Rogers Sugar Income Fund
TSX : RSI.UN

Rogers Sugar Income Fund

January 31, 2007 14:13 ET

Rogers Sugar Income Fund: Interim Report for the First Quarter 2007 Results

Higher adjusted gross margin rate for the quarter. Higher distributable cash for the quarter. The Fund repurchased and cancelled 500,000 units under its Normal Course Issuer Bid during the quarter.

MONTREAL, QUEBEC--(CCNMatthews - Jan. 31, 2007) - Rogers Sugar Income Fund (TSX:RSI.UN) (All dollar amounts are expressed in Canadian funds.)

Message to Unitholders:

On behalf of the Board of Trustees, I am pleased to present the unaudited consolidated financial results of Rogers Sugar Income Fund (the "Fund") for the three months ended December 31, 2006.

Volume for the first quarter was 178,680 metric tonnes, as opposed to 187,722 metric tonnes in the comparable quarter of last year, a decrease of approximately 9,000 metric tonnes. The decrease is due to a combination of factors. As a result of high sugar prices, liquid volume was down by approximately 10,900 metric tonnes due to the loss of volume from HFCS substitutable accounts. There were no thick juice sales in the quarter, as opposed to 7,600 metric tonnes in the comparable quarter of 2006. No contract for thick juice has been negotiated this year due to the higher raw sugar values. Consumer volume was also lower by approximately 1,800 metric tonnes. The above volume shortfall was partially offset by an increase of 8,000 metric tonnes in industrial sales made to existing customers and to an increase of 3,200 metric tonnes in export sales due partially to timing of shipments against the Canada specific quota. Additional export sales were also concluded with Mexico.

Due to the adoption of new accounting policies, effective October 1, 2006, for derivative financial instruments, the Fund's operating results will now have large fluctuations. These fluctuations are due to the mark-to-market of all derivative financial instruments and embedded derivatives in non-financial instruments and reversal of transitional balances at the end of the reporting period. This accounting income does not reflect the economic performance of the Fund. We therefore prepared adjusted gross margin and adjusted earnings results to reflect the economic performance of the Fund during the reporting period. This economic performance is comparable to the earnings reported in previous reportings. All these non-GAAP adjustments are explained in detail in the Management's Discussion and Analysis prepared for the quarter ended December 31, 2006. In this press release, and future press releases, we will discuss adjusted gross margins, which reflect the operating income without the impact of the transitional results from adopting this new accounting policy and the mark-to-market of derivative financial instruments and embedded derivatives in non-financial instruments.

For the quarter, adjusted gross margin increased by $2.5 million, when compared to the same quarter of last year, even though volume was lower. On a per metric tonne basis, adjusted gross margin was $166.80 in 2007 compared to $145.40 for the comparable quarter of last year. The increase in the margin rate is due to a better sales mix, which includes lower liquid HFCS substitutable business, no thick juice volume, improved selling margins and a contribution of almost $5.00 per metric tonne realized on the Taber pre-hedge program initiated in fiscal 2006. Approximately 10,000 metric tonnes of Taber pre-hedge sales were liquidated during the quarter, as products were delivered, for a profit of $0.9 million.

For the quarter, distributable cash was $15.4 million, as compared to $12.9 million in fiscal 2006. The increase was due to better operational performance and lower interest costs incurred in fiscal 2007 with the renegotiation of the initial series convertible debenture in March 2006. During the first quarter, the Fund distributed $9.3 million compared to $8.9 million in fiscal 2006.

Goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. On October 31, 2006, Canada's Minister of Finance made an announcement concerning the imposition of a distribution tax on distributions from publicly traded income trusts. In light of this announcement, and the resulting impact on the income trust equity market, the Fund performed a goodwill impairment test as at December 31, 2006, and concluded that there was no impairment in goodwill.

During the quarter, the Fund bought back and cancelled 500,000 units at an average price of $3.64 under its Normal Course Issuer Bid. The Fund will continue to purchase units should the price trade in a range that does not reflect the fair value of the units.

In Taber, the beet harvest was completed in early November, and a record yield per acre was achieved for this crop. Based on the total harvest, the Taber plant is expected to produce approximately 125,000 metric tonnes of sugar. This is approximately 25,000 metric tonnes higher than expected. Due to limited market opportunities in Western Canada, and for export sales, a large portion of this additional production may have to be warehoused for fiscal 2008 sales.

FOR THE BOARD OF TRUSTEES,

(signed)

Edward Y. Baker,

Toronto, Ontario -- January 31, 2007



Consolidated Balance Sheets
December 31, 2006 and 2005
(In thousands of dollars)
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December 31, September 30, December 31,
2006 2006 2005

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ASSETS (unaudited) (audited) (unaudited)
Current assets:
Cash and cash equivalents $27,559 $14,549 $6,689
Accounts receivable 42,446 48,470 62,325
Inventories 81,249 76,884 65,272
Prepaid expenses 1,449 3,006 2,451
Derivative financial
instruments (Note 5) 438 - -
Future income taxes - - 2,368
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153,141 142,909 139,105

