Detailed Version -

Detailed Version -

ANNUAL report 2006

Table of Contents

1. 2006 Highlights & Five-Year Summary 1

2. Letter from the Chairman of the Board & President & Chief Executive Officer 2

3. Management’s Discussion & Analysis 6

4. Financial Statements 23

5. UFA Corporate Profile 42

6. UFA Board of Directors 45

7. UFA Senior Management 46

8. Contact Information 47



2006 Highlights and Five Year Summary

(All amounts in thousands of dollars) *2007 2006 2005 2004 2003 2002

Sales 1,613,118 1,434,807 1,093,397 941,166 839,606

Earnings before patronage allocation and income taxes 94,716 84,501 25,793 28,639 26,514

Patronage allocation 35,000 25,400 15,263 15,135 14,717

Distributions to Members

Cash portion of patronage allocation 8,166 5,827 3,430 3,372 3,267 5,927

Repayment of patronage loans - - - - - 5,304

Issuance of Class A investment shares 14,206 11,815 10,435 25,721 7,094 -

Dividends on investment shares 2,900 2,417 1,422 1,014 913 -

Retirement of equity 3,250 3,244 3,197 3,933 2,498 1,700

Total Distribution to Members 28,522 23,303 18,484 34,040 13,772 12,931

* 2007 Distribution to Members are estimates of what will occur in 2007 under the Member Equity Plan.




(in millions of dollars)



(in millions of dollars)
















2002 2003 2004 2005 2006














26.5 28.6 25.8

2002 2003 2004 2005 2006



(in millions of dollars)



(in millions of dollars)













193 209 222





2002 2003 2004 2005 2006










14.7 15.1


12.9 13.8





2002 2003 2004 2005 2006


A Letter from Clarence Olthuis and Dallas Thorsteinson

Chairman of the Board and President & Chief Executive Officer


From Farm & Ranch Supply to Petroleum, Information Technology to Strategic Marketing, 2006

has been a year of successes for UFA. Our co-operative has once again produced record

revenues and earnings. Our past achievements are the cornerstone of present and future

performance. UFA has made great progress in becoming more competitive and we remain

dedicated to growing to meet the needs of the customers and owners of our co-operative.

This year we managed to deliver not just record financial success, but success in a host of other

categories as well. We’ve continued to reach out to employees and find new ways of meeting

our customers’ needs. We’ve also made great progress in representing our owners’ interests by

improving our democratic structure. This balanced approach to success has prepared UFA for

the exceptional growth we have planned for the future.

Since UFA’s founding in 1909, our co-operative has consistently grown. As the needs of farmers

and ranchers have evolved, our farm and ranch product lines have expanded. When the

opportunity to supply our owners with fuel came along, we rose to the occasion. In more recent

years, as lifestyle farmers and commercial industry have embraced our products and services,

we’ve grown to serve their needs.

UFA is now on the verge of another significant period of expansion. Management, working

closely with the board of directors, spent considerable time in 2006 assessing the means of

future growth.

Today and tomorrow, we are growing our co-operative for all the right reasons.


The competitive landscape is much different than it was five or 10 years ago. New and

formidable competitors are entering our markets. We must make the necessary adjustments to

ensure our co-operative’s sustainability.


Talented, engaged and well-trained employees are central to UFA’s success. Our ability to

compete in an increasingly competitive business environment is, in part, dependent on the

quality, preparation and satisfaction of our employees. An employee satisfaction survey in May

showed us that our employees needed greater clarity on UFA’s strategy. In order to address the

issue we instituted a series of management forums. After the first two were held in October

2006 and January 2007 the number of employees who understood how their jobs fit in with

UFA’s strategy jumped by 29 per cent.

In the past year we have remained committed to improving customer satisfaction. We are

working hard to ensure that customer demands are met and customer responsiveness is

expanded. Clearly, we are on the right track. Our new stores in Grande Prairie and Stettler

opened with incredible sales and our Petroleum division has increased its sales volumes by 50

per cent in the last five years.

With such strong results it is tempting to rest on our relationship with our customers. If we are to

remain relevant to them, we must know what they want and deliver it consistently and at a

competitive price. Our Strategic Marketing group is employing sophisticated tools to connect

with our owners and customers. They are working with all UFA’s business groups to answer

identified needs with action.

As a co-operative we have a responsibility to add value for our owners. We must ensure that

money is wisely invested and delivers an appropriate return. This is not only true on the balance

sheet, but in the communities where UFA invests.

UFA’s long-term commitment to communities was strengthened this year by the development of

a new community investment strategy. Its goal is to make sure that each dollar UFA invests

does the most it can to strengthen rural communities. Our customer satisfaction monitor showed

that customers want us to invest in two key areas: education and rural living. Our new

community investment strategy – living and learning in the country – is the result of that


Ultimately, enterprise value is best delivered by smart strategy. Our corporate strategic

initiatives manage our growth so that it works for us.

The Information Technology initiatives ensure that our systems are strong enough to serve our

core business reliably, while also allowing us enough flexibility to grow. Our new real estate

strategy has us looking to the future and planning for growth, which will in turn reward us with

greater earnings. Real estate values are skyrocketing and if we don’t plan for the future, we

aren’t fulfilling our responsibilities to invest our owners’ money wisely.

UFA’s record earnings in 2006 were built on attention to owner and customer demands,

forward-looking strategy, and dedicated employees and Petroleum agents. Revenues were

more than $1.6 billion and net earnings before tax and patronage reached $95 million. The

strong financial showing in 2006 was driven by unprecedented results in both Farm and Ranch

Supply and Petroleum, but it is truly the result of the hard work of employees across UFA and

agents across our network. For that we thank them.



Although we are in a good financial position today, we must use our strengths to prepare for

tomorrow. We need to grow our capabilities to deliver greater value to owners and customers.

We must grow new businesses that meet the demands of emerging markets and changing

needs, though we must not do so at the expense of our core owner.

Our expansion into petroleum in 1957 was a significant departure from our core business at the

time. However, we saw that our owners and customers needed a steady supply of fuel, so we

stepped up and delivered it. Making that move into fuel sales didn’t hurt our other business; it

was enhanced. We were able to offer more to our customers and give them additional reasons

to do business with UFA.

As we’ve mentioned, the competitive environment we find ourselves in today is different from

what it was a few years ago. We’re seeing new competitors enter markets in which we were

once the only player. We’re seeing our customers searching for different products, services and

solutions. We’re seeing new opportunities everywhere. And we’re responding effectively to

these trends.

In order to solidify our direction for the future, the board of directors and senior management

have approved a new vision, mission and values for UFA. They define what UFA is and what it

will be in the future.

Our vision commits us to being a dynamic market-driven organization that is recognized as the

leading provider of quality products, services and solutions that serve rural communities. It

preserves UFA’s position as a central player in rural economies, while improving our ability to

serve owners and customers.

Our mission focuses our energy on creating value for owners and customers through strong

financial performance, relevance to agriculture and connections to rural communities. Our

commitment to deliver value to owners is at the core of our co-operative’s purpose. This will

ensure that we stay true to who we are as we grow into the future.

Our values provide UFA with goals to strive for: integrity, collaboration, respect, progressive

thinking, agility, performance and accountability. They describe how we want to behave as an


Taken together, the vision, mission and values give us a sense of what we want to accomplish

at UFA and how we aim to do so. Our vision, mission and values are steeped in the history of

the co-operative, while they enable us to evolve and secure a bright future.

Our new vision, mission and values provide us with a context for action. We have developed a

more appropriate strategy to meet the challenges of a changing marketplace. From there we

identified four platforms for growth: petroleum network expansion; construction; retail farm; and

progressive farm. Our priorities will be set according to whether or not they align with our

strategy and coincide with our growth platforms. Growth will be pursued both organically (by

growing what we have) and through acquisition (by investing in what we don’t have).


It is not only important to address the growth of UFA’s business, but also the governance of the

co-operative. At the 2007 AGM, the board of directors and delegate body ratified 11

recommendations to enhance and improve governance and the democratic structure. These

changes strengthen the co-operative and ensure that the interests and rights of owners remain

our top priority. We are confident that they will also improve our connection to members by

continuing to improve communication.

It is an exciting time for our co-operative. As we set out to grow, you will see aggressive new

things at UFA. We are becoming more efficient, more market-driven and more competitive.

Such changes may be uncomfortable at first, but they are necessary if we hope to maintain our

relevance to our owners, rural customers and the agriculture industry.

Speaking on behalf of UFA’s board of directors, management and employees we would like to

thank our owners and customers for their support of UFA in 2006. We look forward to your

continued support in 2007.

Clarence Olthuis

Chairman of the Board

Dallas Thorsteinson

President & Chief Executive Officer


Management’s Discussion & Analysis

Summary of the key sections of this Management’s Discussion & Analysis (“MD&A”).



