Countryside Power Income Fund
TSX : COU.UN

Countryside Power Income Fund

March 27, 2007 06:00 ET

Countryside Power Income Fund Reports Financial Results for Fiscal Year 2006

Strategic Alternatives Review Process Continues

LONDON, ONTARIO--(CCNMatthews - March 27, 2007) - Countryside Power Income Fund (TSX:COU.UN) ("the Fund") today announced its financial results for the fourth quarter and year ended December 31, 2006. All figures are in Canadian dollars unless otherwise stated.

Highlights for Fiscal 2006:

- The Fund made all declared monthly distributions to unitholders and ended year with payout ratio of 87% of total distributable cash flow

- Adjusted EBITDA for 2006, was $30.3 million, an increase of $9.0 million or 42% from the prior year period, due primarily to the economic optimization of the California cogeneration facilities ("Cogen Facilities") and the inclusion of their full year results in 2006

- Organic growth strategy was advanced with the awarding of a 20-year combined heat and power generation contract by the Ontario Power Authority for a new cogeneration facility at the site of the Fund's district energy system in London, Ontario

- On October 31, 2006, the Canadian Federal government announced tax proposals pertaining to the taxation of distributions paid by income trusts and changes to the personal tax treatment of distributions that would commence in the calendar year 2011

- Following the U.S. Energy Biogas Corp.'s ("USEB") Chapter 11 filing, the Fund entered into a settlement agreement with USEB in January 2007 that resolved all outstanding claims between the parties, including the USEB loan, which provided the Fund with an allowed secured claim of US$99 million (approximately $115 million at Cdn/US dollar exchange rate of 1.17)

- The U.S. Bankruptcy Court approved the USEB settlement in principle on February 1, 2007 and it became final and non-appealable on February, 26 2007. To date, the Fund has received approximately US$34 million from USEB in the form of both principal and interest payments pursuant to the court-approved settlement agreement

- The Fund's board of trustees has initiated a strategic review process in response to both the expected full monetization of the Fund's allowed secured claim in USEB and the federal government's proposed legislation to tax income trusts with a view to maximizing unitholder value

"We had a strong year of operating results that was overshadowed in the final months by two significant events - the Canadian government's trust tax proposal and USEB's filing for reorganization," said Goran Mornhed, President and Chief Executive Officer of Countryside Ventures LLC (the "Manager"). "The substantial increase in distributable cash flow was driven primarily by the performance of the cogen facilities and validates our successful economic optimization plan for these assets. In light of the successful settlement agreement with USEB and potential tax impact on the income trust market, we must now decide on a strategic path for the Fund that will serve the best interests of unitholders" said Mr. Mornhed.

Results for Fiscal 2006

The Fund's total revenue in the twelve months ended December 31, 2006, was $92.5 million, an increase of $25.3 million compared with the same period last year. The majority of this increase resulted from inclusion of the Cogen Facilities' results for the full fiscal year 2006.

Adjusted EBITDA for 2006, was $30.3 million, an increase of $9.0 million from the prior year period, due primarily to the addition and economic optimization of the Cogen Facilities. When excluding the non-cash general and administrative expense of the Manager's Ripon-related subordinated interest in the third quarter of 2005, the Adjusted EBITDA, reflecting solely the operating performance of the Fund's energy portfolio, increased by 24% or $5.8 million. The increase in margins at the Cogen Facilities was offset by lower margins at the district energy systems due to warmer weather during the primary heating season and higher planned maintenance costs, as well as higher associated general and administrative expenses.

Net income for 2006 was $12.8 million, or $0.64 per unit, compared with $11.2 million or $0.72 per unit in the comparable period of 2005. When excluding the non-cash general and administrative expense of the Manager's Ripon-related subordinated interest in the third quarter of 2005, net income decreased by $0.21 per trust unit as a result of an increase in interest expense and non-cash losses on derivative instruments and foreign exchange, offset by an increase in the tax recovery.

In the twelve-month period ended December 31, 2006, distributable cash of $24.0 million increased by 20% or $4.0 million from the prior year period. On a weighted-average per-unit basis, distributable cash of $1.20 per trust unit decreased 7% per trust unit from the prior year comparative period. The decrease in per unit distributable cash flow was due to the greater number of weighted average units outstanding at the end of the 2006 primarily resulting from the issuance of new trust units in November 2005 to refinance bank debt related to the Ripon acquisition and to de-lever the Fund's balance sheet in accordance with terms of the Fund's credit agreement with a syndicate of lenders. Distributions to Unitholders declared for 2006 totaled $1.035 per unit. The Fund's payout ratio was 87% for the twelve-month period ended December 31, 2006.