Capital assets 204,636 205,857 207,529
Derivative financial
instruments (Note 5) 78 6,367 -
Other assets (Note 4) 413 7,280 5,355
Goodwill (Note 6) 223,043 223,043 223,043
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$581,311 $585,456 $575,032
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LIABILITIES AND
UNITHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $- $- $5,000
Accounts payable and
accrued liabilities 46,543 57,898 44,919
Future income taxes 6,726 4,576 -
Derivative financial
instruments (Note 5) 648 - -
Current portion of
convertible unsecured
subordinated debentures - - 7,193
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53,917 62,474 57,112
Employee future benefits 16,974 17,409 17,813
Derivative financial
instruments (Note 5) 37 - -
Long-term debt (Note 7) 113,587 115,000 115,000
Convertible unsecured
subordinated
debentures (Note 8) 129,697 135,000 53,854
Future income taxes 6,951 2,689 6,280
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321,163 332,572 250,059
UNITHOLDERS' EQUITY
Trust units (Note 9) 566,494 571,034 577,563
Equity component of
convertible unsecured
subordinated debentures - - 70,870
Contributed surplus (Note 9) . 1,458 52 11
Accumulated other
comprehensive income (1,334) - -
Deficit (306,470) (318,202) (323,471)
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260,148 252,884 324,973
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$581,311 $585,456 $575,032
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Rogers Sugar Income Fund
Unaudited Consolidated Statements of Operations
For the three months ended December 31, 2006 and 2005
(In thousands of dollars -- except amounts per trust units)
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2006 2005
(unaudited) (unaudited)
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Revenues $134,880 $118,040
Cost of sales 94,666 90,745
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Gross margin 40,214 27,295
Expenses:
Administration and selling 4,519 5,567
Distribution 2,925 3,038
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7,444 8,605
Earnings before interest,
provision for income taxes and
depreciation and amortization 32,770 18,690
Depreciation and amortization 3,157 3,067
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Earnings before interest and
provision for income taxes 29,613 15,623
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Interest on long-term debt and
convertible debentures 3,824 2,760
Amortization of deferred financing costs 380 323
Short term interest (income) (237) (93)
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3,967 2,990
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Earnings before provision for income taxes 25,646 12,633

Provision for (recovery of) income taxes:
Current (443) 227
Future 6,412 1,246
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5,969 1,473
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Net earnings $19,677 $11,160
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Net earnings per trust unit:
Basic $0.22 $0.11
Diluted $0.19 $0.10
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Supplemental disclosure:
Employee future benefits expense $714 $1,078
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Rogers Sugar Income Fund
Unaudited Consolidated Statements of Unitholders' Equity
For the three months ended December 31, 2006 and 2005
(In thousands of dollars)
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2006
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Accumu-
lated
other
Contri- compre-
Trust buted hensive
units surplus income Deficit Total
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Balance beginning
of period $571,034 $52 $- $(318,202) $252,884
Distributions (1,324) - - (7,981) (9,305)
Obligation under
stock options - 12 - - 12
Buy back of trust
units (Note 9) (3,216) 1,394 - - (1,822)
Adjustment for
change in
accounting
policies,
effective
October 1,
2006 (Note 5) - - (3,282) 36 (3,246)
Reversal to cost
of sales of
accumulated
other
comprehensive
income (Note 5) - - 1,948 - 1,948
Interest expense
on equity
portion of the
convertible
unsecured
Subordinated
debentures - - - - -
Net earnings - - - 19,677 19,677
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Balance
end of period $566,494 $1,458 $(1,334) $(306,470) $260,148
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2005
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Equity
component
of
convertible
unsecured
sub- Con-
Trust ordinated tributed
units debentures surplus Deficit Total
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Balance beginning
of period $578,398 $69,207 $- $(324,907) $322,698
Distributions (835) - - (8,061) (8,896)
Obligation under
stock options - - 11 - 11
Buy back of trust
units (Note 9) - - - - -
Adjustment for
change in
accounting
policies,
effective
October 1,
2006 (Note 5) - - - - -
Reversal to cost
of sales of
accumulated
other
comprehensive
income (Note 5) - - - - -
Interest expense
on equity
portion of the
convertible
unsecured
Subordinated
debentures - 1,663 - (1,663) -
Net earnings - - - 11,160 11,160
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Balance
end of period $577,563 $70,870 $11 $(323,471) $324,973
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Rogers Sugar Income Fund
Unaudited Consolidated Statements of Cash Flows
For the three months ended December 31, 2006 and 2005
(In thousands of dollars)
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For the three months ended
December 31
2006 2005
(unaudited) (unaudited)
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Cash flows from operating activities:
Net earnings $19,677 $11,160
Adjustments for items not involving cash:
Depreciation and amortization 3,157 3,067
Amortization of deferred financing costs 380 323
Future income taxes 6,412 1,246
Employee future benefits (435) (554)
Stock based compensation expenses 12 -
Derivative financial instruments 6,536 -
Reversal of accumulated other
comprehensive income (1,334) -
Other (193) 467
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34,212 15,709
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Changes in non-cash operating
working capital:
Accounts receivable 6,024 (4,321)
Inventories (4,365) (33,207)
Prepaid expense 1,557 288
Accounts payable and accrued liabilities (11,876) 120
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(8,660) (37,120)
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25,552 (21,411)

Cash flows from financing activities:
Increase in bank indebtedness - 5,000
Distributions to Unitholders (9,305) (8,896)
Buy back of trust units (1,822) -
Interest expense on the equity portion of
the convertible unsecured and
subordinated debentures - (1,663)
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(11,127) (5,559)
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Cash flows from investing activities:
Additions to capital assets (1,415) (1,632)
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Net change in cash and cash equivalents 13,010 (28,602)
Cash and cash equivalents,
beginning of period 14,549 35,291
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Cash and cash equivalents,
end of period $27,559 $6,689
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Supplemental disclosure:
Interest paid on the debt and equity
components of convertible debentures 5,442 6,960
Income taxes paid 177 273
Capital assets included in accounts
payable and accrued liabilities 989 368
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Notes to Interim Unaudited Consolidated Financial Statements For the three months ended December 31, 2006 and 2005

(Tabular amounts are expressed in thousands of dollars.)

Rogers Sugar Income Fund (the "Fund") is an open-ended, limited purpose trust created under the laws of Ontario by an amended and restated declaration of trust dated February 3, 2005 (the "Declaration of Trust"). An unlimited number of trust units may be issued pursuant to the Declaration of Trust.

Note 1: Basis of presentation

These interim unaudited consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles. Other than the changes in accounting policies noted in Note 2 below, the same accounting policies as disclosed in the consolidated financial statements of the Fund included in our latest annual report have been used. Accordingly, these interim unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2006 annual report. These quarterly consolidated financial statements were not reviewed or audited by our external auditors.

