Royal Utilities Income Fund

Royal Utilities Income Fund

February 23, 2007 08:30 ET

Royal Utilities Income Fund Reports 2006 Earnings

TORONTO, ONTARIO--(CCNMatthews - Feb. 23, 2007) - Royal Utilities Income Fund (TSX:RU.UN) -


- Year-over-year results reflect consistent production and healthy customer relationships

- Strong cash generated; distributions increased by 1% in January 2007

- Highvale and Whitewood contract extended to the end of 2009

Financial Highlights (unaudited) (1)

Three months ended Year ended
December 31, December 31,
2006 2005 2006 2005
Mine-mouth revenues
Owned Mines (2) $ 63.3 $ 61.4 $ 258.1 $ 247.4
Contract and Genesee Mines (2) 46.9 44.1 181.6 157.2
Royalty revenues
Coal Royalties 8.1 7.3 32.3 25.6
Potash Royalties 1.9 2.3 5.4 9.0
Total Revenue 120.2 115.1 477.4 439.2
Cost of Sales 84.6 74.8 325.3 282.1
Operating Margin (3) $ 35.6 $ 40.3 $ 152.1 $ 157.1

EBITDA (3) $ 32.7 $ 35.6 $ 156.3 $ 157.3
Net earnings (loss) 11.5 (7.1) 29.1 (20.6)
Cash flow from operating
activities from continuing
operations 32.0 12.8 96.2 57.6
Productive capacity maintenance
(3) (4) 4.5 5.6 21.3 18.0
Distributable cash from operations
(3) (5) 27.5 49.5
Distributions declared (5) 23.2 47.5

(1) Revenues, cost of sales, operating margin, productive capacity
maintenance, and distributable cash from operations all relate to
continuing operations.
(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, EBITDA, productive capacity
maintenance and distributable cash from operations which
are non-GAAP measures, 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 and are, therefore, unlikely to
be comparable with similar measures presented by other issuers.
(4) Comprises cash capital expenditures and capital lease payments,
excluding interest, to sustain operations.
(5) For the period June 27, 2006 to December 31, 2006.

Royal Utilities Income Fund ("the Fund") today announced 2006 earnings of $29.1 million, or $0.44 per basic and fully diluted unit, for the year ended December 31, 2006, compared to a loss of $20.6 million in 2005. Net earnings for the fourth quarter were $11.5 million, up from a loss of $7.1 million from the same period the previous year.

Total revenues for the fourth quarter were $120.2 million compared with $115.1 million for the prior year's comparable period. Revenues increased by $38.2 million to $477.4 million versus the prior year. Both increases reflect the pass-through of higher operating costs at the contract and Genesee mines, together with inflation adjustments that increased coal sale prices at certain owned mines. Coal royalties for the quarter and the full year were higher as a result of price escalations. Potash royalties began to recover in the fourth quarter after maintenance shutdowns by producers ended in August, however, overall volumes were still lower than the prior year.

Operating margin, excluding royalties, for the fourth quarter was $25.6 million and $114.4 million for the full year. Margins were impacted by reduced sales at Bienfait and the timing of planned costs for major component repairs and replacements. This impact includes planned repairs at Sheerness and Boundary Dam and unplanned repairs at Boundary Dam during the year. Including royalties, the operating margin for the fourth quarter was $35.6 million, which is in line with results from the second and third quarters. Operating margin was also impacted in the current quarter by a planned maintenance outage at the generating station that is serviced by the Paintearth mine. The operating margin including royalties for the year was $152.1 million or 32%, down from 36% in the prior year due mainly to repair costs.

EBITDA was $32.7 million for the quarter and $156.3 million for the year, respectively. The combination of lower foreign exchange losses, due to the U.S. dollar senior notes that were redeemed prior to the Initial Public Offering, and lower other expenses compared to the prior year period offset the margin decline in the quarter. Similarly, there was a foreign exchange gain in the early part of 2006 that minimized the impact of additional repair costs on EBITDA for the year.

Cash flow from continuing operations improved in the fourth quarter and for the year by $19.2 million and $38.6 million, respectively, compared to these periods from the prior year. This improvement is mainly the result of reduced interest expense from the restructuring earlier in the year.

Productive capacity maintenance expenditures for the current quarter decreased by $1.1 million to $4.5 million from the comparable quarter in 2005. This cost is comprised of cash payments for capitalized fixed assets and principal payments on capital-lease obligations and replaces the previously reported cash-funded capital expenditures metric. In 2006, productive capacity maintenance capital expenditures were $21.3 million, compared to $18.0 million in the prior year. This figure increased as a result of additional capital leases entered into in earlier periods.

Distributions since the Fund went public on June 27, 2006, remained steady at $7.8 million ($0.07917 per unit) per month which resulted in a 96% payout ratio for the period. Given strong cash flow and distributable cash from operations, monthly distributions increased by 1% commencing with the January 2007 distribution.

Operating Highlights

Three months ended Year ended
December 31, December 31,
2006 2005 2006 2005
Coal sales (mm of tonnes)
Owned mines (1) 4.4 4.7 17.2 17.6
Contract and Genesee mines (2) 4.9 4.8 19.3 19.1
9.3 9.5 36.5 36.7

Coal production (mm of tonnes)
Owned mines (1) 4.4 4.8 16.8 17.9
Contract and Genesee mines (2) 5.1 4.9 19.4 19.2
9.5 9.7 36.2 37.1

Realized prices ($ per tonne) (3) $ 11.86 $ 11.18 $ 12.04 $ 11.03

(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.

Coal sales and production for the quarter and the year were both down compared with the prior year. Reductions at the owned mines for the quarter were attributable to the planned maintenance in November at the generating station adjacent to Paintearth. Production declines for the year were mainly the result of a generating unit outage at Poplar River that occurred in the second quarter and lasted longer than expected. Sales and production at the contract and Genesee mines were both consistent with prior year periods.

The average realized price per tonne in the fourth quarter of 2006 increased by $0.68 to $11.86 per tonne from the comparable quarter in 2005 and by $1.01 to $12.04 per tonne from the prior year. These increases are primarily due to higher cost recoveries at the contract and Genesee mines. The incremental costs experienced at these mines were mainly in tire and fuel expenses due to increased prices for these commodities. These increases are also the result of inflation adjustments to coal prices at certain owned mines.

On December 14, 2006, the Fund reached an agreement with TransAlta Utilities Corporation to extend, under similar terms, the Highvale and Whitewood mining contract through to the end of 2009. The Highvale and Whitewood contract mines currently supply thermal coal to t he Sundance, Keephills and Wabamun generating stations owned by TransAlta Utilities Corporation. Highvale's annual production capacity is 13.0 million tonnes and Whitewood's is 1.4 million tonnes.

Outlook for 2007

The expectation for 2007 is to build on the success of the Fund in 2006. Coal and royalty revenue and operating margins will experience inflationary growth in 2007.

Maintenance capital expenditures are expected to be approximately $36.8 million for the year, of which $23.0 million will be financed through capital leases. Productive capacity maintenance expenditures are comprised of cash payments for sustaining capital and principal payments on capital lease obligations. Productive capacity maintenance is anticipated to be $26.2 million in 2007.

Distributions are forecast to be $93.8 million (or $0.07997 per unit per month) for 2007. This represents a 1% increase from $0.07917 per unit at December 31, 2006.

Potential growth projects for the Fund are being evaluated or are underway. In addition to the contract extension at Highvale and Whitewood, development work at Boundary Dam has been initiated for SaskPower's proposed clean coal unit. Given the low sulphur content of our coal, Royal Utilities is well positioned to participate in this proposed clean coal unit or other similar ventures. The Fund is also working with SaskPower to address pending environmental legislation requirements for the capture of mercury from power plant emissions. Royal Utilities is reviewing the potential of providing mining services for the Dodds-Roundhill project which would provide coal for the proposed coal gasification plant under consideration by Sherritt International Corporation and Ontario Teachers' Pension Plan.

Royal Utilities Income Fund

The Fund is an unincorporated, open-ended, limited purpose trust established under the laws of Alberta. As of July 19, 2006, subsidiaries of Sherritt International Corporation and Ontario Teachers' Pension Plan each own 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. 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 on which it earns 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 97.8 million trust units trade on the Toronto Stock Exchange under the symbol RU.UN.

The Fund's annual 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 each of the "Outlook" sections of this news release including those with respect to expectations concerning assets, prices, foreign exchange rates, earnings, production, market conditions, capital expenditures, commodity demand, risks, availability of regulatory approvals, 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 15, 2006, and from time to time in the Fund's continuous disclosure documents such as its annual report, annual information form and management information circular.

The Fund does not intend, and does not assume any obligations, to update these forward-looking statements.

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