273,978 and 36,280,228 common shares, respectively, 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 2,538,250 common shares reserved for issuance on exercise of outstanding options and restricted share units.

11. Risks and Uncertainties

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

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

12. Outlook

(a) Universal

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

Universal continues to experience overall steady sales growth showing solid increases in customer aggregation levels over comparable prior periods. Canadian attrition continues to be within our target level of 12% and we expect United States attrition to return to within our target level of 15% in the current quarter. Universal continues to assess growth opportunities by looking at new energy markets such as New York, Illinois and Texas and will favour markets that fit with our existing sales, supply and technology infrastructure and provides collection services.

(b) TGF

TGF is fully staffed and is in the final stages of construction and commissioning of its 150 million litre facility in Belle Plaine, Saskatchewan. The plant is expected to be operational in May 2008.

(c) National Home Services

In April 2008 the Company entered the home services market through its wholly owned subsidiary, National Energy Corporation, operating under the trade name National Home Services. NHS provides Ontario residential customers a long-term water heater rental program offering conventional and power vented tanks in a variety of size. Funding for NHS is initially being provided from the Company's existing cash resources. The NHS product offering is being well received among prospective customers and sales since program launch have exceeded management expectations.

(d) Capital structure review

With TGF commencing ethanol production later this month and UEC generating cash flow in excess of its capital requirements, the Company is exploring ways in which it could enhance shareholder value through the use of alternative capital structures. The Company has retained National Bank Financial as its advisor to assist in this review. There is no assurance that this review will result in any changes to the Company's current business model or capital structure. The Company does not intend to disclose developments with respect to this process until its Board of Directors has received the findings of this review and made a final determination.

13. Additional Information

Additional information relating to the Company is available on SEDAR (www.sedar.com) and on the Company's website at www.universalenergygroup.ca.



Consolidated Balance Sheets
(Thousands of dollars)

March 31 September 30
2008 2007
(Unaudited) (Audited)
$ $
----------------------------------------------------------------------------
ASSETS
Current Assets
Cash 75,401 13,378
Restricted cash Note 8, 12 6,591 3,972
Accounts receivable Note 6 63,210 40,155
Inventory 7,560 581
Gas over delivered - 21,904
Unbilled gas revenues 11,232 -
Current portion of production
contract advances 6,017 5,453
Current portion of future taxes 10,548 15,508
----------------------------------------------------------------------------
180,559 100,951
Restricted cash Note 8 3,000 3,000
Property, plant and equipment Note 7 142,701 116,858
Production contract advances Note 8 164 1,709
Future taxes 22,643 29,372
Intangible assets 2,809 1,030
Goodwill Note 3 70,460 70,460
----------------------------------------------------------------------------
422,336 323,380
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
Current Liabilities
Accounts payable and accrued
liabilities 46,492 44,562
Gas under delivered 9,251 -
Deferred gas revenues - 26,850
Current portion of unrealized
loss on commodity contracts Note 14 26,445 39,375
Current portion of long-term debt Note 8 9,359 7,860
----------------------------------------------------------------------------
91,547 118,647
Unrealized loss on commodity
contracts Note 14 59,794 70,326
Long-term debt Note 8 149,888 41,601
----------------------------------------------------------------------------
301,229 230,574
----------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital Note 9 247,813 247,794
Contributed surplus Note 9 4,581 2,568
Equity component of convertible
debenture Note 8 9,507 -
Deficit (141,101) (157,767)
Accumulated other comprehensive
income 307 211
----------------------------------------------------------------------------
121,107 92,806
----------------------------------------------------------------------------
Commitments Note 13
422,336 323,380
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.

Approved on behalf of the Board:
Gary J. Drummond, Director Tim J. LaFrance, Director


Consolidated Statements of Deficit
For the six months ended March 31
(Unaudited - thousands of dollars)
2008 2007
$ $
----------------------------------------------------------------------------
Deficit, beginning of period (157,767) (60,097)
Deemed distribution on
acquisition of Universal Note 3 - (73,425)
Net income for the period 16,666 17,779
----------------------------------------------------------------------------

DEFICIT, END OF PERIOD (141,101) (115,743)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


Consolidated Statements of Comprehensive Income
and Accumulated Other Comprehensive Income/(Loss)

For the six months ended March 31
(Unaudited - thousands of dollars)

