Royal Utilities Income Fund

Royal Utilities Income Fund

April 29, 2008 18:50 ET

Royal Utilities Income Fund Reports 2008 Q1 Earnings

TORONTO, ONTARIO--(Marketwire - April 29, 2008) - Royal Utilities Income Fund (the "Fund") (TSX:RU.UN) today announced 2008 first quarter net earnings of $15.6 million, or $0.16 per basic and fully diluted unit. Net earnings for the first quarter of 2007 were $16.6 million, or $0.17 per basic and fully diluted unit. Distributions of $23.5 million were declared in the quarter for a payout ratio of 98%.

Financial Highlights (unaudited)
Three months ended
March 31,
(millions of Canadian dollars) 2008 2007
Mine-mouth revenues
Owned mines (1) $ 68.0 $ 66.7
Contract and Genesee mines (1) 55.8 50.1

Royalty revenues
Coal royalties 8.5 9.2
Potash royalties 3.5 2.0
Total revenue $ 135.8 $ 128.0

EBITDA (2) $ 40.0 $ 38.8

Net earnings $ 15.6 $ 16.6
Cash flow from operating activities 31.4 28.7
Productive capacity maintenance (2) (3) 7.3 3.6
Distributable cash from operations (2) 24.1 25.1
Distributions declared 23.5 23.5

(1) At the owned mines, the price of coal sold is adjusted annually using
inflation-based indices. At the contract and Genesee mines, the price
of coal sold comprises a direct pass-through of operating costs plus
a management fee.
(2) The Fund discloses EBITDA, 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 a
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 quarter ended March 31, 2008 for descriptions of these measures and
for reconciliation to GAAP measures.
(3) Comprises cash capital expenditures and capital lease payments,
excluding interest.

Total revenue for the first quarter of 2008 increased compared to last year by $7.8 million to $135.8 million. The largest component of this increase was at the contract and Genesee mines, where the pass-through of higher operating and capital costs increased revenue by $5.7 million. Revenue at the owned mines was higher by $1.3 million on increased revenue at Boundary Dam as a result of increased power plant demand.

Coal royalty revenue for the first quarter of 2008 was $0.7 million lower than the comparable quarter last year as the sequence of mining led to decreased volumes of royalty assessable coal sold at the owned mines. Potash royalties increased by $1.5 million from the first quarter of 2007 due to higher prices in potash markets.

First quarter EBITDA of $40.0 million was $1.2 million higher than the same quarter last year. Higher royalty revenue, reclamation revenue and pension recoveries offset continued cost pressures at the owned mines primarily related to higher diesel fuel, equipment and repair costs.

Cash flow from operating activities was $31.4 million, a $2.7 million increase compared to $28.7 million in the first quarter last year. This was mainly a result of decreased cash used for non-cash working capital as a result of a buildup of inventory and a reduction in trade accounts payable in the first quarter of 2007.

For the first quarter of 2008, the Fund spent $7.3 million in productive capacity maintenance, an increase of $3.7 million from the same quarter of 2007. Cash capital investments for infrastructure related activities and mobile equipment repairs at Sheerness and Genesee combined with an increase of $0.8 million in capital lease payments accounted for this difference.

Distributions declared to unitholders in the first quarter were $23.5 million.

Operating Highlights

Three months ended
March 31,
2008 2007
Coal sales (millions of tonnes)
Owned mines (1) 4.4 4.6
Contract and Genesee mines (2) 4.7 4.8
9.1 9.4
Coal production (mm of tonnes)
Owned mines (1) 4.2 4.7
Contract and Genesee mines (2) 4.6 4.8
8.8 9.5
Realized price ($ per tonne) (3) $ 13.66 $ 12.41

(1) At the owned mines, the price of coal sold is adjusted annually using
inflation-based indices.
(2) At the contract and Genesee mines, the price of coal sold comprises a
direct pass-through of operating costs plus a management fee.
(3) Excludes royalty revenue.

Total sales and production volumes for the first quarter were lower than the same quarter last year. Sales and production volume reductions at the owned mines were largely related to reduced coal demand in Ontario and the planned maintenance of the power plant at Poplar River. Sales volume was higher at the Boundary Dam mine due to increased power plant demand, but production was hampered by poor weather and dragline availability in Saskatchewan.

