Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Tom McMillan - Director of Corporate Communications

Robert Espey - President and Chief Executive Officer

Michael Lambert - Senior Vice President and Chief Financial Officer

Analysts

Kevin Chiang - CIBC

Carson Tong - RBC Capital Markets

Trevor Johnson - National Bank

Eugene Vath - Scotiabank

Derek Dley - Canaccord Genuity

Jason Zandberg - PI Financial Corp

Norman Heimlich - Dundee Securities

Parkland Fuel Corp (OTCPK:PKIUF) Q4 2012 Earnings Call February 26, 2013 4:00 PM ET

Operator

Good afternoon. My name is Tom McMillan and I'm the Director of Corporate Communications for Parkland Fuel Corporation. At this time, I would like to welcome participants to Parkland Fuel Corporation's fourth quarter and yearend 2012 results conference call with President and Chief Executive Officer, Bob Espey; and Senior Vice President and Chief Financial Officer, Mike Lambert. After their remarks, there will be a question and answer session. At this time, all lines have been placed on mute to prevent any background noise.

Please note that while talking about our results and answering questions, Bob and Mike may make forward-looking statements. These statements are subject to known and unknown risks and future results may differ materially. For more information, please review the forward-looking statements and business risks section of Parkland's fourth quarter and yearend 2012 management's discussion and analysis, which along with this quarter's news release and our audited financial statements can be found on our website at www.parkland.ca as well as the SEDAR website. Dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded.

I will now turn the call over to Bob Espey to review the quarter.

Robert Espey

Thanks, Tom. In face of the strong reaction in the market to our results today, I think it's important to land a little perspective. EBITDA increased 14% to $41 million in the fourth quarter compared to $36 million last year due to lower cost and slightly higher gross profit.

Our results were in line with our expectations based on economic conditions and the business drivers we report on, on a monthly basis. Overall the business is performing very well. Just as promised, we reduced our cash flow to pay down debt, strengthen our balance sheet and position ourselves for growth, as an example through the acquisition of Elbow River Marketing. In a nutshell, we saw dramatic improvements across the business through the year, which Mike will talk to later, as he goes through the financial results.

Gross profit increased 1% to $104 million in the fourth quarter compared with $103 million in 2011. This was primarily due to strong refiners' margins, increased margins on a cents per liter basis in commercial and retail, offset by lower fuel volumes. Operating cost decreased 11% to $40 million in the fourth quarter compared with $45 million last year, primarily due to business simplification and standardization in our retail division, which led to cost reductions.

Marketing, general and administrative costs decreased 3% or $0.7 million to $22 million in the fourth quarter compared to last year, primarily due to reduced employee incentive compensation, quick wins from the Give Me Five! strategic cost initiative and enhanced cost control. As a result, net earnings increased 28% to $10 million in the fourth quarter compared with $7 million in 2011 due to higher EBITDA, lower financing costs, lower depreciation and amortization costs that were partially offset by increased risk management expense.

Volumes decreased 34 million liters or 3% in the fourth quarter of 2012 compared with 2011, primarily due to the plant closure of retail sites in the Cango network, which were responsible for a drop of approximately 20 million liters of volume in the quarter and reduced activity in the natural resource sector across the country. This was offset by active sales efforts across the business.

When we look at each of our operating units, the commercial business volumes fell in the fourth quarter and then they decreased 20% year-over-year. Again, this isn't is as dramatic as it looks, because we took 40 million liters and reallocated that into the wholesale business last year, and we have been reporting this all year.

Lower year-over-year industrial activity in key sectors including oil and gas, construction, plus the impact of closure of two pulp mills in the Maritimes. And just to put that into perspective, it's not necessary the pulp mills use the fuel, it's all the ancillary and related industry that does, and the impact of one pulp mill is between 5 million and 10 million liters annually.

The good news is that we have a strong sales activity and investment in our commercial sales staff that provided a focus on diversifying our customer mix, helping to offset some of the foregoing challenges in the quarter, adding back volumes allocated to wholesale commercial, results in a volume decrease of 11% in the fourth quarter compared to the same period in 2011.

