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We begin here.
P a r k l a n d i n c o m e F U n d
a n n U a l r e P o r t 2 0 0 5
P a r k l a n d i n c o m e F U n d
Suite 236, riverside office Plaza
4919 – 59th Street
red deer, alberta
t4n 6c9
www.parkland.ca
Friendly
Hard-working
Dedicated
Committed
Resourceful
Rooted
Solid
We begin here.
At Parkland we try to “live” our values in everything we do, from the way we
operate our businesses to the people we hire from the service we offer customers
to the returns we provide our investors. Parkland is deeply rooted in Western
Canada and we are proud of our strong heritage. As we look to the future, our
company will grow and change as we continue to make acquisitions, upgrade sites,
add complementary business lines and further integrate our operations. However,
through this evolution we will remain committed to our values and our core
strategy of serving our loyal customer base in non-urban markets across Canada.
Corporate Information
Head Office
Suite 236, Riverside Office Plaza
4919 – 59th Street
Red Deer, Alberta
T4N 6C9
Tel: (403) 357-6400
Fax: (403) 346-3015
Email: corpinfo@parkland.ca
Website: www.parkland.ca
Annual General Meeting
Friday, May 5, 2006
2 p.m. at the Capri Hotel
Trade and Convention Centre
3310 – 50th Avenue
Red Deer, Alberta
Banker
HSBC Bank Canada
108, 4909 – 49th Street
Red Deer, Alberta
T4N 1V1
Auditors
PricewaterhouseCoopers LLP
3100, 111 – 5th Avenue SW
Calgary, Alberta
T2P 5L3
Legal Counsel
Bennett Jones LLP
4500, Bankers Hall East
855 – 2nd Avenue SW
Calgary, Alberta
T2P 4K7
Stock Exchange Listing
Toronto Stock Exchange
Trading Symbol: PKI.UN
Registrar and Transfer Agent
Valiant Trust Company
310, 606 – 4th Street SW
Calgary, Alberta
T2P 1T1
Directors
Robert G. Brawn
Jim Dinning
Alain Ferland
Kris Matthews
Jim Pantelidis
David A. Spencer
Andrew B. Wiswell
Officers
Michael W. Chorlton
President and CEO
John G. Schroeder
Vice President and CFO
Corporate Secretary
Chief Privacy Officer
Kelly G. Collier
Controller, Retail
Wholly Owned Subsidiaries
986408 Alberta Ltd.
986413 Alberta Ltd.
Parkland Holdings Limited Partnership
Parkland Industries Limited Partnership
Parkland Industries Ltd.
Parkland Investment Trust
Parkland Refining Ltd.
Designed and Produced by Result Inc.
Printed in Canada.
This annual report is printed on Mohawk Via which is now
manufactured with non-polluting wind-generated energy.
P r e s i d e n t ’ s M e s s a g e . . . . . . . . . . . . . 4
M a n a g e M e n t r o u n d ta b l e . . . . . . . . . . . . . 1 0
r e v i e w o f o P e r at i o n s . . . . . . . . . . . . . 1 6
H e a l t H , s a f e t y a n d e n v i r o n M e n t . . . . . . . . . . . . . 2 0
C o d e o f C o n d u C t . . . . . . . . . . . . . 2 0
C o M M u n i t y i n v o l v e M e n t . . . . . . . . . . . . . 2 1
P r i v a C y s tat e M e n t . . . . . . . . . . . . . 2 1
C o r P o r at e g o v e r n a n C e . . . . . . . . . . . . . 2 4
b o a r d o f d i r e C t o r s . . . . . . . . . . . . . 2 8
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s . . . . . . . . . . . . . 3 2
C o n s o l i d at e d f i n a n C i a l s tat e M e n t s . . . . . . . . . . . . . 5 1
n o t e s t o C o n s o l i d at e d f i n a n C i a l s tat e M e n t s . . . . . . . . . . . . . 5 6
C o r P o r at e i n f o r M at i o n . . . . . . . . . . . . . i b C
Forward-looking Information Disclaimer
Certain information regarding Parkland Income Fund including management’s assessment of future plans and operations, constitutes forward-looking
information or statements under applicable securities laws and necessarily involve assumptions regarding factors and risks that could cause actual
results to vary materially, including, without limitation, assumptions and risks associated with retail pricing and margins, availability and pricing of
petroleum product supply, volatility of crude oil prices, marketing competition, environmental damage, credit granting, interest rate fluctuation and
availability of capital and operating funds. The reader is cautioned that these factors and risks are difficult to predict and that the assumptions used
in the preparation of such information, although considered reasonably accurate by Parkland at the time of preparation, may prove to be incorrect.
Accordingly, readers are cautioned that the actual results achieved will vary from the information provided herein and the variations may be material.
Readers are also cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect
Parkland’s operations or financial results are included in Parkland’s reports on file with Canadian securities regulatory authorities. In particular see
Parkland’s MD&A and the Risk Factors and Industry Conditions section of Parkland’s Annual Information Form. Parkland’s reports may be accessed
through the SEDAR website (www.sedar.com) or Parkland’s website (www.parkland.ca). Consequently, there is no representation by Parkland that
actual results achieved will be the same in whole or in part as those set out in the forward-looking information. Furthermore, the forward-looking
statements contained in this document are made as of the date of issue. Parkland does not undertake any obligation to update publicly or to revise
any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements
contained herein are expressly qualified by this cautionary statement.
Hard-working
Parkland Income Fund is one of Canada’s largest independent marketers of
transportation fuel, operating retail outlets under Fas Gas Plus, Fas Gas and Race
Trac brands. With our Short Stop Food Stores and Short Stop Express, we are one of
the fastest growing convenience store chains in non-urban areas. Parkland is working
hard to deliver quality service to customers, development and career opportunities to
employees, and strong overall performance to unitholders.
P r e s i d e n t ’ s M e s s a g e
To Our Unitholders
As your new CEO, I am pleased to report that
Business and Financial Performance
we closed out 2005 in style with record third and
fourth quarters and record annual performance in
sales, margins, earnings and distributions.
Despite a year of transition in which there was a
management reorganization followed by a change
in CEO, Parkland stayed focused on its key
strategies with excellent growth in its business base,
increased earnings and distributions, and progress
on all of its major initiatives.
Our strong performance this past year leaves us
well positioned to continue to build results and
The records we set in 2005 spanned all of our key
measures – fuel volumes, merchandise sales, gross
margin, EBITDA and unitholder distributions.
Fuel volumes experienced a 6.9 percent growth,
in large part due to our successful Fas Gas Plus
upgrade program, that contributed to a 4.7 percent
increase in same-store volumes, as well as the
initial volume contribution from our new Imperial
Oil (“Esso”) Retail Branded Distributorship
Agreement. Merchandise sales at our company-
operated Short Stop Food Stores maintained double
enhance our capabilities in 2006 and beyond.
digit growth at 18.1 percent.
Performance Measures
fuel volume (millions of litres)
Merchandise sales ($ million)
gross Margin ($ million)
ebitda ($ million)
total distributions ($ million)
2003
1,039
31.3
77.4
29.0
20.4
2004
1,101
38.1
82.9
30.5
21.1
2005
2004/05 Change
1,177
45.0
91.9
36.7
23.9
+ 6.9 %
+ 18.1%
+ 10.9%
+ 20.3%
+ 13.3%
4
P a r k l a n d i n C o M e f u n d
p r e S i D e n t ’ S M e S S a G e
Th e records we s eT I n 2005 s pan n ed all
of ou r Key m eas u res – fu el volu m e,
m erchan dI s e sales, gross margI n, eBITda
an d u n ITholder dI sTrI BuTIon s.
In total, Gross Margins increased by $9 million or 10.9
Key Initiatives
percent driven by increased sales volumes and higher
per unit margins for both fuel and merchandise.
Marketing, General and Administrative expenses
remained well contained, with increases primarily
related to increased variable costs on retail fuel
volumes and merchandise sales.
Overall, EBITDA increased by 20.3 percent over
2004. This increase, as well as our prospects for
sustainable performance going forward, led our
Board to increase monthly distributions from $0.15
to $0.17 per unit in November, and add a year-end
special distribution of $0.10 per unit.
Our marketing strategy took a leap forward in
2005 as we reorganized the business units to
provide a highly integrated approach to retail and
wholesale activities. The new organization has a
common approach to investment with higher return
expectations. There is no slowing in site investment
and upgrades. We continued our network upgrade
in 2005 adding new and upgraded sites and
shedding low performance locations. The operating
environment features ongoing industry reductions
in station count, increased per-store throughput and
continued focus of the market leaders on
2005 Key Initiatives
• Marketing
• Supply
s
s
• Business Development
• organizational Capability s
s
• Corporate Governance s
2 0 0 5 a n n u a l r e p o r t
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3/8/06 3:13:52 PM
P r e s i d e n t ’ s M e s s a g e
high volume urban sites. This opens growth
Saskatchewan gives Parkland a stronger supply base
opportunities for Parkland with our non-urban focus
and more supply options.
and low overhead structure.
We continue to make strides on another key
Our strong business development efforts resulted
initiative – organizational capability. We have
in the signing of the Esso Agreement in the third
focused on building skills in our marketing, supply
quarter. This agreement is expected to add about
and business development areas, with
25 percent to our volumes and about $3 million
new employees in new roles. We continue
per year to EBITDA at maturity. We also made
to enhance our training and development
progress on developing options for the Bowden
programs across the organization as well as
refinery; however, this will need continued focus in
our internal business systems, and we introduced
2006 to bring negotiations to fruition.
new pay systems to attract, motivate and retain
Long-term petroleum product supply, one of the
talented employees.
pillars of our business, was enhanced as we added
Lastly, on the matter of Corporate Governance,
a third major supply source to our portfolio. The
Parkland saw the smooth implementation
signing of the Esso Agreement for Alberta and
of its new Board and Trustee structure. We
Key Strategies Going Forward
Grow Volume / Cash Flow
Increase Competitiveness
Actively Manage Risk
Drive Organizational Change
• existing site upgrades
• marketing excellence
• active supply management
• adoption of proven
• new sites / dealers
• non-fuel revenue growth
• bowden options
• accretive acquisitions
• net unit operating cost
reduction
• conservative financial
structure
• enhanced H s & e program
technology
• continued organization
streamlining and integration
P a r k l a n d i n C o M e f u n d
p r e s i d e n t ’ s m e s s a g e
Ou r FOu r key strateGic areas
remai n u nchanGed as we bu i ld th e
bu s i n ess tO deliver cOn s i stent an d
GrOwi nG u n ithOlder di stri butiOn s.
continue to work with our Board, Committees and
As an organization we will continue to improve
auditors to ensure compliance with new governance
our processes and make further progress on
regulatory changes.
streamlining and integrating our marketing
functions. We want to ensure that we have the
management and the analytic capabilities of the
market leaders while maintaining the speed and
entrepreneurship of an independent operator.
In summary, I am very proud of what has been
accomplished for our unitholders. I believe
Parkland is well positioned to continue its solid
growth record in 2006 and beyond. I would like
to give special thanks to our customers, suppliers,
retailers, employees and our Board, whose efforts
and support have been critical to this performance.
Together we can look forward to continued success.
Going Forward
Our four key strategic areas remain unchanged
as we build the business to deliver consistent and
growing unitholder distributions.
Our focus will remain on our core business of
petroleum products distribution and convenience
stores. We will continue to pursue organic growth
with our non-urban network expansion and
upgrades. Beyond organic growth, we will look for
step changes through our investment and acquisition
efforts and pursue opportunities related to our
Bowden refinery site.
We launched into 2006 with the prospects of higher
volumes, both from our Fas Gas Plus and Race
Trac sites and from full implementation of the Esso
Agreement. At the same time, we know that we
have to be prepared to operate in an environment of
Michael W. Chorlton
margin compression and that our focus continues to
President and CEO
be on net unit operating cost reduction. We expect
to generate sufficient cash flow from operations to
sustain our $0.17 per unit monthly distributions,
without relying on additional acquisitions.
March 1, 2006
2 0 0 5 a n n u a l r e p o r t
112197-PKI_Book6.indd 7
3/9/06 3:24:19 PM
Resourceful
Parkland has developed a strong market niche through its focus on
non-urban markets, where there is loyalty to its brands, lower real estate and
overhead costs and more stable margins. With major competitors focusing on urban
centres, Parkland’s market presence has positioned us well for industry consolidation.
M a n a g e M e n t r o u n d ta b l e
Management Round Table
Parkland Income Fund has become the fastest growing independent marketer of transportation fuel in Western Canada. With
over 600 employees, Parkland has positioned itself as a significant player in non-urban markets, providing breadth and
presence through its network of 536 service stations. In late January 2006, four key members of the Parkland management
team – Michael Chorlton, President and CEO, John Schroeder, Vice President and CFO, Stewart MacPhail, Vice President,
Retail Markets and Bradley Williams, Vice President, Supply, Wholesale and Distribution – sat down to discuss the Fund’s
marketing strategy, its successes and challenges, and opportunities for the future. Here is a summary of their conversation.
on reorganizing the business units
structure, we are able to create a sharper focus, to
Our reorganization of the company this past year
was a strategically driven change intended to align
our activities within a comprehensive marketing
strategy that would effectively position Parkland.
be more consistent and to reduce duplication of
activities across various functions.
on the growth strategy
Previously, each of our three divisions had its
The long-term growth strategy remains unchanged.
own marketing strategy that was effective for that
We will continue to focus on independent fuel
division but not necessarily aligned to position
marketing and convenience store operations in
Parkland as a company. The organization is now in
non-urban markets in Western Canada. We believe
a better position to deliver the objectives we set out
there is significant potential in this business, partly
in our strategy: to build upon our current strengths
due to the opportunities in the market and also
within non-urban markets; to develop a clear brand
because of our understanding of how to operate in
position within those markets; to consolidate our
a very cost-effective way to take advantage of these
position; to diversify away from reliance on fuel
opportunities. Half our stations are in Alberta which
margins as we build a more significant convenience
is experiencing rapid growth. We have a refinery
store business; and to deliver new sources of
asset that should offer some real opportunities for us.
non-fuel margin, all the while keeping our cost
We also have a well-integrated distribution system.
structure low. By moving away from a divisional
10
P a r k l a n d i n C o M e f u n d
m a n a g e m e n t r o u n d ta b l e
Over the past 10 years we have had about 200
make sense, such as co-developing gas bars and
percent volume growth. In 2005 we signed an
fast-food outlets. In Manitoba for instance, we are
agreement with Imperial Oil to market the Esso
constructing a combination gas bar, convenience
brand to independent dealers in Alberta and
store and McDonald’s restaurant.
