UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to__________
COMMISSION FILE NUMBER 1-11727
HERITAGE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1493906
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8801 SOUTH YALE AVENUE, SUITE 310, TULSA, OKLAHOMA 74137
(Address of principal executive offices and zip code)
(918) 492-7272
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of each exchange on
which registered
Common Units New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value as of November 5, 2002, of the registrant's Common
Units held by nonaffiliates of the registrant, based on the reported closing
price of such units on the New York Stock Exchange on such date, was
approximately $252,749,678
At November 5, 2002, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 15,816,347 Common Units
Documents Incorporated by Reference: None
EXPLANATORY NOTE
We are filing this Amendment on Form 10-K/A in connection with the
filing of a Registration Statement on Form S-3 (File No. 333-107324). That
Registration Statement incorporates our annual report on Form 10-K for the
fiscal year ended August 31, 2002, originally filed on November 27, 2002 (the
"Original Filing"). This Form 10-K/A amends and restates in its entirety our
annual report on Form 10-K for the fiscal year ended August 31, 2002.
As described in Note 2 to the Consolidated Financial Statements, we
have revised our previously reported Consolidated Statements of Operations for
the years ended August 31, 2002 and 2001 and for the eight months ended August
31, 2000 and have made corresponding revisions to the Notes to Consolidated
Financial Statements to make the presentations required by EITF 02-3. This
information was previously shown in the Consolidated Statements of Operations on
a gross basis in the separately presented line items of "Revenues-liquids
marketing", "Revenues-other" and "Costs and expenses -- liquids marketing", and
is now presented on a net basis in a single line item as "Liquids marketing,
net". The revisions had no effect on previously reported Operating Income or Net
Income (Loss). Additionally, we have retitled "EBITDA" as "EBITDA, as adjusted"
and made clarifications regarding how we calculate EBITDA, as adjusted. These
revisions did not change how we calculate EBITDA, as adjusted, and it is
calculated in the same manner as we have historically presented such
information.
This Amendment makes certain changes in the form of additional or
supplemental disclosures as follows:
- Part I -- Item 3. Legal Proceedings, pages 10-11: We have
revised to expand the description of the litigation filed by
Heritage against SCANA Corporation, Cornerstone Ventures, L.P.
and Suburban Propane, L.P.
- Part II -- Item 5. Market for the Registrant's Units and
Related Unitholder Matters, pages 14-15: We have revised to
include a description of the Incentive Distribution Rights and
additional information about the issuance of Common Units to
the Class B Subordinated Unitholders, the Class C Units, and
to disclose the total amount of distributions by the
Partnership for the fiscal year and the exemptions from
registration under the Securities Act of 1933.
- Part II -- Item 6. Selected Historical Financial and Operating
Data, pages 17-20: We have revised the tables titled "Heritage
Propane Partners, L.P. (formerly Peoples Gas) and "Heritage
Propane Partners, L.P. (Predecessor Heritage) to reflect the
"Liquids marketing, net" and "EBITDA, as adjusted"
presentations described above, and added tables reconciling
EBITDA, as adjusted to net income and to cash flows from
operations.
- Part II -- Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations, pages 23-33: We
have revised to provide additional or supplemental disclosures
about results of operations, the terms of our credit
agreements and our long-term debt and other contractual
obligations, our adoption of EITF 02-3, the recording of the
minority interests of all partially owned subsidiaries and
Heritage's buying and selling of derivative financial
instruments.
- Part III -- Item 10. Directors and Executive Officers of the
Registrant, Item 11. Executive Compensation and Item 12,
Security Ownership of Certain Beneficial Owners and
Management, pages 41-45: We have revised to include additional
information relating to the reimbursement of the General
Partner's and its affiliates' expenses and to include
information regarding the beneficial ownership of U.S.
Propane, L.P. and U.S. Propane L.L.C.
- Part IV -- Item 15. Exhibits, Financial Statement Schedules,
and Report on Form 8-K -- Notes to Consolidated Financial
Statements, pages F-12-36: We have revised the notes to the
consolidated financial statements to revise "Net revenues" and
"Total Revenues" to reflect the "Liquids marketing, net" and
EBITDA, as adjusted" presentations described above and to
provide additional and supplemental information regarding (i)
the recording of the minority interests of all partially owned
subsidiaries, (ii) a description of our Costs and Expenses,
(iii) clarifications with respect to the cost of fuel
inventories and reclassifications into earnings of previously
recorded gains and losses, (iv) when goodwill is tested for
impairment, (v) Heritage's buying and selling of derivative
financial instruments and liquids marketing contracts, (vi)
our adoption of EITF 02-3, (vii) acquisitions , (viii) the
Note Agreements and the Bank Credit Facility, (ix) our leases
and accruals for legal proceedings and environmental
liabilities, (x) the estimates of compensation under the
Restricted Unit Plan and the Long-Term Incentive Plan, and
(xi) the additional line item "Gross Profit." In addition, we
have
i
added a note for subsequent developments describing the
proposed transactions entered into on November 6, 2003.
This report continues to speak as of the date of the Original Filing,
and we have not updated the disclosure in this report to speak as of a later
date. All information contained in this report and the Original Filing is
subject to updating and supplementing as provided in our periodic reports filed
with the Securities and Exchange Commission.
ii
HERITAGE PROPANE PARTNERS, L.P.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
PAGE
----
ITEM 1. BUSINESS. .........................................................1
ITEM 2. PROPERTIES.........................................................9
ITEM 3. LEGAL PROCEEDINGS.................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED
UNITHOLDER MATTERS...............................12
ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA..................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............21
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................39
ITEM 11. EXECUTIVE COMPENSATION.............................................43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................48
PART IV
ITEM 14. CONTROLS AND PROCEDURES.............................................49
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.............................49
iii
PART I
ITEM 1. BUSINESS
Heritage Propane Partners, L.P., (the "Registrant" or "Partnership"), a
publicly traded Delaware limited partnership, was formed in April 1996 in
connection with its initial public offering. The Partnership's Common Units are
listed on the New York Stock Exchange. In order to simplify the Partnership's
obligations under the laws of several jurisdictions in which it conducts
business, its business activities are primarily conducted through its
subsidiary, Heritage Operating, L.P. (the "Operating Partnership"), a Delaware
limited partnership. The Partnership holds a 98.9899% limited partner interest
in the Operating Partnership. The Operating Partnership accounts for nearly all
of the consolidated assets, sales and operating earnings of the Partnership.
The sole General Partner of the Partnership and the Operating
Partnership is U.S. Propane, L.P. ("U.S. Propane"), a Delaware limited
partnership. U.S. Propane holds a 1% general partner interest in the Partnership
and a 1.0101% general partner interest in the Operating Partnership. U.S.
Propane is a joint venture among the following four publicly traded utilities:
TECO Energy, Inc.; AGL Resources, Inc.; Piedmont Natural Gas Company, Inc.; and
Atmos Energy Corporation.
- TECO Energy, Inc. ("TECO") is a diversified, energy-related
holding company. TECO's subsidiaries include Florida's largest
natural gas distributor, an electric utility, and an
independent power company that builds, owns and operates
electric generation facilities in the United States and
Central America.
- AGL Resources, Inc. ("AGL Resources"), is a regional energy
holding company engaged in natural gas distribution, wholesale
and retail energy services, and building telecommunications
infrastructure. AGL Resources' principal subsidiary is the
second largest pure natural gas distributor in the United
States, serving customers in Georgia, Tennessee, and Virginia.
- Piedmont Natural Gas Company, Inc. ("Piedmont Natural Gas") is
an energy and services company primarily engaged in the
transportation, distribution, and sales of natural gas.
Piedmont Natural Gas is the second largest natural gas
distributor in the Southeast, serving customers in North
Carolina, South Carolina, and Tennessee.
- Atmos Energy Corporation ("Atmos Energy") is an energy and
services company primarily engaged in natural gas distribution
and nonregulated energy management and gas marketing services.
Atmos Energy is the fifth largest pure natural gas distributor
in the United States, serving customers in 11 states.
The business of the Partnership starting with the formation of Heritage
Holdings, Inc. ("Heritage Holdings") in 1989, has grown primarily through
acquisitions of retail propane operations and, to a lesser extent, through
internal growth. Since its inception in 1989 through August 31, 2002, the
Partnership has completed 91 acquisitions for a total purchase price of
approximately $633 million, including the August 2000 transfer by U.S. Propane
of its propane operations to the Partnership. The U.S. Propane transaction
combined five of the nation's 50 largest retail propane operations. Volumes of
propane sold to retail customers have increased steadily from 63.2 million
gallons for the Partnership's fiscal year ended August 31, 1992 to 329.6 million
gallons for the fiscal year ended August 31, 2002.
U.S. PROPANE MERGER
In August 2000, TECO, AGL Resources, Piedmont Natural Gas, and Atmos
Energy contributed each company's propane operations, Peoples Gas Company
("Peoples Gas"), United Cities Propane Gas, Inc. ("United Cities"), Piedmont
Propane Company ("Piedmont"), and AGL Propane, Inc. ("AGL"), respectively, to
U.S. Propane in exchange for equity interests in U.S. Propane. The merger was
accounted for as an acquisition using the purchase method of accounting with
Peoples Gas being the acquirer for accounting purposes.
In August 2000, U.S. Propane acquired all of the outstanding common
stock of the Partnership's former General Partner, Heritage Holdings, for $120
million. By virtue of Heritage Holdings' general partner and limited partner
interests in the Partnership, U.S. Propane gained control of the Partnership.
Simultaneously with that
1
transaction, U.S. Propane transferred its propane operations, consisting of its
interest in four separate limited liability companies, AGL Propane, L.L.C.,
Peoples Gas Company, L.L.C., United Cities Propane Gas, L.L.C. and Retail
Propane Company, L.L.C. (former Piedmont operations) to the Partnership for
$181.4 million plus working capital. The $181.4 million was payable $139.5
million in cash, $31.8 million of assumed debt, and the issuance of 372,392
Common Units of the Partnership valued at $7.3 million and a 1.0101% limited
partner interest in the Operating Partnership valued at $2.7 million. The
purchase price and the exchange price for the Common Units were approved by an
independent committee of the Board of Directors of Heritage Holdings. The
exchange price for the Common Units was $19.73125 per unit under a formula based
on the average closing price of Common Units on the New York Stock Exchange for
the twenty (20) day period beginning ten (10) days prior to the public
announcement of the transaction on June 15, 2000 (the "Formula Price").
Subsequent to August 31, 2000, payments totaling approximately $12.9 million
were made for the working capital adjustment, of which $5.0 million was accrued
at August 31, 2000.
Concurrent with the acquisition, the Operating Partnership borrowed
$180 million from several institutional investors and the Partnership sold
1,161,814 Common Units and 1,382,514 Class B Subordinated Units in a private
placement to the former shareholders of Heritage Holdings. The price paid was
based on the Formula Price and resulted in net proceeds to the Partnership of
$50.2 million. The total of these proceeds was utilized to finance the
transaction and retire a portion of existing debt.
The Partnership is the surviving entity for legal purposes; however,
the combined operations that formed U.S. Propane was the acquirer for accounting
purposes. For purposes of the discussion herein, Peoples Gas is described as the
accounting acquirer since Peoples Gas was the acquirer in the transaction that
formed U.S. Propane. The propane operations of the Partnership and its
subsidiaries prior to the series of transactions with U.S. Propane are referred
to as Predecessor Heritage and the operations of the Partnership and its
subsidiaries following the combination of the operations of U.S. Propane and
Predecessor Heritage are described as Heritage. Peoples Gas had a fiscal
year-end of December 31. The eight-month period ended August 31, 2000 was
treated as a transition period under the rules of the Securities and Exchange
Commission. However, the Form 10-K for the year ended August 31, 2000 was not a
transition report as the Partnership continues to have an August 31 fiscal
year-end.
On February 4, 2002, at the Special Meeting of the Common Unitholders
of the Partnership, the Common Unitholders approved the substitution of U.S.
Propane as the General Partner of the Partnership and the Operating Partnership,
replacing the former General Partner, Heritage Holdings. U.S. Propane, L.L.C.
("USPLLC"), a Delaware limited liability company, is the General Partner of U.S.
Propane. The membership interests of USPLLC are owned by AGL Energy Corporation,
United Cities, TECO Propane Ventures, LLC, and Piedmont. The substitution of
U.S. Propane as the General Partner did not alter the management of the
Partnership, as all of the directors of Heritage Holdings became members of the
Board of Managers of USPLLC, and the management and employees of Heritage
Holdings became the management and employees of U.S. Propane.
GENERAL
Heritage believes it is presently the fourth largest retail marketer of
propane in the United States (as measured by retail gallons sold). Heritage
currently serves more than 600,000 active residential, commercial, industrial
and agricultural customers from over 275 customer service locations in 28
states. Heritage's operations extend from coast to coast with concentrations in
the western, upper midwestern, northeastern, and southeastern regions of the
United States.
At the time of the series of transactions that formed U.S. Propane and
combined the operations of Predecessor Heritage and U.S. Propane, Peoples Gas
was serving more than 70,000 active residential, commercial and wholesale
customers located in the Florida peninsula. Peoples Gas had grown by expanding
existing markets as well as through acquisitions of independent propane
operations located in northeast and southwest Florida. Peoples Gas believed it
was among the top 25 independent propane distributors nationally and the largest
independent propane distributor in Florida.
Peoples Gas believed it held competitive advantages in both the
residential and commercial markets through its focus on customer service and
product reliability. Following is a summary of the retail sales volumes per
fiscal year. The transition period ended August 31, 2000 represents seven months
of Peoples Gas stand-alone and one
2
month of Heritage. The years ended August 31, 2001 and August 31, 2002 reflect
the sales of the combined operations of Peoples Gas and Predecessor Heritage
following the U.S. Propane merger.
HERITAGE PROPANE PARTNERS, L.P. (FORMERLY PEOPLES GAS):
For the
For the Years Ended Eight-months Ended For the Years Ended
December 31, August 31, August 31,
------------ ---------- ----------
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ------ -----
RETAIL GALLONS
SOLD (IN MILLIONS): 29.1 30.9 33.6 38.3 330.2 329.6
As a result of the implementation of the strategy of Heritage described
below, Predecessor Heritage achieved the following retail sales volumes per
fiscal year:
PREDECESSOR HERITAGE:
Period
Ended
For the Years Ended August 31, Aug. 9,
------------------------------ -------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
RETAIL GALLONS
SOLD (IN MILLIONS): 118.2 125.6 146.7 159.9 170.9
Management believes that Heritage's competitive strengths include: (i)
experience in identifying, evaluating, and completing acquisitions, (ii)
operations that are focused in areas experiencing higher-than-average population
growth, (iii) a low-cost administrative infrastructure, and (iv) a decentralized
operating structure and entrepreneurial workforce. These competitive strengths
have enabled both Predecessor Heritage and Heritage to achieve performance
levels per retail gallon sold that management believes are among the highest of
any publicly traded propane partnership. Management believes that as a result of
Heritage's geographic diversity and district-level incentive compensation
program, Predecessor Heritage and Heritage have both been able to reduce the
effect of adverse weather conditions on Heritage's operating results, including
those experienced by Predecessor Heritage during the warmer-than-normal winters
of 1998 - 1999, 1999 - 2000, and by Heritage in 2001 - 2002, recorded as three
of the warmest winters of the century. Management believes that Heritage's
concentration in higher-than-average population growth areas provides a strong
economic foundation for expansion through acquisitions and internal growth.
Management does not believe that Heritage is significantly more vulnerable than
its competitors to displacement by natural gas distribution systems because the
majority of Heritage's areas of operations are located in rural areas where
natural gas is not readily available.
BUSINESS STRATEGY
Heritage's goal is to increase distributions to the Partnership's
Unitholders by being a low-cost, growth oriented retail propane distribution
company. The three critical elements to this strategy are described below.
Acquisitions. Acquisitions are the principal means of growth for
Heritage, as the retail propane industry is mature and overall demand for
propane is expected to experience limited growth in the foreseeable future.
Management believes that the fragmented nature of the propane industry provides
significant opportunities for growth through acquisition. Heritage follows a
disciplined acquisition strategy that concentrates on companies that (i) are
located in geographic areas experiencing higher-than-average population growth,
(ii) provide a high percentage of sales to residential customers, (iii) have a
strong reputation for quality service, and (iv) own a high percentage of the
propane tanks used by their customers. In addition Heritage attempts to
capitalize on the reputations of the companies it acquires by maintaining local
brand names, billing practices, and employees, thereby creating a sense of
continuity and minimizing customer loss. Management believes that this strategy
has helped to make Heritage an attractive buyer for many acquisition candidates
from the seller's viewpoint.
Through August 9, 2000, Predecessor Heritage had completed 68
acquisitions for a total purchase price of approximately $297 million. Of the 68
companies acquired by Predecessor Heritage, 19 represented "core acquisitions"
with multiple plants in a specific geographic area, with the balance
representing "blend-in companies"
3
or acquisitions of companies that operated in an existing Heritage region. On
August 10, 2000, Predecessor Heritage completed the merger with U.S. Propane.
During the period between August 10, 2000 through August 31, 2002, Heritage
completed 22 additional acquisitions. Heritage will focus on acquisition
candidates in its existing areas of operations, but will consider core
acquisitions in other higher-than-average population growth areas in order to
further reduce the impact adverse weather patterns in any one region may have on
Heritage's overall operations. While Heritage is currently evaluating numerous
acquisition candidates, there can be no assurance that Heritage will identify
attractive acquisition candidates in the future, that Heritage will be able to
acquire such businesses on economically acceptable terms or successfully
integrate them into existing operations and make cost-saving changes, that any
acquisition will not dilute earnings and distributions to Unitholders, or that
any additional debt incurred to finance an acquisition will not adversely affect
the ability of Heritage to make distributions to Unitholders.
In order to facilitate Heritage's acquisition strategy, the Operating
Partnership maintains a Bank Credit Facility with a total of $115 million
available for borrowing. The Bank Credit Facility consists of a $50 million
Acquisition Facility to be used for acquisitions and improvements and a $65
million Working Capital Facility to be used for working capital and other
general partnership purposes. Heritage also has the ability to fund acquisitions
through the issuance of additional partnership interests and through long-term
debt. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Description of Indebtedness."
Low-Cost, Decentralized Operations. Heritage focuses on controlling
costs at the corporate and district levels. While Predecessor Heritage realized
certain economies of scale as a result of its acquisitions, it attributes its
low operating costs primarily to its decentralized structure, which Heritage has
continued. By delegating all customer billing and collection activities to the
district level, Heritage has been able to operate without a large corporate
staff. Of the 2,265 full-time employees as of August 31, 2002, only 86, or
approximately 4%, were general and administrative. In addition, Heritage's
district level incentive compensation program encourages district employees at
all levels to control costs while increasing revenues.
Internal Growth. In addition to pursuing expansion through
acquisitions, Heritage has aggressively focused on internal growth at its
existing district locations. Heritage believes that, by concentrating its
operations in areas experiencing higher-than-average population growth, it is
well positioned to achieve internal growth by adding new customers. Heritage
also believes that its decentralized operations foster an entrepreneurial
corporate culture by: (i) having operational decisions made at the district and
regional level, (ii) retaining billing, collection and pricing responsibilities
at the local and regional levels, and (iii) rewarding employees for achieving
financial targets at the local level.