The number of branches and cardlocks in our commercial network continue to come down this quarter, as we optimize our locations in certain markets. Investors should expect continued optimization of our commercial network, as we simplify and standardize the commercial business.

An example would be in some markets, where we had bought multiple businesses, we would have potentially three different operations in one region and we've consolidated them into one, which has allowed us to do a number of things. One is, get some efficiency; second is, make sure that our operations are running to the same standard; and then the third is, to enable our multi-product offerings so that we can sell both gasoline propane and lubricants in the west to our customers.

Please note that in our MD&A we have now added our lubricant distribution centers as a category. Please be aware that these in addition to the branches and cardlocks that we have traditionally reported.

We also directed new investment into our commercial business in 2012, to expand the coverage of our product offering of Western Canada and our delivery fleet. These investments position us for continued growth when the industry's re-support pickup again.

In the retail fuels' division, although volumes decreased 5% year-over-year, primarily due to the finalization of our integration program in the Cango network, which resulted in reduced volumes of 20 million liters. We continue to outperform the industry with same-store sales growth 10 basis points above the industry average. So we have some good same-store sales growth within that channel.

Our financial results for the fourth quarter continue to be favorably impacted by lower costs in retail that helped offset the contractions in volumes described above. We also refreshed 15 sites in our owned network, which have experienced an average lift of 4.1% to date and added two sites that are running well ahead of their original plans.

In the picture here is an example of one of our refreshed sites, where we've changed the look of our canopy, and that's enhanced our brand image in the marketplace. Overall great work is being done in our retail division.

Wholesale, supply and distribution had a great quarter with strong refiners' margins in organic growth. After factoring out inter-segment sales, wholesale fuel volumes increased 52% year-over-year due to the reallocation of 40 million liters of high-volume low-margin accounts from commercial fuels and organic volume growth of 41 million liters through the division sales activities.

The wholesale division accomplished 26% year-over-year organic growth, despite a diesel supply disruption in the fourth quarter, affecting Western Canada and Ontario that limited the amount of diesel available for sale to wholesale customers. During the disruption, the supply group made full use of our strategic supply assets, including rail and storage infrastructure to ensure that our customers kept supplied. For example, our ability to rail imported product from Vancouver into Fort Nelson enabled the corporation to shield most of its customers in that region from the supply disruption.

On September 20, we announced the acquisition of Elbow River and this transaction closed on February 15. Elbow River is a North American transporter supplier and marketer of petroleum products with advanced rail car logistic capabilities.

Through a network of relationships, Elbow River is able to connect buyers and sellers of liquefied petroleum gases such as propane and butane, crude oil, heavy fuel oil and a growing portfolio of refined fuel and biofuel products. With 30 years in the petroleum products marketing sector, Elbow River has the expertise and logistical capabilities to rapidly respond to emerging opportunities.

In addition to acquiring $20 million in EBITDA, we are acquiring a great marketing and logistics team. We believe that Elbow River's ability to market, transport and supply petroleum products throughout North America, utilizing their fleet of 1,200 railcars and 270,000 barrels of fleet storage capacity will enhance our supply group. It will allow our supply group to identify and opportunistically address fuel supply and demand imbalances throughout North America and give us access to a large array of product supply options.

The purchase price of $80 million in cash and the assumption of approximately $50 million debt for a total of $95 million, represents a purchase multiple of 4.7 times annualized EBITDA of $20 million. This is in line with our stated valuation range of 3 to 5 times EBITDA. The transaction will be immediately accretive to Parkland at $0.13 of a dollar per share in net earnings and $0.16 per share in distributable cash flow.

I will now turn the call over to Mike Lambert to review our fourth quarter and full year financial results.

Michael Lambert

Thanks Bob. Given the industry activity that we're witnessing in the regions and the industrial sectors we operate, some of which we report in our monthly business drivers update, our results this quarter are in line with our expectations. Our EBITDA for the fourth quarter was $41 million, a 14% increase compared with the fourth quarter of 2011.

We benefited this quarter from continued strength in refiners' margins and $4.5 million in lower costs as a result of cost reductions in retail through their simplified business model and progress on our strategic cost initiatives. It's not difficult to see where our challenges were as a business in the fourth quarter, as commercial profits, which include non-fuel profits were $6.2 million lower this year compared to the fourth quarter of 2011.