Saskatchewan, excluding Calgary and Edmonton.
In 2006 we expect a 25 percent volume growth from
On the future of the refinery
that agreement alone. There is no reason to believe
that we won’t continue the upward trend.
Operations were suspended at the Bowden refinery
in central Alberta in September 2001. We are
As an independent marketer, we are well positioned
looking at alternative opportunities to generate cash
versus our competitors for growth in this sector.
flow from the facility. The refinery is in an excellent
We have three brand types aimed at three different
location, it’s very central, close to the highway,
customer segments: Fas Gas Plus, Race Trac and
rail and pipelines, and has some very good
Esso. At the same time however, we are not going to
processing equipment. We are hopeful we will
grow for the sake of growth; we are going to grow
have a solution soon.
for the sake of unitholder value.
On pursuing similar deals to the
imperial Oil agreement
We will pursue more arrangements like the
Imperial Oil agreement if they present the right
opportunities. That kind of deal fits very nicely
into a trust structure. A core piece of our growth
strategy is to continue building relationships with
other complementary branded businesses at our
sites. There are a number of kinds of alliances that
On distributions
Our level of distributions is guided by continuous
review of the financial performance of the business
rather than a target pay-out ratio. We carefully
consider our estimate of sustainable cash flow
and tax position going forward. We increased
distributions twice in the past two years when we
saw that distributable cash was growing and judged
to be sustainable.
11
2 0 0 5 a n n u a l r e p o r t
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3/9/06 3:24:28 PM
M a n a g e M e n t r o u n d ta b l e
on risk management
impact on gross margins. To date we have
Fuel margins, our biggest risk factor, are very hard
to gauge over any given 12-month period. That
is one reason we remain conservative with our
distributions. Our risk management program is
very much focused on controlling our costs. We
work hard at reducing costs on a per unit basis and
been successful at keeping operating costs down at
competitive levels. See Management’s
Discussion and Analysis for a more extensive
discussion of risks.
on the Fas gas Plus upgrade program
to date we have been successful. We also focus on
During 2005 we upgraded 17 sites under our Fas
fuel volume growth, which acts as a buffer during
Gas Plus program bringing the total to 95. We
periods when fuel margins are thin.
have approximately 25 to 30 upgrades at controlled
Our marketing mix also helps us in managing
some of the inherent risk in the business. We
are not one brand or one go-to-market strategy.
The mix of retail, independent dealer business
and our arrangements such as the Esso deal each
provide a different risk-reward profile. Geographic
diversification also offsets any spikes or dips in
margins at individual locations.
One significant market challenge in our sector
is competition from food store chains, which are
expanding their business into non-urban markets
and cross merchandising their in-store and fuel
products. Their entry into the market is having an
sites remaining, so by the end of 2007 we will have
completed our plan for the network. The program
has exceeded our expectations, both in terms of
the fuel volume increases we have experienced as
well as the non-fuel margins we have been able to
achieve at our convenience store operations. The
enhancements have attracted a broader range of
customers and our locations are also reporting a
markedly improved level of customer satisfaction.
In 2005 we re-branded our first two Race Trac
locations as Fas Gas Plus because they met the more
stringent criteria. We plan to re-brand 25 of our
independent dealer sites Fas Gas Plus by the end of
2006 and another eight to ten stations in 2007.
12
P a r k l a n d i n C o M e f u n d
M a n a g e M e n t r o u n d ta b l e
on human resource shortages
In order to attract and retain management and
Probably the single largest human resource issue
we are facing, which is typical across the country,
is a shortage of truck drivers for our fleet of
Petrohaul trucks. We have been diligent in our
efforts to ensure we are providing the best training
and recruitment opportunities for new employees
as well as competitive wages and a better working
administrative staff, we have revamped our pay
system and we have implemented better systems to
ensure our compensation is competitive and that
we are consistent and fair in our treatment
of employees.
on governance changes
environment. To that end, in 2005 we moved
Parkland Industries Ltd. was structured with a
our Edmonton operations to upgraded facilities.
Board of Directors. When we converted to a trust
We also provide our drivers with modern
we added independent trustees. However, as an
equipment to drive, and additional incentives such
increasing number of companies converted to trusts,
as a unit purchase plan with a dollar matching
they began using professional corporate trustees as
program. We feel our efforts have positioned us well
this proved to be a more efficient process. During
2005 we reorganized to include the corporate trustee
model. The change does not impact the operations
of the Board or its decision-making process.
in the industry.
Attracting and retaining quality convenience
store personnel is also a challenge, particularly in
attempting to meet our objective of full 24-hour
service. We are addressing this issue through
wages and benefits as well as by creating a superior
working environment.
13
2 0 0 5 a n n u a l r e P o r t
Rooted
Parkland is strongly rooted in Western Canada. Parkland’s strategy is to increase
volumes, enhance the brand and deliver new sources of non-fuel margin, all the while
maintaining a low cost structure. Parkland will continue to upgrade sites, debrand
under-performing sites, increase customer satisfaction through new customer oriented
programs, add new convenience store products and provide beneficial programs to
the dealer network.
r e v i e w o f o P e r at i o n s
Review of Operations
In 2005 Parkland upgraded 17 sites, and added two
1999 the Fund has constructed 34 large format
new service stations and 18 independent dealers to
convenience stores of approximately 2,100 square
its network. It also entered into a long-term Retail
feet. Commission stores are controlled sites either
Branded Distributorship agreement with Imperial
through ownership or a long-term lease, where
Oil which will add approximately 150 new sites.
Parkland contracts with a commission operator
Fas gas Plus
In 2005 Parkland continued its Fas Gas Plus
program, upgrading 15 of its Fas Gas retail and two
of its wholesale service stations in order to improve
the customer experience, as well as broadening the
in-store product offering. To date 95 stations have
been rebranded to Fas Gas Plus. In total, Fas Gas
has 206 service stations across Western Canada, 63
to manage the site and store staff. The operator is
compensated through a commission on fuel sales
volumes and in many cases pays a variable rent
based on merchandise sales. With independent
dealers, who own or lease their own sites, Parkland
enters into an agreement to supply fuel to the site.
Commission and independent dealer operated retail
sites that have not been upgraded to the Fas Gas Plus
standard are operated under the Fas Gas brand.
of which include a Short Stop or Short Stop Express
In 2005, total Fas Gas Plus and Fas Gas retail
convenience store.
Fas Gas retail service stations are operated as
corporate stores, commissioned operations or as
independent dealerships. Corporate stores are
wholly owned and operated sites. Parkland manages
the fuel and adjacent Short Stop convenience
store operations and employs the staff. The
convenience store is normally a larger format. Since
volumes increased 11.6 million litres over 2004
as a result of the Fas Gas Plus upgrade program,
improved marketing programs and the introduction
of a new Fleet Plus charge card program. At the
same time, the number of actual sites decreased
to 206 from 211 sites in 2004 with the closing of
non-performing sites. In 2006, volume increases are
expected to continue with additional upgrades, new
sites and new marketing programs.
1
P a r k l a n d i n C o M e f u n d
r e v i e w o f o P e r at i o n s
Parkland Retail Outlets
(as at December 31, 2005)
Parkland Branded
Volumes
(millions of litres)
692
706
716
■ Fas Gas
■ Fas Gas Plus
■ Race Trac
111
95
215
2003
2004
2005
short stop Food stores
Express locations offer a more limited selection best
Parkland’s convenience store business, launched
in 1999, has become one of the fastest-growing
convenience store chains in non-urban Western
suited to their needs.
Parkland has assembled an experienced team of
merchandise and convenience store professionals to
Canada. There are now 63 outlets under the Short
evaluate and select sites that would make profitable
Stop Food Stores and Short Stop Express brands.
store locations, develop marketing programs,
The addition of these stores has had an impact on
manage relationships with merchandise suppliers
both transportation fuel volumes and overall non-
and oversee daily operations at these sites.
fuel revenue growth. Parkland’s Short Stop Food
Stores offer a broad selection of food, beverage,
snack and convenience products together with
services such as lottery terminals, phone cards
In 2005, merchandise sales grew $6.9 million
or 18.1 percent over 2004 as a result of
stronger promotional programs and improved
and automated teller machines. Our 29 Short Stop
product management.
1
2 0 0 5 a n n u a l r e P o r t
r e v i e w o f o P e r at i o n s
Ongoing growth in sales and the increased focus on
As of December 31, 2005, Parkland had added 115
convenience offerings at all our retail sites continues
Esso branded sites and expects to bring on about 35
to improve Parkland’s relationship with merchandise
additional sites in 2006. The benefit of this business
vendors. This results in more competitive
was nominal in 2005 as sites were not added until
product costs, timely access to new products,
the fourth quarter and only 28 million litres of fuel
broader product selection and increased overall
products had been marketed. Volumes in 2006
promotional support.
race Trac
are expected to be around 250 million litres and
represent a significant growth area for Parkland.
Race Trac sells and delivers fuel to 215 independent
great northern oil
branded retail dealers who operate their own sites
Parkland owns and operates a bulk facility in
throughout Western Canada. Parkland is focused on
Whitehorse, Yukon, that provides home heating
upgrading its Race Trac locations to better attract
fuels to its marketing area under the brand name
high volume retailers. As part of its incentive to
Great Northern Oil and also supports 22 Fas Gas
attract those retailers, Parkland offers promotional
and Race Trac stations in Northern B.C., the Yukon
programs, a proprietary fleet card offering and a
and the Northwest Territories.
Gold Points loyalty program. In 2005 Parkland
added 18 new independent dealers to its growing
supply and distribution
network. Parkland also debranded two sites which
did not meet Parkland’s criteria. In 2006 Parkland
plans to improve its loyalty program and continue to
attract higher quality independent dealers.
esso Branded dealer sites
A key success factor for Parkland is its ability to
have secure sources of fuel supply at competitive
prices. Parkland has long-term contracts with
three major refiners. Each contract has a different
cost structure and different volume commitments.
Parkland ensures it meets its obligations under
In 2005, Parkland entered a Retail Branded
these contracts and balances its supply to obtain
Distributorship agreement with Imperial Oil.
the most beneficial overall product cost. Parkland
The agreement makes Parkland responsible for
is a large customer of each of these refiners and
managing most of the Esso independent dealer
has established a history of meeting volume and
network in Alberta and Saskatchewan, excluding
payment commitments. This history makes it a
Edmonton and Calgary. It also gives Parkland
desired customer and helps ensure competitive
the ability to provide the Esso brand to its own
pricing is received.
dealers where it makes economic sense to do so.
Fuel supply for the Esso dealers is purchased
commercial and reseller
exclusively from Imperial. Margins available
to Parkland in this arrangement are limited but
additional benefit is gained from the value of the
Esso brand generated by its national marketing.
Parkland sells directly to resellers and commercial
customers, either through its 12 cardlock facilities
or by direct delivery. Parkland plans to continue
to add cardlock facilities on an annual basis. Sales
18
P a r k l a n d i n C o M e f u n d
r e v i e w o f o P e r at i o n s
Fuel Volumes
by Type
(year ended December 31, 2005)
(millions of litres)
Commercial and
Reseller Volumes
(millions of litres)
433
380
360
■ Parkland Branded Retail 716
■ Esso
28
■ Commercial and Reseller 433
2003
2004
2005
to reseller and commercial customers are a key
upgraded office building and yard close to its supply
component of Parkland’s supply chain as it allows
terminals. Parkland also leased a significant number
Parkland to increase the size of its supply contracts
of new trucks, replacing 25 percent of its fleet.
and balance supply commitments.
Petrohaul
Bowden refinery
Parkland owns the Bowden refinery located just
One of Parkland’s key business strengths is its
south of Red Deer, Alberta. Operations at the
distribution capabilities through its fleet of 37
refinery were suspended in September 2001. A
Petrohaul trucks and related fuel tankers. Internal
Letter of Intent to sell the refinery to the Blood
control of trucking operations allows better quality
Tribe of Standoff, Alberta has expired but would be
assurance and customer service levels. Volume
expected to be renewed if conditions to the
growth, primarily related to the Imperial Oil
sale were met. One of the key conditions to
agreement, has led to increased use of third party
this sale proceeding is the tribe receiving
carriers. In 2005 Petrohaul handled approximately
confirmation of its exemption from Federal Excise
85 percent of Parkland’s fuel hauling needs. In
Tax on fuel produced at the site. The tribe is
2006 it is expected this will decline to below 70
currently pursuing court action to confirm this
percent unless the truck fleet is expanded. A key
exemption but the timing and ultimate success of
challenge in recent years for Petrohaul, similar
this action is uncertain.
to most trucking companies, is attracting and
retaining skilled drivers. Parkland continues to
monitor industry changes and continues to upgrade
personnel policies to ensure it is able to compete for
the drivers it needs.
A number of alternatives are currently being
pursued to generate cash flow from this site,
including one process that is scheduled to be tested
in the spring of 2006. During 2005 Parkland
incurred additional maintenance expenses at the
In 2005, Petrohaul moved its Edmonton base of
refinery site in preparation for this test and for other
operations from a temporary facility to a new
planned alternative activities.
19
2 0 0 5 a n n u a l r e P o r t
C u l t u r e & C o M M u n i t y
Culture & Community
health, safety and environment
In 2005, Parkland successfully completed a
Parkland is committed to responsible environmental
controls and to protecting the health and safety of its
employees, customers and suppliers.