WEATHER AND SEASONALITY
Heritage's propane distribution business is seasonal and dependent upon
weather conditions in its service areas. Propane sales to residential and
commercial customers are affected by winter heating season requirements. This
generally results in higher operating revenues and net income during the period
from October through March of each year and lower operating revenues and either
net losses or lower net income during the period from April through September of
each year. Sales to industrial and agricultural customers are much less weather
sensitive.
Gross profit margins are not only affected by weather patterns but also
by changes in customer mix. For example, sales to residential customers
ordinarily generate higher margins than sales to other customer groups, such as
commercial or agricultural customers. In addition, gross profit margins vary by
geographic region. Accordingly, gross profit margins could vary significantly
from year to year in a period of identical sales volumes.
4
INDUSTRY BACKGROUND AND COMPETITION
Propane, a by-product of natural gas processing and petroleum refining,
is a clean-burning energy source recognized for its transportability and ease of
use relative to alternative forms of stand-alone energy sources. Retail propane
use falls into three broad categories: (i) residential applications, (ii)
industrial, commercial, and agricultural applications, and (iii) other retail
applications, including motor fuel sales. Residential customers use propane
primarily for space and water heating. Industrial customers use propane
primarily as fuel for forklifts, stationary engines, and furnaces, as a cutting
gas, in mining operations, and in other process applications. Commercial
customers, such as restaurants, motels, laundries, and commercial buildings, use
propane in a variety of applications, including cooking, heating, and drying. In
the agricultural market, propane is primarily used for tobacco curing, crop
drying, poultry brooding, and weed control. Other retail uses include motor fuel
for cars and trucks, outdoor cooking and other recreational uses, propane
resales, and sales to state and local governments. In its wholesale operations,
Heritage sells propane principally to large industrial end-users and other
propane distributors.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is naturally colorless and odorless. An odorant is added
to allow its detection. Like natural gas, propane is a clean burning fuel and is
considered an environmentally preferred energy source.
Propane competes with other sources of energy, some of which are less
costly for equivalent energy value. Heritage competes for customers against
suppliers of electricity, natural gas, and fuel oil. Competition from
alternative energy sources has been increasing as a result of reduced utility
regulation. Except for certain industrial and commercial applications, propane
is generally not competitive with natural gas in areas where natural gas
pipelines already exist because natural gas is a significantly less expensive
source of energy than propane. The gradual expansion of the nation's natural gas
distribution systems has resulted in the availability of natural gas in many
areas that previously depended upon propane. Although the extension of natural
gas pipelines tends to displace propane distribution in areas affected, Heritage
believes that new opportunities for propane sales arise as more geographically
remote neighborhoods are developed. Even though propane is similar to fuel oil
in certain applications and market demand, propane and fuel oil compete to a
lesser extent primarily because of the cost of converting from one to another.
Based upon information provided by the Energy Information Administration,
propane accounts for approximately three percent of household energy consumption
in the United States.
In addition to competing with alternative energy sources, Heritage
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and generally
occurs on a local basis with other large multi-state propane marketers,
thousands of smaller local independent marketers, and farm cooperatives. Most of
Heritage's customer service locations compete with five or more marketers or
distributors. Each retail distribution outlet operates in its own competitive
environment because retail marketers tend to locate in close proximity to
customers. The typical retail distribution outlet generally has an effective
marketing radius of approximately 50 miles although in certain rural areas the
marketing radius may be extended by satellite locations.
The ability to compete effectively further depends on the reliability
of service, responsiveness to customers, and the ability to maintain competitive
prices. Heritage believes that its safety programs, policies, and procedures are
more comprehensive than many of its smaller, independent competitors and give it
a competitive advantage over such retailers. Heritage also believes that its
service capabilities and customer responsiveness differentiate it from many of
these smaller competitors. Heritage's employees are on call 24-hours-a-day,
7-days-a-week for emergency repairs and deliveries.
The wholesale propane business is highly competitive. For fiscal year
2002, Heritage's domestic wholesale operations (excluding MP Energy Partnership)
accounted for only 4.8% of its total gallons sold in the United States and less
than 1% of its gross profit. Heritage does not emphasize wholesale operations,
but it believes that limited wholesale activities enhance its ability to supply
its retail operations.
5
PRODUCTS, SERVICES AND MARKETING
Heritage distributes propane through a nationwide retail distribution
network consisting of over 275 customer service locations in 28 states.
Heritage's operations are concentrated in large part in the western, upper
midwestern, northeastern, and southeastern regions of the United States.
Heritage serves more than 600,000 active customers. Historically, approximately
two-thirds of Predecessor Heritage's and Heritage's retail propane volumes and
in excess of 80% of their EBITDA, as adjusted were attributable to sales during
the six-month peak-heating season from October through March, as many customers
use propane for heating purposes. Consequently, sales and operating profits are
normally concentrated in the first and second fiscal quarters. Cash flows from
operations however, are generally greatest during the second and third fiscal
quarters when customers pay for propane purchased during the six-month peak
season. To the extent necessary, Heritage will reserve cash from peak periods
for distribution to Unitholders during the warmer seasons.
Typically, district locations are found in suburban and rural areas
where natural gas is not readily available. Generally, such locations consist of
a one to two acre parcel of land, an office, a small warehouse and service
facility, a dispenser, and one or more 18,000 to 30,000 gallon storage tanks.
Propane is generally transported from refineries, pipeline terminals, leased
storage facilities, and coastal terminals by rail or truck transports to
Heritage's district locations where it is unloaded into storage tanks. In order
to make a retail delivery of propane to a customer, a bobtail truck is loaded
with propane from the storage tank. Propane is then delivered to the customer by
the bobtail truck, which generally holds 2,500 to 3,000 gallons of propane, and
pumped into a stationary storage tank on the customer's premises. The capacity
of these customer tanks ranges from approximately 100 gallons to 1,200 gallons,
with a typical tank capacity of 100 to 300 gallons in milder climates and from
500 to 1,000 gallons in colder climates. Heritage also delivers propane to
retail customers in portable cylinders, which typically have a capacity of 5 to
35 gallons. When these cylinders are delivered to customers, empty cylinders are
picked up for refilling at Heritage's distribution locations or are refilled on
site. Heritage also delivers propane to certain other bulk end-users of propane
in tractor-trailer transports, which typically have an average capacity of
approximately 10,500 gallons. End-users receiving transport deliveries include
industrial customers, large-scale heating accounts, mining operations, and large
agricultural accounts.
Heritage encourages its customers whose propane needs are temperature
sensitive to implement a regular delivery schedule. Many of Heritage's
residential customers receive their propane supply pursuant to an automatic
delivery system which eliminates the customer's need to make an affirmative
purchase decision and allows for more efficient route scheduling. Heritage also
sells, installs, and services equipment related to its propane distribution
business, including heating and cooking appliances.
Heritage owns, through its subsidiaries, a 60% interest in MP Energy
Partnership, a Canadian partnership that supplies Heritage with propane as
described below under "Propane Supply and Storage." When it is referred to or
information is given regarding domestic operations, amounts attributable to MP
Energy Partnership are generally excluded unless otherwise indicated.
Propane use falls into three broad categories: (i) residential
applications, (ii) industrial, commercial, and agricultural applications, and
(iii) other retail applications, including motor fuel sales. Approximately 95%
of the domestic gallons sold by Heritage in the fiscal year ended August 31,
2002 were to retail customers and 5% to wholesale customers. Of the retail
gallons sold by Heritage, 58% were to residential customers, 27% were to
industrial, commercial and agricultural customers, and 15% were to other retail
users. Sales to residential customers in the fiscal year ended August 31, 2002
accounted for 55% of total domestic gallons sold but accounted for approximately
71% of Heritage's gross profit from propane sales. Residential sales have a
greater profit margin and a more stable customer base than other markets served
by Heritage. Industrial, commercial and agricultural sales accounted for 20% of
Heritage's gross profit from propane sales for the fiscal year ended August 31,
2002, with all other retail users accounting for 8%. Additional volumes sold to
wholesale customers contributed less than 1% of gross profit from propane sales.
No single customer accounts for 10% or more of revenues.
The propane business is very seasonal with weather conditions
significantly affecting demand for propane. Heritage believes that the
geographic diversity of its operations helps to reduce its nationwide exposure
to regional weather. Although overall demand for propane is affected by climate,
changes in price, and other factors, Heritage believes its residential and
commercial business to be relatively stable due to the following
characteristics:
6
- residential and commercial demand for propane has been
relatively unaffected by general economic conditions due to
the largely non-discretionary nature of most propane
purchases,
- loss of customers to competing energy sources has been low due
to the lack of availability or the high cost of alternative
fuels,
- the tendency of Heritage's customers to remain with Heritage
due to the product being delivered pursuant to a regular
delivery schedule and to Heritage's ownership of over 90% of
the storage tanks utilized by its customers, which prevents
fuel deliveries from competitors, and
- the historic ability of Heritage to more than offset customer
losses through internal growth of its customer base in
existing markets.
Since home heating usage is the most sensitive to temperature, residential
customers account for the greatest usage variation due to weather. Variations in
the weather in one or more regions in which Heritage operates can significantly
affect the total volumes of propane sold by Heritage and the margins realized
thereon and, consequently, Heritage's results of operations. Heritage believes
that sales to the commercial and industrial markets, while affected by economic
patterns, are not as sensitive to variations in weather conditions as sales to
residential and agricultural markets.
PROPANE SUPPLY AND STORAGE
Supplies of propane from Heritage's sources historically have been
readily available. Heritage purchases from over 50 energy companies and natural
gas processors at numerous supply points located in the United States and
Canada. In the fiscal year ended August 31, 2002, Enterprise Products Operating
L.P. ("Enterprise") and Dynegy Liquids Marketing and Trade ("Dynegy") provided
approximately 19% and 16% of Heritage's total propane supply, respectively. In
addition, M-P Oils, Ltd., Heritage's wholly owned subsidiary that owns a 60%
interest in MP Energy Partnership, a Canadian partnership, procured 16% of
Heritage's total propane supply during the fiscal year ended August 31, 2002
through MP Energy Partnership. MP Energy Partnership buys and sells propane for
its own account and supplies propane to Heritage for its northern United States
operations.
Heritage believes that if supplies from Enterprise and Dynegy were
interrupted it would be able to secure adequate propane supplies from other
sources without a material disruption of its operations. Aside from Enterprise,
Dynegy, and the supply procured by M-P Oils, Ltd., no single supplier provided
more than 10% of Heritage's total domestic propane supply during the fiscal year
ended August 31, 2002. Heritage believes that its diversification of suppliers
will enable it to purchase all of its supply needs at market prices without a
material disruption of its operations if supplies are interrupted from any of
its existing sources. Although no assurances can be given that supplies of
propane will be readily available in the future, Heritage expects a sufficient
supply to continue to be available. However, increased demand for propane in
periods of severe cold weather, or otherwise, could cause future propane supply
interruptions or significant volatility in the price of propane.
Heritage typically enters into one-year supply agreements. The
percentage of contract purchases may vary from year to year. Supply contracts
generally provide for pricing in accordance with posted prices at the time of
delivery or the current prices established at major delivery or storage points,
and some contracts include a pricing formula that typically is based on these
market prices. Most of these agreements provide maximum and minimum seasonal
purchase guidelines. Heritage receives its supply of propane predominately
through railroad tank cars and common carrier transport.
Because Heritage's profitability is sensitive to changes in wholesale
propane costs, it generally seeks to pass on increases in the cost of propane to
customers. Heritage has generally been successful in maintaining retail gross
margins on an annual basis despite changes in the wholesale cost of propane, but
there is no assurance that Heritage will always be able to pass on product cost
increases fully, particularly when product costs rise rapidly. Consequently,
Heritage's profitability will be sensitive to changes in wholesale propane
prices. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - General."
7
Heritage leases space in larger storage facilities in New York,
Tennessee, Georgia, Michigan, Mississippi, South Carolina, Arizona, New Mexico,
Texas, and smaller storage facilities in other locations and has the opportunity
to use storage facilities in additional locations when it "pre-buys" product
from sources having such facilities. Heritage believes that it has adequate
third party storage to take advantage of supply purchasing advantages as they
may occur from time to time. Access to storage facilities allows Heritage to buy
and store large quantities of propane during periods of low demand, which
generally occur during the summer months, or at favorable prices, thereby
helping to ensure a more secure supply of propane during periods of intense
demand or price instability.
PRICING POLICY
Pricing policy is an essential element in the marketing of propane.
Heritage relies on regional management to set prices based on prevailing market
conditions and product cost, as well as local management input. All regional
managers are advised regularly of any changes in the posted price of the
district's propane suppliers. In most situations, Heritage believes that its
pricing methods will permit Heritage to respond to changes in supply costs in a
manner that protects Heritage's gross margins and customer base, to the extent
such protection is possible. In some cases, however, Heritage's ability to
respond quickly to cost increases could occasionally cause its retail prices to
rise more rapidly than those of its competitors, possibly resulting in a loss of
customers.
BILLING AND COLLECTION PROCEDURES
Customer billing and account collection responsibilities are retained
at the district level. Heritage believes that this decentralized approach is
beneficial for several reasons:
- the customer is billed on a timely basis;
- the customer is more apt to pay a "local" business;
- cash payments are received more quickly, and
- local personnel have a current account status available to
them at all times to answer customer inquiries.
GOVERNMENT REGULATION
Heritage is subject to various federal, state, and local environmental,
health and safety laws and regulations. Generally, these laws impose limitations
on the discharge of pollutants and establish standards for the handling of solid
and hazardous wastes. These laws include without limitation, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the Clean Air Act, the Occupational
Safety and Health Act, the Emergency Planning and Community Right-to-Know Act,
the Clean Water Act, and comparable state statutes. CERCLA, also known as the
"Superfund" law, imposes joint and several liability in most instances, without
regard to fault or the legality of the original conduct, on certain classes of
persons that are considered to have contributed to the release or threatened
release of a "hazardous substance" into the environment. Propane is not a
hazardous substance within the meaning of CERCLA. However, certain automotive
waste products generated by Heritage's truck fleet, as well as "hazardous
substances" or "hazardous waste" disposed of during past operations by third
parties on Heritage's properties, could subject Heritage to liability under
CERCLA. Such laws and regulations could result in civil or criminal penalties in
cases of non-compliance and impose liability for remediation costs. In addition,
third parties may make claims against owners or operators of properties for
personal injuries and property damage associated with releases of hazardous or
toxic substances or waste.
In connection with all acquisitions of retail propane businesses that
involve the acquisition of any interests in real estate, Heritage conducts an
environmental review in an attempt to determine whether any substance other than
propane has been sold from, or stored on, any such real estate prior to its
purchase. Such review includes
8
questioning the seller, obtaining representations and warranties concerning the
seller's compliance with environmental laws, and conducting inspections of the
properties. Where warranted, independent environmental consulting firms are
hired to look for evidence of hazardous substances or the existence of
underground storage tanks.
Petroleum-based contamination or environmental wastes are known to be
located on or adjacent to six sites, which Heritage presently has or which
Heritage or its predecessors formerly had operations. These sites were evaluated
at the time of their acquisition. In all cases, remediation operations have been
or will be undertaken by others, and in all six cases, Heritage obtained
indemnification for expenses associated with any remediation from the former
owners or related entities. Based on information currently available to
Heritage, such projects are not expected to have a material adverse effect on
Heritage's financial condition or results of operations.
In July 2001, Heritage acquired a company that had previously received
a request for information from the U.S. Environmental Protection Agency (the
"EPA") regarding potential contribution to a widespread groundwater
contamination problem in San Bernardino, California, known as the Newmark
Groundwater Contamination. Although the EPA has indicated that the groundwater
contamination may be attributable to releases of solvents from a former military
base located within the subject area that occurred long before the facility
acquired by Heritage was constructed, it is possible that the EPA may seek to
recover all or a portion of groundwater remediation costs from private parties
under CERCLA. Based upon information currently available to Heritage, it is not
believed that Heritage's liability, if such action were to be taken by the EPA,
would have a material adverse effect on Heritage's financial condition or
results of operations.
National Fire Protection Association Pamphlets No. 54 and No. 58, which
establish rules and procedures governing the safe handling of propane, or
comparable regulations, have been adopted as the industry standard in all of the
states in which Heritage operates. In some states these laws are administered by
state agencies, and in others they are administered on a municipal level. With
respect to the transportation of propane by truck, Heritage is subject to
regulations promulgated under the Federal Motor Carrier Safety Act. These
regulations cover the transportation of hazardous materials and are administered
by the United States Department of Transportation. Heritage conducts ongoing
training programs to help ensure that its operations are in compliance with
applicable regulations. Heritage maintains various permits that are necessary to
operate its facilities, some of which may be material to its operations.
Heritage believes that the procedures currently in effect at all of its
facilities for the handling, storage, and distribution of propane are consistent
with industry standards and are in compliance in all material respects with
applicable laws and regulations.
Heritage has implemented environmental programs and policies designed
to avoid potential liability and cost under applicable environmental laws. It is
possible, however, that Heritage will have increased costs due to stricter
pollution control requirements or liabilities resulting from non-compliance with
operating or other regulatory permits. It is not anticipated that Heritage's
compliance with or liabilities under environmental, health and safety laws and
regulations, including CERCLA, will have a material adverse effect on Heritage.
To the extent that there are any environmental liabilities unknown to Heritage
or environmental, health and safety laws or regulations are made more stringent,
there can be no assurance that Heritage's results of operations will not be
materially and adversely affected.
EMPLOYEES
As of August 31, 2002, Heritage had 2,265 full time employees who were
employed by the General Partner or subsidiaries of the Partnership, of whom 86
were general and administrative and 2,179 were operational employees. Of its
operational employees, 67 are represented by labor unions. The General Partner
believes that its relations with its employees are satisfactory. Historically,
the General Partner has also hired seasonal workers to meet peak winter demands.
ITEM 2. PROPERTIES
Heritage operates bulk storage facilities at over 275 customer service
locations. Heritage owns substantially all of these facilities and has entered
into long-term leases for those that it does not own. Heritage believes that the
increasing difficulty associated with obtaining permits for new propane
distribution locations makes its high level of site ownership and control a
competitive advantage. Heritage owns approximately 31 million gallons of above
9
ground storage capacity at its various plant sites and has leased an aggregate
of approximately 50 million gallons of underground storage facilities in New
York, Tennessee, Georgia, Michigan, Mississippi, South Carolina, Arizona, New
Mexico, and Texas. Heritage does not own or operate any underground storage
facilities (excluding customer and local distribution tanks) or pipeline
transportation assets (excluding local delivery systems).
Heritage also owns a 50% interest in Bi-State Propane, a California
general partnership that conducts business in California and Nevada. Bi-State
Propane operates twelve customer service locations that are included on a gross
basis in Heritage's site, customer, and other property descriptions contained
herein. However, the financial statements of Bi-State Propane are audited
separately and Heritage's 50% interest is accounted for under the equity method.