UFA’s vision, mission and governance structure


Major activities and services provided by the enterprise


Discusses key features of UFA’s strategy


Outlines 2006 performance

2007 OUTLOOK Potential future growth


UFA’s financial health and ability to fund operations

and growth


Risks and how the enterprise addresses these risks



Policies requiring management’s judgments



This Management’s Discussion and Analysis (MD&A) provides management’s perspective on

UFA, our performance and our strategy for the future. This MD&A includes UFA’s operating and

financial results for 2006 and 2005 and should be read in conjunction with our Financial

Statements which start on page 23 of this annual report.

Forward–looking statements

This disclosure contains statements that are forward-looking statements and include phrases

such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “outlook,” “should,” “would” and

“could” and other similar expressions. These forward-looking statements are based on certain

assumptions and current expectations about future events. Readers are cautioned that actual

results or events may differ materially from those forecasted in this disclosure because of risks

and uncertainties associated with UFA’s business and the general economic environment.

Management does not intend to publicly update or revise this discussion and analysis as a

result of new information, future events or otherwise.

Non-GAAP Financial Measures

Some financial measures referenced in the MD&A are not GAAP compliant, including EBIT and

EBITDA. Please review the discussion of non-GAAP measures on page 22 when referring to

these measures.

Governance Structure

The board of directors and management are unified in their belief that sound corporate

governance practices are necessary for the achievement of strategic and operational goals, to

the effective management and sustainability of UFA. In addition to the annual general meeting,

the board meets at least six times per year with management to deal with general business and

strategic matters. The executive committee of the board meets formally with the president and

chief executive officer at least twice per year. The board and its committees, as described below,

operate independently from management to protect owner interests. The existing members of

the board are actively engaged in agriculture and have served between four and twenty-two

years on the elected side at UFA. Board members have the right to seek independent advice

should they so desire or deem necessary.

The board of directors has established four committees being Audit, Governance, History and

Environmental, Health and Safety Committees. Each committee meets regularly throughout the

year providing regular updates to the Board.



Incorporated in 1909, UFA is one of Canada’s oldest and largest agricultural organizations, with

a long and profitable history of service to agricultural operations and businesses in rural

communities that support the agricultural industry and rural living. As one of the first agricultural

organizations in Alberta, UFA’s focus has been to create economic value to the agricultural

community through the provision of goods and services, to support rural living, and to improve

conditions for the agricultural sector. Agricultural producers, from the lifestyle farmer to the large

commercial producer, are the heart of UFA’s business, as the majority of agricultural producers

in Alberta are owners and patrons of UFA.

UFA is a member-owned co-operative, with 120,000 members. Membership is available to all

individuals, as well as corporations and businesses that are primarily involved in or support the

agricultural industry. As a co-operative, UFA returns a significant portion of its earnings to

owners through patronage and actively invests in rural community programs. UFA also retains a

portion of earnings within the business to invest in the capital and capacity growth of the cooperative.

In recent years, UFA’s customer base has expanded to include non-agricultural customers. In

addition to serving its core agricultural owners, UFA also provides products and services to

commercial, non-member customers and businesses. Non-member customers do not have

ownership rights in UFA and do not receive benefits of membership, such as patronage on

purchases, participation in the member loan program or the petroleum fixed price contracts for

members and voting to elect delegates.


UFA provides products and services to owners and customers through a coordinated network of

retail farm supply stores and petroleum outlets, with total revenues for 2006 exceeding $1.6


Commodity-driven prices in petroleum products (crude oil and refined products), market supply

disruptions and favorable supply contracts with major refiners all had positive impacts on

financial results. These short-term conditions should not be used to estimate future financial

trends as management can not accurately predict future global markets and their impact in our


Farm Supply

The farm supply product and service offering encompasses a network of stores, crop protection

products and services, feed grain marketing services, construction of specialized farm

production equipment and project management. Through a network of 35 farm and ranch

supply stores, UFA sells a wide array of farm-related products, including crop protection

products, farm buildings, housing packages, lumber, grain storage units, livestock supplements,

agriculture-related hardware supplies and a limited selection of general merchandise. Through

the Stirdon/Betker division, UFA constructs and provides on site service to Western Canadian

farmers for specialized agricultural equipment such as grain handling, feed processing,

intensive livestock systems, grain loop systems and hog and poultry equipment.


Since opening its first farm store in 1954, the store network has grown and is currently

comprised of 24 stores in rural towns, seven stores in and around Calgary and Edmonton, and

four larger regional centres. Sales growth has been positive with sales increasing 27 percent

over the last five years.

In addition to the direct shopping experience at farm and ranch stores, UFA provides a feed

grain trading service for non-Board grains and crops, and a multitude of services to the intensive

livestock operators, such as on-site construction work, products, services, technical support and

24-hour, on-site support.

All farm supply activities are linked through an integrated support network which includes

operations support, procurement, logistics and supply chain. This network provides an

organizational structure which ensures accountability and responsibility for products and

services provided to owners and customers.

UFA’s product lines which include livestock supplies (feed and fencing), crop supplies (seed and

chemicals), buildings, consumer goods (plumbing, electrical and work wear) and petroleum

products, means UFA faces competition from numerous retailers that are part of other networks

in the larger urban communities and are primarily locally owned and operated independent

businesses in rural communities. UFA’s farm supply differentiator is related to the broader and

more comprehensive offering as compared to its competitors.


UFA offers customers extensive service and product selection through the largest cardlock

network in Alberta available twenty-four hours a day, every day of the year. A full range of

petroleum products including both dyed and regular gas and diesel, and propane are available

through bulk delivery, cardlock facilities and or retail locations. Products are provided to

customers in both the core agricultural community and in the transportation, oilfield and other

commercial sectors. The partnership with the Commercial Fueling Network’s (“CFN”) provides

customers with access to a network of over 3,000 participating locations in British Columbia and

the United States.

Since joining the petroleum industry in 1935, UFA has grown to provide and operate 115

petroleum outlets, comprised of 112 cardlock facilities, 90 sites offering bulk delivery and 56

locations providing retail services. In addition to fuels, the petroleum outlets offer lubricants,

automotive products, and ancillary products to customers throughout Alberta and parts of British

Columbia and Saskatchewan.

UFA partners with independent commissioned agents to operate the petroleum sites and

provide bulk delivery services to customers. The business relationship is governed by an

Agency Agreement that covers normal business matters, including environmental and facility

maintenance responsibilities and quarterly evaluations. Agents are compensated largely on

volumes sold and on results of their evaluations. UFA provides training and support to agents

and operates a few outlets to provide UFA with insight into the agent’s perspective of the

business. UFA owns the property, plant and equipment, inventory and accounts receivable at

each outlet. Agents are permitted to sell other products, including convenience store products,

however, UFA establishes prices for all products and selects and sources products to maintain

a consistent brand presence.


As UFA does not own a refinery, UFA has established a balanced and diversified program with

a number of petroleum suppliers to purchase fuel. This program benefits UFA under a variety of

market conditions. UFA engages primary and selected secondary transportation companies to

pick up and deliver fuel products to its agency network. The enterprise is active in the fixed-price

contract market for larger commercial customers and to members for agricultural use.

Imperial Oil Limited, Shell Canada, Petro-Canada Inc., FCL and Husky Energy, as well as

numerous smaller independents, are all recognized competitors in the agricultural and

commercial petroleum business. We are also aware of new competition emerging in the market


UFA is committed to providing superior service to our owners and customers through our extensive

Cardlock network and bulk fuel delivery offerings. Our growth is centered around investment in new

locations, improving our existing locations and expanding our product and service offering to meet

the changing needs of our customers.


As an integral part of the fabric of rural and agricultural life, UFA has numerous opportunities to

expand its offerings and operations. UFA strategy is to actively pursue growth opportunities that

further strengthen its market position, its purchasing powers and its value to owners.

Future growth may include expansion of the Farm Supply network outside of Alberta, expansion

of commercial petroleum operations and other targeted segments, as well as development of

value propositions aimed at progressive farm operations. UFA will also make other discretionary

investments in Strategic Marketing and Information Technology capabilities.

UFA has steadily been improving its financial base and control structure to ensure it has the

economic resources to meet strategic growth initiatives. During the last few years, UFA

restructured its member equity program and improved lender arrangements. In addition to

completing long-term private placement financing in 2005, UFA entered into a new credit facility

in 2006 to increase its borrowing capacity, provide more flexible terms and to lengthen the term

of the facility. UFA remains conservatively financed with a ratio of net debt to net debt and

members’ equity of 2 to 98 at the end of 2006.



• This year’s results were significantly affected by fluctuations in the selling price and

cost of petroleum products and should not be used to estimate future trends.

• EBITDA was $124.8 million, up $16.8 million from $108.0 million in 2005.

• Earnings before patronage allocation and income taxes were $94.7 million

compared to $84.5 million in 2005.

• The proposed current year patronage allocation of $35.0 million is an increase of

$9.6 million over last year’s $25.4 million.

• Distributions to owners in the last five years, including distributions to be made in

2007, totaled $118 million representing 57% of after-tax earnings before patronage

allocation over that time. Distributions are defined as the cash portion of the annual

patronage allocation, issuance of investment shares, dividends on investment

shares and retirement of equity.

• Members had invested $20 million in member loans in UFA at year end, the same

level of investment as last year. The program is fully subscribed, with a waiting list

of interested owners.

