Heating Oil Partners Income Fund
TSX : HIF.UN

Heating Oil Partners Income Fund

May 12, 2005 17:31 ET

Heating Oil Partners Income Fund Releases March 31, 2005 Financial Results

TORONTO, ONTARIO--(CCNMatthews - May 12, 2005) -

Not for distribution to U.S. newswire services or for dissemination in the US.

Heating Oil Partners Income Fund (the "Fund") (TSX:HIF.UN) announced its results for the three and six month periods ended March 31, 2005. The Fund currently has an 88.1% indirect ownership interest in Heating Oil Partners, L.P. ("HOP" or the "Company"), one of the leading residential distributors of heating oil in the northeastern United States.

For the three months ended March 31, 2005 (the second quarter of Fiscal 2005) the Fund reported net income of CA$5.9 million compared to net income of CA$3.0 million during the three month period ended March 31, 2004. Included in the Fund's net income for the second quarter is CA$2.1 million of unrealized gains on derivative instruments used to hedge product purchases. For the six months ended March 31, 2005, the Fund reported a net loss of CA$2.6 million compared to net income of CA$4.1 million for the same period the previous year. Included in the Fund's net loss for the six months ended March 31, 2005, are CA$9.3 million of unrealized losses, consisting primarily of CA$6.1 million of unrealized losses related to derivative instruments used to hedge product purchases. The hedging contracts HOP uses to procure its liquid petroleum product are recognized separately on the balance sheet and statement of operations, and measured at fair market value. From period to period, changes in the fair market value of these derivative instruments are recorded as unrealized gains and losses. When these hedging contracts are sold or closed, they are recorded as recognized gains and losses.

The decline in net income was driven by two primary factors: residential margin erosion and a decrease in residential gallons. The Company experienced per gallon residential gross margin erosion of US$0.0511 and US$0.0349 or US$2.7 million and US$2.8 million in the three and six month periods ended March 31, 2005, respectively, as a result of price sensitive customers seeking lower fuel oil costs during periods of elevated product costs. In an effort to retain these customers and minimize overall customer attrition, the Company offered discounts to certain of these price sensitive customers, which impacted overall gross margins.

Residential gallons also decreased as a result of three factors. First, in the fiscal quarter of Fiscal 2005, HOP launched an operational initiative to reduce delivery expenses and improve productivity. This initiative entailed HOP delaying scheduled deliveries of heating oil to residential customers to raise the average number of gallons delivered per customer per delivery. The anticipated net effect of this initiative is to decrease the number of deliveries per residential customer, while still delivering approximately the same number of gallons, thus decreasing delivery expenses in both actual dollars and on a per gallon basis. As a result of this initiative, the Company estimates that it will deliver approximately 6.5 million fewer gallons to residential customers in Fiscal 2005 compared to what was delivered in Fiscal 2004. At an average gross margin of US$0.5444 per gallon experienced during the period, the Company estimates this delivery initiative had a one-time negative affect on gross margins of approximately US$3.5 million that was recorded during the six month period ended March 31, 2005.

Second, during Fiscal 2004, the Company experienced net attrition of approximately 4.2%, which has resulted in a fewer number of residential gallons delivered in Fiscal 2005 as compared to Fiscal 2004. Net residential customer losses for the six month periods ended March 31, 2005 and 2004 were approximately 215 and 581 customers, respectively, equating to an annualized rate of attrition of approximately 0.2% and 0.5% for the six month periods ended March 31, 2005 and 2004, respectively. The impact of the attrition experienced in Fiscal 2004 is estimated by the Company to have resulted in approximately 3.4 million fewer gallons delivered during the six month period ended March 31, 2005. Assuming an average gross margin of US$0.5444 per gallon, the Company's gross margins would have been greater by approximately US$1.8 million if this attrition had not occurred. Customer attrition was driven by price sensitive customers seeking lower cost fuel oil providers as well as ordinary customer service and credit related issues. The Company experienced approximately 3.6% net attrition over the twelve month period ended March 31, 2005.

Lastly, the Company estimates that due to conservation efforts employed by residential customers in certain markets during the 2004-2005 prime heating season, approximately 0.8 million fewer gallons were delivered in the six month period ended March 31, 2005 compared to the same period in the prior year. The Company estimates gross margins for the six month period ended March 31, 2005 were negatively affected by approximately US$0.4 million due to conservation. The Company believes that this conservation was driven by the historically high oil prices experienced during this period.