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

Net income for the period 16,666 17,779
----------------------------------------------------------------------------
Other comprehensive income:
Unrealized gains and losses on
translating financial
statements of self-sustaining
foreign operations 96 (56)
----------------------------------------------------------------------------

Other comprehensive income/(loss) 96 (56)
----------------------------------------------------------------------------

Comprehensive income 16,762 17,723
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Accumulated other comprehensive
income/(loss), beginning of period 211 (1)
Other comprehensive income/(loss) 96 (56)
----------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS),
END OF PERIOD 307 (57)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


Consolidated Statements of Operations
(Unaudited - thousands of dollars except per share amounts)

For the three For the six
months ended months ended
March 31 March 31
2008 2007 2008 2007
$ $ $ $
----------------------------------------------------------------------------

REVENUE
Gas 101,930 46,227 141,967 65,729
Electricity 46,638 32,858 86,703 59,927
----------------------------------------------------------------------------
148,568 79,085 228,670 125,656
----------------------------------------------------------------------------

COST OF SALES
Gas 85,394 37,961 118,411 52,770
Electricity 26,707 19,077 48,950 32,334
----------------------------------------------------------------------------
112,101 57,038 167,361 85,104
----------------------------------------------------------------------------

GROSS MARGIN 36,467 22,047 61,309 40,552
----------------------------------------------------------------------------

EXPENSES
Customer acquisition costs 4,804 3,027 13,122 6,481
General and administrative 8,310 3,648 14,589 6,707
Financing charges 1,831 21 3,691 51
Stock-based compensation Note 10 1,009 796 2,018 796
Amortization of property,
plant and equipment 186 106 329 198
----------------------------------------------------------------------------
16,140 7,598 33,749 14,233
----------------------------------------------------------------------------

Income before other
income/(expense) 20,327 14,449 27,560 26,319

OTHER INCOME/(EXPENSE)
Investment income, net of
production financing 1,246 (127) 2,621 (138)
Realized loss on commodity
contracts Note 14 (12,814) (7,620) (23,354) (16,746)
Unrealized gain on commodity
contracts Note 14 22,632 10,913 23,462 17,961
----------------------------------------------------------------------------
11,064 3,166 2,729 1,077
----------------------------------------------------------------------------

Income before income tax 31,391 17,615 30,289 27,396
Income tax 13,221 6,632 13,623 9,617
----------------------------------------------------------------------------

NET INCOME FOR THE PERIOD 18,170 10,983 16,666 17,779
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Basic earnings per share Note 11 0.50 0.38 0.46 0.81
Diluted earnings per share Note 11 0.49 0.38 0.45 0.81

See accompanying notes to consolidated financial statements.


Consolidated Statements of Cash Flows
(Unaudited - thousands of dollars)
For the three For the six
months ended months ended
March 31 March 31
2008 2007 2008 2007
$ $ $ $
----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income for the period 18,170 10,983 16,666 17,779

Items not affecting cash:
Amortization of property,
plant and equipment 186 106 329 198
Stock-based compensation 1,009 796 2,018 796
Financing charges, non-cash portion 350 - 700 -
Unrealized gain on commodity
contracts (22,632) (10,913) (23,462) (17,961)
Future taxes 11,284 6,632 11,689 9,617
----------------------------------------------------------------------------
8,367 7,604 7,940 10,429

Changes in non-cash working
capital items:
Accounts receivable (9,985) 10,305 (22,072) 3,249
Inventory (3,656) - (6,979) -
Gas under delivered, net 37,644 15,909 31,155 10,875
Unbilled gas revenues, net (45,528) (20,079) (38,082) (14,770)
Accounts payable and accrued
liabilities (2,693) 8,122 1,930 10,478
----------------------------------------------------------------------------
Cash provided by/(used in)
operating activities (15,851) 21,861 (26,108) 20,261
----------------------------------------------------------------------------

CASH FLOWS USED IN INVESTING
ACTIVITIES
Acquisition of TGF, net Note 3 - (32,222) - (32,222)
Acquisition of Universal Note 3 - (73,425) - (73,425)
Acquisition of gas contracts (1,779) - (1,779) -
Restricted cash Note 8, 12 (1,662) (287) (2,619) (1,620)
Property, plant and equipment (6,681) (15,095) (26,172) (15,265)
----------------------------------------------------------------------------
Cash used in investing
activities (10,122) (121,029) (30,570) (122,532)
----------------------------------------------------------------------------