Note 2: Changes in accounting policies

Financial Instruments

On October 1, 2006, the Fund adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Sections 3855 Financial Instruments -- Recognition and Measurement ("HB-3855"), 3861 Financial Instruments -- Disclosure and Presentation ("HB-3861") and 3865 Hedges ("HB-3865"). These sections were required to be adopted, together with CICA Handbook Sections 1530 Comprehensive Income ("HB-1530") and 3251 Equity, for fiscal years beginning on or after October 1, 2006, on a prospective basis. Under these standards, all financial instruments are classified into one of the following five categories: available-for-sale financial assets, loans and receivables, other financial liabilities, held-for-trading, and held to maturity. Initial measurement of financial instruments is at fair value for all financial statements and subsequent measurement and recognition in changes in value of financial instruments depend on their initial classification. Available-for-sale instruments are measured at fair value at each reporting period and unrealized gains or losses arising from changes in fair value are recorded in other comprehensive income until such time as the asset or liability is removed from the balance sheet. The Fund's short-term liquid investments included in cash and cash equivalents have been classified as available-for-sale assets. The Fund does not carry any loans receivable, and its accounts receivable are measured at amortized cost, which approximates cost. Changes in fair value are recognized in net earnings only if realized, or impairment in the value of an asset occurs. The Fund's accounts payable and accrued liabilities have been classified as other financial liabilities. Financial assets and liabilities classified as held-for-trading are measured at fair value at each reporting period with changes in fair value in subsequent periods included in net earnings. The balance sheet contains derivative financial instruments and certain embedded derivatives, which have been classified as held-for-trading. Held-to-maturity assets and other liabilities are measured at amortized cost and interest income or expense is accrued over the expected life of the instrument. The Company does not hold any assets or liabilities in this category.

(i) Cash and cash equivalents

In accordance with HB-3855, the Fund classifies its cash and cash equivalents as available-for-sale assets and values them at fair value. Cash and cash equivalents include cash on hand, bank balances, and short-term liquid investments with maturities of three months or less, and bank overdraft when the latter forms an integral part of the Fund's cash management. Due to the nature of the elements in cash and cash equivalents, the impact in comprehensive income for the quarter was nil. The adoption of HB-3855 has not resulted in changes to the Fund's classification of cash and cash equivalents.

(ii) Derivative financial instruments and embedded derivatives

In accordance with HB-3855, the Fund classifies derivative financial instruments and embedded derivatives which have not been designated as hedges for accounting purposes as held-for-trading, and values them at fair value. The derivative financial instruments consist of sugar futures, foreign exchange forward contracts and natural gas futures, and the embedded derivatives relate to the foreign exchange component of certain sales contracts, all of which the Funds' operating companies enter into during the regular course of business. The Fund no longer designates these derivative financial instruments and embedded derivatives as hedges as a result of new requirements for hedge accounting (HB - 3865), which came into effect October 1, 2006.

(iii) Comprehensive income

HB-1530 establishes standards for reporting and displaying comprehensive income. Comprehensive income is defined as the change in equity (net assets) from transactions and other events from non-owners sources. Other comprehensive income is defined as revenues, expenses gains and losses that, in accordance with primary sources of GAAP, are recognized in comprehensive income, but excluded from net income. The adoption of new accounting policies (see Note 2) has given rise to transitional balances as at October 1, 2006 recorded in accumulated other comprehensive income. The reversal of these balances will be charged to cost of sales over the life of the hedged item.

Note 3: Significant accounting policies

(a) Hedge accounting

The Fund uses raw sugar futures and foreign currency forward contracts in its raw sugar purchasing programs, and uses natural gas futures to economically hedge natural gas purchases used in its manufacturing operations. The Fund's policy is not to utilize derivative financial instruments for trading or speculative purposes. Prior to the adoption of new accounting policies, effective October 1, 2006 (see Note 2), eligible gains and losses on raw sugar futures and foreign currency forward contracts were deferred and recognized as part of the cost of inventory purchases and charged or credited to cost of sales when such inventory was sold. Eligible gains and losses on natural gas futures were deferred off balance sheet and recognized as part of the cost of the natural gas purchases and charged to cost of sales in the period during which the related manufactured products were sold.

As a result of accounting policies adopted by the Fund on October 1, 2006 (see Note 2), the Fund concluded that it would no longer designate its financial derivatives for sugar, foreign exchange and natural gas as accounting hedges. Therefore, all movements in fair value of derivative financial instruments are now immediately recognized in cost of sales in the consolidated statement of operations with a corresponding amount included in "Derivative financial assets / Derivative financial liabilities" in the balance sheet.



Note 4: Other assets

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December 31 September 30 December 31
2006 2006 2005
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Deferred financing charges (a) $- $6,398 $4,004
Prepaid swap interest (a) - 823 1,196
Other 413 59 155
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$413 $7,280 $5,355
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(a) Due to the adoption of new accounting policies, as identified in Note 2, the October 1, 2006 balance of deferred financing charges of $6.4 million and prepaid swap interest of $0.8 million were reclassified to offset the respective debt for which they were incurred. See Note 7 - Long-term debt and Note 8 - Convertible unsecured subordinated debentures for additional details.

Note 5: Derivative financial assets/Derivative financial liabilities

As indicated in Note 2 of the financial statements, the Fund adopted HB-3855 and HB-3865 on October 1, 2006. HB-3855 expanded on section HB-3860 by prescribing when a financial instrument is to be recognized on the balance sheet and at what amount and how gains and losses are recognized. More specifically, the adoption of this section has resulted in the requirement for the Fund to mark-to-market all financial derivative instruments outstanding at the end of the reporting period, which have not been designated as hedges for accounting purposes.

HB-3865 provides specific criteria for when and how hedge accounting is to be applied and accounted for in a Company's financial statements. Due to a new definition and requirements for hedging as per HB-3865, the Fund concluded that all of its operating companies' financial derivatives for sugar, foreign exchange and natural gas, all of which the Fund's operating companies enter into during the regular course of business, would no longer be designated as accounting hedges.