The transportation of propane requires specialized equipment. The
trucks and railroad tank cars used for this purpose carry specialized steel
tanks that maintain the propane in a liquefied state. As of August 31, 2002,
Heritage utilized approximately 50 transport truck tractors, 50 transport
trailers, 25 railroad tank cars, 1,050 bobtails and 1,567 other delivery and
service vehicles, all of which Heritage owns. As of August 31, 2002, Heritage
owned approximately 627,000 customer storage tanks with typical capacities of
120 to 1,000 gallons that are leased or available for lease to customers. These
customer storage tanks are pledged as collateral to secure Heritage's
obligations to its Banks and the holders of its Notes.
Heritage believes that it has satisfactory title to or valid rights to
use all of its material properties. Although some of such properties are subject
to liabilities and leases, liens for taxes not yet due and payable, encumbrances
securing payment obligations under non-competition agreements, and immaterial
encumbrances, easements, and restrictions, Heritage does not believe that any
such burdens will materially interfere with the continued use of such properties
by Heritage in its business, taken as a whole. In addition, Heritage believes
that it has, or is in the process of obtaining, all required material approvals,
authorizations, orders, licenses, permits, franchises, and consents of, and has
obtained or made all required material registrations, qualifications and filings
with, the various state and local government and regulatory authorities which
relate to ownership of Heritage's properties or the operations of its business.
Heritage utilizes a variety of trademarks and tradenames that it owns
or has secured the right to use, including "Heritage Propane." These trademarks
and tradenames have been registered or are pending registration before the
United States Patent and Trademark Office or the various jurisdictions in which
the marks or tradenames are used. Heritage believes that its strategy of
retaining the names of the companies it has acquired has maintained the local
identification of these companies and has been important to the continued
success of these businesses. Some of Heritage's most significant trade names
include AGL Propane, Balgas, Bi-State Propane, Blue Flame Gas of Charleston,
Blue Flame Gas of Mt. Pleasant, Blue Flame Gas, Carolane Propane Gas, Gas
Service Company, EnergyNorth Propane, Gibson Propane, Guilford Gas, Holton's L.
P. Gas, Ikard & Newsom, Northern Energy, Sawyer Gas, Peoples Gas Company,
Piedmont Propane Company, ProFlame, Rural Bottled Gas and Appliance, ServiGas,
and TECO Propane. Heritage regards its trademarks, tradenames, and other
proprietary rights as valuable assets and believes that they have significant
value in the marketing of its products.
ITEM 3. LEGAL PROCEEDINGS.
Propane is a flammable, combustible gas. Serious personal injury and
significant property damage can arise in connection with its storage,
transportation or use. In the ordinary course of business, Heritage is sometimes
threatened with or is named as a defendant in various lawsuits seeking actual
and punitive damages for product liability, personal injury, and property
damage. Heritage maintains liability insurance with insurers in amounts and with
coverages and deductibles it believes are reasonable and prudent, and which are
generally accepted in the industry. However, there can be no assurance that the
levels of insurance protection currently in effect will continue to be available
at reasonable prices or that such levels will remain adequate to protect
Heritage from material expenses related to product liability, personal injury or
property damage in the future. Of the pending or threatened matters in which
Heritage is a party, none have arisen outside the ordinary course of business
except for an action filed by Heritage on November 30, 1999, is currently
pending in the Court of Common Pleas, State of South Carolina, Richland County,
against SCANA Corporation, Cornerstone Ventures, L.P. and Suburban Propane, L.P.
(the "SCANA litigation"). Heritage has asserted under a number of contract and
fraud causes of action that SCANA materially breached its contract with Heritage
to sell its assets to Heritage, and is seeking an unspecified amount of
10
compensatory and punitive damages. The defendants have denied the claims and
discovery is ongoing. Although any litigation is inherently uncertain, based on
past experience, the information currently available and the availability of
insurance coverage, Heritage does not believe that pending or threatened
litigation matters will have a material adverse effect on its financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders of the
Partnership during the fourth quarter of the fiscal year ended August 31, 2002.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS.
MARKET PRICE OF AND DISTRIBUTIONS ON THE COMMON UNITS AND RELATED UNITHOLDER
MATTERS
The Partnership's common units representing limited partners interests
in the Partnership ("Common Units") are listed on the New York Stock Exchange
under the symbol "HPG". The following table sets forth, for the periods
indicated, the high and low sales prices per Common Unit, as reported on the New
York Stock Exchange Composite Tape, and the amount of cash distributions paid
per Common Unit.
Price Range Cash
High Low Distribution (1)
----- ---- ----------------
2002 FISCAL YEAR
Fourth Quarter Ended August 31, 2002 $27.600 $22.500 $0.6375
Third Quarter Ended May 31, 2002 $29.000 $26.500 $0.6375
Second Quarter Ended February 28, 2002 $30.550 $25.510 $0.6375
First Quarter Ended November 30, 2001 $28.990 $24.650 $0.6375
2001 FISCAL YEAR
Fourth Quarter Ended August 31, 2001 $31.000 $25.250 $0.6250
Third Quarter Ended May 31, 2001 $31.000 $23.950 $0.6125
Second Quarter Ended February 28, 2001 $24.900 $20.125 $0.6000
First Quarter Ended November 30, 2000 $23.875 $20.500 $0.5875
(1) Distributions are shown in the quarter with respect to which they were
declared. For each of the indicated quarters for which distributions
have been made, an identical per unit cash distribution was paid on any
Subordinated Units outstanding at such time.
DESCRIPTION OF UNITS
As of October 25, 2002, there were approximately 14,800 individual
Common Unitholders, which includes Common Units held in street name. Common
Units and Class C Units represent limited partner interests in the Partnership
that entitle the holders to the rights and privileges specified in the Heritage
Propane Partners, L.P. Partnership Agreement (the "Partnership Agreement"). As
of November 5, 2002, there were 15,816,347 Common Units representing, an
aggregate 98.9899% limited partner interest in the Partnership. Except as
described below, the Common Units generally participate pro rata in Heritage's
income, gains, losses, deductions, credits, and distributions. There are also
1,000,000 Class C Units outstanding that are entitled only to participate in
distributions that Heritage may make that are attributable to amounts received
by Heritage in connection with the SCANA litigation.
No person is entitled to preemptive rights in respect of issuances of
securities by the Partnership, except that U.S. Propane, the General Partner,
has the right to purchase sufficient partnership securities to maintain its
equity interest in the Partnership.
Common Units. The Partnership's Common Units are registered under the
Securities Exchange Act of 1934 and are listed for trading on the New York Stock
Exchange. Each holder of a Common Unit is entitled to one vote per unit on all
matters presented to the Limited Partners for a vote. However, if at any time
any person or group (other than the General Partner and its affiliates) owns
beneficially 20% or more of all Common Units, any Common Units owned by that
person or group may not be voted on any matter and are not considered to be
outstanding when sending notices of a meeting of Unitholders (unless otherwise
required by law), calculating required votes, determining the presence of a
quorum or for other similar purposes under our Partnership Agreement. The Common
Units are entitled to distributions of Available Cash as described below under
"Cash Distribution Policy." As of
12
October 25, 2002, there were approximately 14,800 individual Common Unitholders,
which includes Common Units held in street name.
Class C Units. In conjunction with the transaction with U.S. Propane
and the change of control of the former General Partner, Heritage Holdings, the
Partnership issued 1,000,000 newly created Class C Units to Heritage Holdings in
conversion of that portion of its Incentive Distribution Rights that entitled it
to receive any distribution made by the Partnership attributable to the net
amount received by the Partnership in connection with the settlement, judgment,
award or other final nonappealable resolution of the SCANA litigation filed by
Heritage prior to the transaction with U.S. Propane. The Class C Units have zero
initial capital account balance and were distributed by Heritage Holdings to its
former stockholders in connection with the transaction with U.S. Propane. Thus,
U.S. Propane will not receive any distributions made with respect to the SCANA
litigation that would have gone to Heritage Holdings to the extent of its
General Partner interest and Incentive Distribution Rights had it remained the
General Partner of the Partnership.
All decisions of the General Partner relating to the SCANA litigation
will be determined by a special litigation committee consisting of one or more
independent directors of the General Partner. As soon as practicable after the
time, if any, that the Partnership receives the final cash payment as a result
of the resolution of the SCANA litigation, the special litigation committee will
determine the aggregate net amount of such proceeds distributable by the
Partnership by deducting from the amounts received all costs and expenses
incurred by the Partnership and its affiliates in connection with the SCANA
litigation and such cash reserves as the special committee deems necessary or
appropriate. Until the special litigation committee decides to distribute the
distributable proceeds, none of the distributable proceeds will be deemed to be
"Available Cash" under the Partnership Agreement. Please read "Cash Distribution
Policy" below for a discussion of Available Cash. When the special litigation
committee decides to distribute the distributable proceeds, the amount of the
distribution will be distributed in the same manner as the Partnership's
distribution of Available Cash, as described below under "Cash Distribution
Policy," except that the amount of distributable proceeds that would normally be
distributed to holders of Incentive Distribution Rights will instead be
distributed to the holders of the Class C Units, pro rata. The Partnership
cannot predict whether it will receive any cash payments as a result of the
SCANA litigation and, if so, when such distributions might be received.
Each holder of Class C Units receiving a distribution of cash in any
taxable year of the Partnership will be allocated items of gross income with
respect to such taxable year in an amount equal to the cash distributed to the
holder. The holders of Class C Units will not be allocated any other items of
income, gain, loss deduction or credit. The Class C Units do not have any rights
to share in any of the assets or distributions upon dissolution and liquidation
of the Partnership, except to the extent that any such distributions consist of
proceeds from the SCANA litigation to which the Class C Unitholders would have
otherwise been entitled. The Class C Units may not be converted into any other
unit. The Class C Units have no voting rights except to the extent provided by
Delaware law with respect to a vote as a class, in which case each Class C Unit
will be entitled to one vote.
Class B Subordinated Units. Prior to February 4, 2002, the Partnership
had Class B Subordinated Units representing limited partner interests that were
issued to certain former stockholders of Heritage Holdings, who are or were also
members of management, in connection with the transaction with U.S. Propane. The
Class B Subordinated Units had the same voting rights as the Subordinated Units
outstanding before the end of the Subordination Period, and generally
participated pro rata with the Common Units in Heritage's income, gains, losses,
deductions, credits, and distributions. Each Class B Subordinated Unitholder was
entitled to one vote on each matter with respect to which the Class B
Subordinated Units were entitled to vote.
On February 4, 2002, at the Special Meeting of the Common Unitholders
of the Partnership, the Common Unitholders approved an amendment of the
Partnership Agreement that converted all of the 1,382,514 outstanding Class B
Subordinated Units into 1,382,514 Common Units. The Common Units issued upon
conversion of the Class B Subordinated Units share equally with other Common
Units in distributions of Available Cash.
Subordinated Units. At the time of the Partnership's initial public
offering, the former General Partner, Heritage Holdings, held all of the
Partnership's Subordinated Units. The Subordinated Units were a separate class
of limited partner interests and the rights of holders of Subordinated Units to
participate in distributions to partners differed from, and were subordinated
to, the rights of the holders of Common Units.
13
Pursuant to the provisions of the Partnership Agreement relating to
requirements that the Partnership meet specified cash performance and
distribution requirements during successive four-quarter periods commencing with
the initial public offering in June of 1996, all of the Subordinated Units
converted into Common Units and the Subordination Period ended. Pursuant to the
conversion provisions, 925,736 Subordinated Units converted into Common Units as
of July 7, 1999, and 925,736 Subordinated Units converted into Common Units as
of July 5, 2000. The remaining 1,851,471 Subordinated Units converted into
Common Units as of July 6, 2001. Common Units issued upon conversion of the
Subordinated Units share equally with other Common Units in distributions of
Available Cash.
Incentive Distribution Rights. Incentive distribution rights represent
the contractual right to receive an increasing percentage of quarterly
distributions of available cash from operating surplus after the minimum
quarterly distribution has been paid. Please read " -- Cash Distribution Policy"
below. The General Partner owns all of the incentive distribution rights, except
that in conjunction with the August 2000 transaction with U.S. Propane, the
Partnership issued 1,000,000 Class C Units to Heritage Holdings, its general
partner at that time, in conversion of that portion of Heritage Holdings'
incentive distribution rights that entitled it to receive any distribution made
by the Partnership of funds attributable to the net amount received in
connection with the settlement, judgment, award or other final nonappealable
resolution of the litigation filed by Heritage against SCANA Corporation,
Cornerstone Ventures, L.P. and Suburban Propane, L.P. Any amount payable on the
Class C Units in the future will reduce the amount otherwise distributable to
holders of incentive distribution rights at the time the distribution of such
litigation proceeds is made and will not reduce the amount distributable to
holders of common units. No payments to date have been made on the Class C
Units.
CASH DISTRIBUTION POLICY
The Partnership Agreement requires that the Partnership will distribute
all of its Available Cash to its Unitholders and its General Partner within 45
days following the end of each fiscal quarter. The term Available Cash generally
means, with respect to any fiscal quarter of the Partnership, all cash on hand
at the end of such quarter, plus working capital borrowings after the end of the
quarter, less reserves established by the General Partner in its sole discretion
to provide for the proper conduct of the Partnership's business, comply with
applicable law or any Heritage debt instrument or other agreement, or to provide
funds for future distributions to partners with respect to any one or more of
the next four quarters. Available Cash is more fully defined in the Partnership
Agreement previously filed as an exhibit.
After the conversion of the Class B Subordinated Units was approved on
February 4, 2002, each Class B Subordinated Unit converted into one Common Unit
and participates pro rata with the other Common Units in distributions of
Available Cash. Heritage currently distributes Available Cash, excluding any
Available Cash to be distributed to the Class C Unitholders as follows:
- First, 98% to all Unitholders, pro rata, and 2% to the General
Partner, until all Unitholders have received $0.50 per unit
for such quarter and any prior quarter;
- Second, 98% to all Unitholders, pro rata, and 2% to the
General Partner, until all Unitholders have received $0.55 per
unit for such quarter;
- Third, 85% to all Unitholders, pro rata, 13% to the holders of
Incentive Distribution Rights, pro rata, and 2% to the General
Partner, until all Common Unitholders have received at least
$0.635 per unit for such quarter;
- Fourth, 75% to all Unitholders, pro rata, 23% to the holders
of Incentive Distribution Rights, pro rata and 2% to the
General Partner, until all Common Unitholders have received at
least $0.825 per unit for such quarter; and
- Fifth, thereafter 50% to all Unitholders, pro rata, 48% to the
holders of Incentive Distribution Rights, pro rata, and 2% to
the General Partner
14
- The total amount of distributions for the 2002 fiscal year on
Common Units and other outstanding limited partner interests,
the general partner interests and the Incentive Distribution
Rights totaled $40.3 million, $0.8 million and $0.9 million,
respectively. All such distributions were made from Available
Cash from Operating Surplus.
CHANGES IN SECURITIES AND RECENT SALES OF UNREGISTERED SECURITIES
During the Partnership's fiscal year 2002, the following issuances of
Common Units were made, all of which relied on one or more exemptions from
registration under the Securities Act of 1933. On February 4, 2002, in
conjunction with proposals approved by the Common Unitholders at the Special
Meeting of the Common Unitholders of the Partnership and to facilitate the U.S.
Propane transaction, 1,382,514 Common Units were issued to the Class B
Subordinated Unitholders, who are or were members of management, upon the
conversion and cancellation of the 1,382,514 previously outstanding Class B
Subordinated Units.
In conjunction with the Common Unitholder approval of the substitution
of U.S. Propane as the General Partner of the Partnership, the Partnership also
issued 162,913 Common Units to the former General Partner, Heritage Holdings, in
exchange for its 1.0101% general partner interest in the Operating Partnership,
issued 158,026 Common Units to Heritage Holdings in conversion of its 1% general
partner interest in the Partnership, and cancelled 158,026 Common Units
previously held by U.S. Propane.
A total of 11,750 Common Units were issued by the Partnership to a
former officer and to a former director of Heritage that had previously been
awarded under the terms of the Partnership's Restricted Unit Plan.
All of the foregoing Units were not registered with the Securities and
Exchange Commission under the Securities Act of 1933 by virtue of an exemption
under Section 4(2) thereof.
EQUITY COMPENSATION PLAN INFORMATION
At the time of its initial public offering, the Board of Directors of
the Partnership's General Partner adopted a Restricted Unit Plan, amended and
restated as of February 4, 2002 as the Partnership's Second Amended and Restated
Restricted Unit Plan (the "Restricted Unit Plan"), which provided for the
awarding of Common Units to key employees. See "Executive Compensation --
Restricted Unit Plan" for a description of the Restricted Unit Plan.
In conjunction with the U.S. Propane merger, the Partnership adopted a
long term incentive plan (the "Long Term Incentive Plan"), which provides for
awarding Common Units to the executive officers of the General Partner of the
Partnership and certain other persons that may be designated by the Board of
Directors. The Long Term Incentive Plan provides for a maximum award of 500,000
Common Units provided that certain targeted levels of cash distributions are
reached. See "Executive Compensation -- Long Term Incentive Plan" for a
description of the Long Term Incentive Plan.
The following table sets forth in tabular format, a summary of the
Partnership's equity plan information:
15
Number of securities
remaining available for
Number of securities to Weighted-average exercise future issuance under
be issued upon exercise price of outstanding equity compensation plans
of outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column (a))
Plan Category (a) (b) (c)
-------------
Equity compensation plans approved
by security holders 39,400 (1) $1,087,440 15,800
Equity compensation plans not
approved by security holders - - 500,000
-------- ----------- -------
Total (2) 39,400 $1,087,440 515,800
======== =========== =======
(1) Valued as of October 31, 2002. Actual exercise price may differ
depending on the Common Unit price on the date such units vest.
(2) As of October 31, 2002.
ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
HERITAGE
The following table sets forth, for the periods and as of the dates
indicated, selected historical financial and operating data for Heritage Propane
Partners, L.P. and its subsidiaries (formerly Peoples Gas and the surviving
legal entity in the series of transactions with U.S. Propane). The selected
historical financial and operating data should be read in conjunction with the
financial statements of Heritage Propane Partners, L.P. (formerly Peoples Gas
Company) included elsewhere in this report and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" also included
elsewhere in this report. The amounts in the table below, except per unit data,
are in thousands.
