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NEW HORIZONS, INSPIRING OPPORTUNITIESGrowing to meet tomorrow’s needs.

AnnuAl report2013

ufa 2013 unabridged annual report2

CONTENTS

3 Corporate Profile

4 Financial Highlights & Five-Year Summary

5 Chairman’s Message

6 President and CEO’s Message

9 Division Summaries

13 Management Discussion & Analysis

28 Consolidated Financial Statements

ufa 2013 unabridged annual report 3

COrpOraTE prOfilE

Founded in 1909, UFA Co-operative Limited is an Alberta-based agricultural co-operative with more than 120,000 member-owners. UFA’s network comprises more than 110 bulk fuel and Petroleum Cardlock locations, 35 Farm & Ranch Supply stores and a support office located in Calgary, AB. Independent Petroleum Agents and more than 1,200 UFA employees provide products, services and agricultural solutions to farmers, ranchers, members and commercial customers in Alberta, British Columbia and Saskatchewan. UFA also owns and operates Wholesale Sports Outdoor Outfitters. With 13 locations and more than 600 employees, Wholesale Sports is the largest multi-channel retailer in Western Canada dedicated to the outdoor industry. For more information, visit UFA.com.

Core PurPose To improve the economic and social well-being of our agricultural owners and their communities.

VisionUFA is a market-leading agricultural co-operative providing quality products, services and solutions that support our owners and customers and serve the rural community.

Core Values

• Performance• Accountability• Progressive thinking

• Respect• Integrity

• Collaboration• Agility


fiNaNCial HiGHliGHTS & fiVE-YEar SUMMarY(Stated in thousands of Canadian dollars) 2013 2012 2011 2010 2009

Continuing Operations

Revenue $ 2,126,750 $ 2,009,405 $ 2,001,320 $ 1,640,830 $ 1,506,348

Gross margin 237,021 224,707 214,604 188,402 193,337

Operating and administrative expenses (176,253) (162,873) (158,728) (184,110) (155,877)

Net income (loss) from continuing operations – before Patronage Allocation and income tax

24,200 17,457 11,529 (53,260) (4,404)

Net (loss) income from discontinued operations before income tax (16,724) (7,862) (8,139) (35,270) 327

Patronage Allocation (13,600) (10,000) (7,000) – –

Distribution to members

Cash portion of Patronage Allocation 1,826 1,412 – – 3,648

Issuance of Class A Investment Shares 13,302 14,561 14,093 15,012 16,023

Dividends on Investment Shares 2,894 2,722 2,484 1,894 1,550

Dividend on Member Shares 397 – – – –

Retirement of Members’ Equity 6,156 5,893 6,119 6,287 6,163

Total distribution to members $ 24,575 $ 24,588 $ 22,696 $ 23,193 $ 27,384

20132012201120102009

Net Income before Patronage Allocation and Income Taxes from continuing operations ($M)

24

(4)

12

17

(53)

20132012201120102009

Members’ Equity and Total Assets ($M)Total Assets Members’ Equity

402

326

325

311

325

795

721

678

662 70

8

20132012201120102009

Revenue from continuing operations ($M)

1,50

6

1,64

1 2,00

9

2,12

7

2,00

12,

001

20132012201120102009

Total Distribution To Members and Patronage Allocation ($M)

Patronage AllocationDistribution to Members

27

23 23

25 25

10

14

7

0 0

20132012201120102009

Net Income before Patronage Allocation and Income Taxes from continuing operations ($M)

24

(4)

12

17

(53)

20132012201120102009

Members’ Equity and Total Assets ($M)Total Assets Members’ Equity

402

326

325

311

325

795

721

678

662 70

8

20132012201120102009

Revenue from continuing operations ($M)

1,50

6

1,64

1 2,00

9

2,12

7

2,00

12,

001

20132012201120102009

Total Distribution To Members and Patronage Allocation ($M)

Patronage AllocationDistribution to Members

27

23 23

25 25

10

14

7

0 0


CHairMaN’S MESSaGE

Farmers and ranchers spend much of their time looking ahead – if it’s spring, they might be seeding, but they’re also looking ahead to the harvest. If it’s early fall, and they’ve been sitting on the combine non-stop for two weeks trying to get the harvest in, they’re also looking

ahead to next year’s crop. If it’s 2:00 a.m. on a cold winter night and they’re watching over a cow giving birth, they’re also looking ahead to the day when that calf heads off to market. Then there are those times after being wiped out by hail or drought or an early frost, when, even as he’s counting his losses, he’s looking ahead to next year and better times. Farmers and ranchers are a tough, resilient and persistent bunch. They live in the heart of “next year” country and no matter what; they are always looking forward, always looking just over the horizon.

Over the past few years, UFA has faced some tough times. We have spent a lot of time looking back. We’ve asked questions, we’ve learned and we have worked hard to refocus the business so that once again we are a relevant and valued business partner of the agricultural producers in Alberta, and a source of pride to rural families across the province.

I am proud to report that in 2013 we continued to make progress. Our year-over-year results improved: revenues are up, earnings are better and once again we are able to pay a patronage dividend to our members. In the past year, we made investments in our network including the opening of a new petroleum facility in Dawson Creek. We started construction on a new site in Rycroft and now we are working with the City of Airdrie to develop a new site for a combined Farm & Ranch Supply store and full-service Petroleum facility. We also opened a new Wholesale Sports store in Prince George, B.C., in 2013, and another store in Westbank, B.C., in early 2014.

We have restructured and refocused our AgriBusiness team to be better aligned with the changing and growing needs of producers. Our Petroleum business continues to play a dominant role as a preferred supplier of fuel inputs for producers and commercial customers. In 2013, we sold our U.S.-based Wholesale Sports stores. Although our

Wholesale Sports Canada division has been challenged by slower retail sales and increased competitive pressure, we are confident that it remains a viable business opportunity that contributes to our bottom line.

In addition to investments in our network, we also made strategic investments in the communities where our members live. A key part of our mandate as an agricultural co-operative is to give back to the rural community. We were heavily involved in clean-up efforts after floods devastated the town of High River. Additionally, through our Get n’ Give program, we have made major contributions to projects in the communities of Hussar, Foremost, Spruce View and Hand Hills which will have a strong, positive effect for generations to come. These, and the many other projects we support are more than feel good contributions – they are part of the reason we exist and are essential to our business success.

We’re in better shape today than we were four years ago. With the adoption of a three-year strategic plan, we are prepared to more effectively serve the agricultural producers of Alberta and the communities in which they live. The time has come to stop looking back. To ensure our future and secure our place in the Canadian agricultural landscape, we must begin looking ahead – to new horizons, new opportunities and new challenges.

On behalf of the Board of Directors, I want to thank our members and customers for their continued support. I want to acknowledge the efforts of our management team, employees and Agents. I want to thank them for their willingness to take on the challenge of making us better each and every day, and continuing to look forward. I also want to thank my colleagues on the Board of Directors and our Delegates for their commitment and dedication to providing strong governance for the organization.

This is an exciting time to be part of UFA. We can be proud of what we have accomplished in the past. But now is the time to look to the future - to new horizons, new possibilities and inspiring opportunities.

Jim Laverick Chairman of the Board


prESidENT aNd CEO’S MESSaGE

UFA is at a crossroads. Through hard work and tenacity, we have fought our way back from the grim financial position we faced a few years ago. That is behind us. Today, we are operationally and financially much more secure and we have earned the right to consider choices and

opportunities that could not have been contemplated just a few short years ago. I have said on more than one occasion that it is difficult to get very far if you spend all your time looking in the rear view mirror. It is time for us to look ahead – to explore new opportunities, new horizons and new possibilities.

“New Horizons, Inspiring Opportunities” is the theme for this year’s annual member report. It is a theme that not only acknowledges our recent past and journey, but also looks to the future and to the opportunities that lie ahead for our Co-operative. “New Horizons” symbolizes our external world and the agricultural industry that continues to evolve rapidly around us. It also epitomizes the opportunities that lie ahead for UFA. The real value of our hard work and results achieved over the past three years is that it now gives us the opportunity to look at options, to widen and lengthen our view and to look at our “New Horizons”. We must decide how we want to position this Co-operative to be a strong, vibrant player in our agricultural communities for the long term.

Given the changing face of our agricultural industry, we too must change in order to remain, or indeed, become, that vital partner to our owners. In recent years, I am not sure that we have ever been that vital partner for our owners that we endeavour to be and we need to change that or we risk losing them.

In the past, we have talked about “serving our owners better” and although we may have achieved a modest measure of success in this area, we have not come close to what we should indeed, be striving for. It is time for change. We should not talk about serving our owners better; the time has come to act and to do what is best for our owners. To do this will certainly challenge us, but like the agricultural producers we are committed to

serve, we are a tough, resilient and persistent bunch. It is unlikely that meaningful change will happen without courage, some measure of discomfort and consequences, both positive and negative. In the absence of challenging ourselves to be the best, and to do the best for our owners, we will continue to evolve at our modest pace, while we watch the agricultural industry as a whole continue to move out of our reach and beyond our ability to compete.

We are looking to the future, to those “New Horizons”, to see what potential options lie ahead. We will look only to those that could provide an opportunity for this Co-operative to evolve and become a significant participant within the structure of our ever-more complex agricultural industry. Without significant and meaningful change, we run the real risk of becoming a small side-lined observer of the agricultural industry, increasingly challenged to maintain a viable, profitable, agriculturally focused co-operative and quickly becoming less and less relevant to our owners.

Having said that we need to change, in no way do I downplay all the hard work that we have put in to move this Co-operative forward from where we were a few years ago. Our turnaround has been remarkable. Indeed, without all that hard work we would not be in a position today to stand back, to take stock and look forward, candidly and objectively at the potential risks and rewards of opportunities that may lie ahead.

During 2013, we continued to strengthen the operations of our Co-operative across all of our lines of business by improving processes and procedures, enabled by both front-line staff and our support services. Our 2013 operating EBITDA (earnings before interest, taxes, depreciation and amortization) of $64 million has enabled us to declare a patronage dividend of $13.6 million in 2013, an increase of $3.6 million from 2012.

Our past year’s results were made possible by the hard work of the entire UFA team at every level of the organization. Details of each division’s achievements are included later in this document; however here are a few of the highlights of which we are particularly proud.


AgriBusiness – We have experienced substantial growth in the past three years and have made significant progress to improve our value and relevance to members. We still have much work to do. Under new leadership, our AgriBusiness division is focused on developing and expanding its Farm & Ranch sales team and its outbound team of agriculture sales professionals in order to grow and develop deeper relationships with producers by providing increased levels of sales and services at the farm gate. A record crop by the industry also translated into record storage and equipment sales. We have seen a 45 per cent increase in this product category since 2011.

Petroleum – Our Petroleum division continues to generate strong revenues and profits. This past year marked another period of strong operating performance with growth in sales volumes. We completed a new Agent contract agreement, reduced costs through our automated-carrier managed inventory system, completed the Cardlock renovation project and continued investing in the network. Petroleum upgraded its sites in Mayerthorpe and Vermilion, completed the rebuild of the existing site in Dawson Creek and began construction on a new site in Rycroft.

Wholesale Sports Canada – We continue to work on improving the business fundamentals in the face of increasing competition and a softening retail market. To improve operations and overall efficiencies, the team focused on four key initiatives in 2013: we launched a new reporting and forecasting system that will provide reporting tools to improve the in-stock position in our stores; we established a cross-dock facility at the UFA Distribution Center in Edmonton; we implemented phase one of a revamped e-Commerce strategy; and completed the first wave of store refreshes. In 2013, Wholesale Sports opened a new store in Prince George, B.C. and in early February 2014, opened its latest store in Westbank, B.C.

Our support teams at Calgary Support Office and in the field are also working hard to advance the business. We passed our Certificate of Recognition (COR) audit with our best score yet, reflecting health and safety management excellence. Our Human Resources team is focused on attracting, retaining and developing top talent as well as developing organizational capabilities to further enable our employees to drive key results.