Soft sales of fuel and lubes due to the multi-sector slowdown, Bob described earlier, were partially offset by both expanding and diversifying our customer base. Retail was up only slightly in the fourth quarter when compared to a strong fourth quarter in 2011. This was as a result of stronger margins, offset by volume reductions as we wrapped up the Cango rationalization program.

Now, moving to the annual review. For 2012, our EBITDA was $199 million, a 32% increase compared with 2011. Not including the impact of warm weather, which is broken out on the right side of the waterfall chart, commercial was off primarily due to the early break up we had this year and a challenging fourth quarter, as a number of industrial sectors pulled back including construction, pulp and paper, and oil and gas.

Retail benefited from improved margins, offset by lower volumes, as we finalized our rationalization program of Cango's original network. When cost improvements resulting from the divestment of Parkland's long-haul division in 2011 are removed, operating cost decreased $10.7 million primarily due to a decrease in one-time cost of $5 million, business simplification and retail, and progress on our strategic cost initiatives.

Marketing, general and administrative cost or MG&A were down $7.6 million as a result of a $3 million reduction in one-time cost related to management changes in 2011, and also due to progress on our strategic cost initiative. M&A captures the impact of our long-haul divestment on the business, as long-haul divestment on the business net of reduced operating cost as well as cost related to our ongoing M&A activities in 2012. Record refiners' margins in 2012 combined with growth in our wholesale business and progress in our supply initiatives led to a $38 million improvement in supply and wholesale gross profit.

Distributable cash flow is our cash provided by operations minus maintenance capital, excluding changes in our non-cash working capital. Distributable cash flow increased 3% to $130 million in 2012 compared with $126 million in 2011. The increase compared with last year's primarily due to a $48 million increase in EBITDA, a $7 million decrease in interest expense, partially offset by a $21 million increase in tax expense, a $20 million decrease in proceeds from the sale of assets relative to what we received in 2011 for the sale of Parkland's long-haul trucking assets and an $8 million increase in maintenance capital.

Our payout ratio increased to 52% in 2012 compared to 48% in 2011, as dividends increased to $68 million in 2012 compared to $60 million in 2011. We've been using the cash generated this year to pay down debt and strengthen our balance sheet. As a result, net debt at the end of 2012 was $277 million, roughly $64 million less than at the end of 2011. Net debt to EBITDA was 1.39 times at the end of the fourth quarter.

Now as a reminder, in the third quarter net debt to EBITDA was 1.05. The increase at the end of the fourth quarter is entirely due to the seasonality of our working capital requirements related to commercial activity. Our interest coverage ratio at the end of the 2012 was 7.56 compared to 3.99 at the end of 2011, reflecting the increasing strength of our balance sheet.

I am now going to provide some in-depth information on our business drivers to give everyone a sense of our business environment. On this next slide, we show refiners' margin, which in addition to wholesale fuel sales are driver of supply and wholesale gross profits. Weak Canadian crude prices relative to Brent crude prices drove record refiners' margins in 2012. While the fundamental economic factors giving rise to this pricing differential still exists, the differential has weakened in 2013, negatively impacting gasoline margins. These margins on the other hand continue to be robust.

The economic factors driving the pricing differential between these crude benchmarks are primarily due to the bottleneck in transportation infrastructure, preventing Canadian crude from reaching international markets. As a reminder, our hedge program is expected to help protect some of the refiner margin benefits for the balance of 2013 in event of the refiners' margins dissipate. As Bob mentioned earlier, the supply team continues to make progress on several initiatives that are expected to increase the proportion of sustainable profits in this business unit.

On the next slide, we show that while the seasonal recovery in Canadian drilling was muted in the fourth quarter due to continued reductions in dry gas and gas liquid drilling, it was also as a drawbacking growth in the North Dakota Bakken and we saw some improvement in January. The CAODC reported an average rig utilization rate of 60% for January 2013 compared to 70% in January 2012. While activity was lower year-over-year, this represented a significant recovery from the 38% utilization rate reported in December 2012, pulling rig activity back into the middle of the five year range.