CASH FLOWS FROM FINANCING
ACTIVITIES
Issuance of common shares 14 - 14 -
Proceeds from initial public
offering, net of issue
costs Note 3 - 132,156 - 132,156
Issuance of convertible
debenture, net of issue
costs Note 8 52 - 86,695 -
Advances under financing
facilities, net Note 8 12,033 - 31,896 -
----------------------------------------------------------------------------
Cash provided by financing
activities 12,099 132,156 118,605 132,156
----------------------------------------------------------------------------

Unrealized gain/(loss) on
foreign exchange translation 86 (52) 96 (86)
----------------------------------------------------------------------------

NET INCREASE/(DECREASE) IN
CASH (13,788) 32,936 62,023 29,799
CASH/(OVERDRAFT), BEGINNING
OF PERIOD 89,189 (290) 13,378 2,847
----------------------------------------------------------------------------

CASH, END OF PERIOD 75,401 32,646 75,401 32,646
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental information:
Property, plant and equipment
in accounts payable 16,671 19,223 16,671 19,223
Interest paid 1,807 21 3,337 51
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


UNIVERSAL ENERGY GROUP LTD.
Notes to Interim Consolidated Financial Statements
For the three and six months ended March 31, 2008 and 2007
(Unaudited - thousands of dollars except as indicated and per share amounts)


1. Interim financial statements

The unaudited interim consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles applicable to interim consolidated financial statements. These interim financial statements do not include all the note disclosures required for annual financial statements and therefore should be read in conjunction with Universal Energy Group Ltd.'s audited consolidated financial statements for the year ended September 30, 2007.

2. 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 and through its subsidiary Terra Grain Fuels Inc. ("TGF") operates an ethanol business. Universal's wholly owned subsidiary, Universal Gas & Electric Corporation ("UGE"), operates a natural gas marketing business in the United States.

3. 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.

4. 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 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 January 2006, the CICA Accounting Standards Board ("AcSB") 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 International Financial Reporting Standards ("IFRS") effective for fiscal periods beginning on or after January 1, 2011. The Company continues to monitor and assess the impact of the convergence of Canadian GAAP and IFRS.

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). As 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 January 1, 2009. The Company is currently evaluating the effect of the adoption of this new section on the consolidated financial statements.

(b) Principles of consolidation

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

(c) Use of estimates

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

(d) Cash

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

(e) Inventory

Inventory is valued at the lower of cost and net realizable value with cost being determined on a weighted average 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


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

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

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

Gas contracts represent the original fair value of customer natural gas contracts acquired by Universal. These contracts are amortized over their average estimated remaining life.

(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

Realized and 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 and the gas and electricity customer 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 period. 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.

(n) Customer acquisition costs

Universal incurs commissions and other direct selling expenses to acquire customers. Commissions are charged to income in the period 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.

5. Seasonality of operations

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



6. Accounts receivable

March 31 September 30
2008 2007
$ $
----------------------------------------------------------------------------

Trade receivables 46,475 25,813
Utility holdbacks 10,069 5,512
Security deposits 3,993 3,243
Other accounts receivable 2,673 5,587
----------------------------------------------------------------------------

63,210 40,155
----------------------------------------------------------------------------
----------------------------------------------------------------------------


7. Property, plant and equipment

Accumulated Net
Cost amortization book value
March 31, 2008 $ $ $
----------------------------------------------------------------------------

Computer hardware 1,009 385 624
Computer software 738 103 635
Furniture and fixtures 1,171 352 819
Office equipment 496 135 361
Leasehold improvements 537 159 378
Land 299 - 299
----------------------------------------------------------------------------
4,250 1,134 3,116

Belle Plaine Facility under
development Note 13 139,585 - 139,585
----------------------------------------------------------------------------

143,835 1,134 142,701
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Accumulated Net
Cost amortization book value
September 30, 2007 $ $ $
----------------------------------------------------------------------------

Computer hardware 922 281 641
Computer software 278 59 219
Furniture and fixtures 1,145 262 883
Office equipment 455 97 358
Leasehold improvements 524 106 418
Land 299 - 299
----------------------------------------------------------------------------
3,623 805 2,818

Belle Plaine Facility under
development Note 13 114,040 - 114,040
----------------------------------------------------------------------------

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


8. Financing facilities

March 31 September 30
2008 2007
$ $
----------------------------------------------------------------------------

