Heating Oil Partners Income Fund
TSX : HIF.UN

Heating Oil Partners Income Fund

August 15, 2005 09:56 ET

Heating Oil Partners Income Fund Releases June 30, 2005 Financial Results

TORONTO, ONTARIO--(CCNMatthews - Aug. 15, 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 nine month periods ended June 30, 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.

The price of crude oil in world markets has remained at record levels during the nine month period ended June 30, 2005. When comparing the three month and nine month periods ended June 30, 2005 to the same periods in the prior year, the average cost of product increased by approximately 56%. Sales have increased proportionately with the increased cost of liquid petroleum products, resulting in higher accounts receivable balances, and a continued need for additional working capital.

As of June 30, 2005, the Company was in default under the terms of its senior notes and credit agreement. The default includes a failure to meet certain financial covenants as well as a failure to make certain payments under the terms of these agreements. Accordingly, all debt related to these agreements is shown as a current liability in the Fund's June 30, 2005 Consolidated Balance Sheet and is due and payable on demand. The Company has not been able to reach an agreement with its lenders regarding a waiver of these defaults, and the continued failure of the Company to reach such an agreement would be expected to have a material adverse effect on the Company's and the Fund's financial position, results of operations and cash flows.

The Company estimates that, assuming current heating oil prices, it will need approximately US$80.0 million of additional working capital to meet its peak seasonal working capital requirements. The Company is currently exploring a variety of alternative solutions to this issue prior to the commencement of the 2005-2006 prime heating season. Such potential solutions include, an accommodation with its current lenders, including waivers of defaults and an extension to increase its facilities, a re-financing of its existing debt, a sale of equity and a recapitalization and/or sale of the Company. The failure of the Company to achieve one or a combination of such solutions sufficiently in advance of the commencement of the 2005-2006 prime heating season will have a material adverse effect on the Company's and the Fund's financial position, results of operations and cash flows, would raise substantial doubt as to the Company's and the Fund's abilities to continue as a going concern and require the Company to seek protection under US and Canadian bankruptcy laws.

The Fund periodically reviews the carrying value of the investment in intangible assets in order to determine whether an impairment exists. If an impairment does exist, the Fund is required to record the loss as part of its operating expenses. The Fund's annual impairment evaluation as of July 1, 2005 resulted in a non-cash impairment charge on intangible assets of CA$86.6 million. Impairment exists if there is a deficiency in estimated undiscounted cash flows to recover the carrying value related to the assets. In conjunction with its annual goodwill impairment evaluation, the Company engaged an independent third party to conduct an impairment test of its assets, including goodwill, as of July 1, 2005. The Fund has two reporting units, the residential and commercial unit (including service and installation) and the fleet fueling unit. Based on the results of this test, Management concluded that impairment existed at both of the Fund's reporting units. At its residential and commercial reporting unit (including service and installation), this test resulted in a non-cash impairment charge of CA$73.4 million related to customer relationships. At its fleet fueling reporting unit, this test resulted in non-cash impairment charges of CA$9.9 million, CA$0.5 million, and CA$2.3 million related to customer relationships, trade names, and non-compete agreements, respectively. Goodwill impairment was also deemed to exist, resulting in a non-cash impairment charge of CA$0.5 million at the Fund's fleet fueling reporting unit. These non-cash impairment charges adjusted the carrying value of the assets to their respective estimated fair values.

For the three months ended June 30, 2005 (the third quarter of Fiscal 2005) the Fund reported a net loss of CA$96.1 million compared to a net loss of CA$6.3 million during the three month period ended June 30, 2004. For the nine month period ended June 30, 2005, the Fund reported a net loss of CA$98.8 million compared to a net loss of CA$2.2 million for the same period the previous year. As discussed above, included in the Fund's net loss for the three and nine months ended June 30, 2005, is a non-cash impairment charge on intangible assets of CA$86.6 million.

Net losses are net of the non-controlling interest relating to minority investors of HOP of CA$5.2 million and CA$1.0 million for the three months ended June 30, 2005 and 2004, respectively and CA$5.1 million and CA$0.2 million for the nine months ended June 30, 2005 and 2004, respectively. Net losses are also net of unrealized gains (losses) on financial instruments of CA$0.6 million and (CA$0.5 million) for the three months ended June 30, 2005 and 2004, respectively and CA$8.8 million and CA$3.4 million for the nine months ended June 30, 2005 and 2004, respectively. The net gains (losses) exclusive of the non-cash impairment charge on intangible assets, non-controlling interest and unrealized gains and losses are (CA$15.3 million) and (CA$6.8 million) for the three month periods ended June 30, 2005 and 2004, respectively, and (CA$8.5 million) and CA$1.0 for the nine month periods ended June 30, 2005 and 2004, respectively. The increases in net loss, exclusive of the non-cash impairment charge on intangible assets and non-controlling interest, are CA$8.5 million and CA$9.5 million when comparing the three month and nine month periods ended June 30, 2005 and 2004 respectively.