We introduced the new Defined Contribution Pension Plan and refined the Disability Management Program and the Substance Abuse Program. Our annual employee engagement survey scores reached an all-time high. We have strengthened our IT performance with improvements in general network availability and advances in project prioritization and disaster recovery risk mitigation processes. We are also making investments to improve our websites, e-business and other digital assets.

Our financial partners also recognize the overall improvements and health of the business. Four years ago it was difficult to find lenders who were interested in working with us. This time around, interest was strong and lenders competed aggressively for our business. We negotiated a new credit agreement with more favourable terms and future financing opportunities, which link to our strategic growth options.

Most importantly, without the ongoing support from our owners and customers, we of course, could not have achieved the success that we have. On a day-to-day basis, we continue to run our Co-operative with our core purpose front-of-mind — “To improve the economic and social well-being of our agricultural owners and their communities”. In our work to strive for those “New Horizons”, our owners should not be concerned; we will have their interests’ front and centre. Our core purpose will continue to guide us, as will its three key operational pillars:

•Toenableourowners’business

•Toprotectourowners’investment

•Topromoteruralcommunities

To remain, or indeed become, relevant to our agricultural producers – a principle that is central to our core purpose, UFA needs to strengthen and broaden its base and grow its lines of business. Only then can UFA truly aspire to become that preferred partner for all agricultural producers. Our traditional, incremental approach of modest annual investment in our business is unlikely to move the needle fast enough. We would likely fail even to keep pace with structural changes in the agricultural sector let alone be able to withstand encroachment and growth by our competitors.

PRESIDENT AND CEO’S MESSAGE


PRESIDENT AND CEO’S MESSAGE

Today UFA is competing with large, efficient global players with broad service offerings and deep pockets. They have the financial capability to invest and grow at a rate far beyond that which UFA could currently consider. In order to compete with these players, one option may be to consider a partner or partners that can provide extensions to our current lines of business, to enable us to offer a broader and more relevant offering of goods and services to our owners and in doing so, become their preferred partner, their “go-to” supplier of choice.

Our “New Horizon”, our strategic horizon, has moved beyond next year or the year after. It has moved out to five years and beyond. We need to consider how we want to position our Co-operative for the long term. We are not only thinking of the 110th anniversary of the founding of our Co-operative, but also the 150th. How can we best serve our current and future owners and customers with the range of products and services that they need? We are working hard to explore “Inspiring Opportunities” in order to be the best business supplier of agricultural goods and services for our owners today and into the future.

I would like to thank our employees and agents for their service and on-going dedication to this Co-operative. Without their talent and enthusiasm, UFA would not be the mainstay of the rural communities in which it operates.

I would also thank all of our owners and customers for your continued loyalty and support. UFA is only as good as its owners and customers enable it to be. If you stop coming through our doors, the lights will eventually go out. We do not take any of you for granted. We value our collaboration with you and we are working hard to ensure that UFA will be a vibrant part of your business both for today and for the next generations to come.

Bob Nelson President & Chief Executive Officer


diViSiON SUMMariES

PetroleumThe UFA Petroleum division is dedicated to supporting the businesses of its members and customers by providing them with top-quality fuel, lubricants and services needed to keep their operations running smoothly.

UFA Petroleum has an extensive network of 108 Cardlock locations in Alberta, two in British Columbia and three in Saskatchewan. With bulk fuel and oil deliveries, portable storage tanks and local Agents offering service and support, customers can count on having the dyed and clear fuels, lubricants and fluids they need, whenever and wherever they work. In partnership with the Commercial Fueling Network, UFA provides customers with access to a network of more than 3,000 locations in British Columbia and across the United States.

2013 performance Operating• Delivered strong financial results. EBITDA exceeded

2012 results, and almost matched our record 2011 performance.

• Sales volumes in 2013 were higher than the prior year. Strong sales early in the year due to high levels of activity in the oil and gas sector followed by a robust harvest season, compensated for some potential lost sales due to industry-wide product shortages experienced later in the year.

• The supply / demand balance within the market continued to sustain robust unit margins. The petroleum business is a balance between volume and price. Throughout the year, we successfully balanced the need to retain margin for the Co-operative while meeting a variety of local competitive pressures.

• The location of all Petroleum agencies became available on stand-alone navigation systems from manufacturers such as Garmin™ and Tom Tom™. They will also become accessible within OEM navigation systems preinstalled in new vehicles. In addition, we developed an app for iPhones™ and tablets, along with

a mobile browser site for other devices that provides details of all UFA locations and services.

Fuel Supply• During 2013, there was significant planned refinery

maintenance activity. Despite two prolonged refinery shutdowns in the spring, there was minimal supply disruption in the market place. However, a major refinery shutdown in September / October along with other unplanned disruptions caused significant supply shortages. While there were shortages in the market, our multi-sourced supply strategy enabled us to keep UFA Petroleum shortages and their impact on our member and customers, to a minimum.

• Our automated carrier-managed inventory project utilized automatic tank gauging devices, along with communication technology to allow our carriers immediate access to site level inventories and improved our operational efficiencies. Automated delivery will become our future standard operating procedure.

Network Management• Agency network upgrades and expansion continued.

We upgraded sites in Mayerthorpe and Vermilion and completed the rebuild of the existing site in Dawson Creek. Work is underway to build a new Petroleum Agency in Rycroft with a mid-2014 completion date.

• We successfully completed a new Petroleum Agent contract agreement, working closely and collaboratively with the Petroleum Advisory Council.

• We completed our Cardlock renovation project in 2013. Our new modern Cardlock system provides improved technical stability, options for future growth and complies with new privacy standards for financial transactions.

• We focused on Health and Safety initiatives that enabled our network to meet the needs of their customers. In order to transact business with many of their larger commercial customers, Petroleum Agents are required to meet these customers’ ISNetworld®


DIVISION SUMMARIES

and Complyworks® standards. Our focus this year was to enable Agents to develop their own Substance Abuse and Journey Management Policies.

focus for 2014Forecasts for the Alberta economy continue to indicate that it will be at the forefront of economic activity in Canada. With crude oil forecast in the $90 - $100 US per barrel range, the oil and gas industry is continuing to invest and grow, resulting in tight job markets and correspondingly higher wages. As was the case in 2013, this should translate into a relatively robust business environment for the Petroleum business.

Our areas of focus include:

• Advancing our network strategy of building sites in selective new markets and continuing our significant

investment in the redevelopment and maintenance of existing locations. We anticipate building a new Petroleum Agency in Airdrie as well as completing the Rycroft facility currently under construction.

• Managing our supply / margin balance in order to maintain our Agricultural market share while endeavouring to grow our commercial market share.

SummaryThanks to the hard work and dedication of the Petroleum team, we achieved another year of outstanding results. Everyone worked together, from CCO through to our field staff, along with all of our Agents and their staff to tackle issues as they arose, find solutions and drive bottom-line profitability.


agriBusinessThe UFA AgriBusiness division increases the productivity and efficiency of members’ and customers’ businesses by providing insightful solutions and service, supported by retail operations.

The AgriBusiness network consists of 35 Farm and Ranch Supply stores, three bulk fertilizer plants, a distribution centre, which services AgriBusiness, Petroleum and Wholesale Sports, one lumber yard and a Buildings team. Agriculture sales professionals offering services such as farm and ranch sales, feedlot management and rural municipality sales, and approximately one hundred employees including product managers, buyers and support teams located in Calgary, round out the AgriBusiness group.

Highlights• Delivered stronger year-over-year results. EBITDA

increased 19 per cent, profitability improved and market share increased in all crop-related categories (Chemistry, Seed and Fertilizer).

• Completed organizational changes which will lead to increased sales and improved operational effectiveness. We put a new sales management team in place and expanded its scope from crop-related sales to both crop- and livestock-related sales. This will allow members and customers to partner with one agriculture sales professional who can meet all of their needs either at the local store or at the farm gate.

• Reported record storage and equipment sales as a result of the bumper harvest in 2013. Sales in this product category increased ten per cent from 2012 levels and 45 per cent from 2011 levels.

• We reduced our year-end inventory by $11.1 million. While not yet optimum, our increased focus on inventory management is producing results.

focus for 2014 & BeyondIn 2014, we will continue to drive member and customer-focused initiatives.


• Our Team: Continue to improve our functional alignment and focus on team and people development.

• Our Members and Customers: Strengthen customer-facing sales processes; equip and train our sales team with the best-fit tools and resources; and continue to build financial and customer service acumen.

• Our Operations: Continue to invest in inventory management, store maintenance and network design.

Summary Increased operational efficiencies, combined with a record crop, resulted in strengthened financial results for AgriBusiness in 2013. We recorded growth or improvement in all core categories: profit margin, EBIDTA, inventory management and market share.

While these results are positive, further improvements to our operating model will be required to build a sustainable and relevant agricultural business in today’s global market. Our traditional retail model, one where customers come to the store to transact business, needs to change to a customer-focused model, one where agriculture sales professionals meet with customers at the farm or ranch to collaborate, provide insight and help solve business challenges.

DIVISION SUMMARIES


Wholesale sPorts CanadaWholesale Sports Outdoor Outfitters aspires to be one of Canada’s most respected multi-channel retailers dedicated to the sportsmen and women who have a passion for hunting, fishing and camping, and a love of the great outdoors. We strive to be the one-stop shopping destination for outdoor enthusiasts looking for top-quality gear and the expertise to go with it.

With the divesture of our US business in March 2013, our focus shifted to strengthening our Canadian operations while continuing to grow our retail footprint across Western Canada. With 13 stores and 470,000 square feet of retail space across British Columbia, Alberta, Saskatchewan and Manitoba, Wholesale Sports is the largest multi-channel retailer in Western Canada dedicated to the outdoors. We have been part of the Canadian outdoor industry for more than 30 years.

2013 HighlightsDuring 2013, we continued to focus on retail fundamentals while driving key business initiatives. Our financial results were disappointing, and reflect the challenges we faced operating in a softening and increasingly competitive retail environment.

• Our EBITDA contribution to the Co-operative decreased from 2012 levels. The erosion was primarily due to decreased revenue as a result of the divesture of our US business. Further, overhead costs previously shared with the US business became fully-attributable to our Canadian operation.

• Consolidated revenue declined by six per cent from 2012 levels. While many of our locations reported increases in same-store sales, US competitors opening new stores in Western Canada put new pressure on key Wholesale Sports markets.

• We reduced year-end inventory levels.

• We increased our retail footprint. As part of our new store growth strategy, we opened a 34,000 square foot store in Prince George, B.C. and we started work on a new 21,000 square foot store in Westbank, B.C., which opened February 6, 2014.

• We centralized distribution. Since we began utilizing the UFA Edmonton Distribution Centre, we have created positive, enterprise-wide synergies, reduced costs and increased efficiencies.

• We revised our e-Commerce strategy. We were able to leverage existing Calgary warehouse space for a dedicated fulfillment centre and are currently building a discrete inventory to be managed as a stand-alone site. This will improve the overall customer experience, drastically improve our fulfillment capabilities and ultimately drive sales growth.

focus for 2014 & BeyondOur number one priority for 2014 is to increase same-store sales. As the competitive landscape continues to intensify, we must demonstrate our ability to grow and protect market share and strengthening our retail fundamentals remains critical to success.


• Forecasting and Replenishment: In 2014, we will continue to embrace PivotLink™ as our primary reporting tool. With on-demand access to data, we will be able to review, analyze and execute our purchasing and inventory initiatives.

• Centralized Distribution: We expect to vastly improve store in-stock positions, gain operational efficiencies and reduce freight costs.

• E-Commerce: We will be deploying several e-Commerce technologies which, coupled with a vastly improved and branded user interface, will drive purchase behavior. In addition to driving sales growth, these technologies will reduce operational costs, improve customer service and enhance online security.

Summary In 2014, we will continue to build upon our successes in 2013 and demonstrate our ability to compete and grow in an ever-changing and competitive retail market. We are confident we have the team in place to execute on our key initiatives and deliver improved results.