Credit facility (a)(i) 35,412 1,800
Debentures (a)(ii) 40,000 40,000
Wheat production financing (a)(iii) 5,946 7,661
Commodity trade financing (b) - -
Convertible debentures (c) 77,889 -
----------------------------------------------------------------------------
159,247 49,461

Less: current portion (9,359) (7,860)
----------------------------------------------------------------------------

Long-term debt 149,888 41,601
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

(i) Credit facility

A credit facility of up to $50,000 with a syndicate of Canadian lenders. The term of the facility is the construction period (up to 16 months) plus a term of up to 5 years starting the earlier of (i) the date on which a certificate of substantial performance is issued by TGF and the Contractor or (ii) six months from last drawdown (the "Term Conversion Date"). Interest only will be charged on the loan during the construction period until the Term Conversion Date. Blended monthly principal and interest payments will be made thereafter sufficient to amortize the loan over 10 years. The interest rate is prime plus 2% during the construction period and prime plus 1% after construction. TGF has the right to convert to a fixed rate of interest. Security for the credit facility includes a first priority security interest on all assets and undertakings of TGF plus a general security interest on all other current and after acquired assets of TGF. The credit facility includes certain financial covenants the more significant of which relate to working capital, debt to equity ratio, debt service coverage and minimum shareholder's equity. As at March 31, 2008 the amount owing under this facility amounted to $35,412. Interest expense for the three and six months ended March 31, 2008 in the amount of $620 and $922 has been capitalized as part of property, plant and equipment under development. The facility also provides for $5,000 of cash to be held for cost overruns related to construction of the Belle Plaine Facility and debt servicing shortfalls. Upon issuance of a certificate of substantial performance by TGF and the Contractor related to the Belle Plaine Facility, the restriction will be reduced to $3,000 for debt servicing requirements.

(ii) Debentures

A debenture purchase agreement with a number of private parties for the issuance of up to $40,000 aggregate principal amount of debentures. The interest rate is 10.5% per annum, compounded annually and payable quarterly. Interest is to be paid quarterly over the first year and quarterly principal and interest payments made beginning on completion of the Belle Plaine Facility (or August 25, 2008 if earlier) in the amount of $24.99 per $1,000 of principal advanced with a lump sum payment of all outstanding amounts payable sixty months after the date of the initial advance. Security for the credit facility includes a security interest in all of TGF's present and after acquired property, second in priority to the lenders in Note 8(a)(i). The credit facility includes certain financial covenants the more significant of which relate to working capital, debt service coverage and minimum shareholder's equity. As at March 31, 2008 the amount owing under this facility amounted to $40,000. Interest expense for the three and six months ended March 31, 2008 in the amount of $1,044 and $2,103 has been capitalized as part of property, plant and equipment under development.

(iii) Wheat production financing

A credit facility under which wheat growers receive a cash advance under the production contracts from a third party lender (see Note 13(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 has guaranteed the payment of any outstanding cash advances plus interest to the lender. As at March 31, 2008, $5,946 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 three and six months ended March 31, 2008 interest expense under this facility amounted to $145 and $313.

(b) Sempra Energy Trading Corp. ("Sempra"), a related party, provides commodity trade financing to Universal. The commodity financing includes a facility of $5,000 for amounts deemed due for payment, which bears interest at LIBOR plus 2%. Interest during the three and six months ended March 31, 2008 amounted to $Nil (2007 - $11) and $Nil (2007 - $37). The amount owing under this facility as at March 31, 2008 is $Nil.

(c) On October 2, 2007, the Company issued convertible unsecured subordinate 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 commencing on March 31, 2008. 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 three and six months ended March 31, 2008 interest expense amounted to $1,335 (2007 - $Nil) and $2,678 (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 debenture 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 debenture 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 debenture. 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 March 31, 2008 700
----------------------------------------------------------------------------

Balance as at March 31, 2008 77,889
----------------------------------------------------------------------------
----------------------------------------------------------------------------


9. Share capital

(a) Authorized

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



(b) Issued

Special Common
share shares $
----------------------------------------------------------------------------

Share capital at November 1, 2006 1 -
Acquisition of TGF Note 3 7,889,545 86,785
Acquisition of Universal Note 3 15,314,999 25,001
Initial public offering, less issue
costs Note 3 13,068,183 136,008
Special share issued 1 -
----------------------------------------------------------------------------
Share capital at September 30, 2007 1 36,272,728 247,794
Stock options exercised 1,250 19
----------------------------------------------------------------------------

Share capital at March 31, 2008 1 36,273,978 247,813
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(c) Contributed surplus

During the three and six months ended March 31, 2008, a total of $1,009 (2007 - $796) and $2,018 (2007 - $796) was added to contributed surplus. For the three and six months ended March 31, 2008 $548 (2007 - $377) and $1,097 (2007 - $377) relates to the amortization of stock option compensation expense and $461 (2007 - $419) and $921 (2007 - $419) relates to the RSU compensation expense.