On the environmental front, Parkland has numerous
detailed procedures in place, including: testing soil,
tanks and lines on new sites; installing cathodic
protection systems on steel tanks in the network;
performing regular audits of peizometer wells on its
sites; and following strict procedures for detecting
inventory losses at its locations. The Fund has a
Partnership Audit of its programs and facilities.
code of conduct
The Fund has established a Code of Conduct and
Conflict of Interest Guidelines (the “Code”). The
Code is provided to all employees and, specifically
Directors, Officers and Senior Management must
acknowledge understanding and compliance.
It is available on Parkland’s website at
www.parkland.ca.
program that provides for scheduled replacement
In cases where employees feel they have serious or
of older tanks with fibreglass or above ground tanks.
sensitive issues, including possible breaches in the
The Fund has a Health, Safety and Environment
Committee which represents all areas of the
business. This Committee’s mandate is to ensure
consistent health and safety processes and
documentation throughout the organization and
to provide recommendations to management and
employees for addressing occupational health, safety
and training.
Code, the Fund has a Whistle Blower Policy that
provides a means for the employee to report issues
confidentially and, if desired, anonymously. This
Policy also outlines what actions will be taken and
the feedback that will be provided to the employee
to ensure that the issue has been addressed.
20
P a r k l a n d i n C o M e f u n d
C u l t u r e & C o M M u n I t Y
Community Involvement
Parkland strives to make a difference in the
communities it serves.
Parkland Income Fund supports the communities
it does business in by making generous financial
contributions and by supporting its employees in
their community involvement. Each year Parkland
provides financial support to projects that focus on
health, education and youth.
Parkland has made major contributions in recent
years to the Alberta Heart & Stroke Foundation, the
Canadian Cancer Society, the David Thompson
Health Region, Juvenile Diabetes, Search and Rescue,
In collaboration with local dealers, Parkland
sponsors youth sports teams in a number of
marketing areas, usually on a sharing basis with
the local dealers.
Parkland’s associates make a difference at a personal
level through organizations such as service clubs,
the Make a Wish Foundation, the Terry Fox Run,
volunteer fire departments, the Self Esteem Society,
theatre groups, the Girl Guides, the Boy Scouts,
The Women’s Shelter, MADD, Safe Communities
Coalition and Foster Parents Plan of Canada as
well as coaching many sports teams and organizing
community events.
STARS Air Ambulance, United Way, the Red Deer
Privacy Statement
Hospice Society, the Red Deer Regional Hospital
Foundation and its Capital Campaign as well as a
number of regional food banks.
Parkland also sponsors “subject” awards at high
schools and offers scholarships for employees’
children who wish to further their education. Support
is also given in a number of other areas including
School Business Partners, Safety City, Tools for
Schools, the Red Deer College Capital Campaign
and established Lifelong Learning Awards at Red
Deer College.
Parkland has in place generally accepted standards
of technological security for the purpose of
protecting all information provided by customers,
suppliers and employees from misuse, loss or
corruption. Only authorized personnel have access
to personally identifiable information submitted to
Parkland. Such employees are required to maintain
the confidentiality of this sensitive data. The policy
also applies to any and all agents, affiliates and
related entities of Parkland that may receive such
information from Parkland.
21
2 0 0 5 a n n u a l r e p o r t
112197-PKI_Book6.indd 21
3/8/06 3:19:06 PM
Dedicated
Parkland believes that strong corporate governance is key to building trust and
confidence in its business. Parkland is committed to meeting the highest standards
of accurate, transparent and timely communication. Parkland prides itself on
being open, approachable and responsive to its customers, its officers, its
employees and its investors.
C o r P o r at e g o v e r n a n C e
Corporate Governance
The Fund delegates the management and
Board Independence
administration of its business to Parkland Industries
Ltd., a subsidiary of the Fund, and its Board
of Directors.
The Board of Directors is made up of seven
members of whom six are independent. The non-
independent director is Andrew B. Wiswell, who
The fundamental responsibility of Parkland’s Board
served as President and CEO of Parkland Income
is to oversee the management of the business,
with a view to delivering consistent and growing
unitholder returns and ensuring the Fund conducts
Fund until May 13, 2005. The Board met seven
times in 2005 and had a 92 percent attendance rate.
its business in an ethical and legal manner through
Board structure
an appropriate system of corporate governance.
chairman of the Board
Parkland has two committees, made up entirely of
independent Directors. These committees are: the
Audit Committee and the Human Resources and
The Chairman of the Board is James Pantelidis.
Corporate Governance Committee.
He has served on the Board since 1999 and brings
extensive management experience in the retail and
audit committee
wholesale fuels markets. His primary responsibilities
are to:
•
Provide leadership to the Board of directors;
The members of the Audit Committee are Kris
Matthews (Chair); James Pantelidis and Jim
Dinning. All members are independent Directors.
The Chair is appointed by the Board of Directors.
• oversee the Board’s effectiveness and assure
The Committee met five times in 2005 and had a 93
it meets its obligations and responsibilities;
percent attendance rate.
• monitor and co-ordinate the functions of
the Board with management to effectively
maintain the separation of roles and
responsibilities; and
Financial Literacy
All audit committee members are financially
literate. Kris Matthews is a Certified Management
Accountant with extensive experience providing
•
Provide advice and counsel to the President
financial consulting services to businesses and also
and chief executive officer (ceo)
is the audit committee chair of another income
respecting matters within the purview of the
fund. James Pantelidis and Jim Dinning both
Board.
have significant experience as senior executives
and board members of public companies. Mr.
24
P a r k l a n d i n C o M e f u n d
C o r P o r at e g o v e r n a n C e
Pantelidis is a graduate of McGill University where
In performing its duties, the Audit Committee will
he received a B.Sc. degree and an M.B.A. He also
maintain effective working relationships with the
serves on several other audit committees. Mr.
Board of Directors, management and the external
Dinning received a B.Comm. degree from Queens
University. He also serves on several other audit
committees.
Audit Committee Mandate
The Audit Committee is appointed by the Board
of Directors of Parkland Industries Ltd. (the
auditors. To perform his or her role effectively, each
Audit Committee member will need to develop and
maintain his or her skills and knowledge, including
an understanding of the Audit Committee’s
responsibilities and of the company’s business
operations and risks.
“Corporation”) to assist the Board in discharging its
The members of the Audit Committee will be
oversight responsibilities. The Audit Committee will
financially literate and independent as defined by
oversee the financial reporting process with a goal of
Multilateral Instrument 52-110.
ensuring the balance, transparency and integrity of
published financial information of the Corporation
and of Parkland Income Fund (the “Fund”). The
Audit Committee will also review: the effectiveness
of the Corporation’s and the Fund’s internal
financial control and risk management system;
the effectiveness of the internal audit function; the
independent audit process, including recommending
the appointment and assessing the performance of
the external auditor of the Corporation and the
Fund; the Corporation and the Fund’s process for
monitoring compliance with laws and regulations
affecting financial reporting.
Although the Audit Committee has the powers
and responsibilities set forth in this Mandate, the
role of the Audit Committee is oversight. The
members of the Audit Committee are not full-time
employees of the Corporation and may or may not
be accountants or auditors by profession or experts
in the fields of accounting or auditing and, in any
event, do not serve in such capacity nor are they
experts in performing other tasks they are called
on to perform by this Mandate. Consequently, it
is not the duty of the Audit Committee to conduct
audits or to determine that the Corporation’s
financial statements and disclosures are complete
The Corporation and the Fund will comply with the
and accurate and are in accordance with generally
policies and procedures overseen or reviewed by the
accepted accounting principles (“GAAP”) and
Audit Committee and use their best efforts to ensure
applicable rules and regulations. These are
that these policies and procedures are implemented.
the responsibilities of management and the
external auditor.
2
2 0 0 5 a n n u a l r e P o r t
C o r P o r at e g o v e r n a n C e
Authority
The complete Audit Committee Mandate is
The Board authorizes the Audit Committee, within
available on Parkland’s website, www.parkland.ca,
the scope of its responsibilities, to:
and in its 2005 Management Information Circular.
•
Perform activities within the scope of this
mandate;
human resources and corporate
governance committee
• engage independent counsel and other advisors
as it deems necessary to carry out its duties;
The members of the Human Resources and
Corporate Governance Committee are: Alain
• ensure the attendance of corporate officers at
Ferland (Chair), Robert Brawn and David Spencer.
meetings, as appropriate;
All members are independent Directors. The
• request and gain access to members of
management, employees and relevant
information to perform this mandate;
Chair is appointed by the Board of Directors. The
Committee met five times in 2005 and had an 80
percent attendance rate.
• establish procedures for dealing with
Human Resources and Corporate
concerns of employees regarding accounting,
Governance Committee Mandate
internal control or auditing matters;
The Human Resources and Corporate
• establish procedures for the receipt, retention
and treatment of complaints received by the
corporation regarding accounting, internal
controls or auditing matters;
• approve the appointment, compensation,
retention and annual scope of work of the
external auditor; and
Governance Committee is appointed by the
Board of Directors to assist the Board in carrying
out its responsibility for the stewardship of the
Corporation as well as in meeting its disclosure
and continued listing requirements. In terms of
Human Resources, the Committee will examine
the nomination of Directors and appointment of
senior managers of the Corporation as well as
• approve all engagement fees and terms as well
their overall compensation and make appropriate
as reviewing policies for the provision of audit
and non-audit services by the external auditors
and the pre-approval of such non-audit work
as required by multilateral Instrument 52-110.
recommendations to the Board; it will also lead
in the development and review of a succession
plan. With regards to Corporate Governance,
the Committee has the general responsibility
for developing the Corporation’s approach to
2
P a r k l a n d i n C o M e f u n d
C o r P o r at e g o v e r n a n C e
governance issues and recommending an effective
• obtain such advice and assistance from
corporate governance process to the Board
outside accounting, legal or other advisors as
consistent with the TSX guidelines.
the committee determines to be necessary or
In performing its duties, the Committee will
maintain effective working relationships with
the Board of Directors, management, and other
Committees of the Board. To perform his or her
role effectively, each Committee member will
need to develop and maintain his or her skills and
knowledge, including an understanding of the
Committee’s responsibilities and the Corporation’s
advisable in connection with the discharge of
its duties and responsibilities hereunder;
•
Pay any compensation consultant or outside
accounting, legal or other advisor retained
by the committee pursuant to the preceding
paragraph such compensation, including,
without limitation, usual and customary
expenses and charges, as shall be determined
business operations and risks.
by the committee;
• establish procedures for dealing with the
various aspects of their mandate.
The complete Human Resources and Corporate
Governance Committee Mandate is available on
Parkland’s website, www.parkland.ca and in its
2005 Management Information Circular.
Authority
The Board authorizes the Human Resources and
Corporate Governance Committee, within the scope
of its responsibilities, to:
•
Perform activities within the scope of its
mandate;
• ensure the attendance of company officers
at meetings, as appropriate;
• request and gain access to members
of management, employees and
relevant information;
•
select, retain and terminate a compensation
consultant to assist in the evaluation of the
ceo or members of senior management
compensation and approve any
compensation payable by the corporation
to such consultant, including fees, terms and
other conditions for the performance of such
services;
2
2 0 0 5 a n n u a l r e P o r t
b o a r d o f d i r e C t o r s
Robert G. Brawn
Jim Dinning
Alain Ferland
Kris Matthews
Parkland Board of Directors
robert g. Brawn
Mr. Brawn brings significant experience to Parkland’s
Board of Directors, having held various management
roles with companies operating in the oil and gas
industry. Mr. Brawn holds several directorships
that span a variety of industries, including banking,
energy, construction and retail. He is currently
Chairman Emeritus of Canetic Resources Trust,
and a Director of ATB Financial, Zapata Energy
Inc., Finning International Inc., JED Oil Inc.,
Oncolytics Biotech Inc., Russell Metals Inc., Shaw
Communications Inc. and Liquor Stores Income Fund.
Mr. Dinning was appointed as a Trustee on August 19,
2004 and was elected a director of Parkland Industries
Ltd. on May 5, 2005 when Parkland reorganized to a
corporate trustee model.
alain Ferland
Corporation, Calgary Airport Authority and several
Mr. Ferland is the President of EFFA Management
private companies. He is Chairman of Grande Cache
Inc. and has served on the Board since June 22,
Coal Corporation and the Van Horne Institute
1999. He is Chairman of the Human Resources and
(Transportation Studies Policy Group). Mr. Brawn has
Corporate Governance Committee. He also serves
served on the Board since November 13, 1996.
Jim dinning
Mr. Dinning is the non-executive Chair of Western
Financial Group Inc., an Alberta-based western
Canadian financial services company. Prior to 2005,
Mr. Dinning served as Executive Vice President of
TransAlta Corporation. Before joining TransAlta,
he held several key positions during his 11 years
as a member of the legislative assembly of Alberta,
including Provincial Treasurer (1992 to 1997).
He is also a Director of Western Financial Group
on the Board of TORR Canada Inc. Mr. Ferland
has been President of Aéroports de Montréal, IPL
Inc., Geneka Biotechnologies and prior to that was
President of Ultramar Ltd. and Vice President of
Ultramar Diamond Shamrock.
Kris matthews
Ms. Matthews has more than 20 years of experience
providing accounting, financial and management
consulting services to entrepreneurial enterprises.
She is currently Principal of The Matthews Group.
In 2002, she was awarded a Fellowship (FCMA) in
28
P a r k l a n d i n C o M e f u n d
b o a r d o f d i r e C t o r s
James Pantelidis
David A. Spencer
Andrew Wiswell
recognition of her contributions to the community and
david a. spencer
the CMA profession. Ms. Matthews is Trustee and
Chair of the Audit Committee for Prime Restaurants
Royalty Income Fund and Director and President of
PRC Trademarks Inc. Ms. Matthews is also actively
involved in the CMA profession and is currently the
Past-Chair of the CMA Alberta Board, and Chair
of the CMA Alberta Governance Committee. She is
also a Director and Chair of the Audit Committee for
BlueGrouse Seismic Solutions Inc. Ms. Matthews has
served on the Board since May 8, 2003. She is Chair
of the Audit Committee.