Comparisons of the Fund's overall results in the twelve-month period ended December 31 are significantly influenced by the acquisition of the Cogen Facilities at the end of the second quarter of 2005 in that the results of the Cogen Facilities were not included in the Fund's results for the first six months of 2005.



Consolidated Statements of Income and Deficit

Three Months Three Months Year Year
ended ended ended ended
(in thousands of Canadian Dec. 31, Dec. 31, Dec. 31, Dec. 31,
dollars, except per 2006 2005 2006 2005
trust unit amounts) (as restated)
---------------------------------------------------------------------------
$ $ $ $
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REVENUES
Energy sales 19,042 20,274 78,071 52,823
Fuel and other fees 432 422 1,991 2,252
Interest income on loans
to U.S. Energy Biogas Corp. 2,995 2,868 11,517 11,546
Income from U.S.
Energy Biogas Corp.
royalty interest - 133 350 369
Other income 202 145 528 171
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22,672 23,842 92,457 67,161
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EXPENSES
Fuel, operating and
maintenance 15,136 14,391 53,017 34,898
General and administration 2,398 2,965 9,150 10,949
Amortization 3,013 3,097 11,948 8,061
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20,547 20,453 74,115 53,908
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Operating income 2,124 3,389 18,342 13,253
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Interest expense 1,657 2,237 7,104 5,578
Loss (gain) on derivative
instruments 287 (784) 148 (2,871)
Foreign exchange gain 2,474 (750) (373) (750)
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4,418 703 6,879 1,957
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Income before (recovery
of) provision for
income taxes (2,294) 2,686 11,463 11,296
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(Recovery of) provision
for income taxes
Current (1,267) (1,077) 438 22
Future (2,651) (276) (1,779) 30
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(3,918) (1,353) (1,341) 52
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Net income for the period 1,624 4,039 12,804 11,244

Deficit, beginning of
year as previously
reported (10,756) (7,862) (6,580) (3,596)
Correction of prior year (1,917) - (1,917) -
Deficit, as restated (12,673) - (8,497) -
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Distributions declared to
Unitholders (5,382) (4,674) (20,738) (16,145)
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Deficit, end of year (16,431) (8,497) (16,431) (8,497)
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Net income per trust unit
- basic 0.08 0.23 0.64 0.72
Net income per trust unit
- diluted 0.09 0.22 0.64 0.72
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(1) The subordinated interest expense for 2005 includes a non-cash expense
of $3,196 reflecting the estimated value of the Manager's subordinated
interest at such time.


Results for Fourth Quarter 2006

The Fund's total revenue for the three months ended December 31, 2006, was $22.7 million, a decrease of $1.2 million compared with the same period last year.

Adjusted EBITDA in the three-months ended December 31, 2006, was $5.1 million, a decrease of 11% from the prior year period, due primarily to the unfavorable foreign exchange impact on results from the Cogen Facilities, coupled with reduced margins from lower natural gas and associated electric energy pricing, as well as higher non-fuel costs primarily driven by a hot section overhaul at the Ripon facility. The lower results were also due to lower margins from the district energy business due to moderate weather during the primary heating season along with higher operating costs.

Net income in the three-month period ended December 31, 2006, was $1.6 million or $0.08 per unit, compared with $4.0 million or $0.23 per unit in the comparable period of 2005.

In the three-month period ended December 31, 2006, the Fund generated distributable cash of $5.0 million which was lower than the prior year comparative period by $1.2 million. The decrease in distributable cash was primarily a result of the factors related to the decrease in Adjusted EBITDA, coupled with a reduction in the receipt of principal on the USEB Loans. On a per-unit basis, distributable cash of $0.241 per trust unit decreased $0.12 per trust unit from the prior year comparative period. Distributions to unitholders declared for the quarter were $0.259 per unit. The Fund's payout ratio was 108% in the three-month period ended December 31, 2006 due to the seasonality of its cash flows and non-payment of scheduled principal payments from USEB.

Accounting for Manager's Subordinated Interest

In March 2007, the board of trustees reviewed the initial accounting for the granting of the Manager's subordinated interest in Ripon Power LLC and determined that compensation expense consisting of the fair value of the subordinate interest at the time of the grant was required to be recorded in the third quarter of 2005. Accordingly, in the fiscal year ended 2005, general and administrative expenses have been increased by $3.2 million, offset by a decrease in the provision for future income taxes and net income of $1.3 million and $1.9 million, respectively. As a result of the Manager's option to exchange its subordinated interest for a variable number of units of the Fund, the subordinated interest has been classified as a long-term liability totaling approximately $3 million in the Fund's consolidated balance sheet in 2005. However, the associated cash flow and value of the subordinated interest was not reflected in the purchase price paid by the Fund for the Ripon cogeneration assets.

In the twelve-month period ended 2006, the liability associated with the Manager's subordinated interest in the amount of $3 million has now been included in current liabilities in light of the Fund's agreement to purchase 85% of the Manager's subordinated interest in June 2007. The resulting prior period adjustment did not have any impact on distributable cash flow in fiscal 2005 as the associated expense was a non-cash item.

Distributable Cash Summary

The Fund pays monthly cash distributions to unitholders on or about the last business day of each month to unitholders of record on the last business day of the prior month.



Three-month Three-month
period ended period ended Year ended Year ended
December 31, December 31, December 31, December 31,
2006 2005 2006 2005
(as restated)
$ $ $ $
---------------------------------------------------------------------------
Cash provided by
operating activities 3,903 3,145 20,430 16,772
Add: Changes in
working capital 876 2,205 2,159 2,162
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Funds from operations
before working capital
changes 4,779 5,350 22,589 18,934
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Add:
Receipt of principal
on USEB loans 175 476 1,684 1,828
Transaction costs
expensed(1) 357 642 357 1,080

Deduct:
Principal repayments on
Cogen Facilities'
project-related debt - - - 957
Purchases of capital
assets for regular
operations(2) 310 128 670 504
Royalty Interest(3) - 133 - 369

Distributable cash
for the period 5,001 6,207 23,960 20,012
Distributions declared
for the period 5,382 4,674 20,738 16,145
Weighted Average number
of trust units
outstanding
- basic (thousands
of trust units) 20,730,576 17,316,670 19,968,697 15,513,147
- diluted (thousands
of trust units) 26,461,700 23,338,532 25,647,228 21,535,009
Distributable cash per
trust unit for the
period - basic 0.241 0.358 1.200 1.290
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Distributions declared
per trust unit for
the period (whole
dollars) 0.259 0.271 1.035 1.041
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(1) During 2005, transaction costs related to the Ripon acquisition
transaction and during 2006, related to the London Cogen project
acquisition were paid to the Manager and advisors out of financing proceeds
and were not operational in nature
(2) Purchases of capital assets for regular operations are non-expansionary
capital expenditures. Total capital expenditures were as follows: in the
three-month period ended December 31, 2006 - $1,613, for the three-month
period ended December 31, 2005 - $65, in the twelve-month period ended
December 31, 2006 - $3,399 and in the twelve-month period ended December
31, 2005 - $855.
(3) As the timing of the receipt of the royalty interest income earned in a
period is dependent upon the timing and extent of equity distributions made
by USEB to its shareholders', royalty interest income will only be included
in the calculation of distributable cash when payments related to the
royalty interest are received from USEB.


Outlook

USEB Settlement Agreement: Pursuant to the USEB settlement agreement the Fund has received approximately US$33 million in payments against the allowed secured claim and in turn has made a $35 million mandatory prepayment in accordance with the terms of its credit facility provided by a syndicate of lenders. The Fund currently has a remaining balance of approximately US$66 million (or $78 million) that matures on May 31, 2007. USEB is pursuing an exit financing from a third party lender which is expected to fully repay the Fund's remaining allowed secured claim. The Fund is exposed to both credit and market risk with respect to USEB and the successful efforts to complete an exit financing, respectively. On March 22, 2007, USEB announced that it has reached an agreement in principle with the State of Illinois and the Illinois Commerce Commission (collectively, the "ICC") on eliminating a significant balance sheet liability for USEB and resolving the principal remaining outstanding issue in its Chapter 11 filing. The ICC agreement is subject to court approval which the ICC and USEB expect to occur next month. As a result of the USEB agreement with the ICC along with its court-approved settlement agreement with the Fund, USEB indicated that it expects to file shortly a plan of reorganization with the Court that should enable it to exit Chapter 11 in the first half of 2007.

Fund Credit Facility: The USEB bankruptcy filing and its related payment default caused a cross default under the Fund's credit facility. The lenders under the credit facility granted two waivers of the cross-default including most recently a waiver granted on January 25, 2007, which among other things (i) waived the cross-default provisions under the USEB loan agreement until May 31, 2007, (ii) reinstated the credit facility's credit commitment (subject to compliance with financial covenants), (iii) permitted unitholder distributions and permitted investments and capital expenditures (including the London cogeneration facility), (iv) approved the USEB settlement agreement, (v) required the Fund to provide additional collateral relating to Ripon-related assets and (vi) for the Manager to waive certain rights associated with its subordinated interest in Ripon.

Following the Fund's receipt of the US$30 million installment under the USEB settlement agreement and subsequent mandatory prepayment of $35 million on March 14, 2007 in accordance with terms of its bank credit facility, the revolver commitment portion of the credit facility was permanently reduced to approximately $43 million. However, the Fund continues to have ample liquidity with approximately $30 million of unutilized credit capacity and $8 million of cash on hand to fund the construction of London cogeneration facility and meet ongoing liquidity needs. As part of the strategic review process, the Fund is in discussion with it lenders on a long-term financing arrangement that reflects the expected full monetization of the USEB allowed secured claim under the settlement agreement and provides the Fund with sufficient credit capacity to meet its existing growth commitments.

Operations and Growth: The ongoing operations of the District Energy Systems, combined with both the completion of the 17 MW cogeneration facility at the London system in mid-2008, and the addition of peak boiler capacity in PEI in 2007, is expected to result in expanded operations and provide opportunities for additional customer growth beyond customers already contracted for connection in the next few years.

Major maintenance is planned for the Cogen Facilities for the 2008-2009 periods. However, the Fund has developed advanced plans for the re-powering of the facilities with more efficient combustion turbines, which would replace the existing turbines and eliminate the need for major overhaul in the next several years. The re-powering of the Cogen Facilities would also provide for improved efficiency and additional energy production at the facilities. Subject to, among other things, normal course permitting and finalizing documentation relating to additional off-take arrangements as well as construction contracts, the re-powering of the Cogen Facilities would be expected to reach commercial operation by the end of 2008.

Strategic Review Update: As previously disclosed, the Fund has retained Lehman Brothers, Inc. to assist and advise the Fund in identifying and considering the Fund's strategic alternatives with a view toward the best interests of unitholders. The Fund has also considered a range of value enhancement alternatives, including a review of the Fund's prospects going forward as an income trust, a sale of the Fund (or its segments), a conversion to a corporate structure and/or a recapitalization. As part of the strategic review process, the Fund is developing plans to remain a "stand alone" entity while it seeks to determine the Fund's value through a potential sale of the trust to interested buyers. To date, the board of trustees is encouraged by the results of the sale process and will continue to weigh those plans against a stand alone strategy with a view to maximizing unitholder value. A stand alone strategy may comprise several options, including a continuation of operations under the existing trust structure and the Fund's use of proceeds from the expected monetization of the USEB allowed secured claim to (i) fund (with the incurrence of additional leverage) the re-powering of the Cogen Facilities and the new 17 megawatt London cogeneration facility and/or (ii) a recapitalization which may involve a re-leveraging of the Fund with a return of capital to unitholders through a special distribution or unit buy back. Under a potential stand alone plan, any new growth-related investment or recapitalization strategy would be designed to provide accretive distributable cash flow to unitholders. However, the Fund currently does not intend to reinvest the proceeds from any future monetization of the USEB allowed secured claim until the strategic review process has been completed. The board of trustees of the Fund expects the strategic review process to be completed by the end of June 2007.

Conference Call and Webcast

Management will host a conference call at 10 a.m. (ET) on Tuesday, March 27, 2007, to discuss the results. Please call 416-644-3417 or 1-800-733-7560 to access the call. The call will be webcast live and archived on the Countryside web site at www.countrysidepowerfund.com. Countryside's financial statements for the period and management's discussion and analysis are available at www.countrysidepowerfund.com.

(a) Non-GAAP Measures

Distributable cash does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. Since the Fund and its subsidiaries distribute substantially all of their available cash on an on-going basis, management believes that distributable cash is an important measure in evaluating the performance of the Fund and determining whether to invest in units of the Fund. For a reconciliation of cash provided by operating activities from the Consolidated Statements of Cash Flows to distributable cash please see the Fund's MD&A for the period ended December 31, 2006.

Adjusted earnings before interest, income taxes, unrealized (gains) losses on derivative instruments, foreign exchange gains and losses, and depreciation and amortization ("Adjusted EBITDA") is not a measure under Canadian GAAP and there is no standardized measure of Adjusted EBITDA and therefore, it may not be comparable to similar measures presented by other funds or companies. Management uses Adjusted EBITDA as a key measure of operating performance, and thus has framed a portion of the MD&A comments accordingly. Adjusted EBITDA can be calculated from the Fund's GAAP statements as operating income, plus depreciation and amortization.

Forward-Looking Statements

This press release may contain forward-looking statements relating to expected future events and financial and operating results of the Fund that involve risks and uncertainties. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including market and general economic conditions and the risks and uncertainties detailed from time to time in the Fund's prospectus filed with the Canadian securities regulatory authorities. Due to the potential impact of these factors, the Fund disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law.

About Countryside Power Income Fund

Countryside Power Income Fund has investments in two district energy systems in Canada, with a combined thermal and electric generation capacity of approximately 122 megawatts, and two gas-fired cogeneration plants in California with a combined power generation capacity of 94 megawatts. More information about the Fund is available at www.countrysidepowerfund.com.

Contact Information