HOP's EBITDA for the second quarter of Fiscal 2005 was US$12.4 million, which was US$5.4 million lower than the EBITDA of US$17.8 million earned in the second quarter of Fiscal 2004. For the six month period ended March 31, 2005, HOP's EBITDA was US$20.0 million compared to the US$25.1 million earned in the same six month period in the prior year, a decrease of US$5.1 million or 20.3%. Included in the Fiscal 2005 six month results is a one-time gain of US$2.5 million associated with the sale of HOP's foreign currency exchange contracts in November-December 2004.

Primarily as a result of HOP's 2004 acquisitions of Taylor and North Atlantic, total gallons of product delivered during the three month period ended March 31, 2005 were approximately 4.2 million or 4.6% greater than those delivered during the three month period ended March 31, 2004 and for the six month period ended March 31, 2005 were approximately 11.2 million or 7.5% greater than those delivered during the six month period ended March 31, 2004. Heating Degree Days ("HDDs") for the three month period ended March 31, 2005 were approximately 8.6% greater than the ten-year average, but 0.9% less than the three month period ended March 31, 2004. HDDs for the six month period ended March 31, 2005 were approximately 6% greater than the ten-year average, and 0.5% greater than the six month period ended March 31, 2004.

The average per gallon cost of liquid petroleum products increased approximately 50% when comparing the three month and six month periods ended March 31, 2005 to the same periods in the prior year. This resulted in a significant increase in sales dollars, accounts receivables balances and accordingly in the Company's working capital requirements. During the past several months, the Company engaged in a number of short term solutions with its existing bank lenders to provide the requisite working capital the Company needed to conduct business at current liquid petroleum product costs. The Company continues to explore a more permanent, long-term solution to its working capital needs.

EBITDA and Distributable Cash are not recognized measures and do not have standardized meanings under Canadian generally accepted accounting principles. Accordingly, these measures may not be comparable to similar measures presented by other issuers. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations for the Fund for the three and six month periods ended March 31, 2005 for additional information concerning these measures and a reconciliation of these measures to income and sales for the periods presented.

This news release contains forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors outside of Management's control that could cause actual results to differ materially from those described in the forward-looking statements. The Fund does not assume responsibility for the accuracy and completeness of these forward-looking statements and does not undertake the obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances.

The Fund's complete financial statements for the period ended March 31, 2005 can be found at http://www.sedar.com or on the Fund's website at http://www.hif-un.com. The following financial information for the Fund is presented in thousands of Canadian dollars, except for unit and per unit amounts:



Summary of Consolidated Balance Sheets
(unaudited)

March 31, 2005 September 30, 2004
---------------------------------
Assets
------
Current assets $ 115,857 $ 85,724
Property, plant and equipment, net 31,380 33,162
Intangible and other assets, net 191,422 199,922
------------------------------
Total Assets $ 338,659 $ 318,808
------------------------------
------------------------------

Liabilities and Unitholders' Equity
-----------------------------------
Current liabilities $ 146,673 $ 109,817
Long-term debt 63,673 75,590
Asset Retirement Obligation 652 654
Future tax liability 2,550 2,434
Non-controlling interest 5,079 5,884
------------------------------
Total Liabilities 218,627 194,379
Unitholders' Equity 120,032 124,429
------------------------------
Total Liabilities and Unitholders'
Equity $ 338,659 $ 318,808
------------------------------
------------------------------



Summary of Consolidated Statements of Operations
For the three months ended March 31, 2005 and 2004
(unaudited)

For the three month period ended: March 31, 2005 March 31, 2004
-----------------------------

Sales $ 225,777 $ 179,394
Cost of sales 194,277 142,368
------------------------------
Gross Profit 31,500 37,026
Selling, general and administrative expenses 16,772 15,158
Non-cash variable unit-based compensation - (283)
Amortization 5,280 5,638
Recognized and unrealized (gain) loss on
financial instruments (1,588) 3,355
------------------------------
Operating income 11,036 13,158
Interest expense, net (2,701) (1,707)
Amortization of deferred financing and
amendment costs (1,328) (176)
Software abandonment costs - (5,775)
Other, net 30 280
------------------------------
Income before income taxes and
non-controlling interest 7,037 5,780
Future income tax expense (129) (2,040)
------------------------------
Income before non-controlling interest 6,908 3,740
Non-controlling interest (1,033) (695)
------------------------------
Net income $ 5,875 $ 3,045
------------------------------
------------------------------