HERITAGE PROPANE PARTNERS, L.P. (FORMERLY PEOPLES GAS):
Eight Months Years Ended
Years ended December 31, Ended August 31, August 31,
------------------------ ---------------- ----------
1997 1998 1999 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ----
(Unaudited)
Statements of Operating Data:
Revenues $ 32,874 $ 30,187 $ 34,045 $ 21,766 $ 51,534 $543,975 $462,325
Gross profit (a) 15,811 17,904 19,196 13,299 21,572 237,419 224,140
Depreciation and amortization 2,514 2,855 3,088 2,037 4,686 40,431 36,998
Operating income (loss) 1,370 3,961 2,885 2,666 (714) 54,423 40,961
Interest expense - - - - 2,409 35,567 37,341
Income (loss) before income taxes
and minority interests 980 3,483 2,895 2,677 (3,547) 20,524 5,476
Provision for income taxes 378 1,412 1,127 1,035 379 - -
Net income (loss) 602 2,071 1,768 1,642 (3,846) 19,710 4,902
Net income (loss) per unit (b) 0.35 1.19 1.02 0.94 (0.37) 1.43 0.25
Cash dividends/distributions per unit - 1.13 1.30 1.30 0.87 2.38 2.55
16
As of December 31, As of August 31,
------------------------------- ---------------------------------------------
1997 1998 1999 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited)
Balance Sheet Data
Current assets $ 5,278 $ 4,310 $ 6,643 $ 4,326 $ 84,869 $138,263 $ 95,387
Total assets 33,982 37,206 43,724 39,481 615,779 758,167 717,264
Current liabilities 8,204 13,671 19,636 15,716 102,212 127,655 122,069
Long-term debt - - - - 361,990 423,748 420,021
Minority interests - - - - 4,821 5,350 3,564
Partner's capital - general partner (b) 39 39 37 37 939 1,875 1,585
Partners' capital - limited partners (b) 15,457 15,557 15,070 14,944 145,817 206,080 173,677
Eight Months Ended
Years ended December 31, August 31, Years ended August 31,
----------------------------------- ---------------------- ------------------------
1997 1998 1999 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ----
Operating Data (unaudited):
EBITDA, as adjusted (c) $ 3,884 $ 6,816 $ 5,973 $ 4,703 $ 4,507 $ 97,444 $ 81,536
Cash flows from operating
activities 7,682 9,219 9,353 - 14,508 28,056 65,453
Cash flows from investing
activities (4,497) (7,047) (7,191) - (183,037) (122,313) (33,417)
Cash flows from financing
activities (3,561) (2,317) (2,257) - 173,353 95,038 (33,071)
Capital expenditures (d)
Maintenance and growth 4,497 5,328 6,176 2,544 3,559 23,854 27,072
Acquisition - 1,719 1,015 1,015 177,067 94,860 19,742
Retail gallons sold 29,077 30,921 33,608 22,118 38,268 330,242 329,574
(a) Gross profit is computed by reducing total revenues by the direct cost
of the products sold.
(b) Net income (loss) per unit is computed by dividing the limited
partner's interest in net income (loss) by the weighted average number
of units outstanding. Although equity accounts of Peoples Gas survive
the merger, Predecessor Heritage's partnership structure and
partnership units survive. Accordingly, the equity accounts of Peoples
Gas have been restated based on general partner interest and Common
Units received by Peoples Gas in the merger.
(c) EBITDA, as adjusted is presented because such information is relevant
and is used by management, industry analysts, investors, lenders and
rating agencies to assess the financial performance and operating
results of the Partnership's fundamental business activities.
Management believes that the presentation of EBITDA, as adjusted is
useful to lenders and investors because of its use in the propane
industry and for master limited partnerships as an indicator of the
strength and performance of the Partnership's ongoing business
operations, including the ability to fund capital expenditures, service
debt and pay distributions. Additionally, management believes that
EBITDA, as adjusted provides additional and useful information to the
Partnership's investors for trending, analyzing and benchmarking the
operating results of the Partnership from period to period as compared
to other companies that may have different financing and capital
structures. The presentation of EBITDA, as adjusted allows investors to
view the Partnership's performance in a manner similar to the methods
used by management and provides additional insight to the Partnership's
operating results.
EBITDA, as adjusted is used by management to determine our operating
performance, and along with other data as internal measures for setting
annual operating budgets, assessing financial performance of the
Partnership's numerous business locations, as a measure for evaluating
targeted businesses for acquisition and as a measurement component of
incentive compensation. The Partnership has a large number of business
locations located in different regions of the United States. EBITDA, as
adjusted can be a meaningful measure of financial performance because
it excludes factors which are outside the control of the employees
responsible for operating and managing the business locations, and
provides information management can use to evaluate the performance of
the business locations, or the region where they are located, and the
employees responsible for operating them. To present EBITDA, as
adjusted on a full Partnership basis, we add back the minority interest
of the general partner because net income is reported net of the
general partner's minority interest. Our EBITDA, as adjusted includes
non-cash compensation expense which is a non-cash expense item
resulting from our unit based compensation plans that does not require
cash settlement and is not considered during management's assessment of
the operating results of the Partnership's business. By adding these
non-cash compensation expenses in EBITDA, as adjusted allows management
to compare the Partnership's operating
17
results to those of other companies in the same industry who may have
compensation plans with levels and values of annual grants that are
different than the Partnership's. Other expenses include other finance
charges and other asset non-cash impairment charges that are reflected
in the Partnership's operating results but are not classified in
interest, depreciation and amortization. We do not include gain on the
sale of assets when determining EBITDA, as adjusted since including
non-cash income resulting from the sale of assets increases the
performance measure in a manner that is not related to the true
operating results of the Partnership's business. In addition,
Heritage's debt agreements contain financial covenants based on EBITDA,
as adjusted. For a description of these covenants, please read "Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations-Description of Indebtedness."
There are material limitations to using a measure such as EBITDA, as
adjusted, including the difficulty associated with using it as the sole
measure to compare the results of one company to another, and the
inability to analyze certain significant items that directly affect a
company's net income or loss. In addition, Heritage's calculation of
EBITDA, as adjusted may not be consistent with similarly titled
measures of other companies and should be viewed in conjunction with
measurements that are computed in accordance with GAAP. EBITDA, as
adjusted for the periods described herein is calculated in the same
manner as presented by Heritage in the past. Management compensates for
these limitations by considering EBITDA, as adjusted in conjunction
with its analysis of other GAAP financial measures, such as gross
profit, net income (loss), and cash flow from operating activities.
A reconciliation of EBITDA, as adjusted, to net income (loss) is
presented below. Please read "-Reconciliation of EBITDA, As Adjusted to
Net Income" below.
(d) Capital expenditures fall generally into three categories: (i)
maintenance capital expenditures of approximately $12.8 and $8.5
million in fiscal years 2002, and 2001, respectively, which include
expenditures for repairs that extend the life of the assets and
replacement of property, plant and equipment, (ii) growth capital
expenditures, which include expenditures for purchase of new propane
tanks and other equipment to facilitate retail customer base expansion,
and (iii) acquisition expenditures which include expenditures related
to the acquisition of retail propane operations and other business, and
the portion of the purchase price allocated to intangibles associated
with such acquired businesses.
PREDECESSOR HERITAGE
The following table sets forth, for the periods and as of the dates
indicated, selected historical financial and operating data for Predecessor
Heritage. The selected historical financial and operating data of Predecessor
Heritage should be read in conjunction with the financial statements of Heritage
Propane Partners, L.P. and its subsidiaries, (Predecessor Heritage) included
elsewhere in this report and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" also included elsewhere in this report. The
amounts in the table below, except per unit data, are in thousands.
HERITAGE PROPANE PARTNERS, L.P. (PREDECESSOR HERITAGE):
Ten Two
Months Months
Ended Ended Years Ended Period Ended
June 30, August 31, August 31, August 9,
-------- ---------- ---------------------------------- ------------
1996 (a) 1996 1997 1998 1999 2000
-------- ---- ---- ---- ---- ----
Statements of Operating Data:
Revenues $144,623 $ 18,477 $199,785 $185,987 $184,020 $242,491
Gross Profit (b) 55,634 6,314 73,838 89,103 96,753 101,746
Depreciation and amortization 7,581 1,733 11,124 13,680 14,749 17,143
Operating income (loss) 15,755 (1,956) 16,919 22,929 24,567 23,475
Interest expense 10,833 1,962 12,063 14,599 15,915 17,664
Income (loss) before income taxes and
minority interest 6,084 (4,087) 5,625 9,266 10,116 6,936
Provision for income taxes 2,735 - - - - -
Net income (loss) 2,921 (8,423) 5,177 8,790 9,662 6,504
Basic and Diluted Net income (loss) per unit (c) - (1.06) 0.64 1.04 1.11 0.66
18
August 31,
--------------------------------------------
1996 1997 1998 1999
---- ---- ---- ----
Balance Sheet Data (end of period):
Current assets $ 24,014 $ 27,951 $ 26,185 $ 29,267
Total assets 187,850 203,799 239,964 262,958
Current liabilities 24,728 34,426 35,444 47,680
Long-term debt 132,521 148,453 177,431 196,216
Partner's capital - general partner 307 208 273 176
Partners' capital - limited partners 30,294 20,712 26,816 18,886
Period Ended
Years ended August 31, August 9,
------------------------------------------- ------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Operating Data (unaudited):
EBITDA, as adjusted (d) $ 24,365 $ 28,718 $ 37,792 $ 41,047 $ 42,373
Cash flows from operating activities 12,325 15,384 24,532 23,613 14,144
Cash flows from investing activities (23,577) (20,100) (27,124) (30,799) (58,283)
Cash flows from financing activities 26,673 5,571 2,404 7,028 44,587
Capital expenditures (e)
Maintenance and growth 7,244 7,170 9,359 14,974 12,931
Acquisition 16,665 14,549 23,276 17,931 46,801
Retail gallons sold 118,200 125,605 146,747 159,938 170,891
(a) Reflects unaudited pro forma information for Predecessor Heritage as if
the Partnership formation had occurred as of the beginning of the
period presented.
(b) Gross profit is computed by reducing total revenues by the direct cost
of the products sold.
(c) Net income (loss) per unit is computed by dividing the limited
partners' interest in net income (loss) by the weighted average number
of units outstanding.
(d) EBITDA, as adjusted is defined as the Partnership's earnings before
interest, taxes, depreciation, amortization and other non-cash items,
such as compensation charges for unit issuances to employees, gain or
loss on disposal of assets, and other expenses. We present EBITDA, as
adjusted, on a Partnership basis which includes both the general and
limited partner interests. Non-cash compensation expense represents
charges for the value of the Common Units awarded under the
Partnership's compensation plans that have not yet vested under the
terms of those plans and are charges which do not, or will not, require
cash settlement. Non-cash income such as the gain arising from our
disposal of assets is not included when determining EBITDA, as
adjusted. EBITDA, as adjusted (i) is not a measure of performance
calculated in accordance with generally accepted accounting principles
and (ii) should not be considered in isolation or as a substitute for
net income, income from operations or cash flow as reflected in our
consolidated financial statements.
EBITDA, as adjusted is presented because such information is relevant
and is used by management, industry analysts, investors, lenders and
rating agencies to assess the financial performance and operating
results of the Partnership's fundamental business activities.
Management believes that the presentation of EBITDA, as adjusted is
useful to lenders and investors because of its use in the propane
industry and for master limited partnerships as an indicator of the
strength and performance of the Partnership's ongoing business
operations, including the ability to fund capital expenditures, service
debt and pay distributions. Additionally, management believes that
EBITDA, as adjusted provides additional and useful information to the
Partnership's investors for trending, analyzing and benchmarking the
operating results of the Partnership from period to period as compared
to other companies that may have different financing and capital
structures. The presentation of EBITDA, as adjusted allows investors to
view the Partnership's performance in a manner similar to the methods
used by management and provides additional insight to the Partnership's
operating results.
EBITDA, as adjusted is used by management to determine our operating
performance, and along with other data as internal measures for setting
annual operating budgets, assessing financial performance of the
Partnership's numerous business locations, as a measure for evaluating
targeted businesses for acquisition and as a measurement component of
incentive compensation. The Partnership has a large number of business
locations located in different regions of the
19
United States. EBITDA, as adjusted can be a meaningful measure of
financial performance because it excludes factors which are outside the
control of the employees responsible for operating and managing the
business locations, and provides information management can use to
evaluate the performance of the business locations, or the region where
they are located, and the employees responsible for operating them. To
present EBITDA, as adjusted on a full Partnership basis, we add back
the minority interest of the general partner because net income is
reported net of the general partner's minority interest. Our EBITDA, as
adjusted includes non-cash compensation expense which is a non-cash
expense item resulting from our unit based compensation plans that does
not require cash settlement and is not considered during management's
assessment of the operating results of the Partnership's business. By
adding these non-cash compensation expenses in EBITDA, as adjusted
allows management to compare the Partnership's operating results to
those of other companies in the same industry who may have compensation
plans with levels and values of annual grants that are different than
the Partnership's. Other expenses include other finance charges and
other asset non-cash impairment charges that are reflected in the
Partnership's operating results but are not classified in interest,
depreciation and amortization. We do not include gain on the sale of
assets when determining EBITDA, as adjusted since including non-cash
income resulting from the sale of assets increases the performance
measure in a manner that is not related to the true operating results
of the Partnership's business. In addition, Heritage's debt agreements
contain financial covenants based on EBITDA, as adjusted. For a
description of these covenants, please read "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Description of Indebtedness."
There are material limitations to using a measure such as EBITDA, as
adjusted, including the difficulty associated with using it as the sole
measure to compare the results of one company to another, and the
inability to analyze certain significant items that directly affect a
company's net income or loss. In addition, Heritage's calculation of
EBITDA, as adjusted may not be consistent with similarly titled
measures of other companies and should be viewed in conjunction with
measurements that are computed in accordance with GAAP. EBITDA, as
adjusted for the periods described herein is calculated in the same
manner as presented by Heritage in the past. Management compensates for
these limitations by considering EBITDA, as adjusted in conjunction
with its analysis of other GAAP financial measures, such as gross
profit, net income (loss), and cash flow from operating activities.
A reconciliation of EBITDA, as adjusted to net income (loss) is
presented below. Please read "-Reconciliation of EBITDA, As Adjusted to
Net Income" below.
(e) Capital expenditures fall generally into three categories: (i)
maintenance capital expenditures of approximately $5.1 for the period
ended August 9, 2000 and $4.6, $3.6 and $2.3 million in fiscal years
1999, 1998 and 1997, respectively, which include expenditures for
repairs that extend the life of the assets and replacement of property,
plant and equipment, (ii) growth capital expenditures, which include
expenditures for purchases of new propane tanks and other equipment to
facilitate retail customer base expansion, and (iii) acquisition
capital expenditures, which include expenditures related to the
acquisition of retail propane operations and the portion of the
purchase price allocated to intangibles associated with such acquired
businesses.
RECONCILIATION OF EBITDA, AS ADJUSTED TO NET INCOME (LOSS)
The following tables set forth the reconciliation of EBITDA, as
adjusted to net income (loss) Heritage Propane Partners, L.P. (formerly Peoples
Gas Company) and Predecessor Heritage for the periods indicated:
20
HERITAGE PROPANE PARTNERS, L.P. (FORMERLY PEOPLES GAS):
Eight Months Ended
NET INCOME RECONCILIATION Years ended December 31, August 31, Years ended August 31,
-------------------------------- --------------------- ---------------------
1997 1998 1999 1999 2000 2001 2002
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 602 $ 2,071 $ 1,768 $ 1,642 $ (3,846) $ 19,710 $ 4,902
Depreciation and amortization 2,514 2,855 3,088 2,037 4,686 40,431 36,998
Interest -- -- -- -- 2,409 35,567 37,341
Taxes 378 1,412 1,127 1,035 379 -- --
Non-cash compensation expense -- -- -- -- 549 1,079 1,878
Other expenses 390 478 (10) (11) 478 394 294
Depreciation, amortization, and
interest and taxes of investee -- -- -- -- 73 792 743
Minority interest in the
Operating Partnership -- -- -- -- (100) 283 192
Less: Gain on disposal of assets -- -- -- -- (121) (812) (812)
-------- -------- -------- -------- -------- -------- --------
EBITDA, as adjusted (a) $ 3,884 $ 6,816 $ 5,973 $ 4,703 $ 4,507 $ 97,444 $ 81,536
======== ======== ======== ======== ======== ======== ========
(a) Please read footnote (c) under "Item 6. Selected Historical Financial and
Operating Data - Heritage Propane Partners L.P. (formerly Peoples Gas)"
and "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Description of Indebtedness" for a more
detailed discussion of EBITDA, as adjusted.
HERITAGE PROPANE PARTNERS, L.P. (PREDECESSOR HERITAGE):
Period Ended
NET INCOME RECONCILIATION Years ended August 31, August 9,
----------------------------------------------- --------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Net income (loss) (5,502) 5,177 8,790 9,662 6,504
Depreciation and amortization 9,314 11,124 13,680 14,749 17,143
Extra ordinary loss on debt extinguishment 4,361 -- -- -- --
Unrealized gain on investments -- -- -- -- 300
Interest 12,795 12,063 14,599 15,915 17,664
Taxes 2,735 -- -- -- --
Non-cash compensation expense -- 92 218 361 366
Other expenses (223) 74 307 264 137
Depreciation, amortization , and
Interest and taxes of investee 709 507 643 732 714
Minority interest in the
Operating Partnership 403 53 89 86 59
Less: Gain on disposal of assets (227) (372) (534) (722) (514)
-------- -------- -------- -------- --------
EBITDA, as adjusted (a) $ 24,365 $ 28,718 $ 37,792 $ 41,047 $ 42,373
======== ======== ======== ======== ========
(a) Please read footnote (c) under "Item 6. Selected Historical Financial and
Operating Data - Heritage Propane Partners, L.P. (formerly Peoples Gas)"
and "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Description of Indebtedness" for a more
detailed discussion of EBITDA, as adjusted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is a discussion of the historical financial condition and
results of operations of Heritage Propane Partners, L.P. and its subsidiaries,
formerly Peoples Gas and the surviving legal entity in the series of
transactions with U.S. Propane, and should be read in conjunction with the
historical Financial Statements of Peoples Gas and Predecessor Heritage and
Notes thereto included elsewhere in this annual report on Form 10-K.
FORWARD-LOOKING STATEMENTS
21
CERTAIN MATTERS DISCUSSED IN THIS REPORT, EXCLUDING HISTORICAL
INFORMATION, AS WELL AS SOME STATEMENTS BY HERITAGE IN PERIODIC PRESS RELEASES
AND SOME ORAL STATEMENTS OF HERITAGE OFFICIALS DURING PRESENTATIONS ABOUT THE
PARTNERSHIP, INCLUDE CERTAIN "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. STATEMENTS USING WORDS SUCH AS "ANTICIPATE," "BELIEVE,"
"INTEND," "PROJECT," "PLAN," "CONTINUE," "ESTIMATE," "FORECAST," "MAY," "WILL,"
OR SIMILAR EXPRESSIONS HELP IDENTIFY FORWARD-LOOKING STATEMENTS. ALTHOUGH
HERITAGE BELIEVES SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE
ASSUMPTIONS AND CURRENT EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS, NO
ASSURANCE CAN BE GIVEN THAT EVERY OBJECTIVE WILL BE REACHED.