James Pantelidis
Mr. Pantelidis is currently Chairman and CEO
of FisherCast Global Corporation. Prior to this,
Mr. Pantelidis was President and CEO of the Bata
International Organization. He also spent over 30
years in the petroleum industry, and was at one time
President of both the Upstream and Downstream
divisions of Petro-Canada. Mr. Pantelidis also serves as
the Chairman of The Consumers Waterheater Income
Fund, and is on the Board of Industrial Alliance
Insurance and Financial Services Inc. and RONA
Inc. Mr. Pantelidis has served on the Board since
September 7, 1999. He is Chairman of the Board.
Mr. Spencer is a Partner with Bennett Jones LLP in
Calgary, where he is co-leader of the firm’s public
markets practice group. He specializes in corporate
finance, mergers and acquisitions and corporate
governance. Mr. Spencer was appointed as a Trustee
as part of the June 2002 re-organization into a Trust,
and was elected as a director of Parkland Industries
Ltd. in 2005 when Parkland reorganized to a
corporate trustee model.
andrew B. wiswell
Mr. Wiswell earned his law degree and practiced
corporate and commercial law before pursuing his
MBA at the University of Western Ontario. He joined
Gulf Canada and spent 16 years in management roles
including Vice President, Marketing, Senior Vice
President Finance and Chief Financial Officer. He also
served as the first CFO of Athabasca Oil Sands Trust,
now Canadian Oil Sands and later became President
of ICG Propane. Mr. Wiswell served Parkland as
President and Chief Executive Officer from 2001 to
2005. In 2005, he joined NAL Resources Management
as President and CEO. Mr. Wiswell is a Director of
Total Energy Services Trust and NAL Oil and Gas
Trust. Mr. Wiswell has served on the Board since
December 1, 2001.
29
2 0 0 5 a n n u a l r e P o r t
112197-PKI_Book6.indd 30
3/8/06 3:19:09 PM
Solid
Parkland has become one of Canada’s largest independent marketers of
transportation fuel through a thoughtful, strategic and measured business
approach. Parkland’s assets, balance sheet and performance are solid and the
company is strategically positioned in Western Canada to take advantage of
new business opportunities.
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
Management’s Discussion & Analysis
Year Ended December 31, 2005
The following discussion and analysis of the results of operations and financial condition of Parkland Income Fund
should be read in conjunction with the audited Financial Statements for the year ended December 31, 2005. The date
of this discussion and analysis is March 1, 2006. Further information on Parkland Income Fund, including its Annual
Information Form, is available from SEDAR at www.sedar.com.
Parkland Income Fund (the “Fund” or “Parkland”) is an unincorporated, open-ended limited purpose mutual fund
trust established under the laws of the Province of Alberta on April 30, 2002. The Fund was created to acquire the
fuel marketing, convenience stores and related ancillary businesses formerly owned by Parkland Industries Ltd. This
acquisition was completed on June 28, 2002 through a Plan of Arrangement that resulted in the previous Parkland
Industries Ltd. shareholders indirectly exchanging their shares for Units in the Fund or Class B Limited Partnership
Units in Parkland Holdings Limited Partnership (“LP Units”), a limited partnership controlled by the Fund.
review of operations
Parkland’s Business
As one of Western Canada’s largest independent fuel marketers, Parkland operated or supplied a total of 536 service
stations at December 31, 2005 as compared with 433 at December 31, 2004. The December 2005 total consists
of 206 (2004 – 211) retail stations operated under the Fas Gas, Fas Gas Plus and Short Stop brands, 215 (2004
– 222) independently owned wholesale supply accounts operated under the Race Trac brand and 115 (2004 – nil)
independently owned wholesale supply accounts operated under the Esso brand. Products sold through the network of
service stations include gasoline and diesel fuel as well as propane at selected sites. It is Parkland’s strategy to increase
overall sales volumes and average volumes per site within its current marketing area. The actual number of stations
may increase, remain stable or drop as new sites are added and sites which are not generating adequate returns are
closed or sold. The number of Fas Gas and Race Trac stations declined in 2005 as the Fund continued its program
to dispose underperforming sites and to debrand sites that did not meet certain criteria. In some cases, Parkland still
supplies these sites on an unbranded wholesale basis.
Short Stop Food Stores and Short Stop Express, Parkland’s branded convenience store chain being developed across
Western Canada, currently operates at 63 redeveloped locations.
32
P a r k l a n d i n C o M e f u n d
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
Competition and Market Positioning
The wholesale and retail gasoline business is highly competitive, with margins ultimately dependent on the spread
between crude oil, wholesale fuel costs and retail gasoline prices. Due to its focus on smaller markets, Parkland has
limited exposure (11 percent of its retail sites) to the more competitive larger urban markets where the retail gasoline
sales are dominated by major oil companies and by more recent entrants such as grocery chains and large retailers.
This non-urban focus means the Fund operates in markets where average sales volumes are lower but earnings are
enhanced by more stable pricing and margins, lower overhead costs and less expensive real estate.
In recent years, the Fund has strategically focused on reducing its reliance on fuel margins by increasing other sources
of revenue from its sites. The primary actions taken have been the Short Stop convenience store program and the Fas
Gas Plus station upgrade program. By making investments in the sites, Parkland has realized the full benefit of the
merchandise margins, net of operating costs, at the corporately operated convenience store sites and has been able to
realize additional rents based primarily on percentages of merchandise sales at the commission operated sites. It is the
Fund’s intention to continue this strategy for the foreseeable future.
In the independent dealer business, the Fund has focused on increasing its brand value to the operators. At the Race
Trac sites, this has been accomplished through the Gold Points loyalty program, scratch and win promotions, closing
or debranding sites that did not meet certain criteria and pursuing larger volume and higher visibility sites. The Retail
Branded Distributorship agreement with Esso also provides a major brand that Parkland can offer to independent
operators in Alberta and Saskatchewan.
In relation to the above strategy, the Fund’s goals are to provide stable and modestly increasing cash flows for its
unitholders. Significant acquisitions in strategic areas will also be considered but are not necessary to meet the
distribution goals.
33
2 0 0 5 a n n u a l r e P o r t
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
Financial Performance
Summary of Operating and Financial Information
years ended december 31,
($000’s except volume and per unit amounts)
total assets
total long-term liabilities
sales volume (millions of litres)
net sales and operating revenues
Cost of sales and operating expenses
gross margin
expenses
Marketing, general and administrative
amortization of capital assets
loss on writedown of refinery
interest on long-term debt
earnings (loss) before income taxes
income tax (expense) recovery
net earnings
Per unit – basic
– diluted
ebitda
non-gaaP Financial measures
2005
2004
2003
$ 133,019
$ 13,907
1,177
$ 875,539
783,615
91,924
55,223
8,804
–
873
64,900
$ 27,024
(2,055)
$ 24,969
$
$
2.03
2.02
$ 36,701
$ 117,417
$ 17,612
1,101
$ 686,658
603,766
82,892
52,363
9,242
25,310
738
87,653
$ 128,602
$ 18,170
1,039
$ 567,226
489,804
77,422
48,374
7,577
–
897
56,848
$
(4,761)
$ 20,574
8,721
3,960
0.33
0.32
$
$
$
(283)
$ 20,291
$
$
1.67
1.66
$ 30,529
$ 29,048
In this document there are references to non-GAAP financial measures such as EBITDA and Cash Available for
Distribution. EBITDA refers to Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization as
well as the loss on the writedown of the refinery and can be calculated from the GAAP amounts included in the
Fund’s financial statements. Management believes that EBITDA is a relevant measure to users of its financial
information as it provides an indication of pre-tax earnings available to distribute to debt and equity holders in the
Fund. The Fund’s definition of EBITDA may not be consistent with other providers of financial information and
therefore may not be comparable.
Cash Available for Distribution is defined in the Fund’s Deed of Trust and related documents and generally represents
the cash available to be distributed to the Fund’s Unitholders. Cash Available for Distribution is calculated as EBITDA
less interest expense, current income taxes, if any, and maintenance capital expenditures. EBITDA is as defined
above, while interest expense and current income taxes are GAAP measures. Maintenance capital represents capital
expenditures made by the Fund to maintain its current business operations. This differs from growth capital, which
represents capital used to expand the Fund’s business operations.
34
P a r k l a n d i n C o M e f u n d
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
Net Earnings
Higher fuel volumes, consistent average fuel margins and increased convenience store sales and margins all contributed
to higher gross margins in 2005. These increased margins were offset by a $2.9 million increase in marketing, general
and administrative expenses over 2004. EBITDA in 2005 increased by $6.2 million over 2004, consistent with increases
in margins. Net earnings before income taxes for the year of $27.0 million were significantly higher than the $4.8 million
loss reported in 2004 and income of $20.6 million reported in 2003. The primary reason for the increase over 2004
was the $25.3 million loss recorded on the writedown of the refinery assets in that year. Excluding this item, net income
before tax was $20.5 million in 2004.
Volumes
Gasoline and diesel volumes increased by 76 million litres in 2005 to 1.2 billion litres. The Fund’s station upgrade
program was successful in driving increased retail volumes from existing sites while the addition of the Esso sites led to
increased volumes through the wholesale station network. Reseller volumes also increased to match product purchase
commitments. Retail volumes are driven by the number of stations in operation, general business and economic
conditions, weather and competitive conditions in various markets. Reseller volumes are more dependent on general
industry supply and demand conditions. Parkland plans to continue to generate modest volume increases through
general market growth, improved performance at existing sites and the addition of a limited number of new sites as
opportunities arise. Additionally, volume increases of approximately 220 million litres are expected in 2006 as a result
of having the Esso sites for a complete year.
Sales Revenue
Sales for the year ended December 31, 2005 were $875.5 million, an increase of 28 percent over the prior year. Fuel
sales revenue varies with fuel volumes, overall average crude prices and retail and wholesale margins. In 2005 fuel sales
revenue increased to $830.6 million from $648.6 million, largely as a result of volume increases and higher average
crude prices. Convenience store merchandise sales also increased with sales of $45.0 million in 2005 as compared to
$38.1 million in 2004. Convenience store merchandise sales were up as a result of all stores being open for the entire
year, higher average sales per store and increased retail margins.
Cost of Sales and Gross Margins
Fuel cost of sales increased to $750.5 million in 2005 as compared to $575.6 million in 2004. Similar to sales revenue,
cost of sales increased as a result of higher volumes and higher average per litre costs of fuel products. Fuel costs are
generally driven by changes in the underlying cost of crude oil, which was on average 30 percent higher in 2005 than
in the prior year. Convenience store merchandise cost of sales increased to $33.1 million in 2005 from $28.2 million in
2004, consistent with the increase in merchandise sales.
3
2 0 0 5 a n n u a l r e P o r t
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
These factors led to gross margins of $91.9 million in 2005, which was $9.0 million higher than the $82.9 million
achieved in 2004. This increase was primarily driven by a $2.0 million increase in convenience store margins and
higher fuel volumes. Overall fuel margins on a per litre basis were also up three percent over the prior year.
A key driver in margins is the Fund’s ability to competitively purchase both fuel and convenience store merchandise.
As one of the largest independent fuel retailers in Western Canada, the Fund has established positive relationships
with the key fuel suppliers in its market area and has long-term contracts with its three principal fuel suppliers. These
contracts provide the Fund with a consistent source of supply at competitive prices. Additionally, the growth in the
convenience store network and the implementation of the Short Stop Express marketing program has improved the
Fund’s relationships with wholesalers and merchandise suppliers, providing better pricing, increased incentives and
additional promotional support.
Expenses
Marketing, general and administrative expenses were $55.2 million for the year ended December 31, 2005, an
increase of 5.5 percent over 2004 expenses of $52.4 million. The drivers of these increased costs included variable fuel
marketing costs that rose on a per litre basis and in conjunction with higher fuel volumes and higher convenience store
operating costs as a result of all stores being open for the entire year.
The Fund incurred $1.5 million in maintenance expenses in 2005 related to the Fas Gas Plus upgrade program,
as compared to $2.0 million in 2004. Although portions of the Fas Gas Plus program are recorded as maintenance
capital, there are significant components which represent maintenance expenses. To a large extent these expenses are
discretionary and are generating improved results at the upgraded sites. It is expected that expenditures in 2006 will be
comparable as the Fund moves the upgrade program to the independent dealer network.
Also included in marketing, general and administrative expenses for the 2005 calendar year are $0.8 million for
environmental remediation costs as compared to $0.6 million in 2004. Generally, remediation costs for which the Fund
is legally obligated are recorded as an Asset Retirement Obligation and expensed as accretion over the estimated life
of the asset. Amounts included in remediation costs generally relate to costs at sites where the Fund decided to replace
underground storage tanks even though it was not legally obligated to do so. It is the Fund’s policy to upgrade tanks
when a major site upgrade takes place, such as a conversion to a Short Stop convenience store. The Fund has a long-
term tank replacement program and plans to continue incurring expenses annually to modernize its underground tank
network and reduce its exposure to future environmental liabilities.
Refinery Assets
In December 2004, the Fund reduced the carrying value of its Bowden refinery by $25.3 million to a net liability of
$3.4 million on uncertainty around creating an alternative to the refinery being dismantled, remediated and sold for
salvage values. A corresponding future tax recovery of $8.6 million was also recorded.
3
P a r k l a n d i n C o M e f u n d
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
Operations at the refinery have been suspended since September, 2001 pending the completion of a sale to the Blood
Tribe/Kainaiwa Specific Claim Trust No. 1 of Standoff, Alberta. The sale terms are as per a non-binding Letter of
Intent agreed to in October 2003, which has since expired. The Tribe is currently working on one of the key remaining
conditions to the transaction which is to obtain confirmation of its exemption from excise tax obligations and has issued
Statements of Claim against the Government of Canada related to this taxation issue. Should the remaining conditions
to the sale be satisfied, the Fund anticipates that negotiations with the Tribe would resume.
The Fund is also pursuing alternative uses for the refinery site and equipment and is in discussion with interested
parties. However, to date there have been no specific projects completed. The timing and cash flows related to possible
alternative uses is uncertain.
