Royal Utilities Income Fund
TSX : RU.UN

Royal Utilities Income Fund

August 01, 2006 16:32 ET

Royal Utilities Income Fund Reports Second Quarter Results

TORONTO, ONTARIO--(CCNMatthews - Aug. 1, 2006) - Royal Utilities Income Fund (TSX:RU.UN) -

Highlights

- Oversubscribed initial public offering places 17.3 million units on TSX

- Strong royalty revenue growth during quarter

- First distribution declared on July 20, 2006

Royal Utilities Income Fund ("the "Fund") (TSX:RU.UN) today announced second quarter results. These results represent the first public quarterly statements released by the Fund since it began trading on the TSX on June 27, 2006. Net earnings for the quarter were $10.5 million or $0.30 per diluted unit. Strong royalty growth during the quarter and steady mining operations resulted in an operating margin of $34.1 million for the quarter.



Financial Highlights (unaudited)(1)
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Three months Six months
(millions of dollars, except ended June 30 ended June 30
per unit amounts) 2006 2005 2006 2005
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Mine mouth revenues
Owned mines(2) $ 62.0 $ 56.5 $ 128.7 $ 124.3
Contract and Genesee mines(2) 44.8 38.7 89.0 74.3
Royalty revenues
Coal royalties 8.6 3.3 16.6 10.4
Potash royalties 1.4 2.9 2.2 4.7
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Total revenue 116.8 101.4 236.5 213.7
Cost of sales 82.7 68.7 157.8 135.6
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Operating margin(3) $ 34.1 $ 32.7 $ 78.7 $ 78.1
-----------------------------
Adjusted EBITDA(3) $ 30.1 $ 29.1 $ 72.1 $ 71.7
earnings (loss) 10.5 (22.4) 5.9 (26.1)
Cash funded maintenance capital
expenditures(4) $ 7.5 $ 5.3 $ 10.7 $ 7.9
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(1) Revenues, cost of sales, operating margin, adjusted EBITDA and cash funded maintenance capital expenditures 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 and adjusted EBITDA, 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. See Supplementary Financial Information for the Adjusted EBITDA calculation.

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

Total revenues for the quarter were $116.8 million compared with $101.4 million for the prior year quarter. Mine mouth revenues increased by $11.6 million during the quarter primarily due to higher recoverable costs at the contract and Genesee mines, together with inflation-adjustments that increased coal prices at certain owned mines. Coal royalty revenues were $8.6 million in the quarter. This amount included the collection of an additional $1.0 million of royalties related to prior years, following settlement of the royalty rates with a utility customer. Lower potash royalties during the quarter reflected maintenance shut-downs by potash producers while negotiations with Asian customers continue.

The operating margin was $34.1 million for the quarter, approximately $1.4 million higher than the same period last year. The higher coal royalties during the quarter were partly offset by lower potash royalties and repairs required to the Boundary Dam dragline.

Adjusted EBITDA was $30.1 million for the quarter compared with $29.1 million for the prior year period. The $1.4 million increase in the operating margin was somewhat offset by slightly higher general and administrative costs.

Cash funded maintenance capital expenditures in the second quarter of 2006 increased by $2.2 million from the comparable quarter in 2005 to $7.5 million. This increase was due to higher amounts spent on infrastructure for development of new pits at Sheerness and Genesee and higher lease financing payments of $0.7 million.



Operating Highlights

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Three months Six months
ended June 30 ended June 30
2006 2005 2006 2005
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Coal sales (mm of tonnes)
Owned mines(1) 3.8 3.8 8.4 8.6
Contract and Genesee mines(1) 4.7 4.7 9.9 9.6
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8.5 8.5 18.3 18.2
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Coal production (mm of tonnes)
Owned mines(1) 3.6 3.9 8.3 8.7
Contract and Genesee mines(1) 4.7 4.8 10.0 9.6
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8.3 8.7 18.3 18.3
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Realized prices ($ per tonne)(2) $ 12.63 $ 11.14 $ 11.92 $ 10.92
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(1) 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.

(2) Excludes royalty revenue.

Coal sales for the quarter were in line with the prior year quarter, however quarterly production at the owned mines of 3.6 million tonnes was 0.3 million tonnes lower than the prior year quarter. The majority of this production decrease was due to a planned maintenance outage at the Poplar River generating station.

Average realized prices per tonne in the second quarter of 2006 increased by $1.49 from the comparable quarter in 2005 to $12.63 per tonne, largely reflecting the pass-through to revenue of higher tire and fuel costs at the contract and Genesee mines, combined with inflation-adjustments to coal prices at certain owned mines.

Prior to the Initial Public Offering for the Fund, certain mines, undeveloped reserves, technologies under development and other non-core mining assets were disposed of to related parties and the related party debt was restructured. The interim consolidated financial statements summarized herein include the results of the disposed assets up to the disposition date of June 1, 2006 as discontinued operations.

Outlook for 2006

Management is committed to low-cost, reliable and safe mining operations, with a continuous focus on productivity improvements. Two key efficiency initiatives currently being deployed are improving dragline productivity and mobile equipment utilization. Improvements in planning and scheduling of maintenance activities are critical to increasing equipment reliability and reducing operating costs. Scheduled maintenance as a percentage of total maintenance increased from 34% to over 80% over the last three years. The installation of systems designed to monitor the 'health' of mobile equipment is virtually complete. These initiatives are designed to enable the Fund to preserve and increase cash generation and maximize cash available for distribution to unitholders.

Royalty revenues for the year are expected to be approximately $37 million.

General and administrative costs for the balance of 2006 are anticipated to be approximately $6.5 million.

Maintenance capital expenditures for 2006 are currently anticipated to be approximately $28.0 million of which $26.1 million will be cash funded maintenance capital.

Distributions are forecast to be $47.5 million ($0.48557 per unit) for the period June 27, 2006 to December 31, 2006. The first cash distribution of the Fund will occur on August 15, 2006 to unitholders of record as of July 31, 2006.

The union contract for Boundary Dam was renewed in July 2006. Dialogue is currently ongoing with union representatives at the Paintearth and Sheerness mines and negotiations are expected to be concluded in the second half of 2006.

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 37 million tonnes of coal was produced by the Company in 2005. 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 million trust units trade on the Toronto Stock Exchange under the symbol RU.UN.

The Fund's second quarter management's discussion and analysis and interim consolidated financial statements can be found on the Fund's web site at www.royalutilities.com.

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", "will" 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.

Supplementary Financial Information

The table below presents the calculation of adjusted EBITDA. Adjusted EBITDA does not have any standardized meaning prescribed by Canadian generally accepted accounting principles and is, therefore, unlikely to be comparable with similar measures presented by other issuers. Reference should be made to Management's Discussion and Analysis for a reconciliation of adjusted EBITDA to net earnings from continuing operations.



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Three months Six months
ended June 30 ended June 30
(millions of dollars) 2006 2005 2006 2005
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Revenue $ 116.8 $ 101.4 $ 236.5 $ 213.7
Cost of sales 82.7 68.7 157.8 135.6
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Operating margin 34.1 32.7 78.7 78.1
General and administrative costs 4.0 3.6 8.2 6.4
Add back: One time restructuring costs - - (1.6) -
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Adjusted EBITDA $ 30.1 $ 29.1 $ 72.1 $ 71.7
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