• Capital spending for the year was $46.4 million; being $10.5 million more than

2005’s spending. Major projects include the Stettler rebuild and expansion,

completion of the rebuilds for Grande Prairie, Rimbey and Lethbridge, new

petroleum locations in Whitecourt and Innisfail, purchasing land for future growth

and the start of the SAP enterprise system implementation.

• Sales increased 12.4% to $1,613 million, up $178 million from $1,435 million in

2005 due to increased sales levels across the network and increased petroleum

volumes sold.

• Gross margins on combined sales were $231.5 million, up $23.3 million from

$208.2 million in 2005.

• Total Members’ Equity, consisting of Member Entitlements and Retained Earnings,

was $342.3 million while liabilities were $236.7 million at year-end. Year end 2005,

Members’ Equity was $278.4 million while liabilities were $222.7 million.

Farm Supply posted a 5.9% year over year sales improvement and grew gross margin by

responding to customer needs. Improvements over last year are due to the knowledgeable

workforce and recent capital investments and commitment to improve service levels. Results

improved significantly this year despite the agricultural industry experiencing lower than

expected wheat crop yields and a resurgence to ban Canadian beef exports to the United

States by Montana-based R-Calf.


Petroleum sales increased 14.3% over last year on a volume increase of 7.2%, while continuing

to manage the impact of fluctuating selling prices. This year’s increase was more subdued than

last year although crude oil prices for Western Texas Intermediate fluctuated between $60 and

$80 US per barrel during the year. The strong Alberta economy, UFA’s well-known and efficient

cardlock distribution network, UFA’s strong brand presence, and the commitment by agents to

provide the best in-class bulk delivery service helped push up volume and provide a positive

effect on results.

This year operating, marketing and administrative expenses were $118.5 million, an increase of

$9.8 million or 9.1% compared to 2005. Labor-related expenses created most of this increase,

as the tight labor market swelled costs to find, attract and retain employees and consultants.

Operating costs increased as UFA does a clean sweep on technology areas even though the

SAP and business process re-engineering expenditures will be capitalized and amortized over

their useful life. Additional expenses were incurred within operational and strategic initiatives,

such as environment and safety, UFA’s brand and research and marketing.

The following table, expressed in thousands of dollars, reconciles EBITDA, an important non-

GAAP financial measure used by UFA, to net earnings.

2006 2005

EBITDA $ 124,803 $ 108,018

Depreciation (23,482) (18,015)

Financing costs (6,605) (5,502)

Earnings before the under noted 94,716 84,501

Patronage allocation (35,000) (25,400)

Income taxes (19,351) (20,075)

Net earnings $ 40,365 $ 39,026

The net book value of capital assets was $168.8 million, excluding capital property held for

resale of $2.9 million at December 31, 2006, up $19.7 million from 2005. During 2006, UFA

invested $46.4 million in property and equipment, including starting work on the SAP

implementation which will replace the existing enterprise computer system and legacy systems.

Capital spending took place at Stettler, Grande Prairie, Rimbey, Lethbridge, Whitecourt and

Innisfail and UFA purchased land in Athabasca and Camrose for future growth. The enterprise

is making these investments to build a robust foundation to support future anticipated needs

created by growth and evolving business operations.

Depreciation and amortization charges of $23.5 million increased $5.5 million from last year as

capital assets from prior years are fully employed. The estimated useful life of aging technology

assets was also reduced.


Total financing costs for 2006 increased to $6.6 million, up $1.1 million from 2005. Borrowing

costs increased during the year as inventory increased and the $85.0 million Senior Secured

Notes (“Senior Notes”) were outstanding the entire year. The Senior Notes were issued to take

advantage of record low long-term bond yields and to mitigate the risk associated with having

most of its borrowings tied to fluctuations in short-term interest rates.

The average daily bank loan balance was $0.8 million in 2006, down considerably from the

$47.8 million average last year, due to the issuance of the Senior Secured Notes and strong

financial results. The average effective interest rate increased to 5.9% in 2006 compared to

4.9% in 2005 as a result of the increase in bank prime rates.

Other income increased by $3.3 million to $11.8 million. Gains from disposals of capital assets

and interest earned on cash balances contributed to the increase compared to last year.

The net result of the above was earnings before patronage allocation and income taxes

increasing to $94.7 million, up 12.1% or $10.2 million from $84.5 million for the prior year. This

year’s results should not be used to estimate future trends as they were significantly affected by

fluctuations in the selling price for and cost of petroleum products

The proposed patronage allocation is $35.0 million and will be presented to the delegates for

ratification at the March 2007 Annual General Meeting. Once approved, patronage will be

allocated, in accordance with the by-laws, among member shares, cash, revolving equity and

investment shares.

During 2006, UFA paid $2.4 million of dividends on the Class A Investment shares, an increase

of $1.0 million over 2005 dividends.


UFA believes that the strong economic trends experienced during 2006 will continue during

2007. UFA remains focused on fortifying its base business and anticipates capturing additional

market share through organic growth in both Farm Supply and Petroleum and through potential

acquisitions or other business relationships that meet UFA’s requirements.

Weather has a pervasive effect on agricultural producers, who are UFA’s core owners, and

therefore on the financial results of the organization. UFA is broadening and diversifying its

customer base and product offering to mitigate the risk of being economically dependant on

agricultural producers.



UFA depends on its ability to generate cash and attract adequate supplies of capital from

external sources to fulfill its strategic plans and maintain an enduring and sustainable

organization. UFA’s liquidity needs are affected by the seasonal business environment of

agricultural producers. Working capital requirements increase significantly over the summer

and early fall months when agricultural owners are financing their supplies. UFA offers an

extended credit finance plan to owners, allowing these accounts to remain outstanding until

crops are harvested. External financing is used to support these cyclical cash needs and drops

significantly in the fourth quarter as balances owing under the extended credit plan are collected

and inventories of products used during the growing season are reduced. Fiscal 2006 did not

follow the normal borrowing pattern of previous years, as UFA had sufficient cash on hand to

meet the cyclical requirements due to issuance of the Senior Notes in 2005 and the prior year’s

strong financial results. Normal borrowing patterns may return again after UFA utilizes cash on

hand for growth opportunities.

Accounts receivable collections remain strong and other metrics, such as aging, write-offs,

average day’s sales outstanding, and collections statistics on the extended credit program

continue to be similar to historical results and within acceptable limits.

UFA finances the business operations from both internal and external sources of capital.

Internal sources are reflected in the Members’ Equity section of the Balance Sheet as Member

Entitlements and as Retained Earnings. At year-end 2006, internal sources of capital amounted

to $342.3 million.

External sources include the bank financing through the Credit Facility, Senior Notes, capital leases

and member loans. During 2006, UFA entered into a new Credit Facility to increase its borrowing

capacity, and align the covenants with those contained in the Senior Notes. The Credit Facility now

provides UFA with up to $70 million to cover day-to-day operating requirements and an accordion

facility of up to $50 million to cover general corporate purposes. UFA can draw on the facility by

way of prime loans, bankers’ acceptances or letters of credit and repay advances at any time,

without penalty. The Credit Facility matures July 28, 2009.

During 2005, UFA issued the Senior Notes under a private placement offering. The Senior

Notes mature in 2015 and are repayable in three equal annual installments of $28.3 million

beginning in 2013. Interest is payable semi-annually and UFA is subject to meeting quarterly

financial covenants. During 2006 UFA met all financial covenants under the Credit Facility and

Senior Notes agreements.

The majority of capital leases are for automotive and information technology equipment. Capital

lease obligations at December 31, 2006 were $4.6 million with terms ranging between one and

five years, with an average interest rate of approximately 11%.


Another source of external capital is a voluntary member loan program (“Member Loans”). This

program allows members, employees and agents to invest in UFA and earn a rate of return of

bank prime rates, less 0.5%. Member Loans are unsecured and repayable on demand, with

$20.0 million outstanding at December 31, 2006, the same level as the prior year. The Member

Loan program is fully subscribed. Interest on Member Loans of $1.1 million was $0.3 million

greater than last year primarily due to the increase in bank prime rates. The interest expense is

included in short term financing expense. The repayment of Member Loans is subject to the

right of offset of any amounts owing to UFA, and is subject to UFA meeting the covenants

contained under the Credit Facility and Senior Notes agreements.

Cash Flow from Operations

(before changes in non-cash working capital)

(in millions of dollars)















33.0 33.4 35.5

2002 2003 2004 2005 2006

At December 31, 2006, UFA had cash and cash equivalents on hand of $103.2 million with no

outstanding borrowings under the Credit Facility. UFA invested $63.0 million of the cash and

cash equivalents in commercial paper with maturity dates less than 90 days as described in the

notes to the audited financial statements. The balance of cash on hand at year end is unusual

and should not be used to estimate future trends.

Working Capital Ratio

(in millions of dollars)

Current assets

Current liabilities














2.8 : 1




2.2 : 1




1.8 : 1




2.7 : 1




2.9 : 1


At year-end the ratio of net debt to net debt and members’ equity was 2 to 98 compared with 13

to 87 at the end of 2005. Net debt represents amounts owing under the Credit Facility, the

Senior Notes, debentures, capital leases and member loans, net of unencumbered cash

balances available to service debt. Management believes the net debt ratio for 2006 and 2005

to be low for the businesses operated by UFA.