DIVISION SUMMARIES


MaNaGEMENT’S diSCUSSiON aNd aNalYSiS

The following Management Discussion and Analysis (MD&A) provides management’s perspective on UFA, our performance and our strategy for the future. This MD&A includes UFA’s operating and financial results for 2013 and 2012 and should be read in conjunction with our Financial Statements.

forward-looking Statements This disclosure contains forward-looking statements and includes phrases such as “believe”, “expect”, “anticipate”, “intend”, “estimate”, “outlook”, “should”, “would”, “could” and other similar expressions. These forward-looking statements are based on certain assumptions and current expectations about future events. Inherent in these forward-looking statements are known and unknown risks, uncertainties and other factors beyond UFA’s ability to control or predict. Readers are cautioned that actual results or events may differ materially from those forecasted in this disclosure because of risks and uncertainties associated with UFA’s business and the general economic environment. Management does not intend to publicly update or revise this discussion and analysis as a result of new information, future events or otherwise.

Non-Gaap financial Measures UFA uses certain financial indicators within the MD&A that are not specifically defined by Generally Accepted Accounting Principles (GAAP). These non-GAAP indicators may or may not be comparable to similar measures presented by other enterprises and are presented on a consistent basis within this annual report to members. UFA believes EBITDA (earnings before interest, tax, depreciation and amortization) is a critical measure of its operating performance. EBITDA allows UFA to compare its operating performance on a consistent basis year over year. EBITDA excludes certain items that depend on accounting methods or reflect financing choices.

Interest-bearing debt is another non-GAAP disclosure, which provides a measure of all interest-bearing borrowings both short-term and long-term, less unencumbered cash balances available for funding those payments. This indicator is important to UFA as it identifies future obligations that it must meet in order to comply with borrowing agreements, as well as the liquid funds available to meet those obligations. UFA also believes that the ratio

of interest-bearing debt to Members’ Equity is an important non-GAAP measure that identifies how UFA finances its financial assets and operations, and the amount of risk UFA is willing to accept.

Governance Structure The Board of Directors (Board) and management are unified in their belief that sound corporate governance practices are necessary for the achievement of strategic and operational goals, and for the effective management and sustainability of UFA. In addition to the Annual General Meeting, the Board meets with management at least five times per year to deal with general business and strategic matters. The Board and its committees, as listed below, operate independently from management to protect owner interests. The existing members of the Board have served between one and twelve years on the Board at UFA. Board members have the right to seek independent advice should they so desire or deem necessary.

The Board has established four standing committees: Audit; Enterprise Risk Management/Environment, Health & Safety; Governance; and Human Resources Compensation. Each committee meets regularly throughout the year and provides regular updates to the Board.

Code of Business Ethics UFA continually works to make positive contributions to the communities we serve and we believe our conduct is critical to our reputation and success. In order to ensure our daily business is conducted in a safe, fair, honest and respectful manner, all employees formally renew their commitment to UFA’s Code of Business Ethics each year.

We support our employees through the development of policies, processes and training, and we maintain multiple open channels for discussion. Additionally, the Internal Audit team continues to manage UFA’s Integrity Hotline (toll free: 1-877-258-4605 or e-mail: [email protected]). This hotline is available for use by our employees, agents, elected officials and visitors to report and resolve ethical questions or issues that may arise through the course of business.

We continue to promote awareness of our Code of Business Ethics, and we will continue to uphold the high standards of conduct set by our Co-operative.


MANAGEMENT’S DISCUSSION AND ANALYSIS

2013 summary of oPerations

Consolidated Statement of Operations For the period ended(Stated in thousands of Canadian dollars)

December 29, 2013 December 30, 2012

Revenue from continuing operations $ 2,126,750 $ 2,009,405

Cost of sales (1,889,729) (1,784,698)

Gross margin 237,021 224,707

Operating and administrative expenses (176,253) (162,873)

Other income 3,220 1,333

Earnings before the under noted (EBITDA) 63,988 63,167

Depreciation and amortization (31,877) (35,730)

Interest (8,247) (9,933)

Foreign currency exchange gain (loss) 336 (47)

Income before Patronage Allocation and income taxes 24,200 17,457

Patronage Allocation (13,600) (10,000)

Income tax (expense) recovery (2,165) 3,795

Net income from continuing operations 8,435 11,252

Net loss from discontinued operations (16,724) (23,587)

Net loss $ (8,289) $ (12,335)

Revenue from continuing operations was $2,126.8 million in 2013, up slightly from $2,009.4 million the previous year. The Petroleum division ended the year with sales of $1,629.6 million, an increase of 6% from 2012 sales of $1,538.7 million. During the same period, volumes increased by 29.5 million litres (or 2%) primarily due to increased diesel sales. Petroleum sales growth resulted from improved economic conditions, increased activity from the oil patch, and a record harvest year. AgriBusiness division sales grew by 10%, from $354.0 million in 2012 to $390.2 million in 2013. AgriBusiness sales growth was primarily in crop inputs, grain storage and livestock product categories. Wholesale Sports division sales decreased by 6% during the same period, from $113.8 million in 2012 to $106.9 million in 2013 primarily due to a softening in Canadian retail sales and increased competitive pressures in Western Canada.

Gross margin increased by $12.3 million, from $224.7 million in 2012 to $237.0 million in 2013. Of this total, AgriBusiness contributed $9.5 million due to higher sales volumes and improved margin realization; Petroleum contributed $5.6 million due to higher sales volumes and increased margins measured in cents per litre (cpl); while Wholesale Sports’ and Construction

division margins decreased by $2.2 million and $0.6 million, respectively, due to lower sales volumes during the same period. The wind down of the Construction division was concluded in 2013.

Operating and administrative expenses were $176.3 million in 2013, an increase of $13.4 million over the prior year. Salaries and benefits were $99.2 million, or $6.8 million more than 2012 levels. The cost increases were primarily due to higher staffing levels, inflation and increased benefit costs. Maintenance expense in 2013 was $1.7 million higher than in 2012 due to increased levels of preventative maintenance at Petroleum sites and Farm & Ranch Supply stores. A provision of $1.6 million against an advance for materials to a co-operative in the United States was created, as recoverability is deemed doubtful. Net of this exceptional cost, bad debt expense of $0.3 million was incurred in 2013 compared to a net bad debt recovery of $0.5 million in 2012. Advertising expenses during the same reporting period were lower by $0.8 million.

Other income in 2013 was $3.2 million, exceeding the prior year by $1.9 million. In 2013, the net cost relating to the BNS white card program for financing receivables was reduced by $1.1 million and a gain of $0.7 million relating to sale of land was realized.


Although gross margin increased by $12.3 million during the reporting period, higher operating costs impacted profitability, resulting in a modest increase to EBITDA of $0.8 million. After providing for a Patronage Allocation of $13.6 million, the consolidated net loss for 2013 was $8.3 million compared to a net loss of $12.3 million in 2012.

In March 2013, UFA completed the disposition of Wholesale Sports USA, Inc. under an asset and share transfer agreement for a net cash consideration of $47.0 million. The operating results for Wholesale Sports USA, Inc. and the disposition resulted in a loss from discontinued operations of $16.7 million in 2013. An analysis of the loss and comparative with the prior year are provided in note 21 to the consolidated financial statements.

The Petroleum Division Sales volumes in 2013 were 29.5 million litres higher than in 2012. Favourably impacted by a record harvest and increased oil patch activity, bulk marked diesel volumes increased by 13.3 million litres and Cardlock diesel increased by 18.0 million litres over the previous year. The Petroleum division’s average gross margin in 2013 was 7.56 cpl compared to 7.36 cpl in 2012. Market driven inventory valuation resulted in gains of $1.9 million in 2013, compared to an inventory valuation loss of $1.6 million in 2012, and contributed to the increase of $5.6 million in gross margin. EBITDA in 2013 was $85.7 million compared to $82.5 million in 2012.

Gas: Clear Dyed Diesel: Clear Dyed

2012 2013

622

487253

94

Total: 1,456 Total: 1,486

86

640

508252

Fuel Volumes by Fuel Type (Millions of Litres)

The AgriBusiness Division Sales and margin increased by $36.2 million and $9.5 million, respectively, over 2012 levels. The increases were primarily driven by increased sales of crop inputs, higher sales of grain storage bins as a result of the bumper crop in 2013, and higher livestock sales as a result of an increased cow-calf herd in Alberta. Operating expenses increased by $8.4 million over the same period in 2012 as a result of higher staffing costs, maintenance and consulting expenses. EBITDA for 2013 was $17.2 million, representing an increase of $2.7 million over 2012.

AgriBusiness Sales ($M)

2012

LivestockCrop inputFarm storage

RuralMarket

Farm & Ranch

160 194113

26

55

2013

RuralMarket

Farm & Ranch

170 220124

36

60



Wholesale Sports Canada Revenue in 2013 decreased by 6% from 2012 levels due to a soft Canadian retail environment, increased competitive pressures in a few key markets as a dominant, US competitor continued its rapid expansion into Western Canada, and a significant Canadian competitor aggressively entered the outdoor adventure market. In addition, 2012 included an extra week of sales related to the retail calendar. Margin rates remained relatively flat year over year at 36.4% in 2013 compared to 36.1% in 2012. The EBITDA erosion from $10.4 million in 2012 to $5.4 million in 2013 was due primarily to decreased revenue and increased overhead costs associated with the divestiture Wholesale Sports USA, Inc.

Wholesale Sports Sales by Product Category ($M)

Hunting Fishing Camping Clothing

2012 2013

62

19

17

16

Total: 114 Total: 107

59

17

15

16

Centralized Services Centralized Services includes all core business activities required to support the business units within UFA, and the consolidated enterprise as a whole. Services are provided by functional departments and include Environment, Health & Safety, Co-operative and Community Relations, Information Technology, Legal, Risk & Real Estate, Internal Audit, Human Resources, Marketing & Digital Strategy and Finance. Total costs incurred by Centralized Services in 2013 were $46.1 million compared with costs of $47.3 million in 2012. Of the total, 56% of costs were directly attributable to AgriBusiness, Petroleum and Wholesale Sports Canada divisions, with the balance related to enterprise, governance, and Co-operative-related costs.

Capital Spending and depreciationThe net book value of capital assets, excluding goodwill and intangible assets was $216.9 million. During 2013 UFA invested $44.8 million in assets consisting mostly of property and equipment, which represents an increase of $22.8 million from 2012. The improved financial position has provided the opportunity for UFA to increase its investment in growth and maintenance capital. The additions for 2013 include $9.4 million for Petroleum site upgrades, $4.5 million for completion of Petroleum Cardlock renovations, $5.0 million to purchase land in Airdrie for a new Petroleum facility and Farm & Ranch Supply store, $4.0 million on capital leases and $6.7 million for essential information technology projects.

A depreciation and amortization charge of $31.9 million was incurred in 2013 representing a reduction in the prior year charge of $35.7 million, as certain application software reached full depreciation in the year.

20132012201120102009

Capital Spending and Depreciation ($M)

38

22

13

22

45

32

43 42 41

36

Capital Expenditure Depreciation



long Term debt In 2013, UFA was in compliance with all covenants under the Asset-Based Credit Agreement (Credit Agreement). UFA strengthened its liquidity position throughout the year and performed in accordance with the financial commitments made to the lending syndicate. The three-year Credit Agreement entered into in December 2010 matured on December 10, 2013, and was replaced with a new five-year Credit Agreement with more favourable terms. Available funds were $83.7 million in 2013 compared to $73.8 million in 2012.

UFA has three different member loan and investment programs — the on-demand Member Loan program, the High Yield Member Investment Plan (HYMIP) program and the 5-6-7 Member Investment Plan (5-6-7MIP) program. At the end of 2013, the total outstanding under the three programs was $57.5 million (2012 – $58.0 million), of which $15.3 million (2012 - $47.2 million) is classified as long-term debt.

Total financing costs for 2013 were $8.2 million, down from $9.9 million in 2012. Throughout 2013, UFA benefited from receiving best-tier rates under the Credit Agreement, which contributed to the significant reduction in interest costs. UFA’s member investment programs introduced in 2011 will continue to be an important component in UFA’s long-term debt arrangements.