In construction, we expect lower government spending on infrastructure to continue to be a headwind for us going into 2013. All that said, we have met with success in diversifying our sales to other sectors in an effort to offset the impact of lower activity levels in construction and oil and gas. With a pulp mill returning to operations in the Maritimes and the end roads we're making into new markets, we see an opportunity for volume growth in commercial in the upcoming months.

Weather is another major business driver for our commercial fuels' division. Environment Canada's forecast for next three months shows a mixed bag of cooler than normal, as conditions on the West Coast; normal weather in the interior and warmer than normal conditions on the East Coast. Now ironically, what we have seen to date is nearly exactly the opposite. So far it's been colder than 2012 in East Coast and warmer than 2012 in the West Coast. So much for forecast. In general though, overall conditions in our heating oil businesses have improved so far this quarter.

And with that, I'll now turn it back to Bob to wrap up. Bob?

Robert Espey

Thanks Mike. Before concluding, I would like to review our strategy and report our progress on the Penny Plan in 2012. The Penny Plan is based on the concept of growing our business to 7 billion liters in annual fuel volumes by 2016 and achieving an additional 1 cent per liter EBITDA, simply by operating more effectively with an intense focus on customer service. Compared with our base year of 2011, we believe we can realize the third-of-a-cent through economies of scale, we achieve through growth the third-of-a-cent through better supply relationships, and the third-of-a-cent through more efficient operations.

At our Analyst Day in 2012, we presented a normalized 2011 EBITDA of $125 million, which removed one-time cost and irregular profits from refiners' margins to reflect the economics of the Parkland business that we expect for 2014. By achieving a third-of-a-cent through each of our gross supply and operate initiatives, and through acquisitions and organic growth, our five-year strategic plan aims to double 2011 normalized EBITDA by the end of 2016. $70 million is expected to be derived through 1 cent per liter increase in EBITDA margin, $55 million is expected to be derived through acquisitions.

Many of you have asked for 2012 normalized EBITDA, we had a lot of noise in our 2011 results, which allowed us to normalize our 2011 EBITDA, and felt revealing restrictions imposed by our confidential agreements with refiners'. In 2012, our results are much cleaner, preventing us from normalizing the 2012 EBITDA.

Now to our Penny Plan scorecard. I'm very pleased with the progress on the Penny Plan scorecard this year. The acquisition of Elbow River Marketing represents $20 million in EBITDA or 36% of our original 2016 required EBITDA target. We acquired volume, but we don't think it would be fair to account the $2 billion we acquired through Elbow River towards a 7 billion liter target. This volume is low margin in nature. We believe that the closing of this acquisition demonstrates Parkland's ability to rapidly respond and execute quickly on emerging opportunities in the Canadian marketplace.

Our M&A pipeline remains very active. We missed on our organic growth in 2012. Volume continues to be challenged due in part to economic conditions across multiple sectors and to a smaller extent due to warmer than normal weather. With that said, we have not been loosing market share, which is a critical metric we monitor, when markets contract temporarily. We continue to have an intense focus on improving and making sure that we grow organically.

On the supply front, I'm gladdest to report that we are on track with our targets for the Parkland Penny Plan. This is a competitively sensitive area, as I am restricted from saying too much. However, suffice to say we've made excellent progress here in 2012. We continue to make progress, driving our cost down on a cent per liter basis. Operating costs were down 8% in the fourth quarter and 13% for the year compared to 2011 on a cent per liter basis. Marketing, general and administrative expenses were flat in the fourth quarter and down 10% for the year compared to 2011 on a cent per liter basis.

Health, safety and environment is another area, in which we continue to make significant progress. Achieving a lost time injury frequency of 0.5 in 2012 compared with 1.8 in 2011. We surpassed our 2016 target of 0.75. At these low levels, the lost time injury frequency becomes very volatile. So it is becoming appropriate to use as a measure going forward. We are therefore shifting our measure of HSE effectiveness to total recordable injury frequency.

