Royal Utilities Income Fund

Royal Utilities Income Fund

October 30, 2007 17:13 ET

Royal Utilities Income Fund Reports 2007 Q3 Earnings

TORONTO, ONTARIO--(Marketwire - Oct. 30, 2007) - Royal Utilities Income Fund ("the Fund")(TSX:RU.UN) today announced 2007 third quarter net earnings of $9.7 million, or $0.10 per basic and fully diluted unit, compared to net earnings of $11.6 million or $0.12 per basic and fully diluted unit for the third quarter of 2006. Year-to-date net earnings were $38.6 million, or $0.40 per basic and fully diluted unit, an increase compared to $17.5 million or $0.32 per basic and fully diluted unit in the prior year. Net earnings for the nine months ended September 30, 2006 included non-recurring charges for interest expense, foreign exchange gains, debt refinancing costs and discontinued operations, all related to the 2006 restructuring of the Fund. Distributions of $23.5 million were declared in the quarter and the Fund expects a full year payout of $93.8 million.

Financial Highlights (unaudited)(1)
Three months ended Nine months ended
September 30, September 30,
(millions of Canadian dollars) 2007 2006 2007 2006
Mine-mouth revenues
Owned Mines (2) $ 60.8 $ 66.2 $ 189.0 $ 194.8
Contract and Genesee Mines (2) 55.3 45.6 156.0 134.7
Royalty revenues
Coal Royalties 5.6 7.6 23.0 24.2
Potash Royalties 1.7 1.3 5.8 3.5
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Total Revenue 123.4 120.7 373.8 357.2
Cost of Sales 89.4 82.9 263.5 240.7
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Operating Margin (3) $ 34.0 $ 37.8 $ 110.3 $ 116.5
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Net earnings $ 9.7 $ 11.6 $ 38.6 $ 28.7
Cash flow from operating activities 24.7 28.0 82.2 64.1
Productive capacity
maintenance (3)(4) 4.8 6.9 13.4 16.9
Distributable cash from
operations (3)(5) 19.9 21.1 68.8 22.0
Distributions declared (5) 23.5 24.3 70.4 24.3

(1) Revenues, cost of sales, operating margin, cash flow from operating activities, productive capacity maintenance, and distributable cash from operations all relate to continuing operations. These amounts exclude discontinued operations as described in Note 5 to the September 30, 2007 interim consolidated financial statements.

(2) Owned mines refer to mine-mouth operations in which the price of coal sold is adjusted annually using inflation-based indices. Contract and Genesee mines refer to mine-mouth operations where the price of coal sold comprises a direct pass-through of operating costs plus a management fee.

(3) The Fund discloses operating margin, productive capacity maintenance and distributable cash from operations, in order to provide an indication of financial performance on an ongoing basis. These measures do not have any standardized meaning prescribed by Canadian generally accepted accounting principles ("GAAP") and are, therefore, unlikely to be comparable with similar measures presented by other issuers. Reference should be made to the Fund's Management's Discussion and Analysis for the third quarter ended September 30, 2007 for descriptions of these measures and for reconciliation to GAAP measures.

(4) Comprises cash capital expenditures and capital lease payments, excluding interest, to sustain operations.

(5) Results from June 27, 2006, date of the initial public offering of units in the Fund.

Total revenue for the third quarter of 2007 was $123.4 million compared to $120.7 million for the same quarter of 2006. The pass-through of higher operating and capital cost recoveries at the contract and Genesee mines contributed an additional $9.7 million of revenue. Revenue at the owned mines was down due to reduced sales volumes at the Bienfait mine and a reduction of coal requirements at the Paintearth mine where higher than normal temperatures in the summer hampered the generating station's cooling activities. Potash royalty revenue for the third quarter of 2007 totalled $1.7 million. This increase of $0.4 million over the third quarter of 2006 was primarily the result of fewer maintenance shut-down activities by potash producers in the current quarter. Coal royalty revenue for the quarter was $2.0 million lower than the third quarter of 2006. This decrease was due to lower royalties from the Cheviot mine and the temporary mining of lower royalty coal at Sheerness.

Reduced sales volumes at Bienfait and Paintearth and lower coal royalties led to a reduced operating margin for the third quarter of 2007 compared with the same quarter of 2006.

In the third quarter of 2007, operating cash flow from continuing operations was $24.7 million, compared to operating cash flow of $28.0 million in the comparable prior year quarter. This decrease resulted mainly from lower operating margin and the timing of general and administrative expenses. General and administrative expenses remain in-line with annual guidance of between $11.0 million and $12.0 million.

Productive capacity maintenance expenditures, which include cash payments for capitalized fixed assets and principal payments on capital lease obligations, for the third quarter were $4.8 million compared to $6.9 million in the third quarter of 2006. Capital expenditures declined year-over-year as higher amounts were spent last year on infrastructure and the development of new pits at Genesee, Boundary Dam, Paintearth and Sheerness. These decreases were partially offset by higher lease payments in the third quarter of 2007.

Operating Highlights
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
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Coal sales (millions of tonnes)
Owned mines (1) 4.2 4.5 12.7 12.8
Contract and Genesee mines (2) 4.4 4.5 13.7 14.4
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8.6 9.0 26.4 27.2
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Coal production (mm of tonnes)
Owned mines (1) 4.2 4.1 12.8 12.4
Contract and Genesee mines (2) 4.4 4.3 13.8 14.3
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8.6 8.4 26.6 26.7
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Average realized price
($ per tonne) (3) $ 13.47 $ 12.45 $ 13.06 $ 12.10

(1) Owned mines refer to mine-mouth operations in which the price of coal sold is adjusted annually using inflation-based indices.