Net Debt to Equity Ratio

(in millions of dollars)

Net Debt













13 : 87




21 : 79




25 : 75



13 : 87



2 : 98


Member Equity Plan

UFA’s equity structure has been a source of considerable financial strength. As a co-operative,

UFA provides owners dividends by allocating a portion of its earnings to owners in the form of

patronage. Patronage allocation, member shares, investment shares and revolving equity are

considered Member Entitlements of UFA.

Members' Equity to Total Assets

(in millions of dollars)


Members' Equity

Total Assets









209 222







2002 2003 2004 2005 2006

66% 61% 58% 56% 59%

Equity is regularly distributed to owners through investment shares that pay dividends at a

competitive rate. In addition, all member entitlements for members that turn 65 years of age are

converted into Class A Investment shares, with the exception of one $5 member share.

A summary of Member Entitlements is outlined below, with more detailed information found in

the notes to the audited financial statements.

UFA is authorized to issue an unlimited number of member shares with a par value of $5.

Member shares are redeemable at par value when the member reaches age 65, moves out of

the trading area or, at the request of the member’s estate, upon the member’s death.

The patronage allocation for the current year is not distributed to owners until it is ratified by its

elected delegates at their annual general meeting held in March of the following year. The

delegates approve the distribution as provided for under UFA’s by-laws. Revolving equity is

non-interest bearing, non-redeemable by the owner except in specific circumstances and is

converted into Class A Investment shares (“Class A”) over a 12-year period.

Class A Investment shares have a par value of $100, are non-voting, are redeemable at par

value at the option of the holder subject to board approval, are retractable at par value at the

option of UFA, and provide a dividend at bank prime rate less 0.5%.

UFA has the right to delay repayments of any indebtedness to an owner, if the board of

directors determines that the repayment would constitute a default under any debt agreement or

jeopardize the liquidity, solvency or capital needs of UFA. This right to delay repayments to

owners includes the repayment and/or redemption of all member entitlements, including

declaration of patronage allocation, dividends on investment shares and interest on Member



Dividends on the Class A shares of approximately $2.4 million in 2006 (2005 - $1.4 million) are

charged against retained earnings. Interest on member loans of $1.1 million (2005 - $0.8

million) is disclosed as part of short term financing expense in the financial statements.

Based on earnings before patronage allocation and income taxes of $94.7 million, a patronage

dividend of $35.0 million will be presented at the 2007 Annual General Meeting for ratification by

delegates. Distributions to owners in the last five years totaled $102.5 million, consisting of the

cash portion of the annual patronage allocation, issuance of investment shares, dividends on

investment shares and retirement of equity. Over the last five years, cash distributions were

$21.8 million.

Employee Pension Plan

UFA administers two defined-benefit pension plans. A registered pension plan, (the “RPP”) is

registered in accordance with the Alberta Employment Pension Plans Act (the “EPPA”), and

provides benefits for all salaried employees who choose to participate. Pensions provided

under this plan are related to the employee’s income up to maximum pension limits set out by

the Income Tax Act. The funding and governance requirements of this plan are set out by the

EPPA and the plan is in full compliance with these requirements.

Provision for pensions associated with employee income above RPP levels, is made under a

second pension plan, called the Supplemental Employee Retirement Plan (“SERP”). This plan

is not governed by any regulatory body, and UFA funds its obligations under this plan only as

cash requirements arise.

UFA’s Pension Committee manages both plans and is comprised of representation from

management and employees. The Pension Committee acts in accordance with a Governance

Plan, which sets out roles and responsibilities regarding the administration of the plan, and a

statement of investment policies and procedures which sets out limits and guidelines for

investment of the Pension Fund assets.

UFA records costs within operating, marketing and administrative expenses which relate to the

pension plan’s activities and obligations. Current service costs relate to the additional pension

obligations incurred as a result of employment in 2006. Past service pension costs relate to the

obligations incurred in prior years and generally arise from changes in estimates of the

obligation or of funding required to meet that obligation.

The assets of the RPP totaled $73.3 million at December 31, 2006 (2005 - $64.3 million), while

the accrued benefit obligation, excluding unfunded SERP obligation, was $80.2 million (2005 -

$76.7 million). The unfunded SERP obligation at year-end was $3.0 million, unchanged from

the previous year.

In 2006 UFA incurred pension expense of $5.4 million, with $4.6 million related to current

service costs. This compares to pension expense of $4.2 million in 2005, of which $3.6 million

related to current service costs.



Risk Management

UFA is exposed to various risks and uncertainties in the normal course of our business. To

mitigate these risks, UFA follows an enterprise risk management process to manage the risks it

faces. Each department and operating division is responsible for identifying all significant risks

that they face in their daily activities as well as the cause of each risk. These risks are then

prioritized based upon the potential impact of such risk on the company and the likelihood of

occurrence. This process allows UFA to establish a risk profile for its business and develop

appropriate strategies to mitigate such risk. We believe that acceptance of some risk is both

necessary and advantageous in any business, and is necessary to achieve UFA’s vision.

Financial Risk

Certain financial risks may be reduced through insurance or hedging programs, while other risks

are prioritized in relation to the impact on the business and strategies are developed to mitigate

the risk.

Business Cycles and Commodity Risk

UFA’s business is affected by seasonal and other business cycles, in particular agricultural

cycles. Risk is mitigated within the agriculture industry as different segments and areas may

experience offsetting business cycles. UFA’s diversified customer base does mitigate the risk of

being economically dependant on the core owners.

Petroleum revenue is primarily tied to the price of crude oil and UFA follows a number of

strategies to mitigate risks associated with this volatility. One strategy is centralized control over

selling prices that allows UFA to react quickly to changes in purchasing prices from suppliers.

UFA does not enter into any unhedged position, either as a purchaser or as a seller. UFA’s

exposure to price risk is limited to quantities carried in inventory, which is limited to tank

capacity which usually represents less than 5% of sales.

UFA does offer fixed price contracts to qualifying agriculture and commercial customers. To

manage risks associated with fluctuating crude oil prices and maintain its required margin, UFA

offers these contracts only to financially sound customers that meet stringent credit policies and

purchases crude oil and foreign exchange swap agreements from reputable lenders, some of

them being lenders in the Credit Facility. This program benefits the customer since input costs

are set and established which allows for better planning, budgeting and risk management.


Interest Rate Risk

To manage interest rate risk, UFA utilizes both short-term floating interest rate borrowings

issued under the Credit Facility and member loans program, and long-term funds raised under

the Senior Notes to finance its capital requirements. UFA has not hedged any of the interest

rate risk associated with short-term borrowings as it considers the risk to be acceptable.

Credit Risk

UFA is exposed to credit risk on accounts receivable for approximately 40 to 45 days of regular

sales, at any time throughout the year, as most accounts receivable are due by the end of the

month following purchase. UFA also offers an extended credit finance plan for crop inputs and

grain bins whereby customers do not have to pay for these products until the end of October.

UFA partly mitigates exposure to credit risk through the diversity of its customer base and the

large geographic area in which it operates. In addition, thorough credit review and monitoring is

conducted by an experienced credit department. UFA follows established policies regarding

credit limits, payment terms and account reviews. In addition delinquent accounts are followed

up regularly, including engaging external collection and legal assistance.

At December 31, 2006, UFA carries an adequate allowance for doubtful accounts of $4.3

million, which is 3.2 % of the closing accounts receivable balance. This allowance is considered

adequate to protect UFA from any future credit losses.

Foreign Exchange Risk

UFA conducts most of its operations in Canadian dollars and has limited risk to fluctuations in

foreign currency rates.



Our financial statements and accounting policies are presented in accordance with Generally

Accepted Accounting Principles (GAAP). The following is an analysis of critical accounting

policies used by management in preparing the financial statements.

Accounting estimates and assumptions

The preparation of financial statements that conform with Canadian generally accepted

accounting principles (GAAP) require us to make estimates and assumptions that affect the

reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of

the Financial Statements and the reported amounts of revenue and expenses during the

reporting period. We base our estimates on historical experience, current trends and other

assumptions that are believed to be reasonable under the circumstances. Actual results could

differ from those estimates. In our judgment, none of the estimates detailed in Note 1 of our

annual Financial Statements for the year ended December 31, 2006 requires us to make

assumptions about matters that are highly uncertain. The methodology used in establishing

each estimate is based on models that we have used on a consistent basis for a significant

period of time or on the detailed nature of the calculation used to establish the estimates.

Financial Instruments

UFA’s hedging program complies with the CICA’s guidance regarding the identification,

documentation, designation and effectiveness of hedges. UFA hedges its price risk on fixedprice

petroleum contracts as described in the notes to the financial statements. UFA does not

enter into speculative hedges.