Also, in order to comply with HB-3855, the Fund had to review all contracts in place at October 1, 2006 to identify non-financial derivatives. The Fund chose to review all contracts in place on October 1, 2006 that were entered into after October 1, 2002 for any embedded derivatives within these contracts to determine if any such embedded derivatives needed to be accounted for separately at fair value from the base contract. The Fund has concluded that embedded derivatives existed in certain sales contracts denominated in U.S. currency, for customers whose functional currency is not the U.S. dollar.

The impact related to the adoption of these new accounting policies is twofold. Firstly, it has given rise to the initial recognition of unrealized gains/losses for derivative financial instruments and embedded derivatives, which no longer qualify for hedge accounting as of October 1, 2006. These amounts have been calculated and labeled as transitional balances and will be amortized, prospectively, as they come to maturity. Secondly, on a going forward basis, effective October 1, 2006, these derivative financial instruments and embedded derivatives will be marked to market at each reporting date with the unrealized gain/loss charged to the consolidated statement of operations with a corresponding offsetting amount charged to the balance sheet.

Details of recorded gains/losses for the quarter, in marking-to-market all derivative financial instruments and embedded derivatives, as well as the reversal of the transitional balances are noted below. For sugar and natural gas futures contracts (derivative financial instruments), the amounts noted below are netted with the variation margins paid or received to/from these brokers at the end of the reporting period. Natural gas forwards and sugar futures have been marked-to-market using published quoted values for these commodities, while foreign exchange forward contracts have been marked-to-market using rates published by the financial institution which is counter-party to these contracts.



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Accumulated
other com- Statement of
TRANSITIONAL Assets/ prehensive operations
BALANCES (Liabilities) Deficit income cost of sales
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Gain/(Loss)
Opening balance
recorded --
October 1, 2006
Sugar futures
contracts (2,450) - - (2,450)
Natural gas
futures contracts 3,282 - (3,282) -
Foreign exchange
forward contracts - - - -
Embedded derivatives (36) 36 - -
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Sub-total n/a 36 (3,282) (2,450)
Reversal of transitional
balances during
the first quarter
Sugar futures contracts - - - 4,720
Natural gas
futures contracts - - 1,948 (1,948)
Foreign exchange
forward contracts - - - 128
Embedded derivatives - - - -
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Total as at
December 31, 2006 $n/a $36 $(1,334) $450
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Financial Financial Instrument Statement of
Instrument Assets Liabilities operation
Short- Long- Short- Long- cost of
MARK-TO-MARKET term term term term sales
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Sugar futures contracts $- $- $153 $37 $10,080
Natural gas
futures contracts 438 69 - - 1,512
Foreign exchange
forward contracts - 9 133 - (1,232)
Embedded derivatives - - 362 - (399)
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Total $438 $78 $648 $37 $9,961
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Cost of sales impact of
transitional balances - - - - 450
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Total $10,411
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Note 6: Goodwill

Goodwill is not amortized and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the operating segment is compared to its fair value. When the fair value exceeds its carrying amount, goodwill is considered not to be impaired, and the second step of the impairment test is unnecessary. The second step is carried out when the carrying value of a reporting unit exceeds its fair value, in which case the implied fair value of the goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any.

On October 31, 2006, Canada's Minister of Finance made an announcement concerning the imposition of a distribution tax on distributions from publicly traded income trusts. The proposed tax would be imposed on existing trusts, starting in fiscal 2011. In light of this development and the resulting impact on the income trust equity market in Canada, the Fund performed a goodwill impairment test as at December 31, 2006 and concluded that there was no impairment to goodwill.



Note 7: Long-term debt

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December 31 September 30
2006 2006
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Term loan $49,500 $50,000
Senior secured debentures 64,087 65,000
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$113,587 $115,000
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Due to the adoption of new accounting policies as identified in Note 2 --
HB-3855, the Fund has reclassified the October 1, 2006 balance of deferred
financing charges and prepaid interest swap against the actual debt for
which they were incurred. The outstanding amount of the deferred financing
charges will be amortized based on the effective interest method.


Note 8: Convertible unsecured subordinated debentures

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December 31 September 30
2006 2006
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Second series $48,154 $50,000
Third series 81,543 85,000
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$129,697 $135,000
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Due to the adoption of new accounting policies as identified in Note 2 --
HB-3855, the Fund has reclassified the October 1, 2006 balance of deferred
financing charges against the actual convertible debentures for which they
were incurred. The outstanding amount of the deferred financing charges will
be amortized based on the effective interest method.

Note 9: Trust units

During the first quarter, the Fund repurchased under its Normal Course
Issuer Bid 500,000 units, at an average price of $3.644. All of these
units were cancelled prior to December 31, 2006. The capital amount of the
trust unit was credited at the average value of the units at the start of
the quarter, resulting in a reduction of $3.6 million to the capital value
of the trust units, resulting in a contributed surplus of $1.4 million being
the difference between the amount paid and the book value of the units.


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Number of trust units Amount
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Balance -- September 30, 2006 88,788,391 $571,034
Buy back of units 500,000 (3,216)
Return of capital - (1,324)
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Balance -- December 31, 2006 88,288,391 $566,494
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Note 10: Segmented information

The Fund, through its operating companies, operates in the sugar industry.
Management organizes the results into two principal operating segments for
making operating decisions and assessing performance: Eastern Canada and
Western Canada. These segments are managed separately, since they require
specific market strategies. The Fund assesses the performance of each
segment based on operating income. Accounting policies relating to each
segment are identical to those used for the purposes of the consolidated
financial statements.