Annual costs of approximately $400,000 will continue to be incurred to protect the value of the refinery assets until the
sale is completed or an alternate use is in place. These costs primarily relate to security, maintenance, insurance and
property taxes and will continue to be expensed as incurred. This level of costs has been considered when determining
current distribution levels. Additionally, in 2005, approximately $1.5 million in maintenance expenses were expended to
prepare the refinery assets for alternative opportunities that are anticipated in 2006 and beyond.
Capital Assets and Amortization
Amortization expense decreased to $8.8 million in 2005 from $9.2 million in 2004. Increased amortization costs were
recorded in 2004 as the Fund revised the estimated useful lives of some asset classes.
During 2005, the Fund expended $8.6 million in net capital investments, of which $4.5 million was classified as
maintenance capital and $4.1 million was classified as growth capital. The classification of capital as growth or
maintenance is subject to judgment as many of the Fund’s capital projects have components of both. It is the Fund’s
policy to treat all capital related to service station upgrades (i.e. Fas Gas Plus) as maintenance capital even though it
includes the expectation of a financial return, while the construction of a new building on an existing site is considered
growth capital.
The primary components of maintenance capital in 2005 were $1.6 million for Fas Gas Plus upgrades, $0.7 million for
tank replacements and $0.6 million for technology initiatives.
The 2005 growth capital related primarily to major upgrades at existing retail sites and the addition of two new service
station sites.
Parkland owns 110 of the sites in the Fas Gas and Short Stop retail chains, an industrial property in Red Deer which is
used as a maintenance facility, a fuel terminal facility in Whitehorse and the refinery property. The Fund also has lease-
to-purchase arrangements on four of the Fas Gas properties and long-term lease arrangements on an additional 38 sites.
3
2 0 0 5 a n n u a l r e P o r t
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
Parkland operates its own fleet of trucks to meet its fuel hauling needs. Generally, the fleet of 70 trailer units is owned
by the Fund, either directly or through capital leases. The Fund’s capital plans call for power units to be replaced every
three years and trailers every ten years but the expenditure level can be accelerated or slowed depending on specific
needs and financial performance. The Fund also has the option of entering into operating leases as an alternative to
purchasing these units if it is financially beneficial. There were 11 new power units added to the fleet in 2005 which
were through operating lease arrangements.
Interest
For the year ended December 31, 2005 interest on long-term debt was $0.9 million which was $135,000 higher than
the prior year. Debt levels have decreased slightly while interest rates have increased, resulting in the modest increase in
overall interest costs. Approximately 76 percent of the Fund’s long-term debt bears interest at variable rates linked
to prime.
Income taxes
In 2005 the Fund retained taxable income within corporate subsidiaries, resulting in a tax provision of $2.1 million as
compared to an income tax recovery of $8.7 million for the year ended December 31, 2004. Virtually all of the 2004
recovery relates to the writedown of the refinery assets which is not currently deductible for tax purposes. Parkland’s
income taxes payable are typically nominal as it is a trust and taxes are paid on distributions directly by the unitholders
in the Fund or the LP. The 2005 provision results from capital taxes and from retaining funds as a cash reserve to
mitigate potential normal seasonal weaknesses in earnings which may occur in 2006.
The allocation of taxes to the unitholders for 2005 is based on the calculated taxable income of the Fund as follows:
($000’s)
net income before tax
Permanent differences
timing differences
taxable income
income retained in taxable entities in the fund
taxable income to allocate to unitholders
distributions
taxable portion of distributions
$ 27,024
(222)
274
$ 27,076
(3,204)
23,872
23,872
100%
38
P a r k l a n d i n C o M e f u n d
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
Quarterly Financial Information
three months ended
($000’s except per unit amounts)
2005 net sales and operating revenues
net earnings
earnings per unit
ebitda
– basic
– diluted
2004 net sales and operating revenues
net earnings (loss)
earnings (loss) per unit – basic
– diluted
ebitda
March 31
June 30
september 30
december 31
$ 177,081
$
$
$
$
824
0.07
0.07
3,243
$ 141,262
$
$
$
$
824
0.07
0.07
3,066
$ 208,177
$
$
$
$
6,948
0.56
0.56
9,424
$ 179,274
$ 12,502
$
$
1.03
1.02
$ 14,991
$ 258,901
$
$
$
9,634
0.78
0.78
$ 12,546
$ 197,193
$
$
$
$
5,769
0.47
0.47
8,148
$ 231,380
$
$
$
7,563
0.62
0.61
$ 11,488
$ 168,929
$ (15,135)
$
$
$
(1.24)
(1.24)
4,324
The Fund’s business is typically seasonal but can be significantly affected by events occurring throughout the year.
In the first quarter fuel demand is relatively weak which causes excess supply and depressed market conditions. The
second and third quarters significantly improve with spring and summer driving seasons and increased industrial and
farm activity creating higher demand, while the fourth quarter sees a return to more average market conditions. In 2004
the Fund realized higher than expected results in the second quarter as a result of fuel margins which were higher than
typically experienced during that season. In the fourth quarter of 2004, the recognition of the loss on the writedown
of the refinery assets eroded results. In 2005, the third and fouth quarter margins were above expectations as a result
of weather related supply issues which increased margins achieved. Management anticipates that quarterly earnings in
2006 will follow normal seasonal trends but may be affected by unforeseen market events.
Fourth Quarter Results
Excluding the $25.3 million loss on the writedown of the refinery assets recorded in the fourth quarter of 2004, the
2005 results showed improvement as net earnings before tax increased to $8.8 million from $1.6 million in 2004 and
EBITDA increased to $11.5 million from $4.3 million. Increases in fuel volumes and unseasonably high margins early
in the quarter were the key contributors to the positive results. Merchandise sales and margins increased over 2004 as a
result of higher same-store sales. Marketing, general and administrative expenses were consistent with the prior year.
liquidity and capital resources
Working Capital
Parkland’s working capital remained stable at $2.1 million at December 31, 2005 as compared to $1.9 million at
December 31, 2004. It is typical for the Fund to have minimal or negative working capital as a significant portion of its
sales are on a cash basis, inventory turns quickly and average payable terms with vendors exceed average receivable
terms with customers who have credit privileges. The cash balance at December 31, 2005 of $8.3 million increased
from the December 31, 2004 balance of $5.3 million and the Fund also has available a $28 million line of credit to
finance letters of credit and short-term cash flow needs. Assuming normal seasonal trends, it is expected the Fund will
39
2 0 0 5 a n n u a l r e P o r t
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
need to use current cash balances to finance distributions in the first quarter of 2006.
Financing Activities
During the year ended December 31, 2005 Parkland decreased its long-term debt by $1.0 million as a result of normal
repayment of existing term debt offset by new debt and capital leases. At December 31, 2005, Parkland had $9.7 million
in long-term debt (excluding current portions) which is 0.27 times EBITDA. Management believes that cash flow from
operations will be adequate to fund maintenance capital, interest and targeted distributions. Growth capital expenditures
in 2005 have been funded by existing cash balances, cash flow from operations and approximately $3.5 million in
additional debt. It is management’s intent on an ongoing basis to finance growth capital through debt or the issue of
additional units. Any additional debt would be serviced by anticipated increases in cash flow and it is expected that
current debt to EBITDA ratios would be maintained.
Distributions
Commencing in July 2002 the Fund established a monthly distribution policy whereby holders of record on the last
day of a month would receive a distribution on the fifteenth of the following month. The monthly distribution amount
remained consistent at $0.14 per unit from August 15, 2002 through August 15, 2004 at which time the monthly
payment per unit was increased to $0.15. It remained at this level until December 15, 2005 when it was further increased
to $0.17. An additional special distribution of $0.10 per unit was also declared for holders of record at December 30,
2005. Total distributions in 2005 were $23.9 million and estimated distributions in 2006, assuming continued monthly
payments of $0.17 would be $25.3 million.
Cash Available for Distribution
($000’s)
ebitda
Maintenance capital expended
taxes and interest
Cash available for distribution
Cash distributed
March 31, 2005
June 30, 2005
September 30, 2005
December 31, 2005
December 31, 2005
For the three month period ended
For the year ended
$ 3,243
(633)
(198)
$ 2,412
$ 5,515
$ 9,424
(1,195)
(445)
$ 7,784
$ 5,530
$ 12,546
$ 11,488
$ 36,701
(1,546)
(719)
$ 10,281
$ 5,548
(1,151)
(1,237)
$ 9,100
$ 7,279
(4,525)
(2,599)
$ 29,577
$ 23,872
Although it is typical for the Fund’s cash flow to have seasonal fluctuations, it is management’s current intention to pay
consistent distributions throughout the year based on estimated annual cash flows. The Directors review distributions
quarterly giving consideration to current performance, historical and future trends in the business and the expected
sustainability of those trends, as well as maintenance capital requirements to sustain performance.
During 2005, distributions represented a payout ratio of 65 percent of EBITDA or 81 percent of Cash Available for
Distribution. Payout ratios are expected to increase modestly in 2006 as a result of the distribution increase implemented
in late 2005.
40
P a r k l a n d i n C o M e f u n d
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
Contractual Obligations
The Fund has contracted obligations under various debt agreements as well as under operating and capital leases for
land, building and equipment. Minimum lease and principal payments under the existing terms are as follows:
year ending december 31
($000’s)
2006
2007
2008
2009
2010
thereafter
Mortgages, bank loans and notes payable
operating leases
Capital leases
$
2,644
$
1,641
$
4,218
2,165
3,069
1,366
666
–
1,309
909
448
194
558
955
300
206
137
885
The Fund also has purchase commitments under its fuel supply contracts that require it to purchase approximately
1.4 billion litres of product over the next year.
Critical Accounting Estimate
As detailed elsewhere in this document, Parkland has recorded the refinery assets at the net estimated liability that
would be realized if the refinery assets were remediated, dismantled and sold for salvage values. Estimated remediation
costs are supported by a third party report, while other costs and salvage values are based on management estimates.
Actual costs and salvage values could differ significantly from these estimates when, and if, the refinery is remediated,
dismantled and sold. Alternatively, if the Blood Tribe sale is completed or the refinery is re-opened in its current or an
alternative state, there is the potential for positive cash flow from the assets.
non-capital resources
Employees
Parkland’s ability to deliver on its strategy is contingent on retaining and acquiring employees with the proper skill sets
to drive the key initiatives forward. As such, there is a focus on recruiting and retaining key employees. To date, the
Fund has been successful at filling key positions as needed. Compensation plans for senior management have significant
incentive arrangements, with overall compensation dependent on Parkland’s performance, divisional operating
performance and results on individually identified key initiatives.
Parkland has an active Human Resources department, with compensation plans and benefits reviewed on an ongoing
basis to best meet the needs of Parkland and the various employee groups it includes. In lieu of a pension plan,
Parkland provides a unit purchase plan with matching employer contributions. A profit sharing plan is also available to
most employees with greater than two years service. Initiatives like these are intended to bring a sense of ownership to
the employee groups as increases in profits and unit prices are beneficial to all.
41
2 0 0 5 a n n u a l r e P o r t
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
Safety
In addition to other risks, the Fund’s primary business involves the transportation and sale of fuel products, which have
an inherently high degree of risk. The Fund provides training to all staff as required to mitigate these risks and has
operations and response manuals to cover common situations. Safety bonuses are also provided to employees in higher
risk roles as a means of motivating safe performance of duties.
Parkland has a Health, Safety & Environment (“HSE”) Committee. The HSE Committee represents all areas of the
Fund’s business and ensures all identified risks are properly mitigated and that procedures and documentation are
consistent across the entire organization. In 2005, Parkland satisfactorily completed an external audit of its safety
program and facilities.
Technology
Parkland utilizes technology to assist with the administration and control of its operations. Technology initiatives are
primarily implemented in-house with outside consultants used only to assist in specific areas. Parkland’s technology
initiatives include upgrading Point of Sale systems at convenience store and service station sites upgrading cardlock
hardware and software; and continued maintenance and security related to overall network administration and
Emergency Response Plan processes. Based on the current long-range technology plans, there are no significant issues
anticipated that will cause undue risk to Parkland’s business related to required or planned technology changes.
Internal Controls
Parkland’s Board and management are aware of regulations related to internal controls certification. As such, there is
currently an initiative to review and enhance existing systems documentation, analyze risks and identify and test key
controls. The Fund believes that it will be able to continue to comply with regulations as required.
Business risks
Risks Related to the Business and the Industry
retail Pricing and margin erosion
Retail pricing for motor fuels is very competitive, with major oil companies and new entrants such as grocery chains
and large retailers active in the marketplace. From time to time, factors such as competitive pricing, seasonal over-
supply and lack of responsiveness of retail pricing to changes in crude oil costs can lead to lower margins in the
Fund’s business. This is normally limited to seasonal time frames or limited market areas but could occur more
extensively. Furthermore, difficult fuel market conditions may also adversely affect the Fund’s major customers and
create increased credit risk. These risks are partially mitigated by the Fund’s other sources of revenue, conservative
credit policies, geographic diversification and by the wholesale business, which typically would only share in a portion
of any market erosion.
42
P a r k l a n d i n C o M e f u n d
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
competition
We compete with major integrated oil companies, convenience store chains, independent convenience stores, gas
station operators, large and small food retailers, discount stores, club stores and mass merchants, many of which are
well-established companies. In recent years, several non-traditional retail segments have entered the motor fuel retail
business, including supermarkets, club stores and mass merchants, and this additional competition has had a negative
impact on motor fuel profit margins. These non-traditional motor fuel retailers have obtained a significant share of
the motor fuel market and their market share is expected to grow. In some of our markets, our competitors have been
in existence longer and have greater financial, marketing and other resources than we do. We may not be able to
compete successfully against current and future competitors, and competitive pressures faced by us could materially and
adversely affect our business, results of operations and financial condition.
volatility in crude oil Prices and in wholesale Petroleum Pricing and supply
Our motor fuel revenues are a significant component of total revenues. Crude oil and domestic wholesale petroleum
markets display significant volatility. We are susceptible to interruptions in the supply of motor fuel at our facilities.