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM ANY RESULTS PROJECTED,
FORECASTED, ESTIMATED OR EXPRESSED IN FORWARD-LOOKING STATEMENTS SINCE MANY OF
THE FACTORS THAT DETERMINE THESE RESULTS ARE DIFFICULT TO PREDICT AND ARE BEYOND
MANAGEMENT'S CONTROL. SUCH FACTORS INCLUDE:
- CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE UNITED STATES OF
AMERICA AS WELL AS CHANGES IN GENERAL ECONOMIC CONDITIONS AND
CURRENCIES IN FOREIGN COUNTRIES;
- WEATHER CONDITIONS THAT VARY SIGNIFICANTLY FROM HISTORICALLY NORMAL
CONDITIONS WHICH MAY ADVERSELY AFFECT THE DEMAND FOR PROPANE AND
HERITAGE'S FINANCIAL CONDITION;
- HERITAGE'S SUCCESS IN HEDGING ITS PRODUCT SUPPLY POSITIONS;
- THE EFFECTIVENESS OF RISK-MANAGEMENT POLICIES AND PROCEDURES AND THE
ABILITY OF HERITAGE'S LIQUIDS MARKETING COUNTER PARTIES TO SATISFY
THEIR FINANCIAL COMMITMENTS;
- THE GENERAL LEVEL OF PETROLEUM PRODUCT DEMAND AND THE AVAILABILITY
AND PRICE OF PROPANE SUPPLIES;
- SUDDEN AND SHARP PROPANE PRICE INCREASES AND MARKET VOLATILITY MAY
ADVERSELY AFFECT HERITAGE'S OPERATING RESULTS;
- THE POLITICAL AND ECONOMIC STABILITY OF PETROLEUM PRODUCING NATIONS;
- HERITAGE'S ABILITY TO CONDUCT BUSINESS IN FOREIGN COUNTRIES;
- HERITAGE'S ABILITY TO OBTAIN ADEQUATE SUPPLIES OF PROPANE FOR RETAIL
SALE IN THE EVENT OF AN INTERRUPTION IN SUPPLY OR TRANSPORTATION;
- ENERGY PRICES GENERALLY AND SPECIFICALLY, THE PRICE OF PROPANE TO
THE CONSUMER COMPARED TO THE PRICE OF ALTERNATIVE AND COMPETING
FUELS;
- THE MATURITY OF THE PROPANE INDUSTRY AND COMPETITION FROM OTHER
PROPANE DISTRIBUTORS AND OTHER ENERGY SOURCES;
- ENERGY EFFICIENCIES AND TECHNOLOGICAL TRENDS MAY AFFECT DEMAND FOR
PROPANE;
- THE AVAILABILITY AND COST OF CAPITAL;
- HERITAGE'S ABILITY TO ACCESS CERTAIN CAPITAL SOURCES MAY REQUIRE IT
TO OBTAIN A DEBT RATING;
- CHANGES IN LAWS AND REGULATIONS TO WHICH HERITAGE IS SUBJECT,
INCLUDING TAX, ENVIRONMENTAL, TRANSPORTATION, AND EMPLOYMENT
REGULATIONS;
- OPERATING RISKS INCIDENTAL TO TRANSPORTING, STORING, AND
DISTRIBUTING PROPANE, INCLUDING LITIGATION RISKS WHICH MAY NOT BE
COVERED BY INSURANCE;
- HERITAGE'S ABILITY TO GENERATE AVAILABLE CASH FOR DISTRIBUTIONS TO
UNITHOLDERS;
22
- THE COSTS AND EFFECTS OF LEGAL AND ADMINISTRATIVE PROCEEDINGS
AGAINST HERITAGE OR WHICH MAY BE BROUGHT AGAINST IT;
- HERITAGE'S ABILITY TO SUSTAIN HISTORICAL LEVELS OF INTERNAL GROWTH;
- HERITAGE'S ABILITY TO CONTINUE TO LOCATE AND ACQUIRE OTHER PROPANE
COMPANIES AT PURCHASE PRICES THAT ARE ACCRETIVE TO ITS FINANCIAL
RESULTS;
- CASH DISTRIBUTIONS TO UNITHOLDERS ARE NOT GUARANTEED AND MAY
FLUCTUATE WITH HERITAGE'S PERFORMANCE AND OTHER EXTERNAL FACTORS,
INCLUDING RESTRICTIONS IN HERITAGE'S DEBT AGREEMENTS; AND
- HERITAGE MAY SELL ADDITIONAL LIMITED PARTNER INTERESTS, THUS
DILUTING THE EXISTING INTEREST OF UNITHOLDERS.
GENERAL
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales price over propane supply costs. The
market price of propane is often subject to volatile changes as a result of
supply or other market conditions over which Heritage will have no control.
Product supply contracts are one-year agreements subject to annual renewal and
generally permit suppliers to charge posted prices (plus transportation costs)
at the time of delivery or the current prices established at major delivery
points. Since rapid increases in the wholesale cost of propane may not be
immediately passed on to retail customers, such increases could reduce gross
profits. Heritage generally has and Predecessor Heritage generally had attempted
to reduce price risk by purchasing propane on a short-term basis. Heritage has
and Predecessor Heritage had on occasion purchased significant volumes of
propane during periods of low demand, which generally occur during the summer
months, at the then current market price, for storage both at its customer
service locations and in major storage facilities for future resale.
The retail propane business of Heritage consists principally of
transporting propane purchased in the contract and spot markets, primarily from
major fuel suppliers, to its customer service locations and then to tanks
located on the customers' premises, as well as to portable propane cylinders. In
the residential and commercial markets, propane is primarily used for space
heating, water heating, and cooking. In the agricultural market, propane is
primarily used for crop drying, tobacco curing, poultry brooding, and weed
control. In addition, propane is used for certain industrial applications,
including use as an engine fuel for internal combustion engines that power
vehicles and forklifts and as a heating source in manufacturing and mining
processes.
Heritage's propane distribution business is largely seasonal and dependent
upon weather conditions in its service areas. Propane sales to residential and
commercial customers are affected by winter heating season requirements.
Historically, approximately two-thirds of Heritage's retail propane volume and
in excess of 80% of Heritage's EBITDA, as adjusted is attributable to sales
during the six-month peak-heating season of October through March. This
generally results in higher operating revenues and net income during the period
from October through March of each year and lower operating revenues and either
net losses or lower net income during the period from April through September of
each year. Consequently, sales and operating profits are concentrated in the
first and second fiscal quarters, however, cash flow from operations is
generally greatest during the second and third fiscal quarters when customers
pay for propane purchased during the six-month peak-heating season. Sales to
industrial and agricultural customers are much less weather sensitive
A substantial portion of Heritage's propane is used in the
heating-sensitive residential and commercial markets causing the temperatures
realized in Heritage's areas of operations, particularly during the six-month
peak-heating season, to have a significant effect on its financial performance.
In any given area, sustained warmer-than-normal temperatures will tend to result
in reduced propane use, while sustained colder-than-normal temperatures will
tend to result in greater propane use. Heritage uses information based on normal
temperatures in understanding how temperatures that are colder or warmer than
normal affect historical results of operations and in preparing forecasts of
future operations.
23
Gross profit margins are not only affected by weather patterns, but also
vary according to customer mix. For example, sales to residential customers
generate higher margins than sales to certain other customer groups, such as
commercial or agricultural customers. Wholesale margins are substantially lower
than retail margins. In addition, gross profit margins vary by geographical
region. Accordingly, a change in customer or geographic mix can affect gross
profit without necessarily affecting total revenues.
The following is a discussion of the historical financial condition and
results of operations of Heritage Propane Partners, L.P. and its subsidiaries,
(Formerly Peoples Gas and the surviving legal entity in the series of
transactions with U.S. Propane), and should be read in conjunction with the
historical Financial and Operating Data and Notes thereto and the historical
Financial and Operating Data and Notes thereto of Heritage Propane Partners,
L.P. and its subsidiaries (Predecessor Heritage) included elsewhere in this
annual report on Form 10-K.
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS - HERITAGE PROPANE PARTNERS, L.P.
(FORMERLY PEOPLES GAS)
The formation of U.S. Propane (formerly Peoples Gas) and the merger with
Predecessor Heritage affect the comparability of (i) the fiscal year ended
August 31, 2001 to the eight months ended August 31, 2000, because the volumes
and results of operations of fiscal year 2001 include a full year of the volumes
and results of operations of the propane operations of the combined operations,
and (ii) the results of the eight months ended August 31, 2000 to the eight
months ended August 31, 1999, because the volumes and results of operations for
the period from August 10, 2000 through August 31, 2000 also include the volumes
and results of operations of AGL, United Cities, Piedmont, and Predecessor
Heritage. The increases in the line items discussed below are a result of these
transactions. Amounts discussed below reflect 100% of the results of MP Energy
Partnership during the period from August 9, 2000 through August 31, 2000 and
the fiscal years ended August 31, 2001 and August 31, 2002. MP Energy
Partnership is a general partnership in which Heritage owns a 60% interest.
Because MP Energy Partnership is primarily engaged in lower-margin wholesale
distribution, its contribution to Heritage's net income is not significant and
the minority interest of this partnership is excluded from the EBITDA, as
adjusted calculation.
FISCAL YEAR ENDED AUGUST 31, 2002 COMPARED TO THE FISCAL YEAR ENDED AUGUST 31,
2001
Volume. Total retail gallons sold in fiscal year 2002 were 329.6 million,
a decrease of 0.6 million from the 330.2 million gallons sold in fiscal year
2001. This decrease resulted from an approximate 36.2 million gallon reduction
in gallons sold primarily due to the significantly warmer than normal weather in
fiscal year 2002, offset by an approximate 35.6 million gallon increase realized
from acquisitions that were not included in the year ended August 31, 2001.
Temperatures in the Partnership's area of operations were an average of 10%
warmer than last year and 12% warmer than normal.
Heritage sold approximately 82.1 million wholesale gallons during fiscal
year 2002 of which 16.8 million were domestic wholesale and 65.3 million were
foreign wholesale. In fiscal year 2001, Heritage sold 12.7 million domestic
wholesale gallons and 88.9 million foreign wholesale gallons. The increase of
4.1 million in domestic wholesale gallons in fiscal year 2002 compared to fiscal
year 2001 is due to an approximate 10.1 million gallon increase related to
acquisitions, offset by an approximate 6.0 million gallon decrease in volume
sold primarily due to warmer temperatures in fiscal year 2002. The 23.6 million
gallon decrease in foreign wholesale volumes is primarily due to a decrease in
volume sold as a result of the warmer temperatures in fiscal year 2002.
Revenues. Total revenues for fiscal year 2002 were $462.3 million, a
decrease of $81.6 million, as compared to $543.9 million in fiscal year 2001.
Retail revenues for fiscal year 2002 were $365.3 million as compared to $440.5
million for fiscal year 2001, a decrease of $75.2 million, of which $74.5
million was primarily due to lower selling prices and $40.2 million was
primarily due to the decrease in gallons sold as a result of warmer weather
conditions, offset by an approximate $39.5 million increase due to gallons added
through acquisitions. Selling prices in all the reportable segments decreased
from last year in response to lower supply costs. Domestic wholesale revenues
increased $0.1 million to $10.0 million, due to an increase of approximately
$6.0 million in acquisition related volumes, offset by decreases of
approximately $2.3 million due to lower selling prices and approximately $3.6
million related to a decrease in gallons sold as a result of the warmer weather
conditions this fiscal year as compared to fiscal year 2001. Foreign wholesale
revenues were $31.2 million for fiscal year 2002 as compared to $50.0 million
for fiscal year 2001, a decrease of $18.8 million primarily due to a combination
of an approximate $11.3 million in decreased volumes and an approximate $7.5
million decrease related to lower selling prices. Net liquids marketing revenues
decreased from $0.8 million in fiscal year 2001 to $0.5 million in fiscal year
24
2002, primarily due to an overall reduction in the number of contracts entered
into during fiscal year 2002 and lower commodity prices as compared to fiscal
year 2001. Other domestic revenues increased by $12.6 million to $55.3 for
fiscal year 2002, compared to $42.7 million for fiscal year ended 2001 as a
result of acquisitions and an increase in other service fees that are not
weather sensitive.
Cost of Products Sold. Total cost of sales decreased $68.4 million to
$238.2 million as compared to $306.6 million for fiscal year 2001. Retail fuel
cost of sales decreased $53.5 million to $184.6 million for fiscal year 2002,
due to decreases in the cost of propane as compared to fiscal year 2001.
Although the market price for propane for the year ended August 31, 2002 is well
below the price for the year ended August 31, 2001, the average cost per gallon
sold for fiscal year 2002 was negatively impacted by the higher cost of
pre-bought inventory that was absorbed into cost of sales throughout the year
ended August 31, 2002. U. S. wholesale cost of sales increased $0.6 million due
to an increase of approximately $2.3 million as a result of acquisition volumes
offset by an approximate $1.7 million decrease due to lower cost of propane.
Foreign wholesale cost of sales decreased $18.7 million of which approximately
$10.6 million was due to decreased product costs this fiscal year and
approximately $ 8.1 million was due to decreased volumes described above. Other
cost of sales increased $3.2 million to $14.6 million for fiscal year 2002
primarily due to acquisitions.
Gross Profit. Total gross profit decreased to $224.1 million in fiscal
year 2002 as compared to $237.4 million in fiscal year 2001, due to the
aforementioned decreases in volumes and revenues described above, offset in part
by the decreases in product costs and the results of acquisitions. For fiscal
year 2002, retail fuel gross profit was $180.7 million, domestic wholesale gross
profit was $0.3 million, liquids marketing gross profit was $0.5 million, other
gross profit was $40.6 million, and foreign wholesale gross profit was
$2.0 million. As a comparison, for fiscal year 2001, Heritage recorded retail
fuel gross profit of $202.4 million, domestic wholesale fuel gross profit of
$0.8 million, foreign gross profit of $2.0 million, liquids marketing gross
profit of $1.5 million and other gross profit of $30.7 million for a total gross
profit of $237.4 million.
Operating Expenses. Operating expenses were $133.2 million for fiscal year
2002 as compared to $126.8 million for fiscal year 2001. The increase of $6.4
million is primarily the result of $10.8 million of additional operating
expenses incurred for employee wages and benefits related to the growth of
Heritage from acquisitions since the fiscal year ended August 31, 2001, offset
by a $4.4 million decrease in the short-term incentive plan expense and cost
reduction efforts initiated to address the decreased operating income
encountered during the unusually warm winter of fiscal year 2002.
Selling, General and Administrative. Selling, general and administrative
expenses were $13.0 million for fiscal year 2002 as compared to $15.7 million
for fiscal year 2001. This decrease is primarily attributable to the additional
expenses incurred in fiscal year 2001 related to the executive short-term
compensation plan that did not reoccur during fiscal year 2002.
Depreciation and Amortization. Depreciation and amortization for fiscal
year 2002 was $37.0 million, a decrease of $3.4 million as compared to $40.4
million in fiscal year 2001. The decrease is primarily attributable to the
adoption of FASB Statement No. 142, Goodwill and Other Intangible Assets ("SFAS
142") on September 1, 2001, which resulted in goodwill no longer being
amortized. The adoption of SFAS 142 resulted in $5.7 million less amortization
expense for the year ended August 31, 2002. Goodwill amortization totaled $4.9
million for the year ended August 31, 2001. This decrease was offset by
increased depreciation related to property, plant and equipment, and intangible
assets from the businesses acquired since the year ended August 31, 2001.
Operating Income. Heritage reported operating income of $41.0 million in
fiscal year 2002 as compared to the operating income of $54.4 million for fiscal
year 2001. The decrease of $13.4 million is due to the related decrease in gross
profit and increase in operating expenses described above offset by the decrease
in selling, general and administrative expenses and the decrease in deprecation
and amortization previously discussed.
Interest Expense. Interest expense for fiscal year 2002 was $37.3 million,
an increase of $1.7 million as compared to $35.6 million in fiscal year 2001. In
May 2001, Heritage issued $70.0 million of fixed rate Senior Secured Notes.
Interest expense related to these notes was recorded for four months in 2001 and
twelve months in 2002, causing interest expense to increase approximately $3.6
million in fiscal year 2002 compared to fiscal year 2001. This increase was
offset by a $0.6 million decrease in interest expense on the Working Capital
Facility and a $1.3 million decrease in interest expense on the Acquisition
Facility.
25
Net Income. Heritage reported net income of $4.9 million, or $0.25 per
limited partner unit, for fiscal year 2002, a decrease of $14.8 million from net
income of $19.7 million for fiscal year 2001. This reduction is primarily due to
the decreased operating income described above, and a $1.8 million increase in
interest expense, offset by a decrease in minority interest expense due to
decreased net income, a decrease in other expenses, and an increase in earnings
from affiliates.
EBITDA, as adjusted. EBITDA, as adjusted decreased $15.9 million to $81.5
million for fiscal year 2002, as compared to EBITDA, as adjusted of $97.4
million for fiscal year 2001. This decrease is related to the decrease in gross
margin realized during the year ended August 31, 2002 as compared to the year
ended August 31, 2001, resulting in reduced operating income. EBITDA, as
adjusted is not a measure of performance calculated in accordance with generally
accepted accounting principles, and should not be considered in isolation or as
a substitute for net income, income from operations or cash flow as reflected in
our consolidated financial statements. Please read footnote (c) under "Item 6.
Selected Historical Financial and Operating Data - Heritage Propane Partners,
L.P. (formerly Peoples Gas)" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Description of Indebtedness"
for a more detailed discussion of EBITDA, as adjusted.
FISCAL YEAR ENDED AUGUST 31, 2001 COMPARED TO THE EIGHT MONTHS ENDED AUGUST 31,
2000
Volume. Total retail gallons sold in the year ended August 31, 2001 were
330.2 million, an increase of 291.9 million over the 38.3 million gallons sold
in the eight months ended August 31, 2000. Predecessor Heritage sold 170.9
million retail gallons in the approximate eleven-month period ended August 9,
2000. Of the 159.3 million gallon increase, approximately 51.9 million gallons
due to a return to more normal weather during the peak-heating season, and
approximately 107.4 million gallons were attributable to acquisitions.
Heritage sold approximately 101.6 million wholesale gallons during fiscal
year 2001 of which 12.7 million were domestic wholesale and 88.9 million were
foreign wholesale. In the eight months ended August 31, 2000, Heritage sold 0.6
million domestic wholesale gallons and 6.2 million foreign wholesale gallons.
The increase in wholesale gallons is attributable to having a full year of the
operations of Predecessor Heritage reported in fiscal year 2001, as Peoples Gas
did not have any wholesale gallons that were reported in the eight months ended
August 31, 2000. As a comparison, Predecessor Heritage sold approximately 82.6
million wholesale gallons in the eleven-month period ended August 9, 2000 of
which 7.1 million were domestic wholesale and 75.5 million were foreign
wholesale. This 19.0 million gallon increase was primarily due to a return to
more normal weather during the peak-heating season of 2001.