(d) Additional capital disclosure

The Company continues to optimize its capital structure with a view to ensuring a strong financial position to support its growth strategies. The capital structure of the Company is as follows:



March 31 September 30
2008 2007 Change
$ $ %
----------------------------------------------------------------------------

Total shareholders' equity 120,800 92,595 30%
----------------------------------------------------------------------------
Total shareholders' equity as a % of total
capital 43% 65%

Short-term debt 9,359 7,860
Long-term debt 149,888 41,601
----------------------------------------------------------------------------
Total debt 159,247 49,461 222%
----------------------------------------------------------------------------

Total debt as a % of total capital 57% 35%

----------------------------------------------------------------------------

Total capital 280,047 142,056 97%
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Equity is defined as share capital, contributed surplus, equity component of convertible debenture and deficit. During the six months ended March 31, 2008, total equity increased by $28,205 to $120,800. The increase resulted from the equity component of the convertible debenture in the amount of $9,507, amortization of stock option and RSU compensation expense of $2,018, exercise of stock options in the amount of $14 and a net income for the period of $16,666.

Total debt increased during the six months ended March 31, 2008 by $109,786 to $159,247. The increase resulted from the convertible debenture issue, which had a period end carrying value of $77,889, draw downs on the TGF credit facility in the amount of $33,612 and a repayment of a wheat production facility in the amount of $1,715.

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 with such share issuances to occur from treasury.

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 March 31, 2008 is shown below:



Weighted
average
Weighted grant
average date
Stock Range of exercise fair
options exercise prices price value
outstanding $ $ $
----------------------------------------------------------------------------
(dollars) (dollars) (dollars)
Balance, beginning of
period 1,964,500 11.00 to 18.60 12.12
Granted 122,000 14.85 to 18.05 16.00 6.44
Cancelled (57,000) 11.00 to 18.60 15.85
Exercised (1,250) 11.00 11.00
----------------------------------------------------------------------------

Balance, end of period 2,028,250 11.00 to 18.60 12.25
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at March 31, 2008, the range of exercise prices for stock options outstanding and exercisable (vested) are as follows:



Stock options
Stock options outstanding exercisable
----------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Range of Stock remaining exercise exercise
exercise prices options contractual price Number price
$ outstanding life $ exercisable $
----------------------------------------------------------------------------
(dollars) (dollars)
11.00 1,603,250 3.84 years 11.00 399,875 11.00
14.28 to 18.60 156,000 3.84 years 16.71 39,000 16.71
18.05 147,000 4.70 years 18.05 - n/a
14.85 to 18.05 122,000 4.88 years 16.00 - n/a
----------------------------------------------------------------------------

Balance, end of
period 2,028,250 3.96 years 12.25 438,875 11.51
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 3.40 % to 4.55%
Expected dividend yield 0%
Expected forfeitures per year 0% to 1%
Expected share price volatility 40%
Expected option life 4.69 to 5.00 years
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Stock option compensation expense is recognized during the period in which entitlement to the compensation vests. During the three and six months ended March 31, 2008, compensation expense of $548 (2007 - $377) and $1,097 (2007 - $377) 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 performance and/or market price of the common shares, as determined by the Board. The RSU Plan provides that the maximum number of common shares reserved for issuance from time to time pursuant to outstanding RSUs shall not exceed a number of common shares equal to 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. As at March 31, 2008 there were 510,000 RSUs awarded and outstanding. During the three and six months ended March 31, 2008, compensation expense of $461 (2007 - $419) and $921 (2007 - $419) was recognized as a result of RSUs granted under the plan.