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For the three months ended December 31 (unaudited)
2006
Eastern Western Intersegment
Canada Canada and other Total
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Revenues $85,448 $50,989 $(1,557) $134,880
Earnings before interest,
provision for income taxes and
depreciation and amortization 18,798 14,135 (163) 32,770
Depreciation and amortization 1,845 1,000 312 3,157
Interest expense, net 7,065 5,362 (8,460) 3,967
Net earnings $7,594 $4,098 $7,985 $19,677
Additions to property,
plant and Equipment 881 534 - 1,415
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For the three months ended December 31 (unaudited)
2005
Eastern Western Intersegment
Canada Canada and other Total
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Revenues

$73,317 $47,374 $(2,651) $118,040
Earnings before interest,
provision for income taxes and
depreciation and amortization 11,610 7,233 (153) 18,690
Depreciation and amortization 1,772 982 313 3,067
Interest expense, net 7,102 5,314 (9,426) 2,990
Net earnings $1,711 $488 $8,961 $11,160
Additions to property, plant
and Equipment 1,028 604 - 1,632
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Revenues were derived from customers in the following geographic areas:

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For the three months ended
December 31
-------------------------------------------------------------
2006 2005
(unaudited) (unaudited)

Canada $125,473 $107,282
United States and Other 9,407 10,758
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$134,880 $118,040
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Note 11: 2006 Comparative figures

Certain of the 2006 comparative figures have been reclassified in order to conform with the current year's presentation.


MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited financial statements and notes thereto in this quarterly report.

In analyzing our results, we supplement our use of financial measures that are calculated and presented in accordance with generally accepted accounting principles (GAAP), with a number of non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company's historical performance, financial position or cash flow that excludes (includes) amounts, or is subject to adjustments that have the effect of excluding (including) amounts, that are included (excluded) in most directly comparable measures calculated and presented in accordance with GAAP. Non-GAAP financial measures are not standardized; therefore, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar businesses. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.

We use these non-GAAP financial measures in addition to, and in conjunction with, results presented in accordance with GAAP. These non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, may provide a more complete understanding of factors and trends affecting our business.

In the MD&A, we discuss the non-GAAP financial measures, including the reasons that we believe that these measures provide useful information regarding our financial condition, results of operations, cash flows and financial position, as applicable and, to the extent material, the additional purposes, if any, for which these measures are used. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are contained in the MD&A.

This report contains certain forward-looking statements, which reflect the current expectations of the Fund, Lantic Sugar Limited ("Lantic") and Rogers Sugar Ltd. ("Rogers") (collectively the "Company") with respect to future events and performance. Wherever used, the words "may," "will," "anticipate," "intend," "expect," "plan," "believe," and similar expressions identify forward-looking statements. Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether, or the times at which, such performance or results will be achieved. Forward-looking statements are based on information available at the time they are made, assumptions made by management, and management's good faith belief with respect to future events, and are subject to the risks and uncertainties outlined in this report that could cause actual performance or results to differ materially from those reflected in the forward-looking statements, historical results or current expectations.

Additional information relating to the Fund, Lantic and Rogers, including the Annual Information Form, Quarterly and Annual reports and supplementary information is available on SEDAR at www.sedar.com.

This Management's Discussion and Analysis is dated January 25, 2007.

Internal disclosure controls

In accordance with Regulation 52-109 respecting certification of disclosure in issuers' interim filings, the Chief Executive Officer and Chief Financial Officer have designed or caused it to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that (i) information required to be disclosed by the Company in its quarterly filings or other reports filed or submitted by it under applicable securities legislation is recorded, processed, summarized and reported within the prescribed time periods, and (ii) material information regarding the Company is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer in a timely manner.

In addition, the Chief Executive Officer and Chief Financial Officer have designed or caused it to be designed under their supervision, internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. There have been no changes in internal controls during the quarter that have had a material effect on the Company's internal controls.



Results of operations
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For the three months ended
Consolidated Results December 31
--------------------------------------------------------------------------
(In thousands of dollars,
except for volume and per 2006 2005
trust unit information) (unaudited) (unaudited)

Volume (metric tonnes) 178,680 187,722
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Revenues $134,880 $118,040
Gross margin 40,214 27,295
Administration and selling 4,519 5,567
Distribution 2,925 3,038
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Earnings before interest, provision
for income taxes, depreciation
and amortization (EBITDA) 32,770 18,690

Depreciation and amortization 3,157 3,067
Interest, net of interest income and
other charges 3,967 2,990
Provision for income taxes 5,969 1,473
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Net earnings $19,677 $11,160
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Net earnings per trust unit -- basic $0.22 $0.11
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Due to the adoption of new accounting policies for the periods beginning on October 1, 2006 as identified in Note 2, certain derivative financial instruments and embedded derivatives, which the Fund's operating companies utilize in their normal course of business are no longer designated as accounting hedges due to new definition and requirements for hedge accounting.

The impact related to the adoption of these new accounting policies is twofold. Firstly, it has given rise to the initial recognition of unrealized gains/losses for derivative financial instruments and embedded derivatives, which used to qualify for hedge accounting, as of October 1, 2006. These amounts have been calculated and labeled as transitional balances and will be amortized, prospectively, as they come to maturity. Secondly, on a going forward basis, these derivative financial instruments and embedded derivatives are marked to market at each reporting date with the unrealized gain/loss charged to the consolidated statement of operations with a corresponding offsetting amount charged to the balance sheet.

The Fund's derivative financial instruments consist of sugar futures, foreign exchange forward contracts and natural gas futures, all of which the Fund's operating companies enter into during the regular course of business. The Fund's operating companies sell refined sugar to some clients in US dollars. These purchase and sales contracts are viewed as having an embedded derivative if the functional currency of the customer is not US dollars, the embedded derivative being the source currency of the transaction, US dollars.

Details of gains/losses due to the reversal of the transitional balances and to the marking-to-market of all derivative financial instruments and embedded derivatives for the first quarter are noted below.