Revenues. Total revenues for the fiscal year ended August 31, 2001 were
$543.9 million an increase of $492.4 million as compared to $51.5 million in the
eight months ended August 31, 2000. Revenues for the propane operations of
Predecessor Heritage for the approximate eleven-month period ended August 9,
2000 were $242.5 million. Retail revenues for the fiscal year ended August 31,
2001 were $440.5 million as compared to $43.8 million for the eight months ended
August 31, 2000, an increase of $396.7 million. Predecessor Heritage reported
retail fuel revenues of $178.9 million in the eleven months ended August 9,
2000. Of the increase of $261.6 million in retail revenues for fiscal year ended
August 31, 2001 as compared to Predecessor Heritage eleven months ended August
9, 2000, approximately $143.3 million was due to acquisitions, approximately
$49.1 million was due to higher selling prices, and approximately $69.2 million
was due to an increase in gallons sold as a result of the return to more normal
weather patterns. Domestic wholesale revenues were $9.9 million, foreign
wholesale revenues were $50.0 million and other revenues were $42.7 million for
the fiscal year ended August 31, 2001. Heritage also had net revenues from its
liquids marketing activities of $0.8 million for fiscal year 2001, which began
operations in June 2000. For the eight months ended August 31, 2000, Heritage
reported domestic wholesale revenues of $0.4 million, foreign wholesale revenues
of $3.4 million, other revenues of $3.2 million, and net revenues from liquids
marketing activities of $0.7 million. A full year of the combined operations of
the propane operations of U.S. Propane, Predecessor Heritage and the additional
acquisitions made by Heritage attributed to the increases in the revenues, along
with the increase in gallons, due to the return of more normal weather patterns,
higher selling prices and the effect of the operations of previous acquisitions
in fiscal year 2001 as compared to periods reported last year.
Cost of Products Sold. Total cost of products sold in fiscal year 2001
increased $276.6 million to $306.6 million as compared to $30.0 million for the
eight months ended August 31, 2000. Retail fuel cost of sales were $238.1
million for the fiscal year ended August 31, 2001, an increase of $212.7
million, as compared to $25.4 million for the eight months ended August 31,
2000. Predecessor Heritage reported total cost of sales of $140.8
26
million in the eleven-month period ended August 9, 2000, of which $95.1 million
was for retail fuel cost of sales. Of the $143 million increase in retail cost
of sales, approximately $37.4 million was due to an increase in volumes sold,
approximately $77.5 million was due to acquisitions, and approximately $28.1
million was due to higher wholesale cost of fuel for the fiscal year ended
August 31, 2001 as compared to the eight-month period ended August 31, 2000.
Wholesale cost of sales increased $53.4 million of which $44.7 million was
related to foreign cost of sales. Other cost of sales increased to $11.4 million
as compared to $1.0 million due to a full year of the combined operations of the
propane operations of U.S. Propane and Predecessor Heritage coupled with the
acquisitions made during fiscal year 2001. Fuel cost of sales increased due to
the increases in volumes described above and due to the significantly higher
wholesale cost of propane for fiscal year ended August 31, 2001 as compared to
the eight-month period last year.
Gross Profit. Total gross profit increased to $237.4 million in fiscal
year 2001 as compared to $21.6 million for the eight months ended August 31,
2000. This increase is due to the aforementioned increases in volumes and
revenues, offset by the increase in product costs. For the fiscal year ended
August 31, 2001, retail fuel gross profit was $202.4 million, domestic wholesale
fuel gross profit was $0.8 million, and other gross profit was $30.7 million.
Foreign wholesale gross profit was $2.0 million and liquids marketing gross
profit was $1.4 million for the fiscal year ended August 31, 2001. As a
comparison, for the eleven-month period ended August 9, 2000, Predecessor
Heritage recorded retail fuel gross profit of $83.8 million, wholesale fuel
gross profit of $0.6 million, foreign gross profit of $1.5 million and other of
$15.8 million, for a total gross profit of $101.7 million.
Operating Expenses. Operating expenses were $126.8 million for fiscal year
2001 as compared to $16.6 million for the eight-month period ended August 31,
2000. The increase of $110.2 million is the result of the additional operating
expenses related to a full year of the combined propane operations of U.S.
Propane, Predecessor Heritage, and the additional acquisitions made by Heritage.
Predecessor Heritage reported operating expenses of $55.1 million in the
eleven-month period ended August 9, 2000.
Selling, General and Administrative. Selling, general and administrative
expenses were $15.7 million for the fiscal year ended August 31, 2001 as
compared to $1.0 million for the eight months ended August 31, 2000. Peoples Gas
did not classify any of its operating expenses as selling, general and
administrative, so as a comparison Predecessor Heritage had selling, general and
administrative, expenses of $6.0 million for the eleven month period ended
August 31, 2000. The increase in selling, general and administrative expenses is
primarily due to the growth of Heritage resulting from the merger of U.S.
Propane and Predecessor Heritage, other acquisitions, and the additional
executive compensation that relates to fiscal year 2001 operating performance.
Depreciation and Amortization. Depreciation and amortization for the
fiscal year ended August 31, 2001 was $40.4 million, an increase of $35.7
million as compared to $4.7 million in the eight months ended August 31, 2000.
The increase is primarily attributable to the addition of property, plant and
equipment, and intangible assets from the transactions referred to above.
Operating Income (Loss). Heritage reported net income of $54.4 million in
fiscal year 2001 as compared to the operating loss of $0.7 million for the eight
months ended August 31, 2000. Predecessor Heritage reported operating income of
$23.5 million for the eleven-month period ended August 9, 2000. The increases in
gross profit above, offset by the increases in operating and selling, general
and administrative expenses and depreciation and amortization, attributed to the
increase in operating income.
Interest Expense. Interest expense for fiscal year 2001 was $35.6 million
as compared to $2.4 million for the eight months ended August 31, 2000.
Predecessor Heritage reported interest expense of $17.6 million for the
eleven-month period ended August 9, 2000. The increase in fiscal year 2001 is
primarily due to the interest on $180.0 million in Senior Secured Notes issued
in August 2001 and other related debt assumed from Predecessor Heritage.
Provision for Income Taxes. Heritage did not report a provision for income
taxes for fiscal year 2001. Heritage is a limited partnership and as a result,
its earnings or loss for federal income tax purposes is included in the tax
returns of the individual partners. Provision for income taxes was $0.4 million
in the eight months ended August 31, 2000, which represents the provision for
income taxes incurred prior to the transactions with Predecessor Heritage. Prior
to the transaction with Predecessor Heritage, Peoples Gas filed a consolidated
federal income tax
27
return with TECO and, based on a tax sharing agreement, included, in its
statements of operations, a provision for income taxes calculated on a separate
return basis.
Net Income (Loss). Heritage reported a record net income of $19.7 million,
or $1.43 per limited partner unit, for the fiscal year ended August 31, 2001, an
increase of $23.5 million over the net loss of $3.8 million for the eight-month
period ended August 31, 2000. Predecessor Heritage reported net income of $6.5
million or $0.66 per limited partner unit for the eleven-month period ended
August 9, 2000. The increase in net income over the eight-month period ended
August 31, 2000 and the eleven-month period ended August 9, 2000, was the result
of the increase in operating income described above, plus a nonrecurring gain of
$0.8 million on the sale of excess property offset by an increase of $33.2
million of interest expense over the interest expense reported in eight months
ended August 31, 2000. Interest expense for fiscal year 2001 increased due to
the increase of debt incurred in the transaction with U.S. Propane.
EBITDA, as adjusted. EBITDA, as adjusted increased $92.9 million to $97.4
million for the year ended August 31, 2001, as compared to the EBITDA, as
adjusted of $4.5 million for the eight month period ended August 31, 2000. The
EBITDA, as adjusted for Predecessor Heritage for the eleven-month period ended
August 9, 2000 was $42.4 million. EBITDA, as adjusted is not a measure of
performance calculated in accordance with generally accepted accounting
principles, and should not be considered in isolation or as a substitute for net
income, income from operations or cash flow as reflected in our consolidated
financial statements. Please read footnote (c) under "Item 6. Selected
Historical Financial and Operating Data - Heritage Propane Partners, L.P.
(formerly Peoples Gas)" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Description of Indebtedness"
for a more detailed discussion of EBITDA, as adjusted.
EIGHT MONTHS ENDED AUGUST 31, 2000 COMPARED TO THE EIGHT MONTHS ENDED AUGUST 31,
1999 (UNAUDITED)
Volume. Total retail gallons sold in the eight months ended August 31,
2000 were 38.3 million, an increase of 16.2 million over the 22.1 million
gallons sold in the eight months ended August 31, 1999. Heritage sold 16.3
million retail gallons in the period from August 10, 2000 through August 31,
2000, thus the increase in retail gallons is primarily attributable to the
transactions referred to above.
Revenues. Total revenues for the eight months ended August 31, 2000 were
$63.1 million, an increase of $41.3 million as compared to $21.8 million for the
eight months ended August 31, 1999. Revenues for the former propane operations
of Predecessor Heritage for the period from August 10, 2000 through August 31,
2000 were $36.4 million, of which $11.7 million was due to the liquids marketing
activity and the remainder related to increased volumes. The increase in revenue
is primarily attributable to the transactions referred to above.
Cost of Products Sold. Total cost of products sold increased $33.0 million
to $41.5 million for the eight months ended August 31, 2000. Of this increase,
$11.5 million is the result of the liquids marketing activity for the period
from August 10, 2000 through August 31, 2000, with the remainder relating to the
increased volumes described above.
Operating Expenses. Operating expenses were $16.6 million for the
eight-month period ended August 31, 2000 as compared to $8.6 million for the
eight months ended August 31, 1999. The increase of $8.0 million is the result
of the additional operating expense related to the merger.
Depreciation and Amortization. Depreciation and amortization was $4.7
million in the eight months ended August 31, 2000 as compared to $2.0 million in
the eight months ended August 31, 1999. The increase is attributable to the
transactions referred to above.
Operating Income (Loss). Heritage had an operating loss of $0.7 million
for the eight months ended August 31, 2000 as compared to operating income of
$2.7 million for the eight months ended August 31, 1999. The decrease is the
result of the additional operating expenses and depreciation and amortization
resulting from the merger.
Provision for Income Taxes. Provision for income taxes decreased $0.6
million, to $0.4 million for the eight months ended August 31, 2000, as compared
to $1.0 million for the eight months ended August 31, 1999. This decrease is a
result of the decrease in income before provision for income taxes in the
comparable eight-month
28
period of Peoples Gas. Prior to the transaction with Predecessor Heritage,
Peoples Gas filed a consolidated federal income tax return with TECO and, based
on a tax sharing agreement, included, in its statements of operations, a
provision for income taxes calculated on a separate return basis.
Net Income (Loss). For the eight-month period ended August 31, 2000,
Heritage had a net loss of $3.8 million, a decrease of $5.4 million as compared
to net income for the eight months ended August 31, 1999 of $1.6 million. This
decrease is the result of decreased operating income described above.
LIQUIDITY AND CAPITAL RESOURCES
The ability of Heritage to satisfy its obligations will depend on its
future performance, which will be subject to prevailing economic, financial,
business, and weather conditions, and other factors, many of which are beyond
its control. Future capital requirements of Heritage are expected to be provided
by cash flows from operating activities. To the extent future capital
requirements exceed cash flows from operating activities:
a) working capital will be financed by the working capital line of
credit and repaid from subsequent seasonal reductions in inventory
and accounts receivable;
b) growth capital, mainly for customer tanks, expended will be financed
by the revolving acquisition line of credit; and
c) acquisition capital expenditures will be financed by the revolving
acquisition line of credit, other lines of credit, long-term debt,
the issuance of additional Common Units or a combination thereof.
Cash Flows
Operating Activities. Cash provided by operating activities for fiscal
year 2002 was $65.4 million as compared to cash provided by operating activities
of $28.1 million for fiscal year 2001. The net cash provided from operations of
$65.4 million for the fiscal year ended August 31, 2002 consisted of net income
of $4.9 million and noncash charges of $37.9 million, primarily depreciation and
amortization, and a decrease in working capital items of $22.6 million. Working
capital items have decreased in fiscal year 2002 from fiscal year 2001, as
Heritage had secured a substantial amount of inventory and inventory positions
as of August 31, 2001, to protect winter's propane supply from anticipated
unfavorable market dynamics that were not present at the end of fiscal year
2002, and the collection of high accounts receivable balances from the cold
winter of fiscal year 2001.
Investing Activities. Heritage completed ten acquisitions during the
fiscal year ended August 31, 2002 investing $19.7 million, net of cash received.
This capital expenditure amount is reflected in the cash used in investing
activities of $33.4 million along with $12.8 million invested for maintenance
needed to sustain operations at current levels and $14.3 million for customer
tanks and other expenditures to support growth of operations. Investing
activities also includes proceeds from the sale of property of $13.3 million, of
which $3.6 million was for the sale of idle property and $9.7 million was for
the sale of certain assets acquired in the ProFlame acquisition to Bi-State
Propane. This sale was made pursuant to the provision in the Bi-State Propane
partnership agreement that requires each partner to offer to sell any newly
acquired businesses within Bi-State Propane's area of operations to Bi-State
Propane. In conjunction with this sale, the Operating Partnership guaranteed $5
million of debt incurred by Bi-State Propane to a financial institution.
Financing Activities. Cash used in financing activities of $33.1 million
during the fiscal year ended August 31, 2002, was primarily a net increase in
short-term debt of $10.3 million and a net decrease in long-term debt of $2.2
million, offset by $41.2 million of cash distributions paid to Unitholders and
the General Partner.
Financing and Sources of Liquidity
Heritage has a Bank Credit Facility with various financial institutions,
which includes a Working Capital Facility, providing for up to $65.0 million of
borrowings to be used for working capital and other general partnership
purposes, and an Acquisition Facility, providing for up to $50.0 million of
borrowings to be used for acquisitions and improvements. The Working Capital
Facility expires June 30, 2004 and the Acquisition Facility expires December 31,
2003, at which time the facility will convert to a term loan payable in
quarterly installments with a
29
final maturity of June 30, 2006. The weighted average interest rate was 3.675%
for the amounts outstanding at August 31, 2002 on both the Working Capital
Facility and the Acquisition Facility. At August 31, 2002, there was $34.8
million available for borrowing on the Working Capital Facility and $36.0
million available on the Acquisition Facility. See Note 4 - "Working Capital
Facility and Long-Term Debt" to the Consolidated Financial Statements beginning
on Page F-1 of this report.
The Partnership uses its cash provided by operating and financing
activities to provide distributions to Unitholders and to fund acquisition,
maintenance, and growth capital expenditures. Acquisition capital expenditures,
which include expenditures related to the acquisition of retail propane
operations and intangibles associated with such acquired businesses, were $19.7
million for the fiscal year ended August 31, 2002 as compared to $94.9 million
for fiscal year 2001. In addition to the $19.7 million of cash expended for
acquisitions during fiscal year 2002, $2.7 million for notes payable on
non-compete agreements were issued in connection with certain acquisitions. In
comparison, in addition to the $94.9 million of cash expended for acquisitions
during the fiscal year ended August 31, 2001, $6.0 million of Common Units and
$10.0 million for notes payable on non-compete agreements were issued in
connection with certain acquisitions.
Under the Partnership Agreement, the Partnership will distribute to the
General Partner and its Limited Partners, 45 days after the end of each fiscal
quarter, an amount equal to all of its Available Cash for such quarter.
Available cash generally means, with respect to any quarter of the Partnership,
all cash on hand at the end of such quarter less the amount of cash reserves
established by the General Partner in its reasonable discretion that is
necessary or appropriate to provide for future cash requirements. The
Partnership's commitment to its Unitholders is to distribute the increase in its
cash flow while maintaining prudent reserves for the Partnership's operations.
The Partnership raised the quarterly distribution $0.0125 per unit for the first
quarter of fiscal year 2002 from the $0.625 per unit distribution paid on
October 15, 2001 for the fourth quarter ended August 31, 2001, to the current
level of $0.6375 per unit (or $2.55 annually). The current distribution level
includes incentive distributions payable to the General Partner to the extent
the quarterly distribution exceeds $0.55 per unit ($2.20 annually).
The assets utilized in the propane business do not typically require
lengthy manufacturing process time or complicated, high technology components.
Accordingly, the Partnership does not have any significant financial commitments
for capital expenditures. In addition, the Partnership has not experienced any
significant increases attributable to inflation in the cost of these assets or
in its operations.
DESCRIPTION OF INDEBTEDNESS
Predecessor Heritage assumed $120 million principal amount of 8.55% Senior
Secured Notes (the "Notes") at the formation of the Partnership in a private
placement with institutional investors. Interest is payable semi-annually in
arrears on each December 31 and June 30. The Notes have a final maturity of June
30, 2011, with ten equal mandatory repayments of principal, which began on June
30, 2002.
On November 19, 1997, Predecessor Heritage entered into a Note Purchase
Agreement ("Medium Term Note Program") that provided for the issuance of up to
$100 million of senior secured promissory notes if certain conditions were met.
An initial placement of $32 million (Series A and B), at an average interest
rate of 7.23% with an average 10-year maturity, was completed at the closing of
the Medium Term Note Program. Interest is payable semi-annually in arrears on
each November 19 and May 19. An additional placement of $15 million (Series C, D
and E), at an average interest rate of 6.59% with an average 12-year maturity,
was completed in March 1998. Interest is payable on Series C, D and E
semi-annually in arrears on each September 13 and March 13. The proceeds of the
placements were used to refinance amounts outstanding under the Acquisition
Facility. No future placements are permitted under the unused portion of the
Medium Term Note Program.
On August 10, 2000, Heritage entered into a Note Purchase Agreement
("Senior Secured Promissory Notes") that provided for the issuance of up to $250
million of fixed rate senior secured promissory notes if certain conditions were
met. An initial placement of $180 million (Series A through F) at an average
rate of 8.66% with an average 13-year maturity, was completed in conjunction
with the merger with U.S. Propane. Interest is payable quarterly. The proceeds
were used to finance the transaction with U.S. Propane and retire a portion of
existing debt. On May 24, 2001, Heritage issued an additional $70 million
(Series G through I) of the Senior Secured Promissory Notes to a group of
institutional lenders with 7-, 12- and 15-year maturities and an average coupon
rate of 7.66%.
30
Heritage used the net proceeds from the Senior Secured Promissory Notes to repay
the balance outstanding under the Acquisition Facility and to reduce other debt.
Interest is payable quarterly.
The Note Agreements for each of the Notes, Medium Term Note Program and
Senior Secured Promissory Notes, and the Bank Credit Facility contain customary
restrictive covenants applicable to the Operating Partnership, including
limitations on the level of additional indebtedness, creation of liens, and sale
of assets. These covenants require the Operating Partnership to maintain ratios
of Consolidated Funded Indebtedness to Consolidated EBITDA (as these terms are
similarly defined in the Bank Credit Facility and the Note Agreements) of not
more than 5.00 to 1 for the Bank Credit Facility and not more than 5.25 to 1 for
the Note Agreements and Consolidated EBITDA to Consolidated Interest Expense (as
these terms are similarly defined in the Bank Credit Facility and the Note
Agreements) of not less than 2.25 to 1. The Consolidated EBITDA used to
determine these ratios is calculated in accordance with these debt agreements.
For purposes of calculating the ratios under the Bank Credit Facility and the
Note Agreements, Consolidated EBITDA is based upon Heritage's EBITDA, as
adjusted during the most recent four quarterly periods and modified to give pro
forma effect for acquisitions and divestitures made during the test period, and
is compared to Consolidated Funded Indebtedness as of the test date and the
Consolidated Interest Expense for the most recent twelve months. The debt
agreements also provide that the Operating Partnership may declare, make, or
incur a liability to make, a restricted payment during each fiscal quarter, if:
(a) the amount of such restricted payment, together with all other restricted
payments during such quarter, do not exceed Available Cash with respect to the
immediately preceding quarter; and (b) no default or event of default exists
before such restricted payment and after giving effect thereto. The debt
agreements further provide that Available Cash is required to reflect a reserve
equal to 50% of the interest to be paid on the notes. In addition, in the third,
second and first quarters preceding a quarter in which a scheduled principal
payment is to be made on the notes, Available Cash is required to reflect a
reserve equal to 25%, 50%, and 75%, respectively, of the principal amount to be
repaid on such payment dates.