General political conditions and instability in oil producing regions, particularly in the Middle East and South America,
could significantly and adversely affect crude oil supplies and wholesale production costs. Local supply interruptions
may also occur. Volatility in wholesale petroleum supply and costs could result in significant changes in the retail price
of petroleum products and in lower fuel gross margin per litre. In addition, changes in the retail price of petroleum
products could dampen consumer demand for motor fuel. These factors could materially influence our motor fuel
volume, motor fuel gross profit and overall customer traffic, which, in turn could have a material adverse effect on our
operating results and financial condition.
credit
The Fund grants credit to customers ranging from small independent service station operators to larger reseller
accounts. These accounts may default on their obligations. The Fund manages this exposure through rigorous credit
granting procedures, typically short payment terms and security interests where applicable. We attempt to closely
monitor financial conditions of our customers.
environmental
The operation of service stations, refinery facilities and petroleum transport trucks carry an element of environmental
risk. To prevent environmental incidents from occurring, the Fund has extensive environmental procedures and
monitoring programs at all of its facilities. To mitigate the impact of a major accident, Parkland has emergency response
programs in place and provides its employees with extensive training in operational responsibilities in the event of an
environmental incident.
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2 0 0 5 a n n u a l r e P o r t
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
dependence on Key suppliers
The Fund’s business depends to a large extent on a small number of fuel suppliers, all of which are parties to long-
term supply agreements. An interruption or reduction in the supply of products and services by such suppliers could
adversely affect the Fund’s revenue and distributions in the future. Further, if any of the long-term supply agreements
are terminated or end in accordance with their terms, the Fund may experience disruptions in its ability to supply
customers with product until a new source of supply can be secured, if at all. Such a disruption may have a material
negative impact on the Fund’s revenues, distributions and its reputation. Additionally, the Fund cannot ensure that it
will be able to renegotiate such agreements or negotiate new agreements on terms favourable to the Fund.
The Fund is attempting to mitigate this risk by diversifying its supply portfolio to include substantial volumes from
each of its major suppliers and growing to a level of annual sales volumes that will offer potential suppliers a compelling
share of the fuel supply business in our regional market.
economic conditions
Demand for transportation fuels fluctuates to a certain extent with economic conditions. In a general economic
slowdown there is less recreational and industrial travel and consequently less demand for fuel products, which may
adversely affect the Fund’s revenue, profitability and ability to pay distributions.
dependence on Key Personnel
The Fund’s success will be substantially dependent on the continued services of senior management. The loss of the
services of one or more members of senior management could adversely affect the Fund’s operating results. In addition,
the Fund’s continued growth depends on the ability of the Fund and its subsidiaries to attract and retain skilled
operating managers and employees and the ability of its key personnel to manage the Fund’s growth and consolidate
and integrate its operations. There can be no assurance that the Fund will be successful in attracting and retaining such
managers, employees and personnel.
alternate Fuels
Industry continues to develop alternatives to fossil fuels for motive transport and continues to improve the efficiency of
internal combustion engines. To date, no economically viable alternative to the transportation fuels the Fund markets
is widely available. Should such an alternative become widely available, it may negatively affect the demand for the
Fund’s products. As well, certain provinces are developing legislation requiring the inclusion of ethanol in gasoline
which may negatively affect the overall demand for fossil fuel products.
44
P a r k l a n d i n C o M e f u n d
C o n s o l i d at e d f i n a n C i a l s tat e M e n t s
Technology
At the operational level, the Fund relies on electronic systems for recording of sales and accumulation of financial data.
A major breakdown of computer systems would disrupt the flow of information and could cause a loss of records. This
is mitigated by redundancies, emergency response plans and backup procedures.
Insurance
Although we have a comprehensive insurance program in effect, there can be no assurance that potential liabilities,
including those arising from environmental harm, will not exceed the applicable coverage limits under our insurance
policies. Not all risk factors are covered by insurance and no assurance can be given that insurance will be consistently
available or will be consistently available on an economically feasible basis.
management and operation of Industries lP
The Board of Directors of Parkland Industries Ltd. oversees the management and operation of the Fund’s operating
entities. As a result, holders of Units will have limited say in matters affecting the operation of the business and, if such
holders are in disagreement with the decisions of the Board of Directors, they will have limited recourse. The control
exercised by the Board of Directors may make it more difficult for others to attempt to gain control or influence the
activities of the operating entities.
Interest rates
Parkland will have certain floating rate loans and may be negatively impacted by increases in interest rates, the effect of
which increases would be to reduce the amount of cash available for distributions. In addition, the market price of the
Units at any given time may be affected by the level of interest rates prevailing at such time.
government legislation
Transportation fuel sales are taxed by the federal (GST and excise tax), provincial and, in some cases, municipal
governments. Increases in taxes are possible and could negatively affect demand for, or margin of, the Fund’s products.
refinery sale
Parkland has previously announced its intention to sell the refinery to the Blood Tribe. The Letter of Intent related to
the sale has expired. The tribe has commenced legal action against the Government of Canada seeking to confirm its
tax status and other matters. Such action may take an extended period of time and its outcome is uncertain. Should
the tribe be successful in its legal action the transaction could be considered. There is a risk that the sale of the refinery
will not occur or that operation of the refinery may not be recommenced. If the refinery is not sold and it is determined
that operation of the refinery will not recommence, Parkland may incur significant remediation costs. The current
operating permit expires in 2007 and a new permit would be required to allow alternative uses of the facility.
4
2 0 0 5 a n n u a l r e P o r t
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
regional economic conditions
Our revenues may be negatively influenced by changes in regional or local economic variables and consumer
confidence. External factors that affect economic variables and consumer confidence and over which we exercise no
influence include unemployment rates, levels of personal disposable income and regional or economic conditions.
Changes in economic conditions could adversely affect consumer spending patterns, travel and tourism in certain of our
market areas. Some of our sites are located in markets which are more severely affected by weak economic conditions.
Risks Related to the Structure of the Fund
The following items refer to the structure of the Fund and the legal entities that are contained within this structure. The
structure is described in greater detail in the Annual Information Form and the 2005 Information Circular. Parkland
Income Fund (the “Fund”) owns Parkland Income Trust (the “Trust”) which in turn owns a portion of Parkland
Holdings Limited Partnership (“Holdings LP”). The remainder of Holdings LP is held by investors through the Class
B Limited Partnership Units referenced in note 6 of the financial statements. Holdings LP owns Parkland Industries
Limited Partnership (“Industries LP”) which conducts most of the business of the Fund. Holdings LP also owns
Parkland Industries Ltd. (the “Administrator”) which is the general partner of Industries LP and also owns Parkland
Refining Ltd. which in turn holds the Bowden refinery assets.
cash distributions are not guaranteed and will Fluctuate with Performance of the Business
Although the Fund intends to distribute the interest and distributions income earned by the Fund, less expenses and
amounts, if any, paid by the Fund in connection with the redemption of Units, there can be no assurance regarding the
amounts of income to be generated by the Business and transferred indirectly to the Fund.
The actual amount distributed in respect of the Units will depend upon numerous factors, including profitability,
fluctuations in working capital, the sustainability of margins, capital expenditures and the actual cash amounts
distributed to the Fund, directly and indirectly, by the Trust, Holdings LP and Industries LP.
capital Investment
The timing and amount of capital expenditures will directly affect the amount of cash available for distribution to
Unitholders. Distributions may be substantially reduced at times when significant capital or other expenditures are made.
nature of units
Securities like the Units are hybrids in that they share certain attributes common to both equity securities and
debt instruments. The Units do not represent a direct investment in the Trust, Holdings LP, Industries LP or the
Administrator and should not be viewed by investors as Trust Units, Trust Notes, Holdings LP Units, Industries
Participating LP Units or Parkland Shares. As holders of Units, Unitholders will not have the statutory rights normally
4
P a r k l a n d i n C o M e f u n d
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
associated with ownership of shares of a corporation including, for example, the right to bring “oppression” or
“derivative” actions. The Units represent a fractional interest in the Fund. The Fund’s primary assets will be Trust
Notes and Trust Units. The price per Unit is a function of anticipated Distributable Cash and other market factors.
The Units are not “deposits” within the meaning of the Canada Deposit Insurance Corporation Act (Canada) and are
not insured under the provisions of that Act or any other legislation. Furthermore, the Fund is not a trust company and,
accordingly, is not registered under any trust and loan company legislation as it does not carry on or intend to carry on
the business of a trust company.
unitholder limited liability
The Fund Declaration of Trust provides that no Unitholder will be subject to any liability in connection with
the Fund or its obligations and affairs or for any act or omission of the Trustee and, in the event that a court
determines Unitholders are subject to any such liabilities, the liabilities will be enforceable only against, and will be
satisfied only out of, each Unitholder’s share of the Fund Assets as represented by the Unit certificates. The Fund
Declaration of Trust further provides that all written instruments signed by or on behalf of the Fund shall contain a
provision or be subject to an acknowledgment to the effect that such obligation will not be binding upon Unitholders
personally and that such provision or acknowledgment shall be held in trust and enforced by the Trustee for the benefit
of the Unitholders.
However, in conducting its affairs, the Fund will assume certain contractual obligations and may have to assume
further obligations in the future. Although the Trustees will use reasonable efforts to have any contractual obligations
modified so as not to have such obligations binding upon any of the Unitholders personally, they may not obtain such
a modification in all cases. To the extent that any claims under such contracts are not satisfied by the Fund, there is a
risk that a Unitholder will be held personally liable for obligations of the Fund where the liability is not disavowed as
described above.
Notwithstanding the terms of the Fund Declaration of Trust, Unitholders may not be protected from liabilities of the
Fund to the same extent as a shareholder is protected from the liabilities of a corporation. Personal liability may also
arise in respect of claims against the Fund (to the extent that claims are not satisfied by the Fund Assets) that do not
arise under contracts, including claims in tort, claims for taxes and possibly certain other statutory liabilities. The
business of the Fund, the Trust, Holdings LP and Industries LP, will be conducted, upon the advice of counsel, in such
a way and in such jurisdictions so as to avoid, as far as possible, any material risk of liability to the Unitholders for
claims against the Fund including obtaining appropriate insurance, where available, for the operations of the Fund and
Industries LP and their subsidiaries and ensuring that all written agreements signed by or on behalf of the Fund include
a provision that such obligations are not binding upon Unitholders personally. However, there can be no assurance that
a Unitholder will not be subject to liability in the future.
4
2 0 0 5 a n n u a l r e P o r t
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
distribution of securities on redemption or Termination of the Fund
Upon a redemption of Units or termination of the Fund, the Trustee may distribute the Fund Notes, Trust Notes,
Trust Units or Holdings LP Units directly to the Unitholders, subject to obtaining any required regulatory approvals.
Fund Notes, Trust Notes, Trust Units or Holdings LP Units so distributed may not be qualified investments for trusts
governed by registered retirement savings plans, registered retirement income funds, deferred profit sharing plans,
registered education savings plans and other registered plans, depending upon the circumstances at the time.
The Fund may Issue additional units diluting existing unitholders’ Interests
The Fund Declaration of Trust authorizes the Fund to issue an unlimited number of Units for the consideration and
on those terms and conditions as are established by the Directors without the approval of any Unitholders. Additional
Units will be issued by the Fund on the exchange of Rollover LP Units.
restrictions on Potential growth
The payout by Industries LP of substantially all of its operating cash flow will make additional capital and operating
expenditures dependent on increased cash flow or additional financing in the future. Lack of those funds could limit the
future growth of Industries LP and its cash flow.
Investment eligibility and Foreign Property
There can be no assurance that the Units will continue to be qualified investments for registered retirement savings
plans, deferred profit sharing plans, registered retirement income trusts, registered education savings plans or other
registered plans or that the Units will not be foreign property under the Tax Act. The Tax Act imposes penalties for the
acquisition or holding of non-qualified or ineligible investments and on excess holdings of foreign property.
Income Tax matters
There has been considerable debate and consultation in Canada concerning the continued use and expansion of
income trusts and other flow-through entities both publicly and from the Department of Finance (Canada). Prior
to announcing the recent Federal election, the Minister of Finance announced that the Department of Finance had
concluded its consultation process and that no changes to the law governing income trusts and other flow-through
entities would be forthcoming. It is possible the deliberations concerning income trusts and other flow-through entities
could resume.
There can be no assurance that the applicable tax rules would not be changed in the future in a way that could
adversely impact the Fund and/or Unitholders.
48
P a r k l a n d i n C o M e f u n d
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
There can be no assurance that the Fund will continue to qualify as a mutual fund trust within the meaning of the Tax
Act. The consequences of not being a mutual fund trust include the following:
•
the Units would cease to be qualified investments under the aforementioned plans which can have negative tax
consequences to such plans and their annuitants and beneficiaries;
•
the Fund would be required to pay a tax under Part XII.2 of the Tax Act. The payment of Part XII.2 tax by the
Fund may have adverse income tax consequences for certain Unitholders, including non-resident persons and
residents of Canada who are exempt from Part I tax;
•
the Units would be foreign property for certain Unitholders and other persons subject to tax under Part XI of the
Tax Act. The February 23, 2005 Canadian Federal Budget (the "2005 Budget") proposed to eliminate the limit
in respect of foreign property that may be held in the above noted plans for months which end in 2004 and for
subsequent years. However, no assurance can be provided that the Tax Act will be amended in accordance with
the 2005 Budget or at all; and
•
the Units would constitute taxable Canadian property for the purposes of the Tax Act, potentially subjecting non-
residents of Canada to tax pursuant to the Tax Act on the disposition (or deemed disposition) of such Units.
effect of canadian Federal government Budget Proposals
The March 23, 2004 Canadian Federal Budget (the “2004 Budget”) proposed to introduce changes to pensions and
their investment in trust entities. The proposed changes, if enacted, would restrict pension funds in their ownership
of “business income trusts” such as the Fund after 2004 to one percent of the book value of the pension fund’s assets
and to no more than five percent of the units of any business income trust. On May 18, 2004, the Minister of Finance
(Canada) announced that the proposals announced in the 2004 Budget would be suspended to allow consultation
with representatives of the pension fund industry, the investment industry, provincial governments and other interested
parties. Following such consultations, the Minister of Finance (Canada) has indicated the Government will issue
legislation and explanatory notes for the proposed changes introduced in the 2004 Budget. Such proposals did not
contain any proposed legislation on an investment by a pension fund in “business income trusts” described above.