20132012201120102009

Interest Bearing Debt to Equity Ratio ($M)

Debt Ratio

Debt* Equity

* Debt ratio includes off balance sheet working capital finance

216

288

261

258

224

402

326

325

311

325

0.7:10.8:10.8:10.9:10.5:1

Members’ Equity and dividend payments During 2013, UFA paid dividends of $2.9 million on its Class A Investment Shares (Investment Shares), compared to $2.7 million in 2012. This is due to an increase in Investment Shares from $112.9 million on December 30, 2012 to $119.4 million on December 29, 2013. In 2013, a dividend of $0.4 million was declared on Member Shares and distributed as Investment Shares.

Net income before patronage allocation and income Taxes Net income from continuing operations, before taxes and Patronage Allocation, was $24.2 million in 2013, compared to $17.5 million in 2012. UFA’s ability to pay a Patronage Allocation is determined by the taxable income of UFA Co-operative Limited, and excludes financial results from Wholesale Sports Canada Ltd. and losses from discontinued operations.

As a result of UFA’s taxable earnings in 2013, the Board will be recommending to the Assembly at the Annual General Meeting, a Patronage Allocation in the amount of $13.6 million for 2013.



liQuidity UFA depends on its ability to generate cash from operating activities and attract adequate supplies of capital from both internal and external sources to finance its business operations, to execute its strategic plans and to maintain an enduring and sustainable organization. UFA’s liquidity needs are affected by the seasonal business environment of the markets we serve.

Working capital requirements increase significantly over the spring and early summer months when UFA is building its inventory in AgriBusiness and agricultural customers are financing their supplies. UFA’s liquidity needs have been reduced by credit finance plans provided by Farm Credit Corporation and BNS to customers, which allows accounts to remain outstanding until crops are harvested.

Due to its improved financial health and increased liquidity, UFA was able to terminate its agreement with BNS to finance customer credit in December 2013. The receivables are now collateralized and financed under the new Credit Agreement at a lower cost.

internal Capital Internal sources of capital are reflected in the Members’ Equity section of the Balance Sheet as Member Entitlements, Retained Earnings and Cumulative Translation Adjustments (CTA). As at December 2013, internal sources of capital amounted to $325.0 million compared to $311.5 million in 2012. With the disposition of Wholesale Sports USA, Inc., the balance of CTA was recognized in the 2013 Consolidated Statement of Earnings as a loss from discontinued operations.

External Capital UFA entered into a new Credit Agreement in December 2013 which provides for an asset-based revolving credit facility in the maximum aggregate amount of $275.0 million. It also has an accordion feature, which permits UFA to request an increase in the revolving credit facility up to an additional amount of $75.0 million for a total availability of $350.0 million. Any increase under the accordion feature is not committed and must first be approved by the lenders.

The amount available to be drawn under the Credit Agreement will vary from time to time based on UFA’s inventory and accounts receivable balances. Further, advances under the Credit Agreement cannot exceed the revolving loan’s borrowing base as determined by the Credit Agreement and includes such factors as UFA’s inventory levels and receivables. In addition, reserves are calculated under the Credit Agreement to take into account factors such as priority payables and additional collateral requirements.

The Credit Agreement has a five-year term and UFA can borrow under the Credit Agreement using prime, London Interbank Offered Rate (LIBOR) or Banker’s Acceptances (BA). Pricing for Canadian and US prime loans is equal to their respective prime rates. LIBOR loans and BA balances are priced at their respective rates plus an agreed upon spread.

Another source of external capital is the on-demand Member Loan program. The Member Loan program, including accumulated interest, had a balance of $10.5 million at year-end 2013 compared to a balance of $10.8 million at year-end 2012. Member Loans earn a rate of return equal to the bank prime rate, as stated by the Royal Bank of Canada, plus 1.0%. Interest on Member Loans in 2013 remained unchanged from 2012 at $0.4 million, and is included in interest expense. Member Loans are unsecured and repayable on demand.

In 2011, UFA introduced its HYMIP which offered members a three-year investment plan that pays a fixed rate of 7% interest per year, and matures on June 15, 2014. The plan has no early redemption options, and pays interest semi-annually on June 15th and December 15th. The minimum investment allowed under the program was $5,000 and all HYMIP loans are unsecured. The program was fully subscribed and closed to new investment in November 2011. As at December 29, 2013 the total outstanding obligation under this program was $31.7 million compared to $31.8 million in 2012, and included $2.2 million in interest expense compared to $2.3 million in 2012. UFA is exploring the option of introducing a new member investment plan in 2014 to replace the HYMIP.



UFA introduced its 5-6-7MIP to members on July 9, 2012. This plan offered members a three-year investment plan with fixed interest rates of 5% in year one, 6% in year two and 7% in year three. The plan matures on September 15, 2015 and has no early redemption options. Interest is paid semi-annually on March 15th and September 15th. The minimum investment allowed under the program was $2,500 and all 5-6-7MIP loans are unsecured. The program was fully subscribed and closed to new investment in September 2012.

The 5-6-7MIP balance as at December 29, 2013 was $15.3 million (2012 – $15.4 million), and the interest of $0.9 million (2012 – $0.4 million) was included in interest expense. Interest is recognized using the straight line method over the life of the instrument for financial reporting.

The repayment of all Member Loans, HYMIP and 5-6-7MIP is subject to the right of offset of any amounts owing to UFA, and subject to UFA meeting the covenants contained under the Credit Agreement.

Capital lease obligations at December 29, 2013 were $5.4 million compared to $2.6 million at December 30, 2012. Lease terms range from one to five years, with an average interest rate of approximately 5%. The majority of additional capital leases are for automotive, forklift and information technology equipment.

financial Covenants UFA is subject to certain financial and collateral covenants related to the Credit Agreement and was in compliance with all financial and non-financial covenants throughout 2013. UFA provides monthly compliance reporting to its agent under the Credit Agreement and also provides an annual forecast of its availability.

Cash flow from OperationsCash flow from operations, before non-cash working capital changes, increased by $4.0 million, due to improved operating efficiencies. Net cash used by operating activities including working capital changes was $5.1 million in 2013 (2012 – $26.2 million provided), as UFA took over receivables under the BNS customer credit program and re-financed these receivables through the Credit Agreement.

20132012201120102009

Cash Flow from Operations ($M)(before changes in non-cash working capital)

55

(12)

35

51

35

Working Capital and debt ratiosWorking capital ratio of 1.4:1 in 2013 decreased from 1.5:1 in 2012. The working capital amounts represent the ability to manage short term financing requirements of the business. Current liabilities in this graph exclude the HYMIP balance of $31.7 million classified as current liability in the balance sheet. The new, more favourable Credit Agreement entered in December 2013 prompted UFA to pledge more working capital than the previous agreement and removes the fixed term portion of the loan.

Working Capital Ratio ($M)

Current Ratio

Current Assets ABL Revolver FinancingCurrent Liabilities

447

218

421

186

156

146

136

135

161

14416

1

431

430448

39

1.4:11.5:11.4:11.2:12.0:1

20132012201120102009

Includes receivables purchased by BNS



inventoriesWhile Petroleum and Wholesale Sports’ inventories remained relatively unchanged, AgriBusiness inventories decreased by $11.1 million from year-end 2012 to year-end 2013. This net decrease resulted from increased bin sales due to record crop yields in 2013 as well as improved inventory management practices across most rural market categories, partially offset by inventory increases required to support larger crop input sales.

AgriBusiness inventory initiatives in 2014 are focused on reducing the cost of inventory procurement and management combined with a continued focus on improving category management practices in rural market categories.

20132012201120102009

Inventories ($M)

258240

228 237

193

AgriBusinessPetroleum

Wholesale Sports CanadaWholesale Sports US

accounts receivableIn 2013, UFA terminated its agreement with BNS and re-purchased all of its receivables financed under the BNS financing program. The increase in receivables in 2013 is primarily due to this event. The bad debt write-off in 2013 was $0.3 million compared to a recovery of $0.5 million in 2012. Days Sales Outstanding improved in 2013 to 28 days from 31 days in 2012 due to better collection and credit practices and enhanced communication and collaboration with customers and members.

20132012201120102009

Accounts Receivable ($M)

144

118

106

183

111



memBers’ eQuity UFA’s equity structure is a source of capital and considerable financial strength. As a co-operative, UFA provides members’ benefits by allocating a portion of its taxable earnings to members in the form of a Patronage Allocation.

The equity program was enhanced in 2013 to ensure that UFA members who patronize their Co-operative receive greater benefits from their equity. In addition, these changes support the long-term sustainability of UFA’s equity structure and fully align the current strategies of the Co-operative with its capital structure. The enhancements include: Member Shares maximum dollar amount for individual members increased from $1,000 to $5,000; Member Shares became eligible for dividends, subject to Board approval; and the proportion of declared patronage dividend allocated to Member Shares increased from 15% to 30%. These revisions were approved by the Assembly at the 2013 Annual General Meeting and implemented in 2013. Member Shares, Patronage Allocation, Revolving Equity, Investment Shares and Contributed Surplus are considered Member Entitlements of UFA. A summary of Member Entitlements is outlined in the notes to the consolidated financial statements.

UFA is authorized to issue an unlimited number of Member Shares with a par value of $5. Member Shares are redeemable at par value at the option of the holder when the member reaches age 65, moves out of the trading area, or upon a member’s death at the request of the member’s estate.

When the Co-operative has taxable income before Patronage Allocation and income taxes, a Patronage Allocation may be recommended and ratified by UFA’s elected officials at the Annual General Meeting held in March following the end of the fiscal year. The Assembly approves the distribution as provided for under UFA’s by-laws. Once approved by the Assembly, the Patronage Allocation is distributed.

Revolving Equity is non-interest bearing, non-redeemable by the member except in specific circumstances, and is converted to Investment Shares in equal amounts over a 12-year period. In addition, the Revolving Equity of members who turn 65 years of age is automatically converted to Investment Shares.

Investment Shares have a par value of $100, are non-voting, are redeemable at par value at the option of the holder subject to Board approval, are retractable at par value at the option of UFA and provide a dividend equal to the bank prime rate less 0.5%. Dividends on Investment Shares totalled $2.9 million in 2013 compared to $2.7 million in 2012, and are charged against retained earnings.

Actual distributions to members in the five years ending in 2013 totalled $122.4 million, and consist of the cash portion of the annual Patronage Allocation, the issuance of Investment Shares, dividends on Investment Shares, dividends on Member Shares and retirement of Members’ Equity.

20132012201120102009

Members’ Equity and Total Assets ($M)

Total AssetsMembers’ Equity

402

326

325

311

325

795

721

678

662 70

8



emPloyee Pension PlanUFA administers both a Defined Benefit (DB) Pension Plan and a Defined Contribution (DC) Pension Plan for employees of UFA and its wholly-owned subsidiary, Wholesale Sports Canada Ltd. A Registered Pension Plan (RPP), registered in accordance with the Alberta Employment Pension Plans Act, provides benefits to all participating salaried employees. UFA’s RPP includes both a DB component and DC component. The RPP is funded by contributions from plan members, which are matched by contributions from UFA.

Employees hired or transferred into pension-eligible positions on or after October 1, 2012 participate in the DC Pension Plan which became effective January 1, 2013. Employees hired or transferred into pension-eligible positions prior to October 1, 2012 remain in the DB Pension Plan.

Pensions provided under the DB Pension Plan are related to the employee’s income up to maximum pension limits set out by the Income Tax Act. A provision for pensions associated with employee income above RPP levels, is made under a second pension plan, called the Supplemental Employee Retirement Plan (SERP). This plan is not governed by any regulatory body and UFA funds its obligations under this plan only as requirements arise.

UFA’s accounting for pension obligations is dependent on management’s accounting policies and assumptions used in calculating such amounts. The impact of these adjustments has been highlighted in the notes to consoidated financial statements.

UFA’s Management Pension Committee manages both plans and is currently comprised of representation from management and a retiree representative. The pension committee acts in accordance with a governance plan, which sets out roles and responsibilities regarding the administration of the plan, and a statement of investment policies and procedures, which sets out limits and guidelines for investment of the pension fund assets. The pension committee manages these two plans on behalf of the Board, with ultimate responsibility resting with the Board. UFA’s current investment policy identifies the benchmark asset mix as 20% Canadian equities, 40% Global equities and 40% Canadian fixed income. All assets continue to be actively managed against specific bench marks.