Failure to comply with the various restrictive and affirmative covenants
of the Operating Partnership's Bank Credit Facility and the Note Agreements
could negatively impact the Operating Partnership's ability to incur additional
debt and Heritage's ability to pay distributions. The Operating Partnership is
required to measure these financial tests and covenants quarterly and was in
compliance with all requirements, tests, limitations, and covenants related to
the Notes, Medium Term Note Program, Senior Secured Promissory Notes, and the
Bank Credit Facility at August 31, 2002.
The following table summarizes our long-term debt and other contractual
obligations as of August 31, 2002:
Payments Due by Period
----------------------
Less Than 1 - 3 3 - 5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
-------- -------- -------- -------- --------
Long-term debt $440,179 $ 20,158 $ 71,320 $ 92,043 $256,658
Operating lease obligations 7,515 2,864 2,899 1,038 714
-------- -------- -------- -------- --------
Totals $447,694 $ 23,022 $ 74,219 $ 93,081 $257,372
======== ======== ======== ======== ========
See Note 4 - "Working Capital Facility and Long-Term Debt" to the Consolidated
Financial Statements beginning on Page F-1 of this report for further discussion
of the long-term debt classifications and the maturity dates and interest rates
related to long-term debt.
31
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142). Under SFAS
142, goodwill is no longer subject to amortization over its estimated useful
life. Rather, goodwill will be subject to at least an annual assessment for
impairment by applying a fair-value-based test. Additionally, any acquired
intangible assets should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged,
regardless of the acquirer's intent to do so. Those assets will be amortized
over their useful lives, other than assets that have an indefinite life.
Heritage adopted SFAS 142 on September 1, 2001 and accordingly has discontinued
the amortization of goodwill existing at the time of adoption. Under the
provisions of SFAS 142, Heritage was required to perform a transitional goodwill
impairment appraisal within six months from the time of adoption. Management
engaged an independent appraisal firm to perform an assessment of the fair value
of each of Heritage's operating segments, which were compared with the carrying
value of each segment to determine whether any impairment existed on the date of
adoption. Heritage has completed the transitional goodwill impairment appraisal
and has determined that based on the fair value of Heritage's operating
segments, Heritage's goodwill was not impaired as of September 1, 2001.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. Heritage adopted the provisions of SFAS
143 on September 1, 2002. The adoption of SFAS 143 did not have a material
impact on the Partnership's consolidated financial condition or results of
operations.
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 supersedes FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (SFAS 121), and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. SFAS 144 retains the
fundamental provisions of SFAS 121 for recognition and measurement of the
impairment of long-lived assets to be held and used, and measurement of
long-lived assets to be disposed of by sale. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years, with early application encouraged. Heritage
adopted the provisions of SFAS 144 on September 1, 2002. The adoption of SFAS
144 did not have a material impact on the Partnership's consolidated financial
condition or results of operations.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145). SFAS 145 rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. SFAS 145 also rescinds FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers, amends FASB Statement No 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions and also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. SFAS 145 is effective for fiscal years beginning after
May 15, 2002 with early application encouraged. Heritage adopted the provisions
of SFAS 145 on September 1, 2002. The adoption did not have a material impact on
the Partnership's consolidated financial condition or results of operations.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value only when
the liability is incurred. Heritage adopted the provisions of SFAS 146 effective
for exit or disposal activities that are initiated after December 31, 2002. The
adoption did not have a material impact on the Partnership's consolidated
financial position or results of operations.
32
In October 2002, the EITF of the FASB discussed EITF Issue No. 02-3,
Issues Related to Accounting for Contracts Involved in Energy Trading and Risk
Management Activities (EITF 02-3). The EITF reached a consensus to rescind EITF
Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk
Management Activities (EITF 98-10), the impact of which is to preclude
mark-to-market accounting for energy trading contracts not within the scope of
SFAS 133. The EITF also reached a consensus that gains and losses on derivative
instruments within the scope of SFAS 133 should be shown net in the statement of
operations if the derivative instruments are held for trading purposes and what
the disclosure requirements should be. This consensus was effective for
financial statements issued for periods ending after July 15, 2002. Heritage
adopted EITF 02-3 as of August 31, 2002, and upon application reclassified
comparative financial statements for prior periods to conform to the consensus.
This adoption did not have a material impact on Heritage's financial position or
results of operations. The consensus regarding the rescission of EITF 98-10 is
applicable for fiscal periods beginning after December 15, 2002. Energy trading
contracts not within the scope of SFAS 133 purchased after October 25, 2002, but
prior to the implementation of the consensus are not permitted to apply
mark-to-market accounting. The adoption of EITF 02-3 as it relates to the
rescission of EITF 98-10 is not expected to have a material impact on Heritage's
financial position or results of operations.
In December 2002, the FASB issued Statement No. 148 Accounting for
Stock-Based Compensation - Transition and Disclosure (SFAS 148). The statement
amends FASB Statement No. 123 Accounting for Stock-Based Compensation (SFAS 123)
to provide alternative methods of transitions for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS 148 are
effective for fiscal years ending after July 31, 2003, with earlier application
permitted, and the interim disclosure requirements of SFAS 148 are effective for
periods beginning after December 15, 2002. Heritage adopted the fair value
recognition provisions of SFAS 123 effective as of September 1, 2002. Heritage
adopted the fair value recognition provisions following the modified prospective
method of adoption described in SFAS 123. Following adoption, deferred
compensation expense that will be recognized will be the same as that which
would have been recognized had the fair value recognition provisions of SFAS 123
been applied to all awards granted under the Restricted Unit Plan and the Long
Term Incentive Plan granted after its original effective date. Results from
prior years have not been restated.
In April 2003, the FASB issued Statement No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends
and clarifies financial accounting and reporting for derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under SFAS 133. SFAS 149 is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. Heritage adopted SFAS 149 as of July 1, 2003. The adoption
of SFAS 149 did not have a material impact on the Partnership's consolidated
financial position or results of operations.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS
150). SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within the scope of SFAS 150 as a liability (or an asset in some circumstances).
This statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. Heritage adopted the provisions of
SFAS 150 as of September 1, 2003. The adoption did not have a material impact on
the Partnership's consolidated financial position or results of operations.
In November 2002, the FASB issued Financial Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 expands the
existing disclosure requirements for guarantees and requires that companies
recognize a liability for guarantees issued after December 31, 2002. The
implementation of FIN 45 did not have a significant impact on Heritage's
financial position or results of operations.
In January 2003, the FASB issued Financial Interpretation No. 46
Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51
(FIN 46). FIN 46 clarifies Accounting Research Bulletin No. 51, Consolidated
Financial Statements. If certain conditions are met, this interpretation
requires the primary beneficiary to consolidate certain variable interest
entities in which equity investors lack the characteristics of a controlling
interest or do not have sufficient equity investment at risk to permit the
variable interest entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
immediately for variable interest entities created or obtained after January 31,
2003. For variable interest entities acquired before February 1, 2003, the
interpretation is effective for the first fiscal year or interim period
beginning after June 15, 2003. Management does not believe FIN 46 will have a
significant impact on the Partnership's financial position.
33
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to establish accounting policies and make estimates and assumptions
that affect reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Heritage evaluates its policies and estimates on a regular basis. Actual results
could differ from these estimates.
The Partnership's significant accounting policies are discussed in Note 2
-- "Summary of Significant Accounting Policies and Balance Sheet Detail" to the
Consolidated Financial Statements beginning on page F-1 of this report. Heritage
believes the following are critical accounting policies:
Principles of Consolidation. The consolidated financial statements of the
Partnership include the accounts of its subsidiaries, including the Operating
Partnership, MP Energy Partnership, Heritage Service Corp., Guilford Gas
Service, Inc., Heritage Energy Resources, LLC ("Resources") and the Propane
LLCs. A minority interest liability and minority interest expense is recorded
for all partially owned subsidiaries. Heritage accounts for its 50% partnership
interest in Bi-State Propane, another propane retailer, under the equity method.
All significant intercompany transactions and accounts have been eliminated in
consolidation. For purposes of maintaining partner capital accounts, Heritage's
Partnership Agreement specifies that items of income and loss shall be allocated
among the partners in accordance with their percentage interests. Normal
allocations according to percentage interests are made, however, only after
giving effect to any priority income allocations in an amount equal to the
incentive distributions that are allocated 100% to the General Partner. At
August 31, 2002, as successor General Partner, U.S. Propane's 1.0101% general
partner interest in the Operating Partnership was accounted for in the
consolidated financial statements as a minority interest. For the year ended
August 31, 2001, Heritage Holdings' 1.0101% general partner interest and U.S.
Propane's 1.0101% limited partner interest in the Operating Partnership were
accounted for in the consolidated financial statements as minority interests.
Property, Plant and Equipment. Property, plant and equipment is stated at
cost less accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Expenditures
for maintenance and repairs are expensed as incurred. Expenditures to refurbish
tanks that either extend the useful lives of the tanks or prevent environmental
contamination are capitalized and depreciated over the remaining useful life of
the tanks. Additionally, Heritage capitalizes certain costs directly related to
the installation of company-owned tanks, including internal labor costs. Changes
in the estimated useful lives of the Partnership's assets, or its'
capitalization policy could have a material effect on the results of operations.
Intangibles and Other Assets. Intangibles and other assets are stated at
cost net of amortization computed on the straight-line method. Heritage
eliminates from its balance sheet any fully amortized intangibles and the
related accumulated amortization. Changes in the amortization methods or asset
values could have a material effect on results of operations.
Marketable Securities. Heritage's marketable securities are classified as
available-for-sale securities and are reflected as a current asset on the
consolidated balance sheet at their fair value. Unrealized holding losses are
recorded through accumulated other comprehensive income (loss) based on the
market value of the securities.
Long-Lived Assets. Heritage reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. If such a review should indicate that the
carrying amount of long-lived assets is not recoverable, Heritage reduces the
carrying amount of such assets to fair value.
Stock Based Compensation Plans. The Partnership accounts for its
Restricted Unit Plan and Long-Term Incentive Plan using APB Opinion No. 25
Accounting for Stock Issued to Employees (APB 25). These plans are classified as
variable plans so estimates of compensation are required based on a combination
of the fair market value of the Common Units as of the end of the reporting
period and the extent or degree of compliance with the performance criteria.
Heritage follows the disclosure only provisions of SFAS 123, as amended by
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (SFAS 148). Heritage adopted the fair
value recognition provisions of SFAS 123 effective as of September 1, 2002.
34
Heritage adopted the fair value recognition provisions following the modified
prospective method of adoption described in SFAS 123. Following adoption,
deferred compensation expense that will be recognized will be the same as that
which would have been recognized had the fair value recognition provisions of
SFAS 123 been applied to all awards granted under the Restricted Unit Plan and
the Long Term Incentive Plan granted its original effective date. Results from
prior years have not been restated.
SFAS 133 Accounting for Derivative Instruments and Hedging Activities. In
June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 requires that all
derivatives be recognized in the balance sheet as either an asset or liability
measured at fair value. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the statement of operations.
LIQUIDS MARKETING ACTIVITIES
The Partnership buys and sells derivative financial instruments, which are
within the scope of SFAS 133 and that are not designated as accounting hedges.
The Partnership also enters into energy trading contracts, which are not
derivatives, and therefore are not within the scope of SFAS 133. EITF Issue No.
98-10, Accounting for Contracts Involved in Energy Trading and Risk Management
Activities (EITF 98-10), applied to energy trading contracts not within the
scope of SFAS 133 that were entered into prior to October 25, 2002. The types of
contracts the Partnership utilizes in its liquids marketing segment include
energy commodity forward contracts, options, and swaps traded on the
over-the-counter financial markets. In accordance with the provisions of SFAS
133, derivative financial instruments utilized in connection with the
Partnership's liquids marketing activity are accounted for using the
mark-to-market method. Additionally, all energy trading contracts entered into
prior to October 25, 2002 were accounted for using the mark-to-market method in
accordance with the provisions of EITF 98-10. Under the mark-to-market method of
accounting, forwards, swaps, options, and storage contracts are reflected at
fair value, and are shown in the consolidated balance sheet as assets and
liabilities from liquids marketing activities. As of August 31, 2002, the
Partnership adopted the applicable provisions of EITF Issue No. 02-3, Issues
Related to Accounting for Contracts Involved in Energy Trading and Risk
Management Activities (EITF 02-3), which requires that gains and losses on
derivative instruments be shown net in the statement of operations if the
derivative instruments are held for trading purposes. Net realized and
unrealized gains and losses from the financial contracts and the impact of price
movements are recognized in the statement of operations as liquids marketing
revenue. Changes in the assets and liabilities from the liquids marketing
activities result primarily from changes in the market prices, newly originated
transactions, and the timing and settlement of contracts. EITF 02-3 also
rescinds EITF 98-10 for all energy trading contracts entered into after October
25, 2002, and specifies certain disclosure requirements. Consequently, the
Partnership does not apply mark-to-market accounting for any contracts entered
into after October 25, 2002, that are not within the scope of SFAS 133. The
Partnership attempts to balance its contractual portfolio in terms of notional
amounts and timing of performance and delivery obligations. However, net
unbalanced positions can exist or are established based on management's
assessment of anticipated market movements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Heritage has little cash flow exposure due to interest rate changes for
long-term debt obligations. Heritage had $44.2 million of variable rate debt
outstanding as of August 31, 2002. The variable rate debt consists of the Bank
Credit Facility described elsewhere in this report. The balance in the Bank
Credit Facility generally fluctuates throughout the year. A theoretical change
of 1% in the interest rate on the balance outstanding at August 31, 2002 would
result in an approximate $442 thousand change in net income. Heritage primarily
enters debt obligations to support general corporate purposes including capital
expenditures and working capital needs. Heritage's long-term debt instruments
are typically issued at fixed interest rates. When these debt obligations
mature, Heritage may refinance all or a portion of such debt at then-existing
market interest rates which may be more or less than the interest rates on the
maturing debt.
Commodity price risk arises from the risk of price changes in the propane
inventory that Heritage buys and sells. The market price of propane is often
subject to volatile changes as a result of supply or other market conditions
over which Heritage will have no control. In the past, price changes have
generally been passed along to Heritage's and Predecessor Heritage's customers
to maintain gross margins, mitigating the commodity price risk. In order to help
ensure adequate supply sources are available to Heritage during periods of high
demand, Heritage at times will purchase significant volumes of propane during
periods of low demand, which generally occur during the summer months, at the
then current market price, for storage both at its customer service locations
and in major storage facilities and for future delivery.
Heritage also attempts to minimize the effects of market price
fluctuations for its propane supply by entering into certain financial
contracts. In order to manage a portion of its propane price market risk,
Heritage uses contracts for the forward purchase of propane, propane fixed-price
supply agreements, and derivative commodity
35
instruments such as price swap and option contracts. The swap instruments are a
contractual agreement to exchange obligations of money between the buyer and
seller of the instruments as propane volumes during the pricing period are
purchased. The swaps are tied to a fixed price bid by the buyer and a floating
price determination for the seller based on certain indices at the end of the
relevant trading period. Heritage had entered into these swap instruments in the
past to hedge the projected propane volumes to be purchased during each of the
one-month periods during the projected heating season.
At August 31, 2002, Heritage had no outstanding propane hedges. Heritage
continues to monitor propane prices and may enter into additional propane hedges
in the future. Inherent in the portfolio from the liquids marketing activities
of the Partnership is certain business risks, including market risk and credit
risk. Market risk is the risk that the value of the portfolio will change,
either favorably or unfavorably, in response to changing market conditions.
Credit risk is the risk of loss from nonperformance by suppliers, customers, or
financial counter parties to a contract. Heritage takes an active role in
managing and controlling market and credit risk, and has established control
procedures, which are reviewed on an ongoing basis. Heritage monitors market
risk through a variety of techniques, including routine reporting to senior
management. Heritage attempts to minimize credit risk exposure through credit
policies and periodic monitoring procedures.
LIQUIDS MARKETING
Heritage buys and sells derivative financial instruments, which are within
the scope of SFAS 133 and that are not designated as accounting hedges. Heritage
also enters into energy trading contracts, which are not derivatives, and
therefore are not within the scope of SFAS 133. EITF Issue No. 98-10, Accounting
for Contracts Involved in Energy Trading and Risk Management Activities (EITF
98-10), applied to energy trading contracts not within the scope of SFAS 133
that were entered into prior to October 25, 2002. The types of contracts
Heritage utilizes in its liquids marketing segment include energy commodity
forward contracts, options, and swaps traded on the over-the-counter financial
markets. In accordance with the provisions of SFAS 133, derivative financial
instruments utilized in connection with Heritages' liquids marketing activity
are accounted for using the mark-to-market method. Additionally, all energy
trading contracts entered into prior to October 25, 2002 were accounted for
using the mark-to-market method in accordance with the provisions of EITF 98-10.
Under the mark-to-market method of accounting, forwards, swaps, options, and
storage contracts are reflected at fair value, and are shown in the consolidated
balance sheet as assets and liabilities from liquids marketing activities. As of
August 31, 2002, Heritage adopted the applicable provisions of EITF Issue No.
02-3, Issues Related to Accounting for Contracts Involved in Energy Trading and
Risk Management Activities (EITF 02-3), which requires that gains and losses on
derivative instruments be shown net in the statement of operations if the
derivative instruments are held for trading purposes. Net realized and
unrealized gains and losses from the financial contracts and the impact of price
movements are recognized in the statement of operations as liquids marketing
revenue. Changes in the assets and liabilities from the liquids marketing
activities result primarily from changes in the market prices, newly originated
transactions, and the timing and settlement of contracts. EITF 02-3 also
rescinds EITF 98-10 for all energy trading contracts entered into after October
25, 2002 and specifies certain disclosure requirements. Consequently, Heritage
does not apply mark-to-market accounting for any contracts entered into after
October 25, 2002 that are not within the scope of SFAS 133. Heritage attempts to
balance its contractual portfolio in terms of notional amounts and timing of
performance and delivery obligations. However, net unbalanced positions can
exist or are established based on management's assessment of anticipated market
movements.
The notional amounts and terms of these financial instruments as of August
31, 2002 and 2001 include fixed price payor for 1,180,000 and 2,130,000 barrels
of propane, respectively, and fixed price receiver of 1,076,900 and 1,820,000
barrels of propane, respectively. Notional amounts reflect the volume of the
transactions, but do not represent the amounts exchanged by the parties to the
financial instruments. Accordingly, notional amounts do not accurately measure
Heritage's exposure to market or credit risks.
The fair value of the financial instruments related to liquids marketing
activities as of August 31, 2002 and 2001 was assets of $2.3 million and $6.5
million, respectively, and liabilities of $1.8 million and $7.1 million,
respectively.