Amortization of debt issuance and amendment costs increased to CA$5.3 million and CA$6.8 million from CA$0.2 million and CA$0.6 million during the three and nine month periods ended June 30, 2005 and 2004, respectively. These significant increases of CA$5.1 million and CA$6.2 million in this amortization were primarily due to the Company's default under its credit facilities as of June 30, 2005 resulting in accelerated amortization of the remaining net amount of debt issuance and amendment costs associated with this debt. The remaining increases in net loss, exclusive of this amortization are CA$3.4 million and CA$3.3 million during the three and nine month periods ended June 30, 2005 compared to the same periods in the prior year.

During the period from October 1, 2004 to June 30, 2005 the Company lost approximately 1,370 residential customers, which combined with the 2,455 net losses experienced during the three month period ended September 30, 2004 results in a 3.3% attrition rate during the twelve month period ended June 30, 2005. This reduction in the Company's customer base caused fewer delivered gallons during the three month and nine month periods ended June 30, 2005, which the Company estimates to be 0.3 million and 3.7 million fewer gallons, respectively.

When comparing the nine month periods ended June 30, 2005 and 2004, the Company experienced per gallon residential gross margin erosion of US$0.0181 or US$1.7 million, (approximately CA$2.1 million) 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. Additionally, the Company has been unable to secure from its lenders the additional working capital necessary to implement its traditional product hedging strategy. Specifically, the Company has not had the financial resources necessary to purchase the requisite combination of puts, calls, futures and forward contracts to offer its residential customers a fixed and/or capped price for the 2005-2006 prime heating season. The Company anticipates that, if this deviation from its normal operating strategy were to continue into the 2005-2006 prime heating season, it could negatively impact these gross margins further .

Residential gallons decreased as a result of two factors. First, during 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 delivered approximately 6.5 million fewer gallons to residential customers in the Fiscal 2005 prime heating season compared to what was delivered in the Fiscal 2004 prime heating season. At an average gross margin of US$0.5646 per gallon experienced during the nine month period, the Company estimates this delivery initiative had a one-time negative effect on gross margins of approximately US$3.7 million that impacted the nine month period ended June 30, 2005.

Second, 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 nine month period ended June 30, 2005 compared to the same period in the prior year. The Company estimates gross margins for the nine month period ended June 30, 2005 were negatively affected by approximately US$0.4 million due to conservation. The Company believes this conservation was driven by the higher oil prices experienced during this period.

HOP's EBITDA loss for the third quarter of Fiscal 2005 was US$0.5 million, which was US$1.0 million lower than the EBITDA of US$0.5 million earned in the third quarter of Fiscal 2004. For the nine month period ended June 30, 2005, HOP's EBITDA was US$19.5 million compared to the US$25.6 million earned in the same nine month period in the prior year, a decrease of US$6.1 million or 23.8%. Included in the Fiscal 2005 nine month period 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.

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 nine month periods ended June 30, 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 three and nine month periods ended June 30, 2005 can be found at www.sedar.com or on the Fund's website at 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

June 30, 2005 September 30, 2004
(unaudited)
-------------------------------------
Assets
------
Current assets $ 90,449 $ 85,724
Property, plant and
equipment, net 30,568 33,162
Intangible and other
assets, net 101,444 199,922
-------------------------------------
Total Assets $ 221,461 $ 318,808
-------------------------------------
-------------------------------------

Liabilities and Unitholders' Equity
-----------------------------------
Current liabilities $ 191,111 $ 109,817
Long-term debt 2,621 75,590
Asset retirement obligation 671 654
Future tax liability 2,679 2,434
Non-controlling interest - 5,884
-------------------------------------
Total Liabilities 197,082 194,379
Unitholders' Equity 25,379 124,429
------------------------------------
Total Liabilities and
Unitholders' Equity $ 222,461 $ 318,808
-------------------------------------
-------------------------------------


Summary of Consolidated Statements of Operations
For the three month periods ended June 30, 2005 and 2004
(unaudited)

June 30, 2005 June 30, 2004
-------------------------------------

Sales $ 118,656 $ 84,260
Cost of sales 105,316 70,245
-------------------------------------
Gross Profit 13,340 14,015
Selling, general and
administrative expenses 14,991 13,306
Non-cash variable unit-based
compensation - (737)
Amortization 5,415 5,294
Non-cash impairment charge on
intangible assets 86,652 -
Recognized and unrealized (gain)
loss on financial instruments (589) 1,030
-------------------------------------
Operating loss (93,129) (4,878)
Interest expense, net (2,801) (1,935)
Amortization of deferred financing
and amendment costs (5,251) (216)
Software abandonment costs - (210)
Other, net - 72
-------------------------------------
Loss before income taxes and
non-controlling interest (101,181) (7,167)
Future income tax expense (129) (198)
-------------------------------------
Loss before non-controlling
Interest (101,310) (7,365)
Non-controlling interest 5,163 1,045
-------------------------------------
Net loss $ (96,147) $ (6,320)
-------------------------------------
-------------------------------------
Net loss per Fund unit:
Basic and diluted $ (4.47) $ (0.35)