Total recordable injury frequency dropped to 2.33 in 2012 from 2.7 in 2011. Our goal is to achieve a total recordable injury frequency of less than two on an annual basis by 2016. In summary, we made significant progress from the Parkland Penny Plan. We are very much on track with our targets.

Given our inability to provide a 2012 normalized EBITDA and lingering questions about what our EBITDA will look like in 2014, we are hosting an Analyst and Investor Day on March 18 in Toronto. In addition to providing an update on the Penny Plan, we will provide a forecast for 2014 through 2016, and we will level set our metrics.

The event will take place at 9:00 AM Eastern Time. Webcast details can be found in our Q4 press release. An invitation to investors and analysts will be forthcoming in the days ahead. I hope you will join us for this event. On May 08, we will report our first quarter results, and then host our Annual and Special Meeting at the Calgary Marriott Hotel.

As a heads up for our investors, Parkland will be utilizing the newly approved notice and access process for this proxy season as it will save approximately $100,000. More details about our Annual and Special Meeting will be forthcoming in the weeks ahead.

In conclusion, we had a terrific year in 2012. Our teams across the country made tremendous progress on the Parkland Penny Plan, and I'm very proud of their success.

This concludes our formal presentation. I would now like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kevin Chiang from CIBC.

Kevin Chiang - CIBC

I guess my question here is on the commercial side, it looks like there were some challenges in Q4. Can you provide a bit of, I guess, some granularity here in terms of how the outlook is for 2013, specifically on year-over-year growth, both on the volume and margin side? And can you remind me again, when we look at the fuel and non-fuel commodity price pressure we are seeing, how that impacts your margin? Are you just signing contracts with a fixed discount or is that discount based on the commodity prices, so as commodity prices come down, you will also see margin pressure?

Robert Espey

We'll break that question into two parts. And I'll answer the first part, and Mike will talk about the non-fuel margin in the question. So firstly, when we do look at 2012, we did have some headwinds that were largely driven through softness in the natural resources sector, particularly in the last quarter.

We don't give guidance on our volumes. Leading indicators would be heating degree days, which in Q1 depending on where you are in the country. In the west, we're tracking a little bit below normal and then in the east, we're basically on track. Drilling rig activity is another indicator, and similar to what we reported in Q4, if you look at drilling rig activity, it has remained soft, particularly in the areas that we operate. A large part of the areas we service are focused in the natural gas sector. And that's where we've seen a softer drilling activity. And really that's all I can disclose at this point on the sales for 2013.

Some of the things that we did, we made some changes in the business in Q3 and Q4, which didn't realize the full impact of, so we talked about rationalizing a number of sites. So we'll see the cost impact of that flow through. And the other is we've made big investment in sales within the commercial business in Ontario. We've brought on sales manager there, more sales staff. And also in the west, we've brought on a new sales manager in the second half of the year and that teams is now trying to get some good focus and traction. So Mike, I'll turn it over to you to talk about the non-fuel.

Michael Lambert

The non-fuel was reduced by about $2 million in the quarter, $3 million year-to-date on a shift in business that we made and essentially fuel that we were carrying for third parties that we got very low margin on. And it didn't justify the cost that we were incurring as well as the risks and potential liabilities that we were talking with that. So essentially, non-fuel margin went down a couple of million in the quarter, but expenses were reduced by almost that amount as well and that same metric is about $3 million a year-to-date.

Kevin Chiang - CIBC

And when I think about the sensitivity, I understand, I guess, your outlook in terms of volume, but in terms of pricing given that the commodity price environment is also challenged. What's your margin exposure there? Is it as pricing comes down, do you see a compression of margins as well or is that your contracts allow for essentially a fixed margin irrespective of what the commodity price is doing?

Robert Espey

Generally, within the commercial business, the margin is quite stable within that business. We've got many customers in many different aftermarket in there but generally it's stable and isn't impacted by the general economic environment.

Kevin Chiang - CIBC

And maybe this question is better suited for the Analyst Day, but when you're looking at your $250 million EBITDA target for 2016, can you remind me again how we should think of the shape of that earnings growth? Is it more front-end loaded, back-end loaded or do you think of it more evenly distributed over that five-year period?