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-------------------------------------------------------------------------
Gain/(Loss) Transitional
(In thousands of dollars) balance Mark-to-market Total
-------------------------------------------------------------------------
Sugar futures contracts $2,270 $10,080 $12,350
Foreign exchange forward contracts 128 (1,232) (1,104)
Natural gas futures contracts (1,948) 1,512 (436)
Embedded derivatives on
sales contracts - (399) (399)
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Total $450 $9,961 $10,411
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We believe that the Fund's financial results are more meaningful to management, investors, analysts and any other interested parties when financial results are adjusted by the gains/losses from financial derivative instruments, from embedded derivatives and from the amortization of transitional balances, which would then represent the economical results of the Fund versus the accounting results. This measurement is a non-GAAP measurement. Management uses the non-GAAP economic results of the operating companies (before the adjustment for financial derivative instruments and embedded derivatives) to measure and evaluate the performance of the business through its adjusted gross margin and adjusted EBITDA. In addition, management believes that these measures are important to our investors and parties evaluating our performance and comparing such performances to our past results. Management also uses adjusted gross margin and adjusted EBITDA when discussing results with the operating Board of Directors, the Fund's Board of Trustees, analysts, investors, banks and other interested parties.



------------------------------------------------------------------------
------------------------------------------------------------------------
Adjusted financial information:
------------------------------------------------------------------------
For the three months ended
Consolidated Results December 31
------------------------------------------------------------------------
(In thousands of dollars, except 2006 2005
for per trust unit information) (unaudited) (unaudited)

Gross margin as per financial statements $40,214 $27,295
Adjustment for mark-to-market
derivative financial instruments and
transitional balance ("MMDFI/TB") (10,411) -
------------------------------------------------------------------------
Adjusted gross margin 29,803 27,295
------------------------------------------------------------------------
EBITDA as per financial statements 32,770 18,690
Adjustment for MMDFI/TB (10,411) -
------------------------------------------------------------------------
Adjusted EBITDA 22,359 18,690
------------------------------------------------------------------------
Net earnings as per financial statements 19,677 11,160
Adjustment for MMDFI/TB (10,411) -
Deferred taxes on MMDFI/TB 3,064 -
------------------------------------------------------------------------
Adjusted net earnings $12,330 $11,160
------------------------------------------------------------------------
Net earnings per trust unit basis,
as per financial statements $0.22 $0.11
Adjustment for MMDFI/TB net of taxes (0.08) -
------------------------------------------------------------------------
Adjusted net earnings per trust unit basis $0.14 $0.11
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First quarter volume decreased by 9,000 metric tonnes from the comparable quarter in fiscal 2006. The decrease is due to a combination of factors. As a result of high sugar prices earlier in the calendar year, liquid volume was down by approximately 10,900 metric tonnes due to the loss of volume from HFCS substitutable accounts. There were no thick juice sales in the quarter, as opposed to 7,600 metric tonnes in the comparable quarter of fiscal 2006. No contract for thick juice was negotiated this year due to the higher raw sugar value. The above volume shortfall was partially offset by an increase of 3,200 metric tonnes in export sales due to the timing of deliveries for the Canada specific quota, sales to Mexico and an increase in industrial volume of 8,000 metric tonnes. The industrial volume increase was mainly to increased volume from existing accounts and to timing in deliveries. Consumer volume for the quarter was 1,800 metric tonnes lower than last year's comparable quarter.

Revenues for the quarter were $16.8 million higher than the previous year's comparable quarter due to the higher price of world raw sugar in fiscal 2007, than in the comparable quarter of fiscal 2006.

As previously mentioned, gross margins of $40.2 million does not reflect the economic income of the Fund as it includes a gain of $10.4 million for the mark-to-market of derivative financial instruments and reversal of transitional balances. We will therefore comment on adjusted gross margin results.

For the quarter, adjusted gross margin increased by $2.5 million, when compared to the same quarter of last year, even though volume was down. On a per metric tonne basis, adjusted gross margins were $166.80 in 2007 compared to $145.40 for the comparable quarter of last year. Favourable sales mix due to lower liquid volume and no thick juice sales, combined with a higher raw sugar value and improved selling margins were the major reasons for the improved gross margin. This was partially offset with higher operating costs. In addition, Taber's pre-hedging program contributed almost $5.00 per metric tonne of additional gross margin.

In fiscal 2006, Rogers initiated a pre-hedging program for some of its beet sugar sold in Canada. As the beet sugar input price is fixed with the Growers for fiscal 2007 and 2008, this pre-hedging program would allow Rogers to benefit from the higher raw sugar values that were present in fiscal 2006. Approximately 33,000 metric tonnes were pre-hedged for fiscal 2007 and 29,000 metric tonnes for fiscal 2008, at values above 15 cents per pound. During the first quarter, in line with spot deliveries of beet sugar sales, 10,000 metric tonnes were liquidated for a profit of almost $0.9 million.

Distribution costs were comparable during the quarter, while administration expenses were $1.0 million lower in fiscal 2007 than the comparable quarter of fiscal 2006. The decrease is due mainly to lower pension, capital taxes and consultant fee expenses, as well as timing of approximately $500,000 in expenses.

Interest expense for the quarter was higher by approximately $1.0 million due mainly to the refinancing of the initial series debentures in fiscal 2006 where, in the past, a large portion of interest paid on the initial series convertible debenture was charged to equity, while all interest incurred on the new third series convertible debenture is charged to interest expense. In the comparable quarter of fiscal 2006, an amount of $1.7 million of interest had been charged directly to equity for the initial series convertible debentures.

Goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. On October 31, 2006, Canada's Minister of Finance made an announcement concerning the imposition of a distribution tax on distributions from publicly traded income trusts. In light of this announcement, and the resulting impact on the income trust equity market, the Fund performed a goodwill impairment test as at December 31, 2006, and concluded that there was no impairment in goodwill.



