Royal Utilities Income Fund
TSX : RU.UN

Royal Utilities Income Fund

October 30, 2006 17:38 ET

Royal Utilities Income Fund Reports Third Quarter Results

TORONTO, ONTARIO--(CCNMatthews - Oct. 30, 2006) - Royal Utilities Income Fund (the "Fund")(TSX:RU.UN) today announced third quarter results. Net earnings for the quarter were $11.6 million or $0.12 per basic and diluted unit.



Financial Highlights (unaudited)(1)
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Three months Nine months
ended ended
September 30 September 30
2006 2005 2006 2005
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Mine-mouth revenues
Owned Mines (2) $ 66.2 $ 61.7 $ 194.8 $ 186.0
Contract and Genesee Mines (2) 45.6 38.8 134.7 113.1
Royalty revenues
Coal Royalties 7.6 7.9 24.2 18.3
Potash Royalties 1.3 2.0 3.5 6.7
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Total Revenue 120.7 110.4 357.2 324.1
Cost of Sales 82.9 71.7 240.7 207.3
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Operating Margin (3) $ 37.8 $ 38.7 $ 116.5 $ 116.8
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Adjusted EBITDA (3) $ 36.4 $ 36.1 $ 108.4 $ 107.9
Net earnings (loss) 11.6 12.6 17.5 (13.5)
Cash funded maintenance capital
expenditures (3)(4) 7.4 4.4 18.1 12.3
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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, adjusted EBITDA and cash funded maintenance capital 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 third quarter were $120.7 million compared with $110.4 million for the prior year third quarter. The increase in mine-mouth revenues was 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 royalties in the quarter were slightly lower than 2005, however, overall substantially higher on a year-to-date basis. Price negotiations between potash producers and Asian customers that commenced in the beginning of 2006 concluded in August. During negotiations, maintenance shut-downs by potash producers occurred that resulted in lower production and royalties.

Operating margin, excluding royalties, for the third quarter was $28.9 million or 26%. This represented an increase of $4.8 million or 20% from the second quarter due to timing on planned dragline repairs. The operating margin, including royalties, for the third quarter was $37.8 million, an increase of $3.7 million from the second quarter or 11%.

Adjusted EBITDA for the quarter of $36.4 million was $0.3 million higher than the prior year period. Reductions in general and administrative costs more than offset the lower potash royalty revenues.

Cash funded maintenance capital expenditures for the third quarter of 2006 increased by $3.0 million from the comparable quarter in 2005 to $7.4 million. Higher infrastructure costs to develop new mine areas at certain mines, and higher capital lease payments led to the increase.



Operating Highlights
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Three months Nine months
ended ended
September 30 September 30
2006 2005 2006 2005
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Coal sales (mm of tonnes)
Owned mines (1) 4.5 4.3 12.8 12.9
Contract and Genesee mines (2) 4.5 4.7 14.4 14.3
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9.0 9.0 27.2 27.2
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Coal production (mm of tonnes)
Owned mines (1) 4.1 4.4 12.4 13.1
Contract and Genesee mines (2) 4.3 4.7 14.3 14.3
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8.4 9.1 26.7 27.4
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Realized prices ($ per tonne) (3) $ 12.45 $ 11.10 $ 12.10 $ 10.98
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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.

(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 for the quarter were largely comparable with the prior year quarter. Coal production at the owned mines declined mainly due to the extended plant outage at Poplar River. Production at Poplar River returned to expected levels in early September. Planned maintenance shutdowns at the Highvale power plants led to lower production at contract mines in the quarter. Given the direct pass-through of operating costs at the contract operations, this planned production decrease had little impact on the margin in the quarter.

The average realized price per tonne in the third quarter of 2006 increased by $1.35 from the comparable quarter in 2005 to $12.45 per tonne. This increase largely reflected the pass-through to revenue of higher tire and fuel costs at the contract and Genesee mines, and inflation-adjustments to coal prices at certain owned mines.

In August, the union contract that covers the Paintearth and Sheerness mines was ratified and renewed for a three year period.

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 improvements to dragline productivity and mobile equipment utilization. Improvements in planning and scheduling of maintenance activities are critical to increasing equipment reliability and reducing operating costs. Unscheduled maintenance hours as a percentage of total maintenance hours worked has been reduced from 66% to less than 20% over the past three years. The installation of systems designed to monitor the 'health' of mobile equipment is virtually complete. In addition, changes in operating and maintenance practices have been implemented to extend tire life. These practices have increased the tire life on new truck tires by 20% over the past year. These initiatives are designed to enable the Fund to preserve and increase cash generation and maximize cash available for distribution to unitholders.

A revision to the long-term mine plan at a contract mine will impact the timing of royalty revenue. This revision will result in mining in a lower coal royalty ratio area in the near term, therefore, royalty revenue guidance for 2006 is now expected to be approximately $36.0 million. This change in royalty revenue will not impact cash distribution guidance for the year.

The reorganization of the Fund prior to the Initial Public Offering included plans to reduce the corporate overhead. Progress to date has been better than planned. General and administrative costs for the year are now expected to be approximately $12.5 million which is approximately $2.0 million lower than previously estimated.

Maintenance capital expenditures are now expected to be approximately $30 million for the year. Of the $30 million, $24.4 million is expected to be cash funded maintenance capital. The cash funded maintenance capital is $1.7million lower than previously projected due to lower than expected costs for infrastructure capital. Continued diligence on planned maintenance practices has extended the useful life of certain capital equipment.

Distributions are forecast to be $47.5 million ($0.48557 per unit) for the period June 27, 2006 to December 31, 2006, in line with expectations. Monthly cash distributions for the remainder of 2006 are expected to be $7.7 million or $0.07917 per unit.

The Fund intends to file a preliminary short form base shelf prospectus with the Canadian securities regulators for the offering of up to $500 million of debt securities, subscription receipts and/or units.

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 97.8 million trust units trade on the Toronto Stock Exchange under the symbol RU.UN.

The Fund's third 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 Nine months
ended ended
September 30 September 30
(millions of dollars) 2006 2005 2006 2005
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Revenue $ 120.7 $ 110.4 $ 357.2 $ 324.1
Cost of Sales 82.9 71.7 240.7 207.3
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Operating Margin 37.8 38.7 116.5 116.8
General and administrative costs 1.4 2.6 9.7 8.9
Add back: One time restructuring costs - - (1.6) -
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Adjusted EBITDA $ 36.4 $ 36.1 $ 108.4 $ 107.9
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