(c) Stock options and RSUs available for grant

March 31
2008
----------------------------------------------------------------------------
Stock options and RSUs available for grant, beginning of period 39,591
Add: increase in stock options and RSUs from plan amendment 1,089,556
Less: stock options granted during the period (122,000)
Add: stock options and RSUs cancelled/forfeited during the
period 82,000
----------------------------------------------------------------------------
Balance, end of period 1,089,147
----------------------------------------------------------------------------
----------------------------------------------------------------------------

11. Earnings per share

Three months ended Six months ended
March 31 March 31
2008 2007 2008 2007
----------------------------------------------------------------------------

Net income for the period $18,170 $10,983 $16,666 $17,779
----------------------------------------------------------------------------

Weighted average common
shares outstanding - Basic 36,272,811 28,821,090 36,272,769 21,993,835
Dilutive effect of stock
options 455,000 54,507 406,667 22,718
Dilutive effect of RSUs 170,000 109,556 170,000 54,176
----------------------------------------------------------------------------

Weighted average common
shares outstanding
- Diluted 36,897,811 28,985,153 36,849,436 22,070,729
----------------------------------------------------------------------------

Basic earnings per share $0.50 $0.38 $0.46 $0.81
Diluted earnings per share $0.49 $0.38 $0.45 $0.81
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The effect of the conversion of 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.

12. Related party transactions and balances

During the three and six months ended March 31, 2008, the Company entered into various transactions with related parties as follows:

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

(i) Gas purchase agreements

Universal entered into the natural gas purchase and sale agreement with Sempra on July 14, 2005 (amended and restated February 2, 2007). On February 2, 2007 UGE and Sempra also entered into an agreement pursuant to which Sempra 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 three and six months ended March 31, 2008, Universal made natural gas purchases under the agreements totaling $48,264 (2007 - $21,815) and $87,896 (2007 - $41,542). Included in accounts payable at March 31, 2008 is an amount owing of $16,565.

(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 three and six months ended March 31, 2008, Universal incurred net settlement payments under the electricity swap agreements totaling $10,971 (2007 - $7,620) and $21,511 (2007 - $16,782). Included in accounts payable as at March 31, 2008 is an amount owing of $2,475.

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 March 31, 2008 the balance in the blocked account amounted to $4,591.

(b) During the three and six months ended March 31, 2008, Universal incurred expenses amounting to $308 (2007 - $118) and $476 (2007 - $175) for direct mail marketing services to Market Connections Inc. in which certain officers and directors hold an equity interest. Included in accounts payable as at March 31, 2008 is an amount owing of $19.

(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 while the Belle Plaine Facility is under construction. The credit support facility will be phased out shortly after the plant is commissioned and operational. Included in accounts payable as at March 31, 2008 is an amount owing of $219.

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

13. Commitments

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



Amount
Year $
----------------------------------------------------------------------------

2008 642
2009 1,036
2010 883
2011 748
2012 52
----------------------------------------------------------------------------

3,361
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(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:



Amount
Year $
----------------------------------------------------------------------------

2008 98,067
2009 185,754
2010 172,412
2011 145,131
2012 101,817
Thereafter 10,790
----------------------------------------------------------------------------

713,971
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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

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

(d) TGF has entered into an EPC contract with Ellis Don/VCM in Joint Venture for a sum of $143,881 to perform and complete all design, engineering, procurement, construction and commissioning work in connection with the development of the Belle Plaine Facility. As at March 31, 2008 total expenditures incurred under the EPC contract, excluding recovery of investment tax credits, amounted to $139,985.

(e) TGF has entered into a license agreement with Delta-T Corporation ("Delta-T") for the right to use in perpetuity Delta-T's technology for the purpose of construction, operation, enhancement and optimization of the Belle Plaine Facility for a fee of US $2,923 of which US $1,754 has been paid as at March 31, 2008.

(f) TGF entered into a number of contracts with various growers (the "production contracts") to purchase wheat at fixed prices. The production contracts are for one or two year periods and provide the grower with the option to extend the production contract for a further one year term upon written notice. Total commitments under these production contracts to March 31, 2008 are as follows:



Amount
Year $
----------------------------------------------------------------------------

2008 18,308
2009 28,417
2010 46
----------------------------------------------------------------------------

46,771
----------------------------------------------------------------------------
----------------------------------------------------------------------------


14. 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 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 March 31, 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 6,644,400 MWh
Maturity dates April 1, 2008 to February 28, 2013
Fixed price ($/MWh) $57.42 to $80.50
Fair value $70,691 unfavourable
Remaining notional value $473,559
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(ii) TGF has entered into hedges and swaps to mitigate risk exposure to changes in ethanol pricing while the Belle Plaine Facility is under construction. At March 31, 2008, TGF had hedges and swaps to which it had committed with the following terms:



----------------------------------------------------------------------------
Notional volumes - Owned puts 500 to 1,000 bbl/d
Total remaining notional volume 641,000 bbl
Maturity dates April 1, 2008 to December 31, 2009
Option Strike Price (US$/bbl) $55.00 to $65.00
Fair value $327 favourable
Remaining notional value $39,538
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Notional volumes - Sold calls 500 to 1,000 bbl/d
Total remaining notional volume 641,000 bbl
Maturity dates April 1, 2008 to December 31, 2009
Option Strike Price (US$/bbl) $71.00 to $74.00
Fair value $17,327 unfavourable
Remaining notional value $46,765
----------------------------------------------------------------------------
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Notional volumes - Swaps 750 bbl/d
Total remaining notional volume 236,500 bbl
Maturity dates April 1, 2008 to December 31, 2008
Fixed price per bbl (US$/bbl) $71.00 to $93.70
Fair value $1,853 favourable
Remaining notional value $18,717
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(iii) The realized loss on Universal's electricity swap contracts and TGF's hedges and swaps during the three and six months ended March 31, 2008 of $12,814 (2007 - $7,620) and $23,354 (2007 - $16,746) represents the net settlement payments recognized in income on that portion of commodity contracts that matured during the period.

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



March 31 September 30
2008 2007
$ $
----------------------------------------------------------------------------
Current portion of unrealized loss on commodity
contracts 26,445 39,375
Non-current portion of unrealized loss on
commodity contracts 59,794 70,326
----------------------------------------------------------------------------

Total unrealized loss on commodity contracts 86,239 109,701
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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.



March 31, 2008 September 30, 2007
Fair Carrying Fair Carrying
value amount value amount
Asset/Liability $ $ $ $
---------------- ---------------------------------------------
---------------------------------------------

Cash and cash equivalents 75,401 75,401 13,378 13,378
Restricted cash 9,591 9,591 6,972 6,972
Accounts receivable 63,210 63,210 40,155 40,155
Production contract advances 6,181 6,181 7,162 7,162
Accounts payable and accrued
liabilities 46,492 46,492 44,562 44,562
Long-term debt 164,608 159,247 49,461 49,461


The fair values of cash and cash equivalents, restricted cash, accounts receivables, 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 customers. Therefore, Universal receives the collection of customer account balances directly from the LDCs. Management believes that the risk of the LDCs failing to deliver payment to Universal is minimal.

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 attrition of the customers can be managed to meet these supply obligations.

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.

(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 March 31, 2008 (i) a 1% increase in forward spot prices for electricity would decrease the MTM valuation by approximately 5.3%, while a 1% decrease in forward spot prices for electricity would increase the MTM valuation by approximately 5.3%; and (ii) a 5% increase in forward spot prices for electricity would decrease the MTM valuation by approximately 26.4%, while a 5% decrease in the forward spot prices for electricity would increase the MTM valuation by approximately 26.4%.

TGF has entered into crude oil hedges to mitigate the risk exposure to the volatility of ethanol pricing while the Belle Plaine Facility is under construction. Market changes in the NYMEX price of West Texas Intermediate ("WTI") could cause significant changes in the MTM valuation of these derivatives. For example, assuming that all other variables remained constant at March 31, 2008 (i) a one dollar increase in WTI spot prices would decrease the MTM valuation by approximately 2.6%, while a one dollar decrease in spot prices for WTI would increase the MTM valuation by approximately 2.5% and (ii) a five dollar increase in WTI would decrease the MTM valuation by approximately 13.0%, while a five dollar decrease in the WTI spot prices would increase the MTM valuation by approximately 12.6%.

(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

As at March 31, 2008 the Company has variable rate debt in the amount of $41,358 and the effect of a 1% change in the interest rate charged on its variable debt will impact interest expense in the amount of $414 per annum.

15. Reportable business segments

The Company has two reportable business segments, gas and electricity marketing and ethanol. 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 three and six months ended March 31, 2008 and 2007.