Robert Espey

I think a large part of that is through acquisitions. And the acquisitions, they're not a smooth thing. So depending on what's available in the marketplace and whether we can purchase that within the guidelines we set forth dictates how fast we can grow that. I did make a previous statement that our M&A pipeline remains active. We certainly feel that that target is achievable.

Michael Lambert

I'll add a little numerically to that, Kevin, is that and you're right, probably best serve to task, and answer that question on the Analyst Day, but I know some of you on the call are trying to get a sense of what 2013, 2014 looks like. I think the best thing you could do today is if you took a line from 125 to 250, and essentially drew a line that's probably your best estimate on the normalized prospects of those years.

Kevin Chiang - CIBC

And then lastly from me, on the Elbow acquisition, it sounds like these are progressing well there. Can you talk about some of the revenue synergies you have or earnings synergies you have to drive that EBITDA above the $20 million target? And where do you think that can eventually get to as you tuck in Elbow River into your network?

Robert Espey

Its early days, I think we're into just over a week, not even a week that we have owned them. So we see some good earnings momentum within that business just on their existing business. And then there are number of opportunities we're looking at. Now there are some propane opportunities. There are opportunities to leverage Bowden and those are being worked on in parallel right now.

Operator

Your next question comes from the line of Carson Tong from RBC Capital Markets.

Carson Tong - RBC Capital Markets

Just a one question from me and it's with regards to just MG&A expenses which were trending a little over throughout the year, but was just a bit higher in the fourth quarter and if you can shed any color on that?

Michael Lambert

MG&A, you're saying in terms of a percentage of the total. In terms of the fourth quarter, really relates to the fourth quarter of topline being down. There isn't a trend that MG&A is going up all of a sudden.

Operator

Your next question comes from the line of Trevor Johnson from National Bank.

Trevor Johnson - National Bank

Just with regards to the potential diversification of your commercial business and the different customers and industries, can you give us a flavor as to what you might be looking at?

Robert Espey

The business is cyclical at this point. So we are seasonal, so we've got in the west the heavy concentration in natural resource, particularly oil field and in the East in our heating oil business. And we've been focusing much at this year, but building more sales that would be consistent throughout the year and offset that seasonality. One of the segments that we've targeted is construction and we've made some inroads there and won some new accounts.

Trevor Johnson - National Bank

And is that generally Western Canada or is that across the country?

Robert Espey

That would be across the country.

Trevor Johnson - National Bank

With regards to the conversion of retail company sites into your operated sites, any color on what we might be looking for in 2013, is there much less to go or maybe just talk through that issue?

Robert Espey

Sorry, our conversion from?

Trevor Johnson - National Bank

Your retail gas to dealer, just to know if there's a little bit of margin pressure because of the convenience store revs going away, so I'm just curious, if there is much more of that?

Robert Espey

We did a program, which concluded last year, where we were converting our corporate sites into commission operators. I mean that came largely through the acquisition of Cango, which was primarily a dealers business. We don't have any initiative to switch sites from corporate to dealer.

Trevor Johnson - National Bank

And I guess, maybe last one from me with Mike, any color on CapEx and any color on tax you maybe able to give us?

Michael Lambert

So in terms of CapEx, no color other than what we normally give, which is there is no abnormal CapEx either in the current quarter or expected next year that they've projected. We're pretty happy with Bowden, which is completed earlier this year. But we don't see uptick in CapEx, if that's what you're looking for. In terms of taxes, you probably picked on this and that's why you're asking, in the fourth quarter our tax rate is abnormally high and it's just a true-up of previous year's provisions. If you're modeling, you said 27-ish in terms of our normalized tax rate.

Operator

Your next question comes from the line of Eugene Vath from Scotiabank.

Eugene Vath - Scotiabank

I just wanted to clarify something that I think maybe, Mike, had said in terms of the pulp mill closures, were those temporary or permanent?

Robert Espey

One was permanent and the other one is actually just recently reopened and that to a lower scale.

Michael Lambert

Yes, I think that's you're referring to, is that I actually referred to in my comments that the opening will show some recovery.

Operator

Your next question comes from the line of Derek Dley from Canaccord Genuity.