Valuation of Long Lived Assets and Asset Impairment

The historic cost of capital assets is affected by the threshold value for capitalization and by the

types of costs eligible for capitalization. UFA capitalizes costs when a project exceeds $1,000

and only capitalizes labor when costs, including the labor portion, exceed $250,000.

Depreciation and amortization for long-lived capital assets is based on estimates regarding the

service life of the assets. If the estimated service life is inaccurate, depreciation and

amortization expense and the gain or loss on the disposal of the asset may be significantly


UFA’s accounting policy for asset retirements and associated impairments follows the CICA’s

requirements. Details of the Asset Retirement Obligations policy, including underlying

assumptions, are found in UFA’s audited financial statements.


Pension Benefits

UFA provides two defined benefit pension plans to qualified employees based on numerous

assumptions for the discount rate, investment performance of the plan assets, salary escalation

rates and the inflation rates over the period of estimation. In addition management estimates

the qualifying employee demographics and their mortality rates. Changes to any of these

estimates will affect the plan assets, obligations and the related expenses.

Corporate Taxes

Current cash income taxes and future income taxes require significant judgment interpreting tax

laws and regulations. UFA assumes it will realize future tax assets and incur future tax liabilities

and therefore has netted the two amounts in the financial statements.

Non-GAAP Financial Measures

UFA uses certain financial indicators within the MD&A that are not specifically defined by

generally accepted accounting principles (“GAAP”). These non-GAAP indicators may or may

not be comparable to similar measures presented by other enterprises and are presented on a

consistent basis within this Annual Report to Members. UFA believes EBITDA (earnings before

interest, tax, depreciation and amortization and patronage allocation) is a critical measure of its

operating performance. EBITDA allows UFA to compare its operating performance on a

consistent basis year over year. EBITDA excludes certain items that depend on accounting

methods or reflect financing choices.

Net debt is another non-GAAP disclosure, which provides a measure of all borrowings both

short-term and long-term, less unencumbered cash balances available for funding those

payments. This indicator is important to UFA as it identifies required future obligations that UFA

must meet in order to comply with borrowing agreements, as well as the liquid funds available

on hand to meet those obligations. UFA also believes that the ratio of net debt to net debt and

members’ equity ratio is an important non-GAAP measure that identifies how UFA finances its

financial assets and operations, and the amount of risk UFA is willing to accept.


United Farmers of Alberta Co-operative Limited

Financial Statements

December 31, 2006


Management’s Responsibility for Financial Statements

The management of United Farmers of Alberta Co-operative Limited (“UFA”) is responsible for the preparation of the

accompanying financial statements. The financial statements have been prepared in accordance with Canadian generally

accepted accounting principles, which recognize the necessity of relying on management’s judgement and the use of estimates.

Management has determined such amounts on a reasonable basis to ensure the financial statements are presented fairly in all

material respects.

Management’s responsibility to ensure integrity of financial reporting is fulfilled by maintenance of a system of internal

accounting controls designed to provide assurance that transactions are authorized, assets are safeguarded and proper records

maintained. Controls include a comprehensive planning system and processes to ensure timely reporting of periodic financial


Final responsibility for the financial statements and their presentation to members rests with the Board of Directors. The Board

carries out this responsibility principally through its Audit Committee. The Audit Committee meets separately with management

and UFA’s external auditors, to review financial statements, discuss internal controls, the financial reporting process and other

financial and auditing matters; all to satisfy itself that each party is properly discharging its responsibilities. The Audit Committee

reports its findings to the Board for its consideration when the Board approves the financial statements prepared by management.

The financial statements have been audited by Ernst & Young LLP, the external auditors, in accordance with Canadian generally

accepted auditing standards. The external auditors have had full and free access to management, the Audit Committee and the

Board of Directors.

D. Thorsteinson W. D. Gantous, CA

President and Chief Executive Officer

Chief Financial Officer

February 15, 2007 February 15, 2007

Auditors’ Report

To the Delegates / Members of

United Farmers of Alberta Co-operative Limited

We have audited the balance sheets of United Farmers of Alberta Co-operative Limited as at December 31, 2006 and 2005 and the

statements of earnings and retained earnings and cash flows for the years then ended. These financial statements are the responsibility

of UFA's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan

and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit

includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also

includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall

financial statement presentation.

In our opinion, these financial statements present fairly, in all material respects, the financial position of United Farmers of Alberta

Co-operative Limited as at December 31, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in

accordance with Canadian generally accepted accounting principles.

Calgary, Canada

February 15, 2007

Chartered Accountants


United Farmers of Alberta Co-operative Limited

Balance Sheets

As at December 31 2006 2005

(expressed in thousands)

Assets [note 7]


Cash and cash equivalents [note 2] $ 103,216 $ 66,962

Accounts receivable 157,959 162,003

Inventories 126,045 111,269

Prepaid expenses and deposits 13,872 6,274

Property held for re-sale [note 16] 2,898 —

Total current assets 403,990 346,508

Investments 850 816

Future income taxes [note 8] 2,302 1,865

Other long term assets [note 4] 3,025 2,838

Property and equipment [note 3] 168,804 149,140

$ 578,971 $ 501,167

Liabilities and Members' Equity


Accounts payable and accrued liabilities $ 100,731 $ 88,428

Deferred revenue [note 5] 17,809 19,681

Member loans [note 6] 19,994 19,999

Current portion of long term debt [note 7] 2,378 2,569

Total current liabilities 140,912 130,677

Long term debt [note 7] 87,231 87,822

Asset retirement obligations [note 9] 5,360 4,041

Other long term liabilities [note 10] 3,158 200

Total liabilities 236,661 222,740

Commitments, contingencies and guarantees [note 12]

Members' equity

Member entitlements [note 11] 195,539 169,604

Retained earnings 146,771 108,823

Total members' equity 342,310 278,427

See accompanying notes

$ 578,971 $ 501,167

On behalf of the Board:

C. Olthuis E. Newsham




United Farmers of Alberta Co-operative Limited

Statements of Earnings and Retained Earnings

Years ended December 31 2006 2005

(expressed in thousands)


Sales $ 1,613,118 $ 1,434,807

Cost of sales (1,381,594) (1,226,599)

Gross margin 231,524 208,208

Operating, marketing and administrative expenses (118,482) (108,634)

Other income 11,761 8,444

Earnings before the undernoted 124,803 108,018

Depreciation and amortization (23,482) (18,015)

Earnings before financing expenses, patronage allocation and income taxes 101,321 90,003

Financing expenses [notes 6 and 7] (6,605) (5,502)

Earnings before patronage allocation and income taxes 94,716 84,501

Patronage allocation [note 11] (35,000) (25,400)

Income taxes [note 8] (19,351) (20,075)

Net earnings 40,365 39,026

Dividends on investment shares [note 11] (2,417) (1,422)

Increase in retained earnings for the year 37,948 37,604

Retained earnings, beginning of year 108,823 71,219

Retained earnings, end of year $ 146,771 $ 108,823

See accompanying notes


United Farmers of Alberta Co-operative Limited

Statements of Cash Flows

Years ended December 31 2006 2005

(expressed in thousands)

Operating activities

Net earnings $ 40,365 $ 39,026

Items not requiring an outlay of cash

Patronage allocation 35,000 25,400

Depreciation and amortization 23,482 18,015

Future income taxes (437) (1,935)

Other 3,726 (1,657)

102,136 78,849

Increase in non-cash working capital related to operations [note 14] (13,212) (12,501)

Cash provided by operating activities 88,924 66,348

Investing activities

Additions to property and equipent (46,360) (35,852)

Property held for re-sale (2,898) 4,953

Proceeds from disposal of property and equipment 3,585 921

Increase in investments (34) (145)

Decrease in non-cash working capital related to investing activities [note 14] 5,312 3,122

Cash (used in) investing activities (40,395) (27,001)

Financing activities

(Decrease) in bank indebtedness — (33,209)

Long term debt issued [note 7] — 85,000

Long term debt repaid [note 7] (782) (24,649)

Payment of patronage allocation [note 11] (5,827) (3,430)

Repayment of revolving equity [note 11] (820) (530)

Dividends on investment shares [note 11] (2,417) (1,422)

Redemption of shares [note 11] (2,424) (2,667)

(Increase) decrease in non-cash working capital related to financing activities [note 14] (5) 785

Cash (used in) provided by financing activities (12,275) 19,878

Increase in cash and cash equivalents 36,254 59,225

Cash and cash equivalents, beginning of year 66,962 7,737

Cash and cash equivalents, end of year $ 103,216 $ 66,962

See accompanying notes


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)


United Farmers of Alberta Co-operative Limited (“UFA”) was incorporated by Special Act under the laws of

Alberta and operates as a single business segment distributing fuel products and farm supplies to its customers. As a

Co-operative, a significant portion of its business is with its member owners.

1. Significant Accounting Policies

UFA’s accounting policies are in accordance with Canadian GAAP. The following accounting policies are

considered to be significant.

Use of estimates

The amounts recorded in the financial statements require management to make estimates and use assumptions that

affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these


Revenue recognition

UFA recognizes revenue when products, goods and services are delivered to the customer or when the risks and

rewards associated with ownership are transferred to the customer. Revenue related to building and intensive

livestock construction projects is recognized using the percentage of completion basis. Revenue invoiced but not yet

earned is recorded as deferred revenue.