Statement of quarterly results

(In thousands of dollars, except volume and per trust unit information)

-----------------------------------------------------------------------
2007 2006
-----------------------------------------------------------------------
Q1 Q4 Q3 Q2 Q1

Volume (MT) 178,680 199,316 182,267 190,384 187,722

Revenues $134,880 $150,994 $134,863 $128,842 $118,040
Gross margin 40,214 32,091 25,274 19,810 27,295
EBITDA 32,770 21,608 16,802 10,310 18,690
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Net earnings (loss) $19,677 $16,634 $9,704 $3,424 $11,160
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Net earnings (loss)
per trust unit $0.22 $0.19 $0.11 $0.02 $0.11
-----------------------------------------------------------------------
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Adjusted gross
margin $29,803 32,091 25,274 19,810 27,295

Adjusted EBITDA 22,359 21,608 16,802 10,310 18,690
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Adjusted net
earnings (loss) $12,330 $16,634 $9,704 $3,424 $11,160
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Adjusted net
earnings (loss)
per trust unit $0.14 $0.19 $0.11 $0.02 $0.11
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2005
-----------------------------------------------------------------------
Q4 Q3 Q2

Volume (MT) 201,818 189,631 178,098

Revenues $120,631 $111,355 $102,876
Gross margin 30,478 25,087 18,189
EBITDA 20,618 15,443 10,909
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Net earnings (loss) $(81,930) $7,813 $5,712
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Net earnings (loss)
per trust unit $(0.94) $0.07 $0.05
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Adjusted gross
margin 30,478 25,087 18,189

Adjusted EBITDA 20,618 15,443 10,909
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Adjusted net
earnings (loss) $(81,930) $7,813 $5,712
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Adjusted net
earnings (loss)
per trust unit $(0.94) $0.07 $0.05
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Liquidity

The distributable cash generated by the operating companies, Lantic and Rogers, is paid to the Fund by way of dividends and return of capital on the common shares of Lantic and Rogers, and by the payment of interest on the subordinated notes of Lantic and Rogers held by the Fund, after having taken reasonable reserve for capital expenditures and working capital. The cash received by the Fund is used to pay distributions to its Unitholders.

The Fund measures distributable cash. Distributable cash is not intended to be representative of cash flows or results of operations determined in accordance with GAAP, and does not have a standardized meaning prescribed by Canadian GAAP. It may also not be comparable to similar measures used by other companies or income trusts. Distributable cash is meant to show to the Unitholders the ability of the Fund to pay distributions based on the operating performance of the Fund and its operating subsidiaries during the specified period. It is not meant to explain the cash flow from operations shown in the financial statements.

The Canadian Securities Administrators (the "CSA") issued CSA Staff Notice 52-306R clarifying their expectations about the presentation of distributable cash. It concludes that distributable cash is fairly presented only when reconciled to cash flows from operating activities, as presented in the issuers' financial statements.



-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended
(In thousands of dollars) December 31
-------------------------------------------------------------------------
2006 2005
(unaudited) (unaudited)
Operating activities:
Cash flow from operating activities $25,552 $(21,411)
Changes in non-cash operating working capital 8,660 37,120
Recorded gain for derivative financial
instruments and transitional balances
in cost of goods sold (10,411) -
Derivative financial instruments
non-cash amount (6,536) -
Reversal of accumulated other
comprehensive income 1,334 -
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18,599 15,709
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Investing activities:
Total capital expenditures (1,415) (1,632)
Less: Investment capital expenditures 52 437
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Maintenance capital expenditures (1,363) (1,195)
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Financing activities:
Buy-back of trust units-Normal Course
Issuer Bid (1,822) -
Interest expense on the equity portion of
the convertible unsecured and
subordinated debentures - (1,663)
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(1,822) (1,663)
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Distributable cash 15,414 12,851

Declared distributions to Unitholders (9,305) (8,896)
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Available cash $6,109 $3,955
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Distributable cash for the quarter was $2.6 million higher than the comparable quarter in fiscal 2006. The increase in the quarter is due mainly to improve operational performances of Lantic and Rogers.

Changes in non-cash operating working capital represents quarter-over-quarter movement in current assets like accounts receivables and inventories, and current liabilities like accounts payable. Movements in these accounts are due mainly to timing in the collection of receivables, receipts of raw sugar and payment of liabilities. Increases or decreases in such accounts are due to timing issues and therefore do not constitute available cash for distribution. Such increases or decreases are financed from available cash or from the Company's available credit facilities. For the same reason, increases or decreases in short term bank indebtedness are due to timing issues, and therefore do not constitute available cash for distribution.

Recorded gains on derivative financial instruments and on transitional balances, as well as movement in derivative financial instruments assets and liabilities, do not represent cash from operating activities. Also, the net amount of $1.3 million for accumulated other comprehensive income does not constitute cash and is therefore being adjusted from cash from operating activities.

For the quarter, consolidated cash flow from operating activities, adjusted for changes in non-cash working capital and derivative financial instruments, was $18.6 million compared to $15.7 in fiscal 2006. This was due mainly to higher operational income of Rogers during the quarter.

For the quarter, maintenance capital expenditures were higher in fiscal 2007 than 2006 due mainly to timing of expenditures. In addition to the above, Lantic and Rogers spent $0.4 million in fiscal 2006 on investment capital projects. The minimal investment costs incurred in fiscal 2007 relate to the Taber beet pulp press which was put in operation in September 2006. Distributable cash is not reduced by capital investment as these projects are not necessary for the operation of the plants, but are done due to their substantial operational savings to be realized once these projects are completed.

During the quarter, the Fund bought back and cancelled from circulation 500,000 units under its Normal Course Issuer Bid, for a total value of $1.8 million. In fiscal 2006, the Fund repaid the $85.0 million initial series 9.5% convertible debentures from the proceeds of an $85.0 million third series 5.9% convertible debenture. A portion of the interest expense of the Fund's initial series of convertible debentures, which was fully repaid on March 7, 2006, was credited to equity on the balance sheet. As the interest payments were made, they drew down the value of the debt and increased the value of the equity. The amount for the first quarter of 2006 was $1.7 million.

Contractual obligations

There are no material changes in the contractual obligations table disclosed in the Management's Discussion and Analysis of the September 30, 2006 Annual Report.