If enacted, these changes may limit demand for our Units and adversely affect the liquidity and market value of
our Units.
The 2004 Budget introduced a new 15 percent Canadian non-resident withholding tax on the non-taxable portion
of the Fund’s distributions, which, under the current provisions of the Tax Act are not subject to any Canadian
withholding tax. The new 15 percent Canadian withholding tax would potentially be applicable to distributions
made by the Fund after 2004. The new 15 percent Canadian withholding tax will only apply if, at the time of the
distribution, the Units are listed on a prescribed stock exchange (which includes the Toronto Stock Exchange) and
more than 50 percent of the fair market value of the Units is attributable to real property situated in Canada, Canadian
resource property, timber resource property, or any combination thereof. If a subsequent disposition of a Unit results
49
2 0 0 5 a n n u a l r e P o r t
M a n a g e M e n t ’ s d i s C u s s i o n a n d a n a ly s i s
in a capital loss to a non-resident, a refund of the new 15 percent Canadian withholding tax is available in limited
circumstances, subject to the filing of a special Canadian tax return. The proposed withholding tax rules may reduce
the amount of after-tax distributions available for non-residents.
The 2004 Budget also introduced a 25 percent withholding tax on distributions made to non-residents of Canada
which are attributable to capital gains realized by the Fund after March 22, 2004 on the disposition of taxable Canadian
property where the Fund has made certain designations on such capital gains with respect to its Unitholders. The 25
percent rate of Canadian withholding tax may be reduced pursuant to the terms of an applicable income tax treaty
between Canada and the non-resident’s jurisdiction of residence. The proposed withholding tax rules may reduce the
amount of after-tax distributions available for non-residents.
Controls Environment
Management is responsible for the preparation and fair presentation of the consolidated financial statements. We have
established disclosure controls and procedures, internal controls over financial reporting, and corporate wide policies
to provide that Parkland’s consolidated financial position, results of operations and cash flows are presented fairly.
Our disclosure controls and procedures are designed to ensure timely disclosure and communication of all material
information required by regulators.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, these systems provide
reasonable, but not absolute assurance, that financial information is accurate and complete.
The Fund, under the supervision and participation of management, including the Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures pursuant to Multinational
Instrument 52-109 “Certificate of Disclosure in Issuers’ Annual and Interim Filings” as of the end of the period covered
by this report. Based on the evaluations, it was concluded that our disclosure controls and procedures were effective as
of December 31, 2005 to provide reasonable assurance that information required is recorded, processed, summarized
and reported within the time periods specified by the applicable Canadian securities regulators. Furthermore, our
disclosure controls and procedures include controls and procedures designed to provide reasonable assurances that
information required to be disclosed in reports filed or submitted under applicable Canadian securities regulations is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
0
P a r k l a n d i n C o M e f u n d
M a n a g e M e n t ’ s r e P o r t
Management’s Responsibility
for Financial Statements
The accompanying financial statements of Parkland Income Fund have been prepared by management in accordance
with generally accepted accounting principles. Parkland’s accounting procedures and related systems of internal control
are designed to provide reasonable assurance that its assets are safeguarded and its financial records are reliable. In
recognizing that the Fund is responsible for both the integrity and objectivity of the financial statements, management
is satisfied that these financial statements have been prepared accordingly and within reasonable limits of materiality.
Further, management is satisfied that the financial information throughout the balance of this annual report is consistent
with the information presented in the financial statements.
PricewaterhouseCoopers LLP have been appointed by the Unitholders of Parkland to serve as the Fund’s external
auditors. They have examined the financial statements of the Fund for the years ended December 31, 2005 and 2004.
The Audit Committee has reviewed these statements with management and the auditors, and has reported to the Board
of Directors. The Board has approved the information contained in the financial statements of Parkland which are
contained in this annual report.
Michael W. Chorlton
President and CEO
Red Deer, Alberta
March 1, 2006
John G. Schroeder
Vice President and CFO
Red Deer, Alberta
March 1, 2006
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2 0 0 5 a n n u a l r e P o r t
a u d i t o r ’ s r e P o r t
Auditors’ Report
To the unitholders of Parkland Income Fund
We have audited the consolidated Balance Sheet of Parkland Income Fund as at December 31, 2005 and 2004 and the
consolidated Statements of Earnings and Retained Earnings and Cash Flows for the years then ended. These financial
statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of
the Fund as at December 31, 2005 and 2004 and the results of its operations and cash flows for the years then ended in
accordance with Canadian generally accepted accounting principles.
Chartered Accountants
Calgary, Alberta
February 3, 2006
2
P a r k l a n d i n C o M e f u n d
C o n s o l i d at e d f i n a n C i a l s tat e M e n t s
Consolidated Balance Sheet
($000’s)
Assets
Current Assets
Cash and cash equivalents
accounts receivable
inventories
Prepaid expenses
other
Capital assets (note 2)
future income taxes (note 7)
Liabilities
Current Liabilities
accounts payable
income tax payable
long-term debt – current portion (note 5)
long-term debt (note 5)
refinery closure accrual (note 3)
asset retirement obligations (note 4)
Unitholders’ Capital
Class b limited Partners’ Capital (note 6)
unitholders’ Capital (note 6)
December 31,
december 31,
2005
2004
$ 8,290
$
5,286
34,253
18,962
1,570
63,075
1,859
66,454
1,631
21,923
17,973
1,522
46,704
2,101
66,652
1,960
$ 133,019
$ 117,417
$ 53,011
$
40,315
1,138
6,862
61,011
9,749
3,038
1,120
74,918
13,055
45,046
58,101
–
4,466
44,781
13,169
3,400
1,043
62,393
18,833
36,191
55,024
$ 133,019
$ 117,417
James Pantelidis
Chairman of the board
Michael w. Chorlton
President and Ceo
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Consolidated Statement of Earnings
and Retained Earnings
for the years ended
($000’s except per unit amounts)
net sales and operating revenue
Cost of sales and operating expenses
gross margin
expenses
Marketing, general and administrative
amortization
loss on writedown of refinery assets
interest on long-term debt
earnings (loss) before income taxes
income tax expense (recovery) (note 7)
Current
future
net earnings
retained earnings, beginning of year
allocation to Class b limited Partners (note 6)
allocation to unitholders (note 6)
retained earnings, end of year
net earnings per unit – basic
net earnings per unit – diluted
units outstanding
December 31,
december 31,
2005
2004
$ 875,539
$ 686,658
783,615
91,924
603,766
82,892
55,223
8,804
–
873
64,900
27,024
1,726
329
2,055
52,363
9,242
25,310
738
87,653
(4,761)
(103)
(8,618)
(8,721)
$ 24,969
$
3,960
–
(6,859)
(18,110)
$
$
$
–
2.03
2.02
–
(2,187)
(1,773)
–
0.33
0.32
$
$
$
12,338
12,221
4
P a r k l a n d i n C o M e f u n d
C o n s o l i d at e d f i n a n C i a l s tat e M e n t s
Consolidated Statement of Cash Flows
for the years ended
($000’s)
Cash Provided By Operations
net earnings
add (deduct) non-cash items
amortization
unit option compensation
accretion expense (note 4)
loss on writedown of refinery assets
future taxes
Cash flow from operations
net changes in non-cash working capital (note 10)
Cash from operating activities
Financing Activities
Proceeds from long-term debt
long-term debt repayments
fund units issued
distributions to Class b limited Partners
distributions to unitholders
Cash (used for) financing activities
Investing Activities
Change in other assets
refinery closure expenditures
Purchase of capital assets
Proceeds on sale of capital assets
Cash (used for) investing activities
increase in cash
Cash and Cash equivalents, beginning of period
Cash and Cash equivalents, end of period
December 31,
december 31,
2005
2004
$ 24,969
$
3,960
8,804
181
60
–
329
34,343
467
34,810
3,458
(4,483)
1,799
(6,761)
(17,111)
(23,098)
242
(362)
(8,812)
224
(8,708)
3,004
5,286
$ 8,290
$
9,242
97
57
25,310
(8,618)
30,048
526
30,574
5,485
(4,556)
1,305
(8,534)
(12,541)
(18,841)
974
–
(12,265)
2,127
(9,164)
2,569
2,717
5,286
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Notes to Consolidated Financial Statements
December 31, 2005
Dollar and unit amounts presented in tables are in thousands, except per unit information.
significant accounting Policies
Basis of Presentation
Parkland Income Fund (the “Fund” or “Parkland”) is an unincorporated, open-ended limited purpose mutual fund
trust established under the laws of the Province of Alberta on April 30, 2002. The Fund was created to acquire the
fuel marketing, convenience store and related ancillary businesses formerly owned by Parkland Industries Ltd. This
acquisition was completed on June 28, 2002 through a Plan of Arrangement that resulted in the previous Parkland
Industries Ltd. shareholders indirectly exchanging their shares for Units in the Fund or Class B Limited Partnership
Units in Parkland Holdings Limited Partnership (“LP Units”), a limited partnership controlled by the Fund.
Principles of Consolidation
The consolidated financial statements include the accounts of all wholly owned subsidiaries, partnerships and trusts. All
significant accounts and transactions between consolidated entities are eliminated.
The LP Units are, to the greatest extent possible, the economic equivalent to a Unit in the Fund. They are
exchangeable by the holder on a one-for-one basis into Units in the Fund until June 30, 2008. In certain circumstances,
and at any time after June 30, 2008, the Fund may compel the exchange of the LP Units. As such, the LP Units are
treated as being equivalent to Fund Units.
Use of Estimates
The preparation of the financial statements necessarily involves the use of estimates and approximations. Should the
underlying assumptions change, the actual amounts could differ from those estimated.
Estimates are used when accounting for items such as allowance for doubtful accounts, asset retirement obligations, the
refinery closure accrual and amortization.
Inventories
The Fund values its inventories at the lower of cost and market value. The Fund uses the last-in, first-out (LIFO) method
of determining the cost of product inventory.
P a r k l a n d i n C o M e f u n d
n o t e s t o C o n s o l i d at e d f i n a n C i a l s tat e M e n t s
Amortization
Amortization is provided for on a straight line basis over the estimated useful lives of assets at the following annual
rates:
Land improvements
Buildings
Equipment
4 percent
5 percent
10-20 percent
Assets under capital lease 10-20 percent
Income Taxes
Income earned directly by the Limited Partnership is not subject to income taxes as its income is taxed directly to the
Limited Partnership unitholders. Income earned in the Fund and distributed to the Fund unitholders is taxed directly
to the Fund unitholders. Income taxes incurred by taxable entities controlled by the Fund are accounted for using the
future method. Under this method, the Fund recognizes a future tax liability whenever recovery or settlement of the
carrying amount of an asset or liability would result in future income tax outflow. Similarly, the Fund recognizes a
future income tax asset whenever recovery or settlement of the carrying amount of an asset or liability would generate
future income tax reductions.
Long-term future tax assets relate primarily to the difference in the carrying value of the refinery assets to the tax basis.
Asset Retirement Obligations
The estimated future costs to remove underground fuel storage tanks at locations where the Fund has a legal obligation
to remove these tanks is recorded as an Asset Retirement Obligation at the time the tanks are installed. A corresponding
increase to the carrying value of the fuel storage tanks is also recorded at installation. The Fund recognizes accretion
expense in connection with the discounted retirement obligation and amortization in connection with the increase in
carrying value over the estimated remaining life of the respective underground fuel storage tanks.
Long-Term Debt
Capital lease obligations, which relate to transactions which are similar in nature to a purchase, are capitalized and
included in long-term debt.
Earnings Per Unit
Basic earnings per unit are calculated on the weighted average number of units outstanding for the period. Diluted
earnings per unit are calculated by application of the Treasury Stock Method. Under this method, the units are
calculated based upon the weighted average number of units outstanding for the period plus the dilutive effect of the
exercise of those employee stock options which were “in-the-money” during the period.
2 0 0 5 a n n u a l r e P o r t
n o t e S t o C o n S o l i D at e D F i n a n C i a l S tat e M e n t S
Revenue
Net sales and operating revenue are recorded net of provincial fuel taxes. The Fund recognizes revenue on its sale of
goods when title passes to the purchaser.
Grants of Options
The Fund accounts for its grants of options in accordance with the fair value based method of accounting for stock-
based compensation.
Cash and Cash Equivalents
Cash and cash equivalents include short-term investments, such as money market deposits or similar type instruments,
with a maturity of three months or less when purchased.
1. earnings analysis and earnings per unit
For the years ended December 31
earnings (loss) before tax
income tax expense (recovery)
Current
Future
total income tax expense (recovery)
net earnings
earnings per unit – basic
– diluted
For the years ended December 31
equivalent units outstanding, beginning of year
Weighted average of equivalent units issued pursuant to distribution reinvestment plan
Weighted average of equivalent units issued pursuant to exercise of employee unit options
Denominator utilized in basic earnings per unit
incremental equivalent units outstanding that were “in-the-money”
Denominator utilized in diluted earnings per unit
2005
2004
$ 27,024
$
(4,761)
1, 726
329
$ 2,055
$ 24,969
$
$
2.03
2.02
(103)
(8,618)
(8,721)
3,960
0.33
0.32
$
$
$
$
2005
2004
12,221
12,132
18
61
12,300
67
12,367
10
40
12,182
106
12,288
2. capital assets
December 31, 2005
land
land improvements
Buildings
assets under capital lease
equipment
Cost
Accumulated
Amortization
Net Book Value
$ 14,891
$
–
$ 14,891
6,490
23,371
14,691
58,696
$ 118,139
2,025
9,576
6,730
33,354
$ 51,685
4,465
13,795
7,961
25,342
$ 66,454
8
p a r k l a n D i n C o M e F u n D
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n o t e s t o C o n s o l i d at e d f i n a n C i a l s tat e M e n t s
december 31, 2004
land
land improvements
buildings
assets under capital lease
equipment
3. refinery closure accrual
Cost
accumulated
amortization
net book value
$ 14,508
$
–
$ 14,508
6,238
20,455
13,168
58,137
1,862
8,035
5,304
30,653
4,376
12,420
7,864
27,484
$ 112,506
$ 45,854
$ 66,652
In December, 2004 the Fund reduced the carrying value of its Bowden refinery by $25.3 million to a net liability of $3.4
million based on the uncertainty of creating an alternative to the refinery being dismantled, remediated and sold for
salvage values. A corresponding tax recovery of $8.6 million was also recorded related to the writedown.