Cash and cash equivalents

Cash and cash equivalents consist of cash on account and highly liquid investments in commercial paper with an

original maturity of less than 90 days. Cash equivalents are stated at amounts that approximate fair value, based on

quoted market prices.


Inventories of petroleum products are valued at the lower of weighted average cost and replacement cost.

Inventories of farm supply products are valued at the lower of weighted average cost and net realizable value.


Investments are carried at cost. Provisions are made for impairments in realizable value that are considered to be

other than temporary.


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)

Property and equipment

Property and equipment are carried at cost less accumulated depreciation and amortization. Capital leases which

transfer significant ownership rights to UFA are recorded as capital assets. Depreciation and amortization of capital

assets which are in service is based on the estimated useful service lives of the assets at the following rates:

Buildings, fences and yards 4% - 10% Declining balance

Equipment 10% - 30% Declining balance

Automotive and computer software 30% Declining balance

Computer equipment and leased assets 3 - 5 years Straight line

Income taxes

UFA follows the liability method of tax allocation in accounting for income taxes. Under this method, income taxes

are recognized for the differences between financial statement carrying values and the respective income tax basis of

assets and liabilities (temporary differences), and for the carry forward of unused tax losses and income tax

reductions. Future income tax assets and liabilities are measured using income tax rates expected to apply in the

years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets

and liabilities of a change in tax rates is included in income in the period that the change is substantively enacted.

Future income tax assets are evaluated and recorded as required in the financial statements if realization is

considered more likely than not.

The current year provision for income taxes is based on the assumption that the amount of patronage allocation

allowable as a deduction for income tax purposes will be ratified by the delegates in the following year.

Asset retirement obligations

UFA recognizes the fair value of a liability for an asset retirement obligation for all long lived assets in the period

the liability is incurred or can be estimated, whichever is earlier. UFA also recognizes a corresponding increase in

the carrying cost of the asset. This fair value is determined through a review of engineering estimates, market

information, historical information and management's estimate.

The liability is recorded at fair value and is adjusted due to revisions in the associated estimated timing and amount

of costs for the liability. The carrying cost of the asset is depreciated on a declining balance basis, similar to the

underlying assets for which the liability is recognized.

Employee future benefits

UFA operates a defined benefit pension plan for its regular employees along with an unfunded supplemental

retirement plan for those employees affected by the Canada Revenue Agency maximum pension and contribution

limits. The obligations of the plans are determined using the projected benefit method pro-rated on service and

UFA’s best estimate of expected return on assets, salary growth and demographic changes. The net transitional

obligation was amortized over the average remaining service period of the employee groups (11 years at January 1,

2000). Experience gains and losses and changes in assumptions are amortized, using the corridor method, over the

average remaining service period of the employee groups (7.3 years at January 1, 2005). Under the corridor method,

amortization is recorded only if the accumulated net actuarial gains or losses exceed 10% of the greater of the

accrued benefit obligation and the value of the plan assets. The market value of assets is used for all calculations.


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)

Financial instruments

Financial instruments of UFA consist of cash and cash equivalents, accounts receivable, accounts payable, member

loans and long term debt. As at December 31, 2006 there were no significant differences between the carrying

amounts of these financial instruments reported on the balance sheet and their estimated fair values.

The CICA Accounting Guideline 13, “Hedging Relationships”, establishes criteria for hedge accounting and applies

to all hedging relationships. UFA has adopted the hedge accounting permitted by the guideline.

UFA offers, to certain qualifying customers, the ability to lock in the purchase price of certain petroleum products

by allowing them to enter into either Fixed Price or Fixed Forward contracts (the “Fixed Contracts”). To manage

the market price risk associated with these programs UFA utilizes two derivative instruments. Petroleum fixed for

floating swap agreements (“Commodity Instrument”) are used to hedge Fixed Contracts and Foreign exchange swap

agreements (“Financial Instrument”) are used to hedge foreign exchange risk on specific Commodity Instruments.

UFA’s policy is not to utilize either Commodity Instruments or Financial Instruments for trading or speculative


UFA formally designates each Commodity Instrument as a hedge of each specifically identified Fixed Contract. In

conjunction with these designations, UFA believes that the Commodity Instruments utilized are effective as hedges,

both at inception and over the term of the instrument, as the term to maturity and specific volumes match the terms

of the Fixed Contracts.

UFA formally documents its risk management objectives and strategies for undertaking the Commodity Instrument

transactions. This includes assessing the effectiveness of the derivative instruments on an ongoing basis to ensure

that the derivative instruments entered into are highly effective in offsetting changes in fair values of the hedged


Crude oil price swaps are used in UFA’s program to manage the fluctuation of petroleum product market prices.

Gains and losses on the Fixed Contracts are offset by corresponding gains and losses on these swaps and are

deferred and recognized when the hedged transaction occurs.

Financial Instruments are used in UFA’s program to manage the fluctuation of Canadian to United States exchange

rates. Gains and losses on the Financial Instruments are offset by corresponding gains and losses on these Fixed

Contracts and are deferred and recognized when the hedged transaction occurs.

In the event that a designated Commodity Instrument or Financial Instrument is sold, extinguished, is no longer

effective as a hedge, or otherwise cancelled, any realized or unrealized gain or loss on such Commodity Instrument

or Financial Instrument is recognized in the Statement of Earnings and Retained Earnings.

These transactions, which are settled within one year, involve a degree of credit risk, which UFA controls through

the establishment of credit policies. In addition, the crude oil price swaps and foreign exchange swaps are

conducted with high credit standing financial institutions and, accordingly, UFA does not anticipate nonperformance

by the counter-parties.


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)

2. Cash and Cash Equivalents

Cash consists of cash on account of $40.2 million (2005 - $22.0 million). Cash equivalents consists of commercial

paper of $63.0 million (2005 - $45.0 million) with maturity dates of less than 90 days at rates of return of 4% (2005

- 3.1% to 3.2%).

3. Property and Equipment

2006 2005













Land $ 19,550 $ — $ 19,550 $ 20,762 $ — $ 20,762

Buildings, fences and yards 94,580 29,903 64,677 74,852 29,358 45,494

Equipment 102,093 51,147 50,946 84,397 48,396 36,001

Computer equipment and software 48,136 38,396 9,740 42,021 28,878 13,143

Automotive equipment 18,057 11,715 6,342 15,188 10,589 4,599

Leased assets 7,468 3,766 3,702 9,364 4,700 4,664

Construction in progress 13,847 — 13,847 24,477 — 24,477

$ 303,731 $ 134,927 $ 168,804 $ 271,061 $ 121,921 $ 149,140

UFA includes labour costs as part of a capital asset where the cost of the capital asset is in excess of $0.25 million. For

the year ended December 31, 2006 labour costs included in capital assets are $6.1 million (2005 - $2.2 million).

The balance at December 31, 2006 of construction in progress is expected to be placed into productive use during fiscal

2007 and represents work commenced but not completed on buildings, equipment and an enterprise wide computer

system. Depreciation and amortization will commence once these assets are substantially complete and put into use.

4. Other Long Term Assets

2006 2005

Accrued benefit asset [note 13] $ - $ 807

Deferred charges - financing [note 7] 1,385 1,091

Deposit on new office facility [note 16] 785 -

Other long term assets 855 940

$ 3,025 $ 2,838

5. Deferred Revenue

2006 2005

Goods and services $ 16,374 $ 17,756

Construction jobs 1,435 1,925

$ 17,809 $ 19,681

Included in goods and services is cash received from qualifying customers for Fixed Forward contracts (note 12).


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)

6. Member Loans

A voluntary member loan program (“Member Loans”) provides members, employees and agents the opportunity to

invest in UFA and earn a return on the investment of prime rate less 0.5%. Member Loans are unsecured and

repayable on demand. The balance of Member Loans at December 31, 2006, is $20.0 million (2005 - $20.0 million).

The interest on Member Loans of $1.1 million (2005 - $0.8 million), is included in short term financing expense.

The repayment of Member Loans is subject to the right of offset of any amounts owing to UFA, and is subject to

UFA meeting the covenants contained under both the Credit Facility and Senior Secured Notes.

7. Long Term Debt

2006 2005

Senior Secured Notes $ 85,000 $ 85,000

Obligations under capital leases 4,609 5,391

89,609 90,391

Less current portion (2,378) (2,569)

$ 87,231 $ 87,822

During 2005, UFA issued $85.0 million of Senior Secured Notes (the “Notes”) under a private placement offering. The

Notes, which have a coupon rate of 5.46%, mature on June 30, 2015 and are repayable in three equal annual

installments of $28.3 million beginning in 2013. Interest is payable semi-annually. The costs associated with issuing

the Notes are deferred and amortized over 10 years. The amortization costs are included in long term financing

expense. Financing costs associated with long term debt totaled $3.7 million for 2006 (2005 - $3.1 million).

The Note holders share, pari-passu, the security described under the credit facility.