Weighted average number of
Fund Units outstanding:
Basic and diluted 21,511,667 18,153,903


Summary of Consolidated Statements of Operations
For the nine month periods ended June 30, 2005 and 2004
(unaudited)

June 30, 2005 June 30, 2004
-------------------------------------
Sales $ 495,781 $ 377,953
Cost of sales 436,796 304,330
-------------------------------------
Gross Profit 58,985 73,623
Selling, general and
administrative expenses 46,636 43,009
Non-cash variable unit-based
compensation - (228)
Amortization 15,920 16,571
Non-cash impairment charge on
intangible assets 86,652 -
Recognized and unrealized (gain)
loss on financial instruments (1,242) 2,874
-------------------------------------
Operating (loss) income (88,981) 11,397
Interest expense, net (7,482) (5,273)
Amortization of deferred
financing costs (6,759) (551)
Non-cash loss on extinguishment
of debt (355) -
Software abandonment costs - (5,985)
Other, net (13) 271
-------------------------------------
Loss before income taxes and
non-controlling interest (103,590) (141)
Future income tax expense (245) (2,238)
-------------------------------------
Loss before non-controlling
interest (103,835) (2,379)
Non-controlling interest 5,071 173
-------------------------------------
Net loss $ (98,764) $ (2,206)
-------------------------------------
-------------------------------------

Net loss per Fund unit:
Basic and diluted $ (4.59) $ (0.12)

Weighted average number of
Fund Units outstanding:
Basic and diluted 21,511,667 18,136,883


Summary of Consolidated Statements of Cash Flows
For the three month periods ended June 30, 2005 and 2004
(unaudited)

June 30, 2005 June 30, 2004
-------------------------------------
Net cash provided by
operating activities $ 22,785 $ 14,175
-------------------------------------
Purchases of equipment and other (376) (804)
Net proceeds from sale
of equipment 91 35
Acquisition of heating oil
business, net of cash acquired - (4,184)
-------------------------------------
Net cash used in investing
activities (285) (4,953)
-------------------------------------

(Decrease) increase in cheques
in transit (676) 759
Net borrowing on Revolving Loan
and Additional Credit Facility (14,411) (10,787)
Borrowings on Acquisition
Facility - 7,576
Repayment of Term Loan (3,769) -
Distributions to unitholders - (6,353)
Distributions to non-controlling
interest - (1,062)
Net repayment of vehicle
financing and other (1,604) (315)
Issuance of units of HOP to
non-controlling interest - 99
-------------------------------------
Net cash used in financing
activities (20,460) (10,083)
-------------------------------------

Effect of exchange rate
changes on cash (29) (695)
-------------------------------------
Increase (decrease) in cash 2,011 (1,556)
Cash, beginning of period 1,454 2,689
------------------------------------
Cash, end of period $ 3,465 $ 1,133
-------------------------------------
-------------------------------------


Summary of Consolidated Statements of Cash Flows
For the nine month periods ended June 30, 2005 and 2004
(unaudited)

June 30, 2005 June 30, 2004
-------------------------------------
Net cash used in operating
Activities $ (18,160) $ (5,320)
-------------------------------------

Purchases of equipment
and other (2,660) (2,640)
Net proceeds from sale of
equipment 120 66
Acquisition of heating oil
businesses, net of cash acquired - (6,082)
-------------------------------------
Net cash used in investing
activities (2,540) (8,656)
-------------------------------------

Decrease in cheques in transit (626) (134)
Net borrowing on Revolving Loan
and Additional Credit Facility 23,019 24,737
Borrowings on Acquisition Facility - 9,456
Repayment of Acquisition Facility (9,325) -
Borrowings on Term Loan 27,258 -
Repayments of Term Loan (7,383) -
Distributions to unitholders (4,482) (19,042)
Distributions to non-controlling
interest (583) (3,314)
Net repayment of vehicle
financing and other (4,812) (399)
Issuance of units of HOP to
non-controlling interest - 270
-------------------------------------
Net cash provided by financing
Activities 23,066 11,574
-------------------------------------
Effect of exchange rate changes
on cash (1,063) 1,303
-------------------------------------
Increase (decrease) in cash 1,303 (1,099)
Cash, beginning of period 2,162 2,232
-------------------------------------
Cash, end of period $ 3,465 $ 1,133
-------------------------------------
-------------------------------------



Contact Information

  • Heating Oil Partners, L.P.
    Carlos Rojas
    Chief Financial Officer
    (203) 655-8290