Annual costs of approximately $400,000 will continue to be incurred to protect the value of the refinery assets. These
costs primarily relate to security, maintenance, insurance and property taxes and will continue to be expensed as
incurred. In 2005 the Fund incurred $362,000 of closure costs related to the buyout of a supply contract.
The Fund is currently pursuing alternative uses for the refinery site.
4. asset retirement obligations
A reconciliation of the Fund’s liability for the removal of its underground fuel storage tanks is as follows:
for the years ended december 31
asset retirement obligations, beginning of year
additions during the year
accretion expense
asset retirement obligations, end of year
2005
$ 1,043
$
17
60
2004
930
56
57
$ 1,120
$
1,043
On an undiscounted basis, the estimated liability is $1.5 million, with costs expected to be incurred between 2006 and
2019. The discount rate used to calculate the liability is 6.9 percent.
9
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5. long-Term debt
December 31, 2005
december 31, 2004
bank loans secured by an assignment of accounts receivable, inventories and demand
debentures creating a first fixed charge over specific fixed assets and floating charge upon all
other assets. the loans are repayable in monthly installments of $141,368 including interest
at prime plus 0.35 percent. the effective interest rate at year end was 5.35 percent
(2004 – 4.60 percent). the loans mature at various dates from november 30, 2006 to
december 31, 2010.
$
5,448
$
3,286
Mortgages payable in monthly installments totaling $135,169 including interest. interest rates
vary from 5.15 percent to 8.50 percent and prime plus 0.70 percent to prime plus 0.80
percent per annum. the effective rates of interest at year end for the prime based loans
were 5.70 percent to 5.80 percent (2004 – 4.95 percent to 5.05 percent). the mortgages
are secured by real properties with a net book value of $8,907,000 and mature at various
dates ending May 7, 2009.
4,462
5,359
Capital leases payable in monthly installments totaling $207,338 including interest varying
from 4.54 percent to 16.34 percent and prime plus 0.35 percent per annum. the effective
rate of interest at year end for the prime based lease was 5.35 percent (2004 – 4.60 per-
cent). the leases are for land, buildings and equipment with a net book value of $7,961,000
and mature at various dates ending July, 2022.
unsecured notes
less current portion
Estimated principal repayments for the next 5 years are:
2006
2007
2008
2009
2010
thereafter
6,701
–
16,611
6,862
8,928
62
17,635
4,466
$ 9,749
$
13,169
$ 6,862
3,120
3,369
1,572
803
885
$ 16,611
For the years ended December 31, 2005 and 2004 the Fund did not incur net interest expense on working capital
borrowings as average monthly cash balances exceeded average borrowings.
The Fund has outstanding letters of credit totaling $25,685,000 (December 31, 2004 – $18,605,000) which mature at
various dates to October 21, 2006.
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P a r k l a n d i n C o M e f u n d
n o t e s t o C o n s o l i d at e d f i n a n C i a l s tat e M e n t s
For 2005 the Fund has available lines of credit of $28,000,000, subject to margin calculations. The outstanding letters of
credit are considered a part of this facility.
6. unitholders’ capital
An unlimited number of Fund Units and LP Units may be created and issued, pursuant to the Fund Declaration of Trust
and the Amended and Restated Limited Partnership Agreement, respectively, as outlined in the Plan of Arrangement.
Fund Units represent an undivided interest in the Fund. LP Units represent a partnership interest in Parkland Holdings
Limited Partnership and are exchangeable on a one-for-one basis into Fund Units. Both Fund Unitholders and LP
Unitholders are entitled to vote at meetings of the Fund and are entitled to distributions from time to time as determined
by the Board of Directors.
Class b limited Partnership units
balance, beginning of year
allocation of retained earnings
distribution to partners
exchanged for fund units
balance, end of year
unitholders’ Capital
balance, beginning of year
allocation of retained earnings
unit option compensation
issued under distribution reinvestment plan
issued under unit option plan
distribution to unitholders
exchange of limited Partnership units
balance, end of year
December 31, 2005
december 31, 2004
Units
Dollars
units
dollars
4,307
$ 18,833
5,411
$ 31,487
–
–
(1,399)
2,908
7,914
–
–
32
85
–
1,399
9,430
12,338
6,859
(6,761)
(5,876)
13,055
36,191
18,110
181
661
1,138
(17,111)
5,876
45,046
$ 58,101
–
–
(1,104)
4,307
6,721
–
–
22
67
–
1,104
7,914
2,187
(8,534)
(6,307)
18,833
39,250
1,773
97
441
864
(12,541)
6,307
36,191
12,221
$ 55,024
The Fund has an Incentive Option Plan under which the Fund may grant up to 1,200,000 Incentive Options to
directors, officers, employees and consultants. The incentive options have a 10 year term and, with limited exceptions,
vest proportionately over the first three anniversary dates following the grant.
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The table below represents the status of the Fund’s Incentive Option Plan as at December 31, 2005 and 2004 and the
changes therein for the periods then ended:
balance, beginning of year
granted
options exercised
Cancelled
balance, end of year
exercisable options, end of year
2005
2004
Number of
Weighted Average
number of
weighted average
Options
Exercise Price
options
exercise Price
438
280
(85)
(83)
550
129
$ 15.26
$ 21.38
$ 13.45
$ 19.02
$ 18.09
$ 15.28
361
170
(67)
(26)
438
55
$ 13.04
$ 19.03
$ 12.87
$ 15.22
$
15.26
$ 13.23
Exercise prices for outstanding options at December 31, 2005 have the following ranges: 162,309 from $12.45 – $15.71;
143,668 from $17.62 – $18.97 and 244,000 from $21.05 – $21.80, which represent market value at the date of issue.
The corresponding remaining contractual life for these options ranges from 7 to 10 years.
The Fund accounts for its grants of options in accordance with the fair value based method of accounting for stock-
based compensation. The total cost to be reported is $577,910. The compensation cost that has been charged against
income for the year ended December 31, 2005 is $181,000 (December 31, 2004 – $97,000).
The fair value of the options granted is estimated using the Black-Scholes options pricing model on the basis of the
following assumptions:
Expected average annual distribution
Expected average volatility
$1.80
20 percent
Weighted average risk-free interest rate
3.25 percent
Expected life
3 years
The weighted average fair value of options granted during the year is $1.25.
7.
Income Taxes
Income tax expense varies from the amounts that would be computed by applying the Canadian Federal and Provincial
income tax rates to earnings before provision for income taxes as shown in the following table:
for the years ended
Amount of
%
amount of
Provision for income taxes at statutory rates
$ 9,085
33.62
$
(1,612)
%
33.87
December 31, 2005
december 31, 2004
add (deduct) the tax effect of:
income earned in limited partnership
large Corporation/Capital taxes
Change in tax rates
other
(7,697)
(28.48)
(6,796)
142.74
623
–
44
$ 2,055
2
P a r k l a n d i n C o M e f u n d
2.30
–
0.16
7.60
(103)
(158)
(52)
2.16
3.32
1.08
$
(8,721)
183.17
n o t e s t o C o n s o l i d at e d f i n a n C i a l s tat e M e n t s
Capital assets and inventory held directly by the Limited Partnership, having carrying values of $51,630,510
(December 31, 2004 – $51,739,494) and $5,856,757 (December 31, 2004 – $5,077,934), have a tax basis of $46,736,174
(December 31, 2004 – $47,750,014) and $8,319,802 (December 31, 2004 – $6,331,134), respectively.
Future income tax assets amounting to $1,631,000 (2004 – $1,960,000) relate to the difference in carrying value of
the refinery assets to the tax basis. The refinery assets are held by Parkland Refining Ltd., a wholly owned subsidiary
of the Fund.
8. commitments
The Fund has contracted obligations under various debt agreements as well as under operating and capital leases
for land, building and equipment. Minimum operating lease payments under the existing terms for each of the five
succeeding years are as follows:
2006
2007
2008
2009
2010
$ 1,641
$ 1,309
$
$
909
448
$ 194
The Fund also has purchase commitments under its fuel supply contracts that require the purchase of approximately
1.4 billion litres of product over the next year.
9.
Financial Instruments
The fair value of cash, accounts receivable and accounts payable are equal to their carrying values due to their short
term maturities. The fair value of long-term bank loans equal their carrying values as their interest rates fluctuate with
the prime lending rate. The carrying values and fair values of mortgages payable, capital lease obligations, unsecured
notes payable and other assets, which consist primarily of mortgages and loans receivable, are as follows:
Mortgages payable
Capital lease obligations
notes payable
Mortgages and loans receivable
December 31, 2005
december 31, 2004
Carrying Value
Fair Value
Carrying value
fair value
$ 4,462
$ 4,465
$ 5,359
$
5,359
6,701
–
1,930
6,735
–
1,822
8,928
62
2,438
8,991
62
2,347
3
2 0 0 5 a n n u a l r e P o r t
n o t e s t o C o n s o l i d at e d f i n a n C i a l s tat e M e n t s
Fair value of mortgages and loans receivable and long-term debt are estimated using discounted cash flow analysis
based upon incremental borrowing rates for similar borrowing arrangements.
The Fund does not have a significant credit exposure to any individual customer. The Fund reviews a new customer’s
credit history before extending credit and conducts regular reviews of its existing customers’ credit performance.
Mortgages and loans receivable are receivable in monthly instalments of $31,368, bear interest at rates ranging between
0 and 13 percent and are secured by specific assets of the mortgage.
10. net changes in non-cash working capital
accounts receivable
inventories
Prepaid expenses
accounts payable
income taxes payable
other cash flow information
Cash taxes paid (received)
Cash interest paid
11. segmented Information
December 31, 2005
december 31, 2004
$ (12,330)
$ (6,263)
(989)
(48)
12,696
1,138
1,499
115
5,175
–
$
467
$
526
$ 588
$ 873
$
(103)
$
738
The Fund’s operations are predominantly in fuel marketing in Western Canada. Commercial and retail sales are
considered to be a single reportable segment as margins in both are predominantly dependent on the difference
between fuel costs and retail prices for transportation fuels.
The Fund operates convenience stores that are integrated into fuel marketing properties already controlled by the Fund,
and all continue to market transportation fuels. Due to the amount of common operating and property costs it is not
practical to report these segments below gross margin.
Similarly, it is not practical to segregate total assets, capital expenditures or cash flows from these segments.
year ended december 31, 2005
net sales and operating revenue
Cost of sales
gross margin
year ended december 31, 2004
net sales and operating revenue
Cost of sales
gross margin
fuel Marketing
Merchandise
total
$ 830,569
750,501
$ 80,068
$ 648,607
575,603
$
73,004
$ 44,970
33,114
$ 11,856
$ 875,539
783,615
$ 91,924
$ 38,051
$ 686,658
28,163
603,766
$ 9,888
$
82,982
4
P a r k l a n d i n C o M e f u n d
Friendly
Hard-working
Dedicated
Committed
Resourceful
Rooted
Solid
We begin here.
At Parkland we try to “live” our values in everything we do, from the way we
operate our businesses to the people we hire from the service we offer customers
to the returns we provide our investors. Parkland is deeply rooted in Western
Canada and we are proud of our strong heritage. As we look to the future, our
company will grow and change as we continue to make acquisitions, upgrade sites,
add complementary business lines and further integrate our operations. However,
through this evolution we will remain committed to our values and our core
strategy of serving our loyal customer base in non-urban markets across Canada.
Corporate Information
Head Office
Suite 236, Riverside Office Plaza
4919 – 59th Street
Red Deer, Alberta
T4N 6C9
Tel: (403) 357-6400
Fax: (403) 346-3015
Email: corpinfo@parkland.ca
Website: www.parkland.ca
Annual General Meeting
Friday, May 5, 2006
2 p.m. at the Capri Hotel
Trade and Convention Centre
3310 – 50th Avenue
Red Deer, Alberta
Banker
HSBC Bank Canada
108, 4909 – 49th Street
Red Deer, Alberta
T4N 1V1
Auditors
PricewaterhouseCoopers LLP
3100, 111 – 5th Avenue SW
Calgary, Alberta
T2P 5L3
Legal Counsel
Bennett Jones LLP
4500, Bankers Hall East
855 – 2nd Avenue SW
Calgary, Alberta
T2P 4K7
Stock Exchange Listing
Toronto Stock Exchange
Trading Symbol: PKI.UN
Registrar and Transfer Agent
Valiant Trust Company
310, 606 – 4th Street SW
Calgary, Alberta
T2P 1T1
Directors
Robert G. Brawn
Jim Dinning
Alain Ferland
Kris Matthews
Jim Pantelidis
David A. Spencer
Andrew B. Wiswell
Officers
Michael W. Chorlton
President and CEO
John G. Schroeder
Vice President and CFO
Corporate Secretary
Chief Privacy Officer
Kelly G. Collier
Controller, Retail
Wholly Owned Subsidiaries
986408 Alberta Ltd.
986413 Alberta Ltd.
Parkland Holdings Limited Partnership
Parkland Industries Limited Partnership
Parkland Industries Ltd.
Parkland Investment Trust
Parkland Refining Ltd.
Designed and Produced by Result Inc.
Printed in Canada.
This annual report is printed on Mohawk Via which is now
manufactured with non-polluting wind-generated energy.
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We begin here.
P a r k l a n d i n c o m e F U n d
a n n U a l r e P o r t 2 0 0 5
P a r k l a n d i n c o m e F U n d
Suite 236, riverside office Plaza
4919 – 59th Street
red deer, alberta
t4n 6c9
www.parkland.ca