UFA is subject to certain financial covenants related to both the Notes and credit facility that have been met at

December 31, 2006.

In 2005, in conjunction with the issuance of the Notes, UFA prepaid the 10.0% fixed rate Debenture that was to mature

in December 2006. In addition to the principal amount of $2.0 million, a make-whole payment of $0.2 million, which is

included in long term financing expenses in 2005, was made to the Debenture holders.


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)

Capital lease obligations

The assets under capital leases are the security for the respective obligations. The lease terms range from 1 to 5 years

at interest rates varying between 5.0% and 18.0% for 2006 (2005 - 5.0% and 11.6%).

Scheduled principal payments over the next five years are as follows:

2007 $ 2,378

2008 1,363

2009 563

2010 236





Credit Facility

UFA entered into a new Credit Facility during 2006. The Credit Facility consists of a $70.0 million committed

revolving operating facility, which is used to finance general operating requirements and a $50.0 million expandable,

non-committed facility. The expandable, non-committed facility may be used for general corporate purposes. UFA can

borrow either through Prime Loans, Bankers’ Acceptances or Letters of Credit. UFA can repay, without penalty,

advances under the Credit Facility. The Credit Facility matures July 28, 2009.

The Credit Facility and the Notes are collateralized, pari passu, by a fixed and floating charge debenture creating a first

charge over all of UFA’s assets. The Credit Facility bears interest at rates ranging from bank prime plus 0.0% to 1.75%.

In addition, a General Security Assignment is issued granting a security interest in all present and after-acquired

property of UFA, subject only to permitted encumbrances as defined under the Credit Facility and the Notes.

The amount outstanding under the Credit Facility at December 31, 2006 is $ nil (2005 - $ nil). At any time, the total

amount available under the Credit Facility is the lesser of the Credit Facility limit or a limit based on trade receivables

and unencumbered inventory.

Short term financing costs totaled $1.6 million for 2006 (2005 - $2.4 million).

The effective average interest rate in 2006 on all borrowings under the Credit Facility was 5.9% (2005 - 4.9%). The

effective rate includes the amortization of the costs associated in finalizing the Credit Facility.


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)

8. Income Taxes

Income tax expense differs from the amount that would be computed by applying the Federal and Provincial

statutory income tax rates to earnings before income taxes as set out below:

2006 2005

Earnings before patronage allocation and income taxes $ 94,716 $ 84,501

Patronage allocation (35,000) (25,400)

Earnings before income taxes $ 59,716 $ 59,101

Statutory income tax rate 32.50 % 33.62 %

Expected income tax expense $ 19,408 $ 19,870

Plus non-deductable items (57) 205

$ 19,351 $ 20,075

Income taxes consists of:

Current income taxes $ 19,788 $ 22,010

Future income taxes (437) (1,935)

$ 19,351 $ 20,075

The net future income tax asset at December 31 is comprised of the tax effect of the following temporary


2006 2005

Future income tax assets:

Cumulative eligible capital $ 454 $ 561

Allowances not deductible for tax purposes 3,915 4,385

Other assets 330 -

4,699 4,946

Future income tax liabilities:

Other liabilites - (299)

Capital assets (2,397) (2,782)

(2,397) (3,081)

Net future income tax asset $ 2,302 $ 1,865


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)

9. Asset Retirement Obligations

2006 2005

Balance, beginning of year $ 4,041 $ 3,625

Accretion expense 242 218

Revisions in estimated cash flows 2,228 $ 1,082

Liabilities settled (1,151) (884)

Balance, end of year $ 5,360 $ 4,041

The estimates used in determining UFA's asset retirement obligations could change due to changes in regulations

and the timing, nature and extent of environmental remediation required. Changes in estimates relating to the timing

or the amount of the original estimate of undiscounted cash flows are accounted for prospectively in the period that

the estimate is revised.

Estimated undiscounted future cash flows, adjusted for inflation, are $40.7 million (2005 - $37.7 million) and are

expected to be incurred up to and including fiscal 2045. The present value, or discounted fair value of the

obligations was determined using a 6.0% discount rate (2005 - 6%) and a 2.0% inflation rate (2005 - 2%).

10. Other Long Term Liabilities

2006 2005

Accrued pension benefit liability [note 13] $ 1,472 $ -

Other long term liabilities 1,686 200

$ 3,158 $ 200

11. Member Entitlements

Member entitlements consist of member shares, the current year’s patronage allocation, revolving equity, and

investment shares.

All member entitlements for members that turn 65 years of age (“Senior Members”), is converted into Class A

Investment shares, with the exception of one $5.00 member share.

The repayment and redemption of equity and the payment of patronage and dividends are subject to the right of

offset of any amounts owing to UFA, and are subject to UFA meeting the covenants contained under both the Notes

and Credit Facility.

Details of member entitlements are as follows:

2006 2005

Member shares $ 28,304 $ 27,260

Patronage allocation 34,801 25,194

Revolving equity 84,309 78,635

Investment shares 48,125 38,515

Member entitlements, end of year $ 195,539 $ 169,604


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)

Member shares

UFA is authorized to issue an unlimited number of member shares with a par value of $5.00. Member shares are

redeemable at par value when the member reaches age 65, moves out of the trading area or, at the request of the

member’s estate, upon the member’s death.

Authorized : Unlimited ordinary shares of $5 par value

2006 2005

Ordinary shares issued: Number Amount Number Amount

Balance, beginning of year 5,452 $ 27,260 5,366 $ 26,830

Patronage allocation 358 1,789 248 1,241

Conversion to Class A Investment shares (105) (526) (111) (555)

Redemption (44) (219) (51) (256)

Balance, end of year 5,661 $ 28,304 5,452 $ 27,260

Patronage allocation

UFA distributes a portion of its current year earnings to its members in the form of a patronage allocation. The

allocation must be ratified by UFA’s elected delegates at their annual meeting held in March of the following year.

As part of the ratification and as provided for under UFA’s by-laws, the delegates also approve the distribution of

the current year allocation to member shares, non-interest bearing revolving equity, Class A Investment shares and

the amount to be paid in cash.

2006 2005

Balance, beginning of year $ 25,194 $ 15,149

Current year distribution

Member shares (1,789) (1,241)

Cash (5,827) (3,430)

Revolving equity (15,995) (9,610)

Investment shares (1,786) (1,076)

Prior year adjustment 4 2

Current year allocation 35,000 25,400

Balance, end of year $ 34,801 $ 25,194


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)

Revolving equity

Revolving equity is non-interest bearing, non-redeemable by the member except in specific circumstances and is

converted into Class A Investment shares over a 12 year period.

2006 2005

Balance, beginning of year $ 78,635 $ 78,359

Patronage allocation 15,995 9,610

Conversion to Class A Investment shares (8,064) (7,329)

Conversion to Class A Investment shares for Senior Members (1,437) (1,475)

Repayment (820) (530)

Balance, end of year $ 84,309 $ 78,635

Class A Investment shares

Class A Investment shares have a par value of $100.00, are non-voting, are redeemable at par value at the option of

the holder subject to Board approval, are retractable at par value at the option of UFA, and provide a dividend at

prime rate less 0.5%. The dividends of $2.4 million (2005 - $1.4 million) on the investment shares are charged

against retained earnings.

Authorized : Unlimited investment shares of $100 par value

2006 2005

Number Amount Number Amount

Balance, beginning of year 385 $ 38,515 305 $ 30,491

Patronage allocation 18 1,786 11 1,076

Conversion from revolving equity 81 8,064 73 7,329

Conversion from revolving equity for Senior Members 14 1,437 15 1,475

Conversion from member shares for Senior Members 5 528 5 555

Redemption (22) (2,205) (24) (2,411)

Balance, end of year 481 $ 48,125 385 $ 38,515


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)

12. Commitments, Contingencies and Guarantees

Future minimum payments under operating leases for certain facilities and equipment, including those described in

note 16, Subsequent Events, are due as follows:

2007 $ 2,438

2008 3,044

2009 3,256

2010 3,092

2011 2,346

After 2011 29,907

$ 44,083

UFA guarantees long term equipment financing available to petroleum sales agents from a third party to a maximum

of $10.0 million. At December 31, 2006 guarantees totaling $2.4 million (2005 - $1.7 million) were outstanding.

The risk of loss on these guarantees is mitigated by virtue of the fact that equipment financing can not exceed 75%

of the asset value and is for terms up to five years, which is less than the normal economic life of the financed

equipment. UFA has the right to seize and liquidate the equipment and has a contractual right of offset with its

petroleum sales agents whereby it could withhold sales commissions to extinguish the debt. Notwithstanding the

above, any payments required to be made by UFA under these guarantees is limited to $0.5 million per year.

UFA has entered into Fixed Contracts that require the future delivery of petroleum products. The prepayment

amounts on the Fixed Forward contracts are included in deferred revenue (note 5).

To hedge its price risk on the above Fixed Contracts, UFA has outstanding petroleum fixed for floating swap

agreements at December 31, 2006 for 51.4 million litres for a range of terms that expire by October 31, 2007. To

hedge the foreign exchange risk on these commodity swaps UFA has entered into financial foreign exchange swap

agreements totaling USD$19.5 million which match to the corresponding petroleum swap agreements.