The assets of the RPP totaled $111.7 million at December 29, 2013 compared to $94.0 million in 2012, while the accrued benefit obligation, excluding the unfunded SERP obligation, was $118.4 million in 2013 compared to $113.9 million in 2012. The unfunded SERP obligation at year-end 2013 was $3.7 million, compared to $3.6 million at year-end 2012.

In 2013, UFA incurred a net pension expense of $6.0 million, with $5.1 million related to current service costs. This compares to a net pension expense of $4.6 million in 2012, of which $4.1 million related to current service costs.



risK management

Enterprise risk ManagementUFA is exposed to various risks and uncertainties in the normal course of business. To mitigate these risks, UFA follows an enterprise risk management process to manage the major risks it faces. Each department and operating division is responsible for identifying all major risks that they face in their businesses as well as the cause of each major risk. These risks are then prioritized based upon the potential impact on the enterprise and the likelihood of occurrence. Using a systematic process, UFA establishes a risk profile for its business and develops appropriate strategies to mitigate such risks. We believe that acceptance of some risk is both necessary and advantageous in any business, and is necessary to achieve UFA’s vision. UFA’s Enterprise Risk Management/Environment, Health & Safety Board Committee, on behalf of the Board, provides oversight on the risk management program and processes, and continuously reviews both the planning and outcomes of such processes.

financial risk UFA undertakes certain transactions denominated in foreign currencies and, as a result, foreign currency exposures arise. UFA is exposed to foreign exchange risk on financial commodity contracts, which are denominated in foreign currencies. Certain financial risks may be reduced through insurance or hedging programs, while other risks are prioritized in relation to the potential impact on the business and strategies are developed to mitigate the risk.

Business Cycles and Commodity risk UFA’s business is affected by the seasonal business cycles of the agriculture industry. Risk is mitigated within the agriculture industry as different segments and areas may experience offsetting business cycles. UFA’s diversified customer base mitigates much of the risk associated with being economically dependent on core members.

Petroleum sales revenue is closely linked to crude oil pricing, wholesale “rack-back” margins and local

supply/demand balances which impact “rack-forward” margins. UFA follows a number of strategies to mitigate risks associated with this volatility. One strategy is centralized control over selling prices that allows UFA to react quickly to changes in purchasing prices from suppliers. UFA’s exposure to price risk is limited to quantities carried in inventory.

UFA may offer fixed-price contracts to qualifying customers. To manage risks associated with fluctuating crude oil prices and maintain its desired margin, UFA offers these contracts only to financially sound customers that meet stringent credit criteria. UFA may purchase, depending on needs, crude oil and foreign exchange swap agreements from lenders in the Credit Agreement.

Credit risk UFA continues to be exposed to credit risk on accounts receivable for approximately 40 to 45 days of regular sales, at any time throughout the year, as most accounts receivable are due by the end of the month following purchase. Although UFA offers an extended credit finance plan for crop inputs and grain bins whereby customers do not have to pay for these products until February 15 of the subsequent year, Farm Credit Canada and BNS provide the financing for the plan, and assumes all credit risk.

UFA partly mitigates exposure to credit risk through the diversity of its member and customer base and the large geographic area in which it operates. In addition, a full credit review and monitoring is conducted by an experienced credit department. UFA follows established policies regarding credit limits, payment terms and account reviews. In addition, delinquent accounts are followed up regularly, including engaging external collection and legal assistance when required.

There is nominal exposure to credit risk in the subsidiary, Wholesale Sports Canada Ltd., as no credit programs are offered to retail customers.



liquidity risk UFA manages liquidity risk to ensure it has sufficient liquidity to meet liabilities when they come due. To guarantee it had the financial capacity and sufficient access to cost-effective financing sources to fund its capital and operating activities, UFA renewed its Credit Agreement in December 2013. At December 29, 2013 UFA had current assets of $421.2 million to settle current liabilities of $166.3 million. All accounts payable, accrued liabilities and deferred revenue are subject to normal trade terms.

In 2013, UFA negotiated a five-year Credit Agreement, which became effective on December 10, 2013. UFA expects to be compliant with all of its financial covenants in 2014.

interest rate risk To manage interest rate risk, UFA utilizes short-term floating interest rate borrowings issued under the Credit Agreement and through the on-demand member loans program. UFA has not hedged any of the interest rate risk associated with short-term borrowings as it considers the risk to be acceptable.

foreign Currency risk UFA is exposed to foreign currency risks in relation to US dollar cash balances and short term loans required for its on-going operations.

Environment, Health & SafetyIn 2013, UFA further enhanced its Environment, Health & Safety (EH&S) programs. In partnership with the business divisions, the EH&S team continues to help minimize the Co-operative’s risks typically found in our industries.

Key risk areas of focus include: physical injuries; environmental contamination and chemical releases; handling, distribution and storage of products and materials; equipment and physical site network infrastructure; and power tool, machinery and fleet management.

With full support of UFA’s Board, the Enterprise Risk Management/Environment, Health & Safety Board Committee, the CEO and senior management, the Co-operative has enjoyed substantial EH&S improvements across the enterprise and continues to diligently work to mitigate risks.

Our most recent EH&S COR certification audit resulted in a passing grade of 96%.



United Farmers of Alberta Co-operative Limited

fiNaNCial STaTEMENTS

management’s resPonsiBility for finanCial statementsThe management of United Farmers of Alberta Co-operative Limited (UFA) is responsible for the preparation of the accompanying financial statements. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles, which recognize the necessity of relying on management’s judgement and the use of estimates. Management has determined such amounts on a reasonable basis to ensure the financial statements are presented fairly in all material respects.

Management’s responsibility to ensure integrity of financial reporting is fulfilled by maintenance of a system of internal accounting controls designed to provide assurance that transactions are authorized, assets are safeguarded and proper records maintained. Controls include a comprehensive planning system and processes to ensure timely reporting of periodic financial information.

Final responsibility for the financial statements and their presentation to members rests with the Board of Directors. The Board carries out this responsibility principally through its Audit Committee. The Audit Committee meets separately with management and UFA’s external auditors, to review financial statements, discuss internal controls, the financial reporting process and other financial and auditing matters; all to satisfy itself that each party is properly discharging its responsibilities. The Audit Committee reports its findings to the Board for its consideration when the Board approves the financial statements prepared by management.

The financial statements have been audited by PricewaterhouseCoopers LLP, the external auditors, in accordance with Canadian generally accepted auditing standards. The external auditors have had full and free access to management, the Audit Committee and the Board of Directors.

Bob Nelson Peter Melnychuk President and Chief Executive Officer Chief Financial Officer February 27, 2014 February 27, 2014


PricewaterhouseCoopers LLP Suite 3100, 111 – 5th Ave S.W., Calgary, Alberta, Canada T2P 5L3 T: +1 403 509 7500, F: +1 403 781 1825 “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

February 27, 2014 Independent Auditor’s Report To the Delegates/Members of United Farmers of Alberta Co-operative Limited We have audited the accompanying consolidated financial statements of United Farmers of Alberta Co-operative Limited and its subsidiaries, which comprise the consolidated balance sheet as at December 29, 2013 and the consolidated statement of operations, changes in members’ equity and cash flows for the 52 week period then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibil ity for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian accounting standards for private enterprises, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibil ity Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.


Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of United Farmers of Alberta Co-operative Limited and its subsidiaries as at December 29, 2013 and the results of their operations and their cash flows for the 52 week period then ended in accordance with Canadian accounting standards for private enterprises. Chartered Accountants


CONSOLIDATED FINANCIAL STATEMENTS


CONSOlidaTEd BalaNCE SHEET

As at (Stated in thousands of Canadian dollars)


Assets

Current AssetsCash and cash equivalents $ 21,478 $ 1,485Accounts receivable (note 3) 183,229 106,447Inventories 192,647 196,228Prepaid expenses and deposits 20,830 25,814Future income tax asset (note 8) 2,974 2,708

421,158 332,682Property held for resale (note 4) 11,881 12,252Investments 970 934Other long-term assets 2,356 1,828Goodwill and intangible assets (note 5) 46,175 48,492Future income tax asset (note 8) 8,908 7,278Property and equipment (note 6) 216,873 203,270

$ 708,321 $ 606,736Assets of discontinued operations (note 21) – 55,372

$ 708,321 $ 662,108

Liabilities and Members’ Equity

Current LiabilitiesAccounts payable and accrued liabilities (note 17) $ 100,999 $ 96,480Deferred revenue 19,910 16,769Current portion of member loans (note 7) 42,160 10,766Current portion of long-term debt (note 9) 1,367 132,246Current portion of long-term liabilities (note 11) 1,817 1,826

166,253 258,087

Long-term debt (note 9) 164,921 1,667Member loans (note 7) 15,334 47,226Asset retirement obligations (note 10) 23,135 22,360Long-term liabilities (note 11) 13,631 11,274

383,274 340,614

Members’ Equity

Member entitlements (note 13) 218,424 212,402Retained earnings 106,616 118,079Cumulative translation adjustment – (19,004)

325,040 311,477$ 708,314 $ 652,091

Liabilities of discontinued operations (note 21) 7 10,017 $ 708,321 $ 662,108

See accompanying notes to consolidated financial statements

On behalf of the Board Chairman Director



CONSOlidaTEd STaTEMENT Of OpEraTiONS

For the period ended(Stated in thousands of Canadian dollars)


Revenue (note 18) $ 2,126,750 $ 2,009,405

Cost of sales (1,889,729) (1,784,698)

Gross margin 237,021 224,707

Operating and administrative expenses (176,253) (162,873)

Other income 3,220 1,333

Earnings before the under noted 63,988 63,167

Depreciation and amortization (31,877) (35,730)

Interest (notes 7,9) (8,247) (9,933)

Foreign currency exchange gain (loss) 336 (47)

Income before patronage and income taxes 24,200 17,457

Patronage Allocation (note 13) (13,600) (10,000)

Income tax (expense) recovery (note 8) (2,165) 3,795

Net income from continuing operations 8,435 11,252

Net loss from discontinued operations (note 21) (16,724) (23,587)

Net loss $ (8,289) $ (12,335)






CONSOlidaTEd STaTEMENT Of CHaNGES iN MEMBErS’ EQUiTY

As at(Stated in thousands of Canadian dollars)


Member Entitlements (note 13)

Beginning of period $ 212,402 $ 209,614

Patronage Allocation 13,600 10,000

Patronage paid in cash (1,826) (1,412)

Redemptions / repayments (6,156) (5,893)

Member share dividend 397 –

Less than minimum and unclaimed 127 168

Patronage recovery (120) (75)

218,424 212,402

Retained Earnings

Beginning of period 118,079 133,069

Net loss (8,289) (12,335)

Member share dividend (397) –

Patronage recovery (net of closeouts) 117 67

Dividends on Investment Shares (2,894) (2,722)

106,616 118,079

Cumulative Translation Adjustment (CTA)

Beginning of period (19,004) (17,424)

Change in CTA 19,004 (1,580)

– (19,004)

Total Members’ Equity $ 325,040 $ 311,477





CONSOlidaTEd STaTEMENT Of CaSH flOWS

For the period ended(Stated in thousands of Canadian dollars)


Operating activities

Net income from continuing operations $ 8,435 $ 11,252

Items not requiring an outlay of cash


(Gain) loss on disposal of property and equipment (172) 454

Asset retirement obligation accretion (note 10) 1,722 1,459

Future income tax recovery (note 8) (1,897) (6,794)

Increase (decrease) in other long-term liabilities 609 (1,015)

Other amortization 2,311 1,814

Depreciation and amortization (notes 5,6) 31,877 35,731

56,485 52,901

Asset retirement obligations settled (note 10) (1,017) (1,419)

Changes in non-cash working capital related to continuing operations (note 19) (60,557) (25,294)

Cash provided by (used in) operating activities (5,089) 26,188

Investing activities

Additions to property and equipment (40,608) (19,520)