Derek Dley - Canaccord Genuity

Just wanted to be clear on a couple of things one on, in terms of the acquisitions. The $20 million acquisition of Elbow, I mean that comes towards $55 million in terms of your overall strategic acquisition target, but the liters are not going towards 2.5 billion, that's correct, right?

Robert Espey

Yes, that's correct. The volumes are diversified mix of midstream. So there is butane, there is some crude. There is some heavy fuel oil, there is biofuels. And what we've done is, I mean, our objective is 7 billion liters of gasoline and diesel, basically. So we don't want to inflate that number and really we still want to continue to focus and still believe that there is a good opportunity to grow our business to 7 billion liters through organic growth and acquisition.

Derek Dley - Canaccord Genuity

And just on that acquisition target, I know in the past you guys have said that the pipeline for liters to be acquired was about 7 billion, you're looking for about 2.5 billion of that by 2016, have we seen that pipeline expand it all, if you will?

Robert Espey

The pipeline is consistent with what we originally said, some of the timing of the prospects has changed, but generally its 7 billion liters or larger.

Derek Dley - Canaccord Genuity

In terms of acquisition multiples, whereabouts are you sort of seeing them trending, roughly in line with what you paid for Elbow?

Robert Espey

The two that we did this year, Magnum and the Elbow are within our target, three to five.

Derek Dley - Canaccord Genuity

And that's sort of what you're seeing out there in the environment right now?

Michael Lambert

Gas price is always higher, but of course we'll remain disciplined.

Robert Espey

Lots of factors depends on the quality of the assets.

Derek Dley - Canaccord Genuity

On given the balance sheet you guys are right now, obviously the leverage has come down quite nicely here. The comfort range is still sort of that two to three times, or in the not comfort range, I guess, sort of target leverage ratio in that two to three times, is that still the case?

Michael Lambert

Our guideline is that we'd like to play in the two to three times. If we're under two, it means that we're poised for an acquisition. And that's where we are right now. We're really comfortable with our balance sheet. And it positions us well for more acquisitions.

Derek Dley - Canaccord Genuity

And then just finally, on the dividend increase, to me that was very relatively unexpected this early. Are you still seeing in terms of the drip, what's the loyalty rate on that? Is that still around 70%?

Robert Espey

Yes. It's still around 70%. To reiterate what we've said before about the dividend, any dividend increase would just essentially reaffirm that our comfort and our confidence in the Penny Plan. And that's what this dividend increase is. It's a reaffirmation that we're pretty comfortable that the Penny Plan is taking hold.

Operator

Your next question comes from the line of Jason Zandberg from PI Financial Corp.

Jason Zandberg - PI Financial Corp

I wanted to get a better feel for your margins on a 1 cent per liter on the commercial side. You've mentioned, it's up somewhat 20%, but you've mentioned that that's primarily due to reallocating a very low margin portion of the business. If we do like sort of an apples-to-apples comparison, are we seeing any movement on those margins, are they pretty static or declining?

Michael Lambert

Again margin, it's a change of mix. So we reallocated that 40 million liters into wholesale, which is a very low margin business. So part of it's the change in mix. We have made improvements on the cost side, which are reflected as well in that.

Jason Zandberg - PI Financial Corp

So there would be some true increase year-over-year in terms of a margin on the commercial side?

Michael Lambert

Again, a small amount. The bulk of it is really that change in mix.

Jason Zandberg - PI Financial Corp

And as well if you were to look at all of your supply agreements for fuel. What is your sort of the top-end in terms of the amount of fuel that you're able to access currently right now?

Robert Espey

We can basically supply what we sell, so I'm not sure what your question is? We don't have any supply constraints. We've got multiple contracts to service our 4 billion to 4.5 billion liters, we currently have commitments to.

Jason Zandberg - PI Financial Corp

And I guess what I'm leaning towards is the expiry of your 1 billion liter supply agreement, whether that's something that needs to be worked on urgently or where would that set?

Robert Espey

Again, as we've talked about in the Penny Plan and a large portion of the Penny Plan is supply and that initiative is on track. I really can't put anymore color into that at this point.

Operator

Your next question comes from the line of Norman Heimlich from Dundee Securities.