Gas and
Electricity
Marketing Ethanol Corporate Total
Three months ended March 31, 2008 $ $ $ $
----------------------------------------------------------------------------

Revenue 148,568 - - 148,568
Cost of sales 112,101 - - 112,101
----------------------------------------------------------------------------

Gross margin 36,467 - - 36,467
----------------------------------------------------------------------------

Income/(loss) before under-noted
items 14,812 (3,791) (1,491) 9,530

Financing charges - (145) (1,686) (1,831)
Amortization of property, plant
and equipment (143) (43) - (186)
Investment income, net of
production financing 122 392 732 1,246
Unrealized gain/(loss) on
commodity contracts 25,658 (3,026) - 22,632
Income tax (expense)/recovery (13,858) 1,577 (940) (13,221)
----------------------------------------------------------------------------

Net income/(loss) 26,591 (5,036) (3,385) 18,170
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Total assets 102,135 176,791 143,410 422,336
Capital expenditures 488 6,193 - 6,681
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Gas and
Electricity
Marketing Ethanol Corporate Total
Three months ended March 31, 2007 $ $ $ $
----------------------------------------------------------------------------

Revenue 79,085 - - 79,085
Cost of sales 57,038 - - 57,038
----------------------------------------------------------------------------

Gross margin 22,047 - - 22,047
----------------------------------------------------------------------------

Income/(loss) before under-noted
items 8,422 (583) (883) 6,956

Financing charges (21) - - (21)
Amortization of property, plant
and equipment (102) (4) - (106)
Investment income, net of
production financing 8 (229) 94 (127)
Unrealized gain/(loss) on
commodity contracts 12,210 (1,297) - 10,913
Income tax (expense)/recovery (7,317) 693 (8) (6,632)
----------------------------------------------------------------------------

Net income/(loss) 13,200 (1,420) (797) 10,983
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Total assets 58,527 87,500 82,676 228,702
Capital expenditures 218 14,807 - 15,025
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Gas and
Electricity
Marketing Ethanol Corporate Total
Six months ended March 31, 2008 $ $ $ $
----------------------------------------------------------------------------

Revenue 228,670 - - 228,670
Cost of sales 167,361 - - 167,361
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Gross margin 61,309 - - 61,309
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Income/(loss) before under-noted
items 15,423 (4,487) (2,710) 8,226

Financing charges - (313) (3,378) (3,691)
Amortization of property, plant
and equipment (268) (61) - (329)
Investment income, net of
production financing 214 777 1,630 2,621
Unrealized gain/(loss) on
commodity contracts 35,282 (11,820) - 23,462
Income tax (expense)/recovery (18,176) 4,562 (9) (13,623)
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Net income/(loss) 32,475 (11,342) (4,467) 16,666
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----------------------------------------------------------------------------
----------------------------------------------------------------------------

Total assets 102,135 176,791 143,410 422,336
Capital expenditures 598 25,574 - 26,172
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----------------------------------------------------------------------------


Gas and
Electricity
Marketing Ethanol Corporate Total
Six months ended March 31, 2007 $ $ $ $
----------------------------------------------------------------------------

Revenue 125,656 - - 125,656
Cost of sales 85,104 - - 85,104
----------------------------------------------------------------------------

Gross margin 40,552 - - 40,552
----------------------------------------------------------------------------

Income/(loss) before under-noted
items 11,288 (583) (883) 9,822

Financing charges (51) - - (51)
Amortization of property, plant
and equipment (194) (4) - (198)
Investment income, net of
production financing (3) (229) 94 (138)
Unrealized (gain)/loss on
commodity contracts 19,258 (1,297) - 17,961
Income tax/(recovery) (10,302) 693 (8) (9,617)
----------------------------------------------------------------------------

Net income/(loss) 19,996 (1,420) (797) 17,779
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Total assets 58,527 87,500 82,676 228,702
Capital expenditures 388 14,807 - 15,195
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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



Three months ended Six months ended
March 31 March 31 March 31 March 31
2008 2007 2008 2007
Revenue $ $ $ $
----------------------------------------------------------------------------
Canada 77,782 56,257 132,919 93,066
United States 70,786 22,828 95,751 32,590
----------------------------------------------------------------------------

148,568 79,085 228,670 125,656
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----------------------------------------------------------------------------


March 31 March 31
2008 2007
Property, plant and equipment, intangible assets
and goodwill $ $
----------------------------------------------------------------------------
Canada 215,970 188,348
United States - -
----------------------------------------------------------------------------

215,970 188,348
----------------------------------------------------------------------------
----------------------------------------------------------------------------


16. Comparative figures

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

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