Additions to goodwill and intangibles (4,240) (2,571)

Proceeds from disposal of property and equipment 1,927 1,227

Increase in other long-term assets (194) (136)

Cash provided by (used in) investing activities related to continuing operations (43,115) (21,000)

Financing activities

Long-term debt issued (repaid) (note 9) 31,805 (8,712)

Member loans (redeemed) issued (note 7) (200) 15,399

Repayment of revolving equity (698) (739)

Dividends on Investment Shares (2,894) (2,722)

Redemption of shares (5,331) (4,994)

Patronage Allocation paid in cash (1,826) (1,412)

Net repayment of member loans (299) (653)

Cash provided by (used in) financing activities related to continuing operations 20,557 (3,833)

Cash provided by (used in) discontinued operations 47,640 (1,010)

Increase in cash 19,993 345

Cash and cash equivalents, beginning of period 1,485 1,140

Cash and cash equivalents, end of period $ 21,478 $ 1,485


32 ufa 2013 unabridged annual report

noteS to ConSolidated finanCial StateMentS


NOTES TO CONSOlidaTEd fiNaNCial STaTEMENTS(Tabular amounts are stated in thousands of Canadian dollars except unit numbers)

1. nature of oPerationsUnited Farmers of Alberta Co-operative Limited (UFA) was incorporated by special act under the laws of Alberta and operates as three business segments distributing fuel products, farm supplies, and outdoor recreation products to its customers. As a co-operative, a significant portion of its business is with its member-owners. The outdoor recreation products segment operates through a wholly-owned subsidiary, Wholesale Sports Canada Ltd. operating in Western Canada. UFA also has a 50% interest in UFA-LIT Joint Venture (UFA-LIT). Until March 2013, UFA also operated, through a wholly-owned subsidiary, Wholesale Sports USA, Inc., which was subsequently sold (see note 21).

2. signifiCant aCCounting PoliCiesUFA prepares its consolidated financial statements on a retail calendar basis. The fiscal period end reflected in the consolidated financial statements is December 29, 2013 and the comparative period is December 30, 2012.

Basis of presentation These consolidated financial statements have been prepared in accordance with Canadian accounting standards for private enterprises.

Consolidation

The consolidated financial statements include the accounts of UFA and its wholly-owned subsidiary, Wholesale Sports Canada Ltd. and 50% proportionate interest in its jointly-controlled operations/assets of UFA-LIT. Transactions between UFA, its wholly-owned subsidiary and the proportionately consolidated entity are eliminated on consolidation.

These consolidated financial statements are expressed in Canadian dollars.

Comparative figures Certain comparative financial information has been reclassified to be consistent with the presentation adopted for 2013.

future accounting pronouncements

In May 2013, the Canadian Accounting Standards Board issued CPA CANADA Handbook, Part II, Section 3462, Employee Future Benefits. The new standard replaces Section 3461, and is applicable for annual financial statements relating to fiscal years beginning on or after January 1, 2014. Early application is permitted, and the standard is applied retrospectively.

The new standard eliminates the deferral and amortization approach and requires the use of the immediate recognition approach. The immediate recognition approach requires recognition in the balance sheet of the full value of the plan obligations net of plan assets, measured at the balance sheet date.

UFA will adopt the new accounting standard during the 2014 fiscal year. The impact of the adoption is a decrease in opening retained earnings and a corresponding increase in accrued liabilities of $17.4 million, representing the unamortized actuarial loss as of December 31, 2012. Additionally, this would result in an increase to the actuarial gain and corresponding reduction to accrued liabilities in fiscal 2013 in the amount of $13.3 million. The impact of adoption of the standards for fiscal year 2014 cannot be determined.

33ufa 2013 unabridged annual report


revenue recognition

UFA recognizes revenue when products, goods and services are delivered to the customer or when the risks and rewards associated with ownership are transferred to the customer. Revenue related to building and intensive livestock construction projects is recognized using the percentage of completion basis. Under the percentage of completion method of accounting, the actual costs incurred and the budgeted costs to complete the project are used to measure progress on each contract. Revenue and cost estimates are revised periodically based on changes in circumstances. Revenue invoiced but not yet earned is recorded as deferred revenue.

Cash and Cash Equivalents

Cash and cash equivalents consists of cash on account and bank balances.

inventories

Inventories are comprised of finished goods and are valued at the lower of cost and net realizable value, with cost being determined using the weighted average cost method. The cost of inventories includes the cost of purchase and other costs incurred in bringing the inventories to their present location and condition. Costs such as storage costs, administrative overheads that do not contribute to bringing the inventories to their present location and condition, and selling costs are specifically excluded from the cost of inventories and are expensed in the period incurred. The amount of inventory recognized as an expense in the current period was $1,842.5 million (2012 – $1,738.5 million).

investments

Investments are primarily held in other co-operative enterprises that are not publicly traded. For financial instrument purposes, these investments are measured at amortized cost. Provisions are made for impairments that are considered to be other than temporary.

property and Equipment

Property and equipment are recorded at cost. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets at the rates indicated below commencing the month that the assets are placed into service. Capital leases which transfer significant ownership rights to UFA are recorded as property and equipment.

Buildings, fences and yards 15 to 25 years Equipment 5 to 8 years Computer equipment and system software 3 to 5 years Automotive equipment 5 years Leased assets 3 to 15 years

Property and equipment classified as “In progress” is expected to be placed into productive use within 12 months and represents work commenced but not completed on major projects. Depreciation will commence once these assets are put into service.

property Held for resale

Property held for resale is recorded at the lower of cost or fair value less selling costs.



Goodwill and intangible assets

UFA records as goodwill the excess amount of the purchase price of entities acquired over the fair value of the identifiable net assets acquired, including intangible assets, at the date of acquisition. Goodwill is not amortized but is tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the reporting unit to which the goodwill is assigned may exceed the fair value of the reporting unit. In the event of impairment, the excess of the carrying amount (including goodwill) of a reporting unit over its fair value would be charged to earnings. Intangible assets are amortized on a straight-line basis over the estimated useful life of the assets identified.

Application software 3 to 5 years Trademarks/Trade names 10 years Lease/Licenses 10 years Non-competition agreements 4 years Customer relationships 3 years

income Taxes

UFA follows the future tax method of tax allocation in accounting for income taxes. Under this method, income taxes are recognized for the differences between financial statement carrying values and the respective income tax basis of assets and liabilities (temporary differences), and for the carry-forward of unused tax losses and income tax reductions. Future income tax assets and liabilities are measured using income tax rates expected to apply in the periods in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is included in income in the period that the change is substantively enacted. Temporary differences relating to subsidiaries and interests in joint ventures are accounted for using inside basis differences, unless it is apparent that the temporary differences will reverse in the foreseeable future, in which case the outside basis differences are recorded. Future income tax assets are evaluated and recorded as required in the consolidated financial statements if realization is considered more likely than not. Valuation allowances are established for amounts not likely to be realizable.

asset retirement Obligations

UFA recognizes the current best estimate of the expenditure required to settle the asset retirement obligation for all long-lived assets in the period when the liability is incurred or the period when it can be reasonably estimated, whichever is earlier. The liability is adjusted due to revisions in the associated estimated timing and amount of costs. Estimates are determined using management’s best judgment supplemented by historical experience, market information and, in some cases, a review of engineering data. UFA also recognizes a corresponding increase in the carrying cost of the asset. The carrying cost of the asset is depreciated on a straight-line basis, similar to the underlying assets for which the liability is recognized.

Employee future Benefits

UFA operates a defined benefit pension plan for its regular employees along with an unfunded supplemental employee retirement plan for those employees affected by the Canada Revenue Agency maximum pension and contribution limits. A defined contribution pension plan has been adopted in 2013 for new employees starting from October 1, 2012; the defined benefit pension plan will remain intact for employees who entered this plan prior to October 1, 2012. The obligations of the plans are determined using the projected benefit method pro-rated on service and UFA’s best estimate of expected return on assets, salary growth and demographic changes. Experience gains and losses and changes in assumptions are amortized, using the corridor method, over the average remaining service period of the employee groups. Under the corridor method, amortization is recorded only if the accumulated net actuarial gains or losses exceed 10% of the greater of the accrued benefit obligation and the value of the plan assets. The market value of plan assets is used for all calculations. Company contributions to employees under the defined contribution pension plan are charged to expenses.



foreign Currency TranslationUFA translates foreign currency assets and liabilities into Canadian dollars at the period-end exchange rate for monetary items and at the historical exchange rate for non-monetary items. Foreign currency revenues and expenses are translated at the exchange rate in effect on the date of the related transaction. Foreign currency gains and losses are included in income immediately.

financial instruments

CPA CANADA Handbook, Part II, Section 3856 provides the disclosure and presentation requirements for privately-owned organizations. It deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset.

Financial assets and financial liabilities will be recognized on the balance sheet when UFA becomes party to the contractual provisions of the financial instrument. UFA classifies financial assets and liabilities according to their characteristics and management’s choices and intentions related thereto for the purposes of ongoing measurement.

All financial instruments are measured at fair value upon initial recognition. Subsequent measurement is at amortized cost, with the exception of cash and cash equivalents which are held at fair value.

Use of EstimatesThe preparation of the consolidated financial statements in conformity with Canadian accounting standards for private enterprises requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates are based on management’s best knowledge of current events and actions that UFA may undertake in the future. Management believes that the estimates are reasonable; however, actual results could differ from those estimates. Estimates are used when accounting for such items as inventory provisions, depreciation, pension obligation, income and other taxes, allowance for doubtful accounts, asset retirement obligations and long-lived assets for impairment. Information presented and estimates used in the financial statements do not reflect anticipated resolutions to uncertainties by management.

3. aCCounts reCeiVaBleDuring 2009, UFA entered into an arrangement with the Bank of Nova Scotia (BNS) to transfer the rights to certain UFA trade receivables in exchange for cash. UFA terminated this arrangement in December 2013 and re-purchased the receivables from BNS.

Accounts receivable is comprised of customer and member receivables of $169.2 million (2012 – $91.8 million) extended under commercial terms, and other miscellaneous receivables of $14.0 million (2012 – $14.6 million). The customer and member receivables are net of an allowance of $2.6 million (2012 – $2.4 million). In 2013, UFA recorded $1.9 million in bad debts of which $0.3 million related to trade receivables (2012 – $0.5 million recovery).

Other miscellaneous receivables consist of vendor rebates, income tax, Alberta Farm Fuel Benefits and other related receivables from the normal course of business.



4. ProPerty held for resale2013 2012

Land $ 11,531 $ 11,531

Relocation properties 350 721

$ 11,881 $ 12,252

The balance of property held for resale represents assets which management have evaluated as not integral to business operations. The assets include purchases of employee homes to facilitate their relocation, with the intention of selling these properties as soon as possible.

5. goodWill and intangiBle assets

2013

Cost

Accumulated Depreciation, Amortization Net Book Value

Application software $ 59,577 $ 50,775 $ 8,802

Goodwill 29,384 – 29,384

Trademark/Trade names 9,276 4,925 4,351

Leases/Licenses 7,994 4,408 3,586

Non-competition agreements 3,113 3,061 52

Customer relationships 100 100 –

$ 109,444 $ 63,269 $ 46,175

2012

Cost


Application software $ 55,345 $ 45,926 $ 9,419

Goodwill 29,384 – 29,384

Trademark/Trade names 9,276 4,028 5,248

Leases/Licenses 7,994 3,605 4,389

Non-competition agreements 3,113 3,061 52

Customer relationships 100 100 –

$ 105,212 $ 56,720 $ 48,492



6. ProPerty and eQuiPment

2013

Cost


Land $ 47,351 $ – $ 47,351

Buildings, fences and yards 161,973 81,569 80,404

Equipment 144,112 96,067 48,045

Computer equipment and system software 19,435 13,714 5,721

Automotive equipment 15,925 14,409 1,516

Leased assets 33,974 14,194 19,780

Assets under construction 14,056 – 14,056

$ 436,826 $ 219,953 $ 216,873

2012

Cost


Land $ 46,621 $ – $ 46,621

Buildings, fences and yards 158,984 74,598 84,386

Equipment 134,514 93,177 41,337

Computer equipment and system software 29,869 24,916 4,953

Automotive equipment 17,513 16,673 840

Leased assets 29,816 11,643 18,173

Assets under construction 6,960 – 6,960

$ 424,277 $ 221,007 $ 203,270

The balance of assets under construction at December 29, 2013 is expected to be placed into productive use during fiscal 2014 and represents work commenced but not completed on buildings, equipment, computer equipment and systems software. Depreciation and amortization will commence once these assets are put into service. Included in leased assets under capital lease in 2013 were $4.9 million (2012 – $2.3 million).