Norman Heimlich - Dundee Securities

My question, I guess maybe have been partially answered was with reference to the Suncor agreement and where are you expecting to replace that supply element at those margins, because from what I understand, you guys have had some pretty good margins now. And if you had to go elsewhere, you probably would not be getting the same kind of margins as you're getting off the Suncor contract?

Michael Lambert

Yes, and we've talked about this a lot in our Investor Day and also in previous calls. We do have an initiative internally, which is focused on two things, one is, replacing the volume and the second is, making sure that we replace a portion of the economic benefit, understand that that contract is volatile and has been volatile. Last year was an anomaly in terms of the amount of cash it produced. But we'd like to say, we do have an initiative that has a target that is replacing a substantial portion of the contribution of that contract over the lifetime of the contract. And that we're happy with the progress on that initiative.

Norman Heimlich - Dundee Securities

But if we're looking in terms of the year, say full year 2013, and then even again 2014 relative to say the 2012, what kind of increases are we looking at from the point of view of cash flow?

Robert Espey

Again, we can't disclose the details of that contract as it is confidential. And that's been consistent for the last 12 years that we've had that contract.

Norman Heimlich - Dundee Securities

No, I'm not talking about the contract. I'm talking about in general. When I'm looking to compare 2013, say to 2012 and then 2014 to let's say 2013?

Robert Espey

So again, we will be having an Investor Day on March 18 in Toronto. There will also be a webcast and you're welcome to listening on that. And we'll give an update on the Penny Plan and progress and a portion of that will be to give an update on the supply piece and how that's going to impact us in 2014, '15 and '16.

Michael Lambert

And also we'll give an idea of what our projections are in terms our EBITDA for 2014, '15 and '16. And there necessarily one is, in the meantime if you took a straight line from last year's normalized of 125 to 250. It's probably the best indication that you could have from us in terms of normalized earnings post 2013.

Tom McMillan

Norman, this is Tom McMillan, I'll reach out to you directly after this call and make sure that you have all the information you need.

Norman Heimlich - Dundee Securities

Because the thing that, sort of I guessed, I was surprised, I know I was surprised was the degree of magnitude to which the fourth quarter numbers were way below street estimates, your analyst estimates. And I think that's what was reflected in the share price pattern today.

Tom McMillan

Fair enough. I think there is a couple of things that were delayed between the consensus estimate versus what the results were, and I think in part due to some structural issues with how our business is viewed by certain analysts, we'll see to correct that during the Analyst Day.

Operator

Your next question comes from the line of (inaudible).

Unidentified Analyst

It seems to me is although the biggest shock came from those income taxes that really put a hole in the available cash flow and I know some analyst asked the question earlier. And you said that there were some catch up in the fourth quarter, and I know that you then said that the tax rate would be around 27% in the future versus around 33% or 32% now. Could you just comment a little more on that?

Michael Lambert

Yes, that's exactly right, so you heard it right. It was a true up sign, and one of the things that true up of tax provision is as you go back and you complete audits and complete your tax returns, you true up your provisions for those prior years. And for us it was about $4 million to just quantify it for you. And that affected the rate in the quarter, but a normalized rate for us would be 27%. A lot of that is not cash taxes it's just a tax provision.

From my perspective, I actually don't think that was one of the surprises in the quarter. It didn't affect our distributable cash by a meaningful amount. And a lot of what analyst lookout and shareholders lookout is our EBITDA. And I think, Tom, pointed it out quite correctly that as much as we give our monthly business driver update, which we think is pretty good discloser, we found that a lot of the expectations weren't adjusted even though the business driver show that especially in the oil patch activity was down.

Robert Espey

Okay, I hope things will be clarified for the March analyst update, so that we can get the start back up again, obviously. So thank you very much.

Operator

We have no further questions in queue. I will turn the call back to the presenters for closing remarks.

Tom McMillan

Thank you very much for listening into our fourth quarter and our yearend. And again I'll reiterate a very strong result for the year, very happy with performance against our Penny Plan and we look forward to talking to you again on March 18 at the Investor Day.

Operator

This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Parkland Fuel's CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts