Royal Utilities Income Fund

Royal Utilities Income Fund

February 25, 2008 16:45 ET

Royal Utilities Income Fund Reports 2007 Earnings

TORONTO, ONTARIO--(Marketwire - Feb. 25, 2008) - Royal Utilities Income Fund ("the Fund")(TSX:RU.UN) today announced 2007 net earnings of $84.0 million, or $0.86 per basic and fully diluted unit. Net earnings for 2006 of $29.1 million, or $0.44 per basic and fully diluted unit were affected by non-recurring charges for interest expense, foreign exchange gains, debt refinancing costs and discontinued operations, all of which were related to the 2006 restructuring of the Fund. Fourth quarter net earnings were $45.4 million, or $0.46 per basic and fully diluted unit, an increase compared to $11.5 million or $0.12 per basic and fully diluted unit reported in the prior year. Distributions of $23.5 million were declared in the quarter for a full year payout of $93.8 million, or 94% of Distributable Cash from Operations, in 2007.

Financial Highlights (unaudited)(1)
Three months ended Year ended
December 31, December 31,
(millions of Canadian dollars) 2007 2006 2007 2006
Mine-mouth revenues
Owned mines(2) $ 65.4 $ 63.3 $ 254.4 $ 258.1
Contract and Genesee mines(2) 54.5 46.9 210.5 181.6
Royalty revenues
Coal royalties 8.7 8.1 31.7 32.3
Potash royalties 2.6 1.9 8.4 5.4
Total Revenue 131.2 120.2 505.0 477.4
Cost of Sales 89.7 84.6 353.2 325.3
Operating Margin(3) $ 41.5 $ 35.6 $ 151.8 $ 152.1
Net earnings $ 45.4 $ 11.5 $ 84.0 $ 29.1
Cash flow from operating activities 37.7 32.0 119.9 96.2
Productive capacity maintenance(3)(4) 6.6 4.5 20.0 21.3
Distributable cash from
operations(3)(5) 31.1 27.5 99.9 49.5
Distributions declared(5) 23.5 23.2 93.8 47.5

(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 2007 audited
consolidated financial statements.
(2) 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.
(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
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 year ended December 31, 2007 for descriptions of these measures and
for reconciliation to GAAP measures.
(4) Comprises cash capital expenditures and capital lease payments,
excluding interest.
(5) Results from June 27, 2006, date of the initial public offering of units
in the Fund.

Fourth quarter revenue was $131.2 million compared to $120.2 million for the same quarter of 2006, while revenue for the full year 2007 reached a record level of $505.0 million. Both figures reflect increases in the pass-through of higher operating and capital cost recoveries at the contract and Genesee mines. Fourth quarter revenue at the owned mines was $2.1 million higher than the same period in 2006. This increase can be attributed to Paintearth where the power plant did not operate due to a shutdown for most of the prior year period. This increase was partially offset by lower Bienfait sales to Ontario Power Generation due to lower coal demand in Ontario. The lower coal demand in Ontario coupled with unexpected power plant shutdowns at Boundary Dam lowered full year 2007 revenues from the owned mines by $3.7 million to $254.4 million.

Coal royalty revenue for the quarter was $0.6 million higher than the fourth quarter of 2006. The increase was a result of higher royalty volumes at the contract and Genesee mines. Lower coal royalties from the Cheviot mine caused total 2007 coal royalties to decrease $0.6 million to $31.7 million. Strong potash demand and pricing contributed to increased potash royalties which totaled $2.6 million in the fourth quarter of 2007. Potash royalties for the year were also higher than 2006 due to fewer maintenance shut-down activities by potash producers in 2007 as compared to 2006.

Increased volumes at Paintearth and higher coal and potash royalties increased the operating margin in the fourth quarter of 2007 by $5.9 million to $41.5 million relative to the same period in 2006. Operating margin for full year 2007 was $151.8 million, or $0.3 million lower than 2006, which was mainly due to reduced revenues at Bienfait and Boundary Dam.

In the fourth quarter of 2007, cash flow from operating activities was $37.7 million, a $5.7 million increase compared to $32.0 million in the prior year quarter. This increase was a result of the higher operating margin and partially offset by higher general and administrative expenses. Cash flow from operations for full year 2007 increased by $23.7 million to $119.9 million as compared to 2006, largely due to higher interest expense in 2006 reduced after the restructuring of the Fund.

Productive capacity maintenance expenditures, which include cash payments for capitalized fixed assets and principal payments on capital lease obligations, were $6.6 million for the fourth quarter compared to $4.5 million in the fourth quarter of 2006. Capital expenditures in the quarter increased due to higher capital repairs at Genesee and higher lease payments across all of the mines. For the full year 2007, productive capacity maintenance expenditures of $20.0 million were $1.3 million lower than 2006 due to lower infrastructure requirements, and were partially offset by increased capital lease payments for mobile equipment.

Distributions declared to unitholders in the fourth quarter were $23.5 million, for a total of $93.8 million in 2007 as compared to a total of $47.5 million in 2006, declared after June 27, the date of the Fund's initial public offering.

Operating Highlights
Three months ended Year ended
December 31, December 31,
2007 2006 2007 2006
Coal sales (millions of tonnes)
Owned mines(1) 4.4 4.4 17.1 17.2
Contract and Genesee mines(2) 5.0 4.9 18.7 19.3
9.4 9.3 35.8 36.5
Coal production (mm of tonnes)
Owned mines(1) 4.2 4.4 17.0 16.8
Contract and Genesee mines(2) 5.3 5.1 19.1 19.4
9.5 9.5 36.1 36.2
Average realized price ($ per
tonne)(3) $ 12.83 $ 11.86 $ 13.00 $ 12.04

(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.

Overall sales and production volumes for the fourth quarter were comparable to last year. Volumes at the contract and Genesee mines improved in the fourth quarter over the lower volumes recorded earlier in the year which were the result of unexpected power plant shutdowns and an unfavourable timing impact of mining areas with higher strip ratios at Genesee. Coal sales at the owned mines for the fourth quarter of 2007 reflected the full operation of the Paintearth power plant which did not operate for most of the fourth quarter of 2006. This was offset by lower Bienfait sales to Ontario Power Generation due to reduced coal demand in Ontario. Lower fourth quarter production at the owned mines reflected lower Bienfait sales and a drawdown of inventory from earlier in the year at Boundary Dam.

Average realized prices per tonne in the fourth quarter increased by $0.97 from the prior year period to $12.83 and increased by $0.96 to $13.00 for 2007. These increases were primarily due to higher cost and capital recoveries at the contract and Genesee mines and inflation adjustments at certain owned mines in the fourth quarter of 2007.

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.

According to the Alberta Electric System Operator, 3,800 megawatts of additional power generation will be required by 2016 to meet continued growth in Alberta. Saskatchewan is also anticipating a future power supply gap. The Fund is well positioned to take advantage of this increase in demand, through the expansion of existing mines and the start-up of new mines.

The Fund has completed preliminary economic models to supply contract mining services to Sherritt and OTPP's proposed Dodds-Roundhill coal gasification project. If approved by regulators, construction of the plant and coal mine would commence in mid-2010 and would be operational in 2012.

Value-added products made from coal, such as char, have the potential to be an increasingly important source of cash flow for the Fund. In this respect, the Fund is currently assessing the opportunity to construct a plant to manufacture activated carbon. The activated carbon would be used by companies to respond to mercury capture legislation in Alberta and Saskatchewan that will be effective in 2010.

Safety and productivity improvements enhance the returns on the long-term coal contracts and the Fund will continue to concentrate on these areas in the future. Productivity improvements remain focused on maintenance, operations and reclamation activities. The Fund is proud of its safety record and continues to be recognized as an industry leader. This safety record has directly contributed to productivity improvements.

Productive capacity maintenance, comprised of cash funded capital expenditures and principal portions of lease payments and excluding possible growth initiatives described above, is expected to increase by $19.9 million to $39.8 million in 2008 due to scheduled major repairs on draglines and equipment replacement. Capital expenditures for growth initiatives may be funded through cash on hand or the use of available credit facilities.

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. However, high supply-related diesel prices, increasing repair costs and the timing of productive capacity maintenance could impact the 2008 payout ratio. Canada is facing diesel shortages and associated higher diesel costs related to limited refining capacity and not to oil prices, the measure upon which the fuel component of coal prices for the owned mines is indexed. These factors combined could result in significant fluctuations in Distributable Cash from Operations and payout ratios within the year and the 2008 annual payout ratio could exceed 100%. Current expectations are that the cumulative payout ratio since the initial public offering to the end of 2008 will be approximately 97%.

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 December 31, 2007, Sherritt International Corporation ("Sherritt") and Ontario Teachers' Pension Plan Board ("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, 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 2007 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 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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