7. memBer loans

2013 2012

Member demand loan $ 10,467 $ 10,766

HYMIP 31,693 31,847

5-6-7MIP 15,334 15,379

57,494 57,992

Less: current portion (42,160) (10,766)

$ 15,334 $ 47,226

UFA has three different voluntary member loan programs — the on-demand Member Loan program, the High Yield Member Investment Plan (HYMIP) program and the 5-6-7 Member Investment Plan (5-6-7MIP) program, all of which provide members, employees, and agents the opportunity to invest in UFA and earn a return on their investment. All member loans are unsecured.

The on-demand Member Loans earn a rate of return equal to the bank prime rate, as stated by the Royal Bank of Canada, plus 1%. The balance of the on-demand Member Loans, including accumulated interest, as at December 29, 2013 was $10.5 million (2012 – $10.8 million), and interest of $0.4 million (2012 – $0.4 million) was included in interest expense.

UFA introduced the HYMIP program to members on June 15, 2011. The program has a three-year term and pays a fixed rate of 7% interest per year on investment and matures on June 15, 2014. The plan has no early redemption options, and pays interest semi-annually on June 15th and December 15th. The minimum investment allowed under the program was $5,000. The program was fully subscribed and closed to new investment in November 2011.

The HYMIP balance as at December 29, 2013 was $31.7 million (2012 – $31.8 million), and interest of $2.2 million (2012 – $2.3 million) was included in interest expense.

UFA introduced the 5-6-7MIP program to members on July 9, 2012. This program also has a three-year term but pays a fixed rate of 5% interest the first year, 6% the second year and 7% in the third and matures on September 15, 2015. The plan has no early redemption options, and pays interest semi-annually on March 15th and September 15th. The minimum investment allowed under the program was $2,500. The program was fully subscribed and closed to new investment in September 2012.

The 5-6-7MIP balance as at December 29, 2013 was $15.3 million (2012- $15.4 million), and interest of $0.9 million (2012- $0.4 million) was included in interest expense. Interest is recognized using the straight line method over the life of the instrument for financial reporting.

The repayment of member loans may be redirected in order to repay delinquent amounts owing to UFA, and is subject to UFA meeting the covenants contained under the Asset-Based Credit Agreement (see note 9).



8. inCome taxes Income tax expense (recovery) differs from the amount that would be computed by applying the Canadian Federal and Provincial statutory income tax rates to earnings before income taxes as set out below:


Income before patronage and income taxes $ 24,200 $ 17,457

Patronage Allocation (13,600) (10,000)

Net income before income taxes 10,600 7,457

Statutory income tax rate 25.01% 25.01%

Expected income tax expense 2,651 1,865

Non-deductible items and other 70 (65)

Rate adjustment including US rate impact – (5)

Tax impact of US investments (1,969) (6,653)

True ups and other (556) (5,590)

Future income tax valuation allowance 1,969 6,653

Income tax expense (recovery) 2,165 (3,795)

Income taxes consists of:

Current income tax expense 4,062 2,999

Future income tax expense (recovery) (1,897) (6,794)

$ 2,165 $ (3,795)

The net future income tax asset at the fiscal period end is comprised of the tax effect of the following temporary differences:


Current future income tax asset:

Payables, warranty and other $ 2,974 $ 2,708

Long-term future income tax asset:

Long term debt and other 3,899 3,219

Asset retirement obligation 5,786 5,592

Tax loss and other 8,982 6,653

Property and equipment and other (1,137) (1,533)

Valuation allowance (8,622) (6,653)

$ 8,908 $ 7,278



9. long-term deBt


Asset-Based Credit Agreement – Revolving loans $ 161,280 $ 90,650

Asset-Based Credit Agreement – Term loan – 41,250

Obligations under capital leases 5,417 2,580

Deferred financing charges (409) (567)

166,288 133,913


$ 164,921 $ 1,667

asset-Based Credit agreement

UFA entered into an amended and restated Asset-Based Credit Agreement (Credit Agreement) on December 10, 2013, upon maturity of the previous Credit Agreement. The syndicate of banks participating in the Credit Agreement is slightly modified from the previous Credit Agreement. The Credit Agreement has a five-year term, maturing on December 9, 2018 and provides for an asset-based revolving credit facility in the maximum aggregate amount of $275.0 million. There are no fixed terms of repayment under the revolving credit facility.

The Credit Agreement also has an accordion feature, which permits UFA to request an increase in the revolving credit facility up to an additional amount of $75.0 million. Any increase under the accordion feature is not committed and must first be approved by the lenders. The “Term Loan” portion of the matured Credit Agreement was not renewed.

Borrowing Base

The amount available to be drawn under the Credit Agreement will vary from time to time based on UFA’s inventory and accounts receivable balances. Advances under the Credit Agreement cannot exceed lower of the revolving loans borrowing base determined according to terms under the agreement that factors UFA’s inventory and receivables, and the maximum aggregate amount of $275.0 million. In addition, reserves are calculated under the Credit Agreement to take into account factors such as priority payables and additional collateral requirements.

At December 29, 2013, under the Credit Agreement, the borrowing bases for accounts receivable and inventory were margined at $137.3 million (2012 – $54.4 million) and $124.1 million (2012 – $147.9 million) respectively. In 2013, the total amount of reserve deducted from the borrowing bases was approximately $16.4 million (2012 – $19.4 million). At December 29, 2013, $83.7 million (2012 – $73.8 million) of credit was available to fund operations and working capital requirements.

As at December 29, 2013 UFA’s balance in revolving loans under the Credit Agreement included $161.3 million (2012 – $109.3 million) drawn in Canadian dollars and $nil (2012 – $nil) in US dollars. The Canadian dollar borrowings consisted of $100.0 million (2012 - $90.0 million) of 30 day Banker’s Acceptances (BA) and $61.3 million of prime loans (2012 – $19.3 million). Any US debt balances carried throughout the year are held in prime loans.

The total drawn by UFA under the Credit Agreement was offset by $nil in 2013 (2012 – $24.7 million) residing in bank balances held in deposit accounts.



Terms

Under the renegotiated Credit Agreement, UFA can borrow using Prime, LIBOR or BA. Pricing for Canadian and US prime loans is equal to their respective prime rates. LIBOR loans and BA balances are priced at their respective rates plus a spread of 1.25%.

Security

The Credit Agreement grants a security interest in all of UFA’s personal and real property.

Covenants

UFA is subject to certain covenants related to the Credit Agreement. If availability falls below $20.0 million a Fixed Charge Coverage Ratio at 1:1 will apply. The Fixed Charge Coverage Ratio is calculated on a 12-month rolling basis at the end of each fiscal month. UFA was in compliance with all financial covenants during the year and as at December 29, 2013.

Capital lease Obligations

The assets under capital leases (see note 6) are the security for the respective obligations. Scheduled minimum lease payments for the next five periods total $6.0 million, including $0.5 million in financing expenses. The lease terms range from one to five years at interest rates between 4.4% and 6.0% for 2013 (2012 – 4.4% and 7.2%).

Principal Interest Total

2014 $ 1,390 $ 231 $ 1,621

2015 1,566 158 1,724

2016 1,093 92 1,185

2017 502 57 559

2018 866 10 876

$ 5,417 $ 548 $ 5,965

10. asset retirement oBligations

2013 2012

Balance, beginning of year $ 22,360 $ 18,944

Accretion expense 1,722 1,459

Revisions in estimated cash flows 70 3,376

Liabilities settled (1,017) (1,419)

Balance, end of year $ 23,135 $ 22,360

Estimated undiscounted future cash flows, adjusted for inflation, are $59.7 million (2012 – $59.6 million) and are expected to be incurred up to and including fiscal 2063. The present value or discounted fair value of the obligations was determined using a 7.7% discount rate and a 2.2% inflation rate (2012 – 7.7% and 2.2% respectively). The estimates used in determining UFA’s asset retirement obligations could change due to changes in regulations and the timing, nature and extent of environmental remediation required. Changes in estimates are accounted for prospectively in the period that the estimate is revised.



11. long-term liaBilities


Accrued pension benefit liability (note 15) $ 6,224 $ 6,025

Other long-term liabilities 9,224 7,075

15,448 13,100


$ 13,631 $ 11,274

Other long-term liabilities include $4.8 million relating to long-term incentive programs and $2.4 million relating to deferred lease inducements.

12. Commitments, ContingenCies and guaranteesFuture minimum payments under operating leases for certain facilities and equipment are due as listed:

2014 $ 10,138

2015 10,128

2016 9,195

2017 9,247

2018 7,950

After 2018 24,622

$ 71,280

UFA’s by-laws provide indemnification to its current and former directors, officers and employees to the extent permitted by law, against liabilities arising from their service to UFA. The broad nature of these indemnification by-laws does not permit a reasonable estimate of the maximum potential amount of any liability. No amount has been accrued in the consolidated financial statements in this respect.



13. memBer entitlements Member Entitlements consist of Member Shares, the current period’s Patronage Allocation, Revolving Equity, Class A Investment Shares (Investment Shares) and Contributed Surplus. The total Revolving Equity amount converts to Investment Shares when a member turns 65 years of age (Senior Members). Member Shares for members that turn 65 years of age are converted at the option of the member into Investment Shares, with the exception of one $5.00 Member Share.

Details of Member Entitlements are as follows:


Member Shares $ 26,616 $ 26,382


Revolving Equity 50,660 60,920

Class A Investment Shares 119,398 112,882

Contributed Surplus 8,150 2,218

Member Entitlements, end of period $ 218,424 $ 212,402

The repayment and redemption of Equity and the payment of a Patronage Allocation and dividends are subject to the right of offset of any amounts owing to UFA, and are subject to UFA meeting the covenants contained under the Credit Agreement (see note 9).

Member Shares

UFA is authorized to issue an unlimited number of Member Shares with a par value of $5.00. Member Shares are redeemable at the option of the holder at par value when the member reaches age 65, moves out of the trading area or, at the request of the member’s estate, upon the member’s death. The maximum dollar amount of Member Shares held by each member increased from $1,000 to $5,000 in 2012 and Member Shares are now eligible for a Board of Directors’ declared annual dividend. A dividend of $0.4 million was paid out on Member Shares in 2013 (2012 - $nil).

2013 2012

Ordinary shares issued: Number Amount Number Amount

Balance, beginning of period 5,276 $ 26,382 5,435 $ 27,173

Patronage Allocation 587 2,933 73 365

Conversion to Class A Investment Shares (7) (33) (150) (750)

Redemption (83) (413) (82) (406)

Contributed Surplus (450) (2,253) – –

Balance, end of period 5,323 $ 26,616 5,276 $ 26,382

(450)



patronage allocation

UFA distributes a portion of its current fiscal period taxable earnings to its members in the form of a Patronage Allocation. The Patronage Allocation must be ratified by UFA’s elected delegates at the Annual General Meeting held in March of the following period. As part of the ratification of the Patronage Allocation and as provided for under UFA’s by-laws, the delegates also approve the distribution of the current period allocation to Member Shares, non-interest bearing Revolving Equity, Investment Shares and the amount to be paid in cash.

2013 2012

Balance, beginning of period $ 10,000 $ 7,000

Current period distribution

Member Shares (2,933) (365)

Cash (1,826) (1,412)

Revolving Equity (4,321) (4,533)

Class A Investment Shares (801) (626)

Distribution adjustments (119) (64)

Current period allocation 13,600 10,000

Balance, end of period $ 13,600 $ 10,000

revolving Equity

Revolving Equity is non-interest bearing, non-redeemable by the member except in specific circumstances and is converted into Investment Shares on a straight-line basis over a 12-year period.