(2) Contract and Genesee mines refer to mine-mouth operations where the price of coal sold comprises a direct pass-through of operating costs plus a management fee.

(3) Excludes royalty revenue.

Overall sales volumes for the third quarter of 2007 were down slightly from the comparable quarter last year. Increased sales at the Poplar River mine were offset by an unplanned shutdown of a generator at the Shand generating station serviced by Boundary Dam and by lower requirements from the power station serviced by the Paintearth mine. Bienfait sales to Ontario Power Generation were lower than the comparable quarter of 2006 based on reduced demand for coal in Ontario. Overall, production volumes for the third quarter were slightly higher than the same quarter of 2006.

Average realized prices per tonne increased by $1.02 per tonne to $13.47 per tonne from the prior year quarter. This increase was primarily due to higher cost and capital recoveries at the contract and Genesee mines.

Outlook (see Forward-looking Statements)

The primary goal of the Fund is to maintain distributable cash. The Fund continues to focus on productivity improvements, pursuing opportunities related to new or expanding power plants, and new business development initiatives to achieve this goal.

Distributions of $23.5 million were declared in the third quarter. For the nine months ended September 30, 2007, $70.4 million of distributions were declared. Consistent with previous guidance, the Fund intends to declare distributions of approximately $93.8 million ($0.9596 per unit) in 2007 for a target payout ratio of 97%.

Operating margins are forecast to increase in the fourth quarter of 2007 driven by higher coal volumes, less maintenance and higher coal royalties. This is expected to enable the Fund to achieve a target payout ratio of 97%. Maintenance capital expenditures are projected to be $32.9 million in 2007 with $22.5 million of this amount financed through capital leases. Productive capacity maintenance is projected to be $21.8 million for the year, declining due to changes in mine plans at the owned mines resulting from reduced sales volumes in 2007.

The Fund continues to pursue business development initiatives. The contract with Ontario Power Generation expires at the end of this year, and discussions are underway for a potential new agreement. The Fund continues to assess the opportunity to construct a plant to manufacture activated carbon from Bienfait coal. The Fund also has the right of first offer to provide mining services for new coal mines owned or controlled by Sherritt International Corporation ("Sherritt") and Ontario Teachers' Pension Plan Board ("OTPP"). In this regard, the Fund has completed preliminary economic models to supply contract mining services to Sherritt and OTPP's proposed Dodds-Roundhill coal gasification project.

Productivity improvements remain focused on maintenance, operations and reclamation activities. Adherence to scheduling maintenance activities is critical to improving reliability and reducing costs and weekly scheduled maintenance continues to be above 85%. Idling hours for heavy equipment fleets have been reduced by 3% to September 30, 2007 from the prior year as the Fund implemented a mobile equipment utilization program to improve efficiencies.

Royal Utilities Income Fund

The Fund is an unincorporated, open-ended, limited purpose trust established under the laws of Alberta. As at September 30, 2007, Sherritt and OTPP each directly or indirectly owned approximately 41.2% of the issued and outstanding units of the Fund.

The Fund indirectly holds all of the common shares of Prairie Mines & Royalty Ltd. (the "Company"), which is the largest thermal coal producer in Canada. The Company owns and operates the Paintearth, Sheerness, Poplar River, Boundary Dam and Bienfait mines. The Company also owns 50% of the Genesee mine, which it operates under contract, along with the Highvale and Whitewood mines, both of which are owned by TransAlta Utilities Corporation. A total of 36.2 million tonnes of coal was produced by the Company in 2006. The Company also holds a portfolio of mineral rights located in Alberta and Saskatchewan that generate royalties from the production of coal and potash.

A leader in employee safety, the Fund is also dedicated to ensuring that its operations meet the highest standards in environmental stewardship.

The Fund's approximately 97.8 million trust units trade on the Toronto Stock Exchange under the symbol RU.UN. The Fund's 2006 Management's Discussion and Analysis and consolidated financial statements can be found on the Fund's web site at

Forward-looking Statements

This news release contains forward-looking statements. Forward-looking statements generally can be identified by the use of statements that include words such as "believe", "expect", "anticipate", "intend", "plan", "forecast", "likely", "may" or other similar words or phrases. Similarly, statements contained in the "Outlook" section of this news release including those with respect to expectations concerning assets, prices, revenues, costs, distributions, foreign exchange rates, earnings, production, market conditions, capital expenditures, commodity demand, risks, availability of regulatory approvals, the impact of investments in asset-backed commercial paper, corporate objectives and plans or goals, are or may be forward-looking statements. These forward-looking statements are not based on historic facts, but rather on current expectations, assumptions and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that are beyond the Fund's ability to control or predict. Actual results and developments may differ materially from those contemplated by this news release depending on, among others, such key factors as business and economic conditions in Canada.

Key factors that may result in material differences between actual results and developments and those contemplated by this news release also include the supply, demand and prices for the Fund's products; dependence on significant customers; deliveries; production levels, production and other anticipated and unanticipated costs and expenses; energy costs; interest rates; foreign exchange rates; rates of inflation; changes in tax legislation; the timing, capital costs and financing arrangements associated with development projects; the timing of the receipt of government and other approvals; risks related to collecting accounts receivable; risks associated with mining, processing and exploration activities; potential imprecision of reserve estimates; market competition; developments affecting labour relations and the market for skilled workers; environmental and utility industry regulation; and other risk factors listed in the Fund's prospectus dated June 16, 2006, and the Fund's Management's Discussion and Analysis for the year ended December 31, 2006 from time to time in the Fund's continuous disclosure documents such as its annual report, annual information form and management information circular.

Further, any forward-looking statement speaks only as of the date on which such statement is made, and except as required by applicable law, the Fund undertakes no obligation to update any forward-looking statements.

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