Production at the contract and Genesee mines was lower than the first quarter of last year due to lower dragline availability to uncover coal in the first quarter of 2008 as compared to the same quarter last year.

Average realized prices per tonne increased by $1.25 to $13.66 for the first quarter of 2008, mainly due to higher cost and capital recoveries at the contract and Genesee mines and higher inflation indexed selling prices at the owned mines.

Outlook (see Forward-looking Statements)

The primary purpose of the Fund is to provide stable cash distributions funded by long-term coal supply contracts and royalty streams. Coal continues to be the main source of fuel for power generation in Western Canada and this trend is likely to continue into the foreseeable future driven by higher industrial demand and the commercialization of coal gasification technologies.

The Fund continues to pursue opportunities to capitalize on coal's economic pricing relative to other energy sources such as oil and natural gas. These initiatives include supplying mining services to Sherritt International Corporation's ("Sherritt") and Ontario Teachers' Pension Plan Board's ("Teachers'") proposed Dodds-Roundhill coal gasification project, manufacturing activated carbon, and pursuing other contract mining opportunities.

The Fund continues to target a long-term payout ratio of 97% of distributable cash from operations and expects to maintain the current level of distributions in 2008. Cost pressures continue, including higher supply-related diesel prices, increasing equipment and repair costs and labour shortages. While the coal supply contracts contain price escalation provisions intended to reflect these increases, they are unlikely to offset them in the short-term. The 2008 forecast payout ratio remains around 100%, although payout ratio since inception to the end of the year should be approximately 97%. Management also continues to review opportunities to mitigate these factors through the reduction of other expenditures, including productive capacity maintenance.

Significant Event

On March 18, 2008, Sherritt announced its intention to make an offer to purchase all of the issued and outstanding trust units of the Fund that it does not already own. Under the initial offer made on March 21, 2008, unitholders of the Fund would receive consideration of $12.25 per unit, consisting of, at the unitholders option, (i) $12.25 in cash, (ii) 0.8033 of a Sherritt common share, or (iii) a combination of cash and Sherritt common shares, subject to a maximum of $225 million cash and an aggregate number of common shares issuable by Sherritt not to exceed approximately 31.4 million. On March 18, 2008, Sherritt and Teachers' entered into an agreement pursuant to which Teachers' agreed to tender to Sherritt's offer its approximately 40.3 million units, representing approximately 41.2% of the outstanding units.

On April 14, 2008, Sherritt and the Fund reached an agreement to increase the consideration being offered by Sherritt for each unit under the offer to, at the election of the unitholders, (i) $12.68 in cash, (ii) 0.8315 of a Sherritt common share, or (iii) a combination of cash and Sherritt common shares, provided that the aggregate cash consideration paid by Sherritt does not exceed approximately $250 million and the aggregate number of Sherritt common shares issuable does not exceed approximately 31.4 million.

The Sherritt offer expired on April 28, 2008. Sherritt has announced its intention to take up the units that have been tendered under the offer.

Royal Utilities Income Fund

The Fund is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Alberta. As at March 31, 2008, Sherritt and Teachers' each directly or indirectly owned approximately 41.2% of the issued and outstanding units of the Fund.

The Fund holds all of the securities of Prairie Mines & Royalty Ltd. (the "Company"), which is the largest thermal coal producer in Canada. The Company owns and operates the Paintearth, Sheerness, Genesee (50% joint venture interest), Poplar River, Boundary Dam and Bienfait mines and operates the Highvale and Whitewood mines under contract. A total of 36.1 million tonnes of coal was produced by the Company in 2007. The Company also holds a portfolio of mineral rights located in Alberta and Saskatchewan on which it earns royalties from the production of coal and potash.

The Fund's approximately 97.8 million trust units trade on the Toronto Stock Exchange under the symbol RU.UN. The Fund's 2008 first quarter Management's Discussion and Analysis and interim consolidated financial statements can be found on the Fund's web site at

Forward-looking Statements

This news release contains certain 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 other things, 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 this news release, the Fund's Management's Discussion and Analysis for the year ended December 31, 2007 and from time to time in the Fund's continuous disclosure documents such as its 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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