2013 2012



Conversion to Class A Investment Shares (11,557) (11,858)

Senior Members conversion to Class A Investment Shares (912) (1,346)

Repayment (698) (739)

Contributed Surplus (1,414) –

Adjustments – 127




Class a investment Shares

Class A Investment Shares are non-voting, have a par value of $100 and are redeemable at par value at the option of the holder, subject to Board approval. The Board has the authority to restrict redemptions in any given year, even in situations where such redemptions are not unfavorable to UFA.

Investment Shares are retractable at par value at the option of UFA and provide a dividend at bank prime rate less 0.5%. Dividends of $2.9 million (2012 – $2.7 million) on the Investment Shares are charged against retained earnings. The minimum payment required for a dividend check to be issued is $50 per member and the amount owing is held in Investment Shares until the minimum is met.

2013 2012

Number Amount Number Amount


Patronage Allocation 8 801 6 626

Conversion from Revolving Equity 116 11,556 118 11,839

Senior Members conversion from Revolving Equity 9 912 13 1,346

Senior Members conversion from Member Shares – 33 8 750

Member Share dividend 4 397 – –

Redemption (50) (5,045) (49) (4,867)

Contributed Surplus (23) (2,265) – –

Less than minimum and unclaimed – 127 – 168


Contributed SurplusThe By-laws of the Co-operative provide for termination of a member’s membership due to inactivity. When a member’s membership is terminated for inactivity, the member has no further entitlement to be paid any amount in respect of the member’s Investment Shares, Member Shares, Revolving Equity or Unclaimed Funds (together, the Member’s Equity), and the membership number and Equity shall be cancelled without any payment or notice to the member. In 2013, Members’ Equity of $5.9 million was cancelled and classified as Contributed Surplus, as outlined below.

2013 2012


Current period additions:

Member Shares 2,253 –

Revolving Equity 1,414 –

Class A Investment Shares 2,265 –




14. finanCial instrumentsUFA’s risk exposures and the impact on UFA’s financial instruments are summarized below:

Credit risk

Credit risk is the risk of loss associated with a counter-party’s inability to fulfill its payment obligations. UFA is exposed to the credit risk on its accounts receivable from members and customers. The accounts receivable are net of applicable allowances for doubtful accounts, which are established based on the specific credit risks associated with individual members and customers and other relevant information. Concentration of credit risk with respect to receivables is limited, due to the large number of members and customers.

liquidity risk

UFA’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when they come due. At December 29, 2013, UFA had current assets of $421.2 million (2012 – $332.7 million) to settle current liabilities of $166.3 million (2012 – $258.1 million). All of UFA’s accounts payable, accrued liabilities and deferred revenue are subject to normal trade terms (see notes 7 and 9 for information on payment terms of member loans and current and long-term debt).

Market risk

Market risk is the risk of loss that may arise from changes in market factors such as interest rates, foreign exchange rates, and commodity prices. These fluctuations may be significant.

interest rate risk

UFA is exposed to interest rate risk under the Credit Agreement. Prior to the Credit Agreement renewal, interest was calculated based on prime plus a spread determined by the Fixed Charge Coverage Ratio performance. Up to the renewal, the interest rates paid on Canadian dollar advances and US dollar advances were Canadian or US prime rate plus 0.75% (2012 – Canadian or US prime rate plus 0.75%). For BAs the interest rate was BA plus 2.25% (2012 – BA plus 2.25%). Upon renewal of the Credit Agreement, interest paid on Canadian and US dollar advances is calculated based on Canadian or US prime rate and for BA, the interest rate is BA plus 1.25%. Further, the amortized transaction costs impacted the interest rate by 0.3% (2012 – 0.3%) making the effective interest rate 4.05%. A 1.0% change in the prime rate may have an annual before income taxes impact of approximately $1.7 million. UFA is not exposed to interest rate risk on capital lease obligations as the rates are fixed.

foreign Currency risk

UFA is exposed to foreign currency risk on exchange fluctuations related to its US dollar borrowings through the company’s Credit Agreement (see note 9) and short-term payables related to foreign suppliers. The foreign currency risk is considered minimal as these assets and liabilities are not of significant value, and all transactions are with trade vendors with typical payment terms. In 2013, UFA incurred a gain of $0.3 million (2012 – $nil) due to changes in the value of the US-CDN exchange rate.



15. emPloyee future BenefitsUFA administers two defined benefit pension plans: a funded registered plan (RPP) for all employees and an unfunded supplemental employee retirement plan (SERP) for those employees whose earnings exceed the maximum allowable under government guidelines for the RPP. UFA funds the RPP in accordance with current pension legislation. UFA does not fund the SERP, but has the obligation to pay SERP benefits out of general revenue in the period payments are made. Pension benefits are provided to qualified employees and are based, in general, on years of service and compensation near retirement.

UFA employees who were hired into a pension-eligible position prior to October 1, 2012 are participants of the defined benefit pension plan. Employees newly hired or transferred into a pension eligible position on or after October 1, 2012 participate in a newly created defined contribution pension plan effective January 1, 2013. The employer contribution towards the defined contribution plan, recognized as an expense, was $0.2 million (2012 - $nil).

UFA measures its accrued benefit obligation and the fair value of plan assets in its pension plans for accounting purposes as at the end of each fiscal period. The most recent actuarial valuation of the RPP for funding purposes was as of December 31, 2010.

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


Accrued benefit obligation, end of year $ 122,110 $ 117,496

Market value of plan assets, end of year 111,715 94,024

Deficit of plan at end of year (10,395) (23,472)

Unamortized net actuarial loss 4,171 17,447

Accrued liability $ (6,224) $ (6,025)

Included in the accrued benefit obligation is $3.7 million related to the SERP (2012 – $3.6 million).

UFA’s accrued liability of $6.2 million differs from its funded status deficit of $10.4 million due to $4.2 million in unamortized net actuarial losses. Unamortized actuarial losses arise from differences between the expected and actual long-term rate of return on plan assets and from differences between actuary assumptions used to calculate UFA’s accrued benefit obligation and UFA’s actual experience.



16. Joint VentureThe consolidated financial statements include, on a proportionate basis, UFA’s interest in UFA-LIT Joint Venture.

During 2010, UFA-LIT completed construction of a crop nutrition facility, a jointly-controlled operation that began in 2009.

A summary of the Company’s interest in the jointly-controlled operation at December 29, 2013 is as follows before elimination of UFA’s contribution:

Statement of Earnings 2013 2012

Revenue $ 4,038 $ 2,701

Cost of sales (3,986) (2,578)

Operating and administrative expenses (98) (126)

Depreciation and amortization (90) (70)

Net loss $ (136) $ (73)

Balance Sheet December 29, 2013 December 30, 2012

Current assets $ 6 $ 85

Property and equipment 753 690

$ 759 $ 775

Current liabilities $ 97 $ 96

Long term liabilities 41 –

UFA’s contribution in equity 757 752

Current loss from Company’s interest in Joint Venture (136) (73)

$ 759 $ 775



The consolidated statements include UFA’s interest in this asset at $0.8 million (2012 – $0.8 million). UFA charges depreciation and amortization in accordance with its policy on property, equipment and intangible assets on its portion of interest held.

2013

Cost


Property and Equipment

Land $ 74 $ – $ 74

Building 296 43 253

Equipment 697 274 423

Computer hardware 10 10 –

$ 1,077 $ 327 $ 750

Intangible Assets

Application software $ 11 $ 8 $ 3

$ 11 $ 8 $ 3

2012

Cost


Property and Equipment

Land $ 74 $ – $ 74

Building 293 31 262

Equipment 485 138 347

Computer hardware 10 8 2

$ 862 $ 177 $ 685

Intangible Assets

Application software $ 11 $ 6 $ 5

$ 11 $ 6 $ 5



17. goVernment remittanCesAccounts payable and accrued liabilities as at December 29, 2013 include $9.6 million (2012 – $8.9 million) in respect of government remittances other than income taxes. Included in this total are federal and provincial sales and excise taxes, payroll related taxes, and environmental levies.

18. reVenue segmentationUFA derives a significant portion of its revenue by providing products and services to its members. The Company’s business reflects three distinct categories of activity, including fuel products and construction, farm supplies, and outdoor recreation merchandise as outlined below.

Category December 29, 2013 % December 30, 2012 %

Petroleum $ 1,629,631 76.7 $ 1,541,567 76.7

AgriBusiness 390,242 18.3 353,997 17.6

Outdoor recreation 106,877 5.0 113,841 5.7

$ 2,126,750 $ 2,009,405

19. Changes in non-Cash WorKing CaPital related to Continuing oPerations

Non-cash working capital relating to continuing operations used cash flows of $60.6 million in fiscal year 2013 (2012 - $25.3 million).


Accounts receivable $ (76,782) $ 4,071

Inventory 3,581 (15,097)

Prepaid expenses 4,984 (6,363)

Accounts payable and accrued liabilities 4,519 (14,936)

Deferred revenue and other 3,141 7,031

$ (60,557) $ (25,294)



20. interest and inCome taxes PaidInterest paid in fiscal year 2013 is $7.7 million (2012 – $9.3 million). Income taxes paid in fiscal year 2013 was $3.8 million (2012 – $8.7 million paid).

21. disContinued oPerationsIn March 2013, UFA and Wholesale Sports USA, Inc., its wholly-owned subsidiary, concluded an asset and share purchase agreement with Sportsman’s Warehouse Inc. and Alamo Group, LLC. respectively, for the purchase of the assets and shares of Wholesale Sports USA, Inc. The net cash consideration for this transaction was $47.0 million.

Assets and liabilities of discontinued operations were not classified as held for resale in 2012. For comparative purposes, these balances have been reclassified in the financial statements of 2013 under assets and liabilities of discontinued operations.

Arising from this transaction, UFA recognized a total loss of $16.7 million (2012 – $23.6 million) from discontinued operations, comprising loss on disposition of its subsidiary $14.1 million (2012 – $nil) and loss from discontinued operations of $2.6 million (2012 – $23.6 million).


(Loss) earnings from discontinued operations before the undernoted $ (1,532) $ 2,449

Depreciation, interest and foreign exchange (1,130) (4,615)

Future income taxes – (15,709)

Impairment of goodwill – (5,712)

Cumulative translation adjustment write off (19,004) –

Deferred lease liability and other costs 5,484 –

Closing costs and provisions (542) –

Loss from discontinued operations $ (16,724) $ (23,587)


Senior Leadership

Bob NelsonPresident &Chief Executive Officer

dave irvineVice-President, Human Resources

Bruce NysetvoldGeneral Counsel, UFA Corporate Secretary, Wholesale Sports

peter MelnychukExecutive Vice-President & Chief Financial Officer

Steve BoilyVice-President, Information Technology

Glenn BingleyChief Operating Officer, Wholesale Sports

Jim WattChief Governance Officer

Sherry EwertVice-President, Strategy & Integrated Services

Ed McCoyVice-President, Petroleum

Jimm HollandVice-President, Marketing & Digital Strategy

Todd OrmannVice-President, AgriBusiness

Senior Leadership


Senior Leadership 2013 Board of Directors

Harvey HagmanMayerthorpe, AB

lori EllCalgary, AB

doug ThompsonMedicine Hat, AB

Tim BancroftCalgary, AB

rick HansenBlackie, AB

Cornie TeichroebLa Crete, AB

Bob ChisholmCalgary, AB

Jim laverickChairman of the BoardSpruce Grove, AB

Kevin HoppinsHuxley, AB

Bill dobsonParadise Valley, AB

Bill leeCamp Creek, AB


Contact Information

Corporate OfficeUFA Co-operative LimitedSuite 700, 4838 Richard Road SWCalgary, AB T3E 6L1

Mailing addressUFA Co-operative LimitedP.O. Box 5350 Station ACalgary, AB T2H 2J9

Contact Us1-877-258-4500 Option [email protected] UFA.com

Documents

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