At December 31, 2006, the operating companies had commitments to purchase a total of 907,000 metric tonnes of raw sugar, of which only 288,570 metric tonnes had been priced, for a total dollar commitment of $112.4 million.

Capital resources

Lantic and Rogers each have respectively $50.0 million and $40.0 million as authorized lines of credit available to finance their operations. At quarter's end, no amount was drawn from either of the working capital facilities and Lantic and Rogers had respectively $20.8 and $6.7 million of cash available.

At quarter's end, inventories are high compared to the period ended September 30, 2006 due to higher levels of inventories mainly as a result of the larger Taber beet crop.

Cash requirements for working capital and other capital expenditures are expected to be paid from available cash resources and from funds generated from operations.

Outstanding securities

A total of 88,288,391 units were outstanding as at December 31, 2006, being 500,000 units less than at September 30, 2006. During the quarter, the Fund purchased 500,000 units at an average price of $3.644 under its Normal Course Issuer Bid.

Critical accounting estimates

In March 2006, Lantic recorded a $2.0 million provision in regards to costs to be incurred due to a product withdrawal/recall. Some of these claims have now been settled, but there are still large value claims to be settled. At the present time, the estimate is still viewed as adequate by management.

Changes in accounting policies and critical accounting estimates

Our accounting policies and critical accounting estimates remain substantially unchanged from those that were disclosed in our Management's Discussion and Analysis of the Annual Report for the year ended September 30, 2006, except for the following:

On October 1, 2006, the Fund adopted the new requirements of Sections 3855 and 3865 of the CICA Handbook for financial instruments and hedge accounting. New section 3855 of the CICA Handbook expands on section 3860 by prescribing when a financial instrument is to be recognized on the balance sheet and at what amount and how gains and losses are recognized.

New section 3865 of the CICA Handbook on hedge accounting adds complexity for hedging items to be accounted as hedges. Under these new requirements, each of our sale or purchase contract (hedge item) would have to be identified to a specific hedging item (futures contract) and such hedging item needs to be liquidated close to the date the hedge item is transacted and accounted for. The effectiveness of these hedges would need to be measured on a retroactive and prospective basis on each reporting date, and any ineffectiveness recorded immediately. Due to the large volume of transactions, financial costs, and inefficiencies that this new requirement would create, Lantic and Rogers will not account for its financial instruments as hedging items.

Therefore the Company will mark-to-market, at each reporting period, all financial derivatives outstanding at the end of such periods, which have not been designated as hedges, as the Company concluded that all of its financial derivatives for sugar, foreign exchange and natural gas would no longer qualify for hedge accounting under the new rules.

As a result, the Fund will recognize, on a quarterly basis, in its profit and loss statement and balance sheet, all movements in the price (mark-to-market) of these financial derivatives. Even though Lantic and Rogers are rigorously economically hedging all their sugar transactions and continue not to take any speculative positions on sugar, by this new requirement the Fund will have large fluctuations in its GAAP financial results each reporting period. None of these adjustments impact distributable cash, as they are non-cash transactions.

Also, in order to comply with this new section, the Company had to review all contracts in place at October 1, 2006, initiated after October 1, 2002, to identify non-financial derivatives or any embedded derivatives within these contracts to determine if any such embedded derivatives needed to be accounted for separately at fair value from the base contract.

Risk factors

Risk factors in Lantic's and Rogers' businesses and operations are discussed in the Management's Discussion and Analysis of our Annual Report for the year ended September 30, 2006. This document is available on SEDAR at www.sedar.com or on one of our websites at www.lantic.ca or www.rogerssugar.com.

OUTLOOK

In Taber, the beet harvest was completed in November 2006, and a record yield per acre harvested was achieved. It is now estimated that Taber will produce in excess of 125,000 metric tonnes of beet sugar. This is approximately 25,000 metric tonnes more than was expected. As the Western market is limited, some sugar may be warehoused for the Fall of 2007, fiscal 2008 sales. This may add additional warehousing and distribution costs to be charged against this year's results.

Natural gas prices have been declining over the last several months. With this decline, approximately 50% of our expected Spring and Summer usage (April to September) was hedged at levels lower than the previous year. Unless a very cold winter is experienced in the months of February and March, natural gas prices should continue to decline. In addition, we have taken some futures positions for fiscal 2008 to 2011 at attractive levels when compared to prices achieved in 2006. We will continue to monitor the natural gas market dynamics in order to minimize our natural gas costs.

World raw sugar prices ranged between 11 and 12.50 cents per pound during the first quarter. As at the date of this writing, we had not yet recovered some of the large HFCS liquid substitutable business lost earlier in 2006. We believe that some of this business will be reacquired during the year as we expect world raw sugar prices to stabilize between 10 and 11.50 cents per pound and HFCS supply continues to be tight in the marketplace. This could represent 30,000 metric tonnes of volume for the balance of the fiscal year.

Although some shortfall in margin is expected from lower liquid and export sales volumes, the shortfall will be offset by improving selling margins. For the most part, selling margin increases for 2007 contractual business are in line with our expectations.

We understand that Sucor, formerly CanSugar, in Saint John, New Brunswick, has started production of refined sugar. The impact of Sucor on Lantic's sales volume and margins is too early to assess. Initiatives to protect Lantic's market share will be aggressively pursued.

The labour contract for Rogers' Vancouver facility expires in February, 2007. Negotiations for this contract will soon be underway, and we expect that this collective agreement will be renewed at competitive market rates.

A new investment project in Montreal, consisting of robotics, was approved during the first quarter. This project, which will cost in excess of $1.0 million, should generate annual savings of over $600,000 per year when completed, in May, 2007.

or visit our Websites at www.rogerssugar.com or www.Lantic.ca

Contact Information

  • Rogers Sugar Income Fund
    Mr. Daniel L. Lafrance
    SVP Finance, CFO and Secretary
    514-940-4350
    514-527-1610 (FAX)