Net income per Fund unit:
Basic and diluted $ 0.27 $ 0.17

Weighted average number of Fund Units
outstanding:
Basic and diluted 21,511,667 18,133,147



Summary of Consolidated Statements of Operations
For the six months ended March 31, 2005 and 2004
(unaudited)

For the six month period ended: March 31, 2005 March 31, 2004
-----------------------------

Sales $ 377,125 $ 293,693
Cost of sales 331,480 234,085
------------------------------
Gross Profit 45,645 59,608
Selling, general and administrative expenses 31,645 29,703
Non-cash variable unit-based compensation - 509
Amortization 10,505 11,277
Recognized and unrealized (gain) loss on
financial instruments (653) 1,844
------------------------------
Operating income 4,148 16,275
Interest expense, net (4,681) (3,338)
Amortization of deferred financing costs (1,508) (335)
Non-cash loss on extinguishment of debt (355) -
Software abandonment costs - (5,775)
Other, net (13) 199
------------------------------
(Loss) income before income taxes and
non-controlling interest (2,409) 7,026
Future income tax expense (116) (2,040)
------------------------------
(Loss) income before non-controlling interest (2,525) 4,986
Non-controlling interest (92) (872)
------------------------------
Net income $ (2,617) $ 4,114
------------------------------
------------------------------

Net (loss) income per Fund unit:
Basic and diluted $ (0.12) $ 0.23

Weighted average number of Fund Units
outstanding:
Basic and diluted 21,511,667 18,128,420



Summary of Consolidated Statements of Cash Flows
For the three months ended March 31, 2005 and 2004
(unaudited)

For the three month period ended: March 31, 2005 March 31, 2004
-----------------------------

Net cash used in operating activities $ (31,629) $ (11,889)
------------------------------

Purchases of equipment and other (821) (1,014)
Net proceeds from sale of equipment 16 20
Acquisition of heating oil business, net
of cash acquired - (1,898)
------------------------------
Net cash used in investing activities (805) (2,892)
------------------------------

(Decrease) increase in cheques in transit (341) 558
Net borrowing on Revolving Loan and
Additional Credit Facility 34,778 17,075
Borrowings on Acquisition Facility - 1,880
Distributions to unitholders - (6,346)
Distributions to non-controlling interest - (1,126)
Net repayment of vehicle financing and other (2,200) 282
Issuance of units of HOP to non-controlling
interest - 136
------------------------------
Net cash provided by financing activities 32,237 12,459
------------------------------

Effect of exchange rate changes on cash (41) 1,255
------------------------------
Decrease in cash (238) (1,067)
Cash, beginning of period 1,692 3,756
------------------------------
Cash, end of period $ 1,454 $ 2,689
------------------------------
------------------------------



Summary of Consolidated Statements of Cash Flows
For the six months ended March 31, 2005 and 2004
(unaudited)

For the six month period ended: March 31, 2005 March 31, 2004
-----------------------------
Net cash used in operating activities $ (40,945) $ (19,495)
------------------------------

Purchases of equipment and other (2,284) (1,836)
Net proceeds from sale of equipment 29 31
Acquisition of heating oil businesses, net of
cash acquired - (1,898)
------------------------------
Net cash used in investing activities (2,255) (3,703)
------------------------------

Increase (decrease) in cheques in transit 50 (893)
Net borrowing on Revolving Loan and Additional
Credit Facility 37,430 35,524
Borrowings on Acquisition Facility - 1,880
Repayment of Acquisition Facility (9,325) -
Borrowings on Term Loan 27,258 -
Repayments of Term Loan (3,614) -
Distributions to unitholders (4,482) (12,689)
Distributions to non-controlling interest (583) (2,252)
Net repayment of vehicle financing and other (3,208) (84)
Issuance of units of HOP to non-controlling
interest - 171
------------------------------
Net cash provided by financing activities 43,526 21,657
------------------------------

Effect of exchange rate changes on cash (1,034) 1,998
------------------------------
(Decrease) increase in cash (708) 457
Cash, beginning of period 2,162 2,232
------------------------------
Cash, end of period $ 1,454 $ 2,689
------------------------------
------------------------------



Contact Information

  • Heating Oil Partners, L.P.
    Paul J. Forest
    Chief Financial Officer
    (203) 655-8290