All Fixed Contracts have been hedged at December 31, 2006. At December 31, 2006, $0.3 million would have been

paid to settle the petroleum and foreign exchange swap transactions. These instruments have no book value

recorded in the financial statements. UFA has no intention to settle the contracts early.

During the normal course of business activities, UFA is subject to tax audits by federal and provincial authorities.

On a regular basis management reviews the status of such audits to ensure the provisions included in accounts

payable and accrued liabilities is adequate to cover any potential reassessments that may be issued by the tax

authorities. By its nature, this provision amount is subject to measurement uncertainty, and despite careful and

comprehensive analysis, the amount ultimately determined could be materially higher or lower than the amount


UFA’s by-laws provide indemnification to its current and former directors, officers and employees to the extent

permitted by law, against liabilities arising from their service to UFA. The broad nature of these indemnification

by-laws does not permit a reasonable estimate of the maximum potential amount of any liability. No amount has

been accrued in the financial statements in this respect.


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)

13. Employee Future Benefits

UFA administers two defined benefit pension plans; a funded registered plan (the “RPP”) for all employees and an

unfunded supplemental retirement plan (the “SERP”) for those employees whose earnings exceed the maximum

allowable under government guidelines for the RPP. UFA funds the RPP in accordance with current pension

legislation. UFA does not fund the SERP but has the obligation to pay SERP benefits out of general revenue in the year

payments are made. Pension benefits are provided to qualified employees and are based, in general, on years of service

and compensation near retirement.

UFA measures its accrued benefit obligation and the fair value of plan assets of its pension plans for accounting

purposes as at December 31 of each year. The most recent actuarial valuation of the RPP for funding purposes was

as of January 1, 2005, and the next required valuation will be as of January 1, 2008.

Total cash payments for employee future benefits, including cash contributed by UFA to the RPP and cash payments

directly to employees in respect of the SERP, totaled $3.1 million in 2006 (2005 - $2.8 million).

Information regarding UFA’s defined benefit plans is as follows:

2006 2005

Change in accrued benefit obligation

Accrued benefit obligation, beginning of year $ 79,756 $ 65,941

Employer's current service costs 4,566 3,597

Interest cost 4,030 3,816

Employees' contributions 1,271 1,165

Benefits paid (3,713) (2,993)

Actuarial (gain) loss (2,709) 8,230

Accrued benefit obligation, end of year $ 83,201 $ 79,756

Change in plan assets

Market value of plan assets, beginning of year $ 64,326 $ 55,741

Actual return on plan assets 8,321 7,603

Employer's contributions 3,057 2,810

Employees' contributions 1,271 1,165

Benefits paid (3,713) (2,993)

Market value of plan assets, end of year $ 73,262 $ 64,326

Reconciliation of funded status

Deficit of plan at end of year $ (9,939) $ (15,430)

Unamortized net actuarial loss 8,464 16,233

Unamortized transitional obligation 3 4

Accrued benefit (liability) asset [notes 10 and 4] $ (1,472) $ 807

Included in the accrued benefit obligation is $3.0 million relating to the SERP (2005 - $3.0 million).


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)

2006 2005

Plan assets by asset category

Canadian equity securities 34% 34%

International equity securities 25% 27%

Debt securities 36% 35%

Cash and short term securities 5% 4%

Total plan assets by asset category 100% 100%

The pension expense is determined as the cost of employee benefits earned in the current year, interest expense on

the accrued benefit obligation, expected investment return on the market value of plan assets, the amortization of

transitional obligations (assets) and the amortization of actuarial gains and losses in excess of the corridor.

2006 2005

Pension expense components

Employer's current service cost $ 4,566 $ 3,597

Interest cost 4,030 3,816

Actual return on plan assets (8,321) (7,603)

Actuarial (gain) loss on accrued benefit obligation (2,709) 8,230

Costs arising in the period (2,434) 8,040

Differences between costs arising in the period and costs recognized

in the period in respect of:

Return on plan assets 3,978 3,808

Actuarial losses (gains) 3,841 (7,671)

Transitional obligation 1 1

Net pension expense recognized $ 5,386 $ 4,178

January 1, January 1,

2006 2005

Weighted-average assumptions for expense

Discount rate 5.00% 5.90%

Expected long-term rate of return on plan assets 6.75% 6.75%

Salary escalation 4.00% 4.00%

December 31, December 31,

2006 2005

Weighted-average assumptions for disclosure

Discount rate 5.20% 5.00%

Salary escalation 4.00% 4.00%


United Farmers of Alberta Co-operative Limited

Notes to Financial Statements

(tabular amounts expressed in thousands)

14. Increase in Non-Cash Working Capital

2006 2005

Accounts receivable and prepaid expenses $ (3,555) $ (39,446)

Inventories (14,776) (1,777)

Accounts payable and accrued liabilities 12,303 23,998

Deferred revenue (1,872) 7,846

Member loans (5) 785

Increase in non-cash working capital $ (7,905) $ (8,594)

Comprised of:

Operating activities $ (13,212) $ (12,501)

Investing activities 5,312 3,122

Financing activities (5) 785

$ (7,905) $ (8,594)

15. Supplementary disclosure of cash payments

2006 2005

Interest $ 6,606 $ 5,674

Income taxes $ 16,187 $ 23,309

16. Subsequent Events

During fiscal 2006, UFA announced its agreement to enter into a long term lease for new office facilities in Calgary,

with an estimated occupancy date of mid-2008. In connection with leasing new office facilities, UFA also entered into

a sale and leaseback agreement related to the existing Calgary office facility with a third party. On January 31, 2007,

UFA and the third party completed the sale and leaseback agreement on the existing office facility. The proceeds from

the sale totaled $12.7 million, resulting in a gain of $9.4 million. The gain will be amortized over the length of the

leaseback. The leaseback agreement will cover the period of time until the new office facilities are available for


17. Comparative Figures

Certain comparative figures have been reclassified to conform with the current year’s financial statement presentation.


Corporate Profile





UFA is a thriving and progressive co-operative with a passion for agriculture and an affinity

for rural life. We are committed to being a market-driven organization that is recognized as

the leading provider of quality products, services and solutions that support agriculture and

serve the rural community.


We are a co-operative with a mandate to create value for our owners and customers

through our unwavering commitment to strong financial performance; relevance to

agriculture producers; and connection to the rural community.

• We excel at anticipating and responding to the changing needs of the people who live,

work and play in the rural environment.

• We have an exceptional ability to identify, source and deliver relevant products, services

and solutions at the right place and time.

• We champion a work environment that inspires a balance of progressive thinking, agility,

collaboration and accountability for results.

In doing so, we believe that UFA will become the preferred choice of owners, customers,

business partners and top-performing employees who share our passion for this business.


• Integrity

• Collaboration

• Respect

• Progressive thinking

• Agility

• Performance

• Accountability


UFA Co-operative Limited is owned by more than 120,000 active members. As a cooperative,

UFA returns its earnings to members, proportionate to financial results.

Membership is available with a minimum share purchase of five dollars.



UFA Co-operative Limited is one of Alberta’s most dynamic enterprises. The co-operative’s

network of more than 110 petroleum outlets, 35 Farm and Ranch Supply stores and the

Stirdon/Betker division provides rural communities with the products and services they need.

Our employees and independent agents distribute petroleum and farm supplies to farmers,

ranchers, consumers and commercial accounts throughout Alberta, B.C. and Saskatchewan.

With more than $1.6 billion in annual revenues, UFA is one of Canada’s most successful cooperatives.


120,000 members

57 delegates

9 directors

3 officers; part of the 9-

member senior

management team

1,313 employees &



UFA members elect 57 delegates in sub-districts across UFA’s areas of operation. In turn,

delegates elect nine directors to sit on the board of directors. Directors elect the chairman of

the board and two vice-chairmen; they appoint the president and chief executive officer,

vice-president of Corporate Affairs and corporate secretary, and chief financial officer. The

chairman of the board and the president and chief executive officer meet with the directors

and delegates during the year, seeking input and listening to members.


Delegate-owner meetings are held twice a year, once in spring and once in fall. The

meetings are an opportunity to communicate the co-operative’s business and financial




The co-operative’s earnings belong to its member-owners. Patronage allocations are ratified

by delegates at the annual meeting and are paid in proportion to each member’s purchases

during the previous year. UFA also invests a portion of its earnings in rural community



Members finance UFA Co-operative Limited through the application of patronage allocation

to shares and revolving equity. Through the co-operative’s Member Equity Plan, members

have the opportunity to earn investment dividends on a portion of their equity. As well, under

UFA’s Member Loan Program, members, employees and agents have the opportunity of

earning an attractive rate of return on amounts loaned to the co-operative. For more

information, contact Member Records at 1-877-258-4500, option 3.




Contact Information

Head Office

UFA Co-operative Limited

1016 – 68 Avenue SW

Calgary, Alberta

T2V 4J2

Mailing Address

UFA Co-operative Limited

P.O. Box 5350 Station A

Calgary, Alberta

T2H 2J9



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