36
SENSITIVITY ANALYSIS
Estimates related to Heritage's liquids marketing activities are sensitive
to uncertainty and volatility inherent in the energy commodities markets and
actual results could differ from these estimates. A theoretical change of 10% in
the underlying commodity value of the liquids marketing contracts would result
in an approximate $181 thousand change in the market value of the contracts as
there were approximately 4.3 million gallons of net unbalanced positions at
August 31, 2002.
DISCLOSURES ABOUT LIQUIDS MARKETING ACTIVITIES ACCOUNTED FOR AT FAIR VALUE
The following table summarizes the fair value of Heritage's contracts,
aggregated by method of estimating fair value of the contracts as of August 31,
2002 and 2001 where settlement had not yet occurred. Resources' contracts all
have a maturity of less than 1 year. The market prices used to value these
transactions reflect management's best estimate considering various factors
including closing average spot prices for the current and outer months plus a
differential to consider time value and storage costs.
August 31, August 31,
Source of Fair Value 2002 2001
------- -------
Prices actively quoted $ 1,276 $ 827
Prices based on other valuation methods 1,025 5,638
------- -------
Assets from liquids marketing $ 2,301 $ 6,465
======= =======
Prices actively quoted $ 669 $ 1,297
Prices based on other valuation methods 1,149 5,833
------- -------
Liabilities from liquids marketing $ 1,818 $ 7,130
======= =======
Unrealized gains (losses) $ 483 $ (665)
======= =======
The following table summarizes the changes in the unrealized fair value of
Heritage's contracts where settlement had not yet occurred for the fiscal years
ended August 31, 2002 and 2001 and the 8-months ended August 31, 2000.
2002 2001 2000
------- ------- -------
Unrealized gains (losses) in fair value of contracts
outstanding at the beginning of the period $ (665) $ 591 $ --
Unrealized gains (losses) recognized at inception of
contracts -- -- --
Unrealized gains (losses) recognized as a result of
changes in valuation techniques and assumptions -- -- --
Other unrealized gains (losses) recognized during the
period 1,207 250 724
Less: Realized gains (losses) recognized during the
period 59 1,506 133
------- ------- -------
Unrealized gains (losses) in fair value of contracts
outstanding at the end of the period $ 483 $ (665) $ 591
======= ======= =======
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial statements set forth on pages F-1 to F-47 of this report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
PARTNERSHIP MANAGEMENT
The Partnership does not directly employ any persons responsible for its
management or operations. Prior to the February 4, 2002 Special Meeting of the
Common Unitholders of the Partnership, all of the Partnership's activities were
managed and operated by its General Partner, Heritage Holdings. Persons employed
to manage and operate the activities of the Partnership and its subsidiaries
were employees, officers or directors of Heritage Holdings.
Following Common Unitholder approval of the substitution of U.S. Propane
as General Partner of the Partnership, the Partnership's activities have been
managed and operated by U.S. Propane. Former employees of Heritage Holdings
became employees of U.S. Propane. Officers and directors of Heritage Holdings
were appointed officers and directors of U.S. Propane's General Partner, USPLLC.
Each of the thirteen members of the Board of Directors of Heritage Holdings was
appointed, individually, a manager of USPLLC, and collectively, such persons are
referred to as the Board of Directors. The Board of Directors of USPLLC is
comprised of its Chairman, its President and Chief Executive Officer, two
persons designated by each of its four members, and three independent persons
approved by a majority of the members.
The Board of Directors appoints members of the Board to serve on the
Independent Committee with the authority to review specific matters to which the
Board of Directors believes there may be a conflict of interest in order to
determine if the resolution of such conflict proposed by the General Partner is
fair and reasonable to the Partnership. Any matters approved by the Independent
Committee will be conclusively deemed to be fair and reasonable to the
Partnership, approved by all partners of the Partnership and not a breach by the
General Partner or its Board of Directors of any duties they may owe the
Partnership or the Unitholders. Bill W. Byrne, Stephen L. Cropper, and J.
Charles Sawyer were appointed to serve as the members of the Independent
Committee of the Board of Directors of Heritage Holdings in October of 2001,
appointed as members of the Independent Committee of the Board of Directors of
USPLLC on February 4, 2002, and reappointed in October 2002.
AUDIT COMMITTEE
The Board of Directors appoints persons who are neither officers of USPLLC
nor employees of the General Partner or any affiliate of the Partnership to
serve on its Audit Committee. The Audit Committee has at least one person with
accounting or financial management expertise. The Audit Committee meets on a
scheduled basis with the Partnership's independent accountants and is available
to meet at their request. The Audit Committee has the authority and
responsibility to review external financial reporting of the Partnership, to
review the Partnership's procedures for internal auditing and the adequacy of
the Partnership's internal accounting controls, to consider the qualifications
and independence of the Partnership's independent accountants, to engage the
Partnership's independent accountants, and to review the letter of engagement
and statement of fees relating to the scope of the annual audit work and special
audit work which may be recommended or required by the independent accountants.
The Audit Committee reviews and discusses the audited financial statements with
management, discusses with the Partnership's independent auditors matters
required to be discussed by SAS 61, Communications with Audit Committees, and
makes recommendations to the Board of Directors relating to the Partnership's
audited financial statements. On February 4, 2002, the Board of Directors of
USPLLC adopted the Charter for the Audit Committee previously adopted by
Heritage Holdings. Any matters approved by the Audit Committee will be
conclusively deemed to be fair and reasonable to the Partnership, approved by
all partners of the Partnership and not a breach by the General Partner or its
Board of Directors of any duties they may owe the Partnership or the
Unitholders. Bill W. Byrne, Stephen L. Cropper, and J. Charles Sawyer were
appointed to serve as members of the Audit Committee of the Board of Directors
of Heritage Holdings in October of 2001, appointed as members of the Audit
Committee of the Board of Directors of USPLLC on February 4, 2002, and
reappointed in October 2002.
39
EMPLOYEE MATTERS
The Partnership does not directly employ any of the persons responsible
for managing or operating the Partnership. As of August 31, 2002, the General
Partner or subsidiaries of the Partnership employed 2,265 full time individuals.
The employment agreements with Messrs. Bertelsmeyer and Krimbill specify that
they serve as Chairman of the Board and President and Chief Executive Officer,
respectively.
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER
The following table sets forth certain information with respect to the
executive officers and members of the Board of Directors as of October 31, 2002.
Executive officers and directors are elected for one-year terms.
Name Age Position with General Partner
---- --- -----------------------------
H. Michael Krimbill (1) 49 President and Chief Executive Officer, and Director
James E. Bertelsmeyer 60 Chairman of the Board and Director
R. C. Mills 65 Executive Vice President and Chief Operating Officer
Michael L Greenwood (2) 47 Vice President, Chief Financial Officer, Secretary & Treasurer
Bradley K. Atkinson 47 Vice President of Corporate Development
Mark A. Darr (3) 42 Vice President - Southern Operations
Thomas H. Rose (3) 58 Vice President - Northern Operations
Curtis L. Weishahn (3) 49 Vice President - Western Operations
Bill W. Byrne 72 Director of the General Partner
J. Charles Sawyer 66 Director of the General Partner
Stephen L. Cropper (4) 52 Director of the General Partner
J. Patrick Reddy (1) 49 Director of the General Partner
Royston K. Eustace (1) 61 Director of the General Partner
William N. Cantrell (1) 50 Director of the General Partner
Clayton H. Preble (5) 55 Director of the General Partner
David J. Dzuricky (1) 51 Director of the General Partner
JD Woodward III (6) 52 Director of the General Partner
Richard T. O'Brien (6) 48 Director of the General Partner
Kevin M. O'Hara (7) 44 Director of the General Partner
Andrew W. Evans (8) 36 Director of the General Partner
(1) Elected to the Board of Directors August 2000.
(2) Elected Vice President and Chief Financial Officer July 2002.
(3) Elected an Executive Officer July 2000.
(4) Elected to the Board of Directors April 2000
40
(5) Elected to the Board of Directors August 2000 and resigned October 2002.
(6) Elected to the Board of Directors October 2001
(7) Elected to the Board of Directors April 2002
(8) Elected to the Board of Directors October 2002.
H. Michael Krimbill. Mr. Krimbill joined Heritage as Vice President and
Chief Financial Officer in 1990 and was previously Treasurer of a publicly
traded, fully integrated oil company. Mr. Krimbill was promoted to President of
Heritage in April 1999 and to Chief Executive Officer in March 2000. Mr.
Krimbill is a director of the National Propane Gas Association, (the "NPGA").
James E. Bertelsmeyer. Mr. Bertelsmeyer has over 25 years of experience in
the propane industry, including six years as President of Buckeye Gas Products
Company, at the time the nation's largest retail propane marketer. Mr.
Bertelsmeyer served as Chief Executive Officer of Heritage since its formation
until the election of H. Michael Krimbill in March 2000. Mr. Bertelsmeyer began
his career with Conoco Inc. where he spent ten years in positions of increasing
responsibility in the pipeline and gas products departments. Mr. Bertelsmeyer
has been a director of the NPGA for the past 25 years, and is a former president
of the NPGA.
R. C. Mills. Mr. Mills has over 40 years of experience in the propane
industry. Mr. Mills joined Heritage in 1991 as Executive Vice President and
Chief Operating Officer. Before coming to Heritage, Mr. Mills spent 25 years
with Texgas Corporation and its successor, Suburban Propane, Inc. At the time he
left Suburban in 1991, Mr. Mills was Vice President of Supply and Wholesale.
Michael L. Greenwood. Mr. Greenwood became Heritage's Vice President,
Chief Financial Officer, Secretary and Treasurer on July 1, 2002. Prior to
joining Heritage, Mr. Greenwood was Senior Vice President, Chief Financial
Officer and Treasurer for Alliance Resource Partners, L.P., a publicly traded
master limited partnership involved in the production and marketing of coal. Mr.
Greenwood brings to Heritage over 20 years of diverse financial and management
experience in the energy industry during his career with several major public
energy companies including MAPCO Inc., Penn Central Corporation, and The
Williams Companies.
Bradley K. Atkinson. Mr. Atkinson joined Heritage on April 16, 1998 as
Vice President of Administration. Prior to joining Heritage, Mr. Atkinson spent
twelve years with MAPCO/Thermogas, eight of which were spent in the acquisitions
and business development of Thermogas. Mr. Atkinson was promoted to Vice
President of Corporate Development in August 2000.
Mark A. Darr. Mr. Darr has 17 years in the propane industry. Mr. Darr
joined Heritage in 1991 and has held various positions including District
Manager and Vice President and Regional Manager before his election to Vice
President - Southern Operations, in July 2000. Prior to joining Heritage, Mr.
Darr held various positions with Texgas Corporation, and its successor, Suburban
Propane. He is a past President of the Florida Propane Gas Association, the
Florida Director of the NPGA, and a member of the LP Gas Bureau State Advisory
Council
Thomas H. Rose. Mr. Rose has 26 years of experience in the propane
industry. Mr. Rose joined Heritage in November 1994 as Vice President and
Regional Manager. Prior to joining Heritage, Mr. Rose held Regional Manager
positions with Texgas Corporation, its successor, Suburban Propane, and later
Vision Energy of Florida. Mr. Rose was appointed Vice President - Northern
Operations in July 2000.
Curtis L. Weishahn. Mr. Weishahn has 24 years experience in the propane
industry. Mr. Weishahn joined Heritage in 1995 as Vice President and Regional
Manager and was elected Vice President - Western Operations in July 2000. Prior
to joining Heritage, Mr. Weishahn owned his own propane business, which was
acquired by Heritage. Prior to that time, Mr. Weishahn spent twelve years with
Amerigas/CalGas where, at the time of departing, he was Director of
Marketing/Strategic Development for the Western United States.
Bill W. Byrne. Mr. Byrne is the principal of Byrne & Associates, LLC, a
gas liquids consulting group based in Tulsa, Oklahoma, and has held that
position since 1992. Prior to that time, he served as Vice President of Warren
Petroleum Company, the gas liquids division of Chevron Corporation, from
1982-1992. Mr. Byrne has served as a director of Heritage since 1992, is a
member of both the Independent Committee and the Compensation Committee, and is
Chairman of the Audit Committee. Mr. Byrne is a former president and director of
the NPGA.
41
J. Charles Sawyer. Mr. Sawyer is the President and Chief Executive Officer
of Computer Energy, Inc., a provider of computer software to the propane
industry since 1981. Mr. Sawyer is also the President and Chief Executive
Officer of Sawyer Cellars. Mr. Sawyer was Chief Executive Officer of Sawyer Gas
Co., a regional propane distributor, until it was purchased by Heritage in 1991.
Mr. Sawyer has served as a director of Heritage since 1991 and is a member of
both the Independent Committee and the Audit Committee. Mr. Sawyer is a former
president and director of the NPGA.
Stephen L. Cropper. Mr. Cropper spent 25 years with The Williams Companies
before retiring in 1998, as President and Chief Executive Officer of Williams
Energy Services. Mr. Cropper is a director of Rental Car Finance Corp. and Berry
Petroleum. He also serves as a director and member of the compensation
committees of Sun Logistics and QuikTrip Corporation. Mr. Cropper has served as
a director of Heritage since April 2000 and is a member of the both the
Independent Committee and the Audit Committee.
J. Patrick Reddy. Mr. Reddy is the Senior Vice President and Chief
Financial Officer of Atmos Energy and has held that position since October 2000.
Prior to being named to that position, Mr. Reddy served as Atmos Energy's Senior
Vice President, Chief Financial Officer and Treasurer from March 2000 to
September 2000, and its Vice President of Corporate Development and Treasurer
during the period from December 1998 to April 2000. Prior to joining Atmos
Energy in August 1998 as Vice President, Corporate Development, Mr. Reddy held a
number of management positions with Pacific Enterprises, Inc. during the period
from 1980 to 1998, including Vice President, Planning & Advisory Services from
1995 to August 1998. Mr. Reddy has served as a director of Heritage since August
2000 and is a member of the Compensation Committee.
Royston K. Eustace. Mr. Eustace is the Senior Vice President of Business
Development for TECO, and has held that position since 1998. Mr. Eustace has
also served as the President of TECO Coalbed Methane since 1991 and as the
President of TECO Oil & Gas since 1995. Mr. Eustace joined TECO in 1987 as its
Vice President of Strategic Planning and Business Development. Mr. Eustace has
served as a director of Heritage since August 2000 and is Chairman of the
Compensation Committee.
William N. Cantrell. Mr. Cantrell currently serves as President of several
TECO companies engaged in natural gas distribution, gas marketing, and energy
services, including Peoples Gas System, TECO Solutions and TECO Partners, Inc.
Mr. Cantrell has been employed with TECO since 1975. At the time of the
formation of U.S. Propane, Mr. Cantrell was the President of Peoples Gas
Company, a regional propane distributor serving the Florida market. Mr. Cantrell
has served as a director of Heritage since August 2000.
Clayton H. Preble. Mr. Preble is the Senior Vice President of AGL
Resources, Inc. ("AGL") and has held that position since June 1999. Prior to
being named to that position, Mr. Preble served as the Senior Vice President -
Direct Marketing of SouthStar Energy Services, L.L.C. and as the President of
The Energy Spring, Inc., both affiliates of AGL. Mr. Preble joined AGL in 1970
and served in various executive capacities prior to these positions. Mr. Preble
served as a director of Heritage from August 2000 until his resignation in
October 2002.
David J. Dzuricky. Mr. Dzuricky is the Senior Vice President and Chief
Financial Officer of Piedmont Natural Gas and has served in that capacity since
May 1995. Prior to being named to that position, Mr. Dzuricky held a variety of
executive officer positions with Consolidated Natural Gas Company during the
period from 1982 to 1995. Mr. Dzuricky has served as a director of Heritage
since August 2000.
JD Woodward III. Mr. Woodward has served as Senior Vice President of Non
Utility Operations of Atmos Energy since April 2001, and is responsible for
Atmos Energy's non-regulated business activities. Prior to being named to that
position, Mr. Woodward held the position of President of Woodward Marketing,
LLC, in Houston, Texas from January 1995 to March 2001. Mr. Woodward was named a
director of Heritage in October 2001.
Richard T. O'Brien. Mr. O'Brien is Executive Vice President and Chief
Financial Officer of AGL Resources and has held that position since May 2001.
Prior to being named to that position, he was Vice President of Mirant (formerly
Southern Energy) and President of Mirant Capital Management, LLC from March 2000
to April 2001 in Atlanta, Georgia. Prior to that time, Mr. O'Brien held various
executive positions with PacifiCorp in Portland, Oregon during the period from
1983 to 2000. Mr. O'Brien was named a director of Heritage October 2001.
42
Kevin M. O'Hara. Mr. O'Hara is Vice President of Corporate Planning for
Charlotte-based Piedmont Natural Gas. Mr. O'Hara joined Piedmont Natural Gas in
1987 and his current responsibilities include the development and implementation
of corporate strategies related to system expansion and organization
development. In addition, Mr. O'Hara has responsibility for non-regulated
business activities of Piedmont Natural Gas. His prior work experience was with
Andersen Consulting (now Accenture) where he started his career in their Chicago
office. Mr. O'Hara was elected a director of Heritage in April 2002.
Andrew W. Evans. Mr. Evans is the Vice President of Finance and Treasurer
of AGL Resources. He has held that position since May 2002. Prior thereto Mr.
Evans was with Mirant Corporation where he served as Vice President of Corporate
Development for Mirant Americas business unit, and prior to that Vice President
and Treasurer for Mirant Americas. During his tenure with Mirant, he oversaw
market analysis and structured product development for the energy marketing
business. He also served as Director of Finance for Mirant's trading business,
Mirant Americas Energy Marketing. Prior to Mirant, Evans was employed by the
Cambridge, MA office of National Economic Research Associates and the Federal
Reserve Bank of Boston. Mr. Evans was named a director of Heritage in October
2002.
COMPENSATION OF THE GENERAL PARTNER
The General Partner does not receive any management fee or other
compensation in connection with its management of the Partnership and the
Operating Partnership. The General Partner and its affiliates performing
services for the Partnership and the Operating Partnership are reimbursed at
cost for all expenses incurred on behalf of Heritage, including the costs of
compensation allocable to Heritage, and all other expenses necessary or
appropriate to the conduct of the business of, and allocable to, Heritage. These
costs totaled approximately $95.7 million for the year ended August 31, 2002 and
$93.4 million for the year ended August 31, 2001.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES AND EXCHANGE ACT
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Partnership's officers and directors, and persons who own more than 10% of a
registered class of the Partnership's equity securities, to file reports of
beneficial ownership and changes in beneficial ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors and greater than 10%
Unitholders are required by SEC regulations to furnish the General Partner with
copies of all Section 16(a) forms.
Based solely on the Partnership's review of the copies of such forms
received by it, or written representations from certain reporting persons that
no Form 5s were required for those persons, the Partnership believes that during
fiscal year ending August 31, 2002, all filing requirements applicable to its
officers, directors, and greater than 10% beneficial owners were met in a timely
manner.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the annual salary, bonus and all other
compensation awards and payouts for each of the past three fiscal years earned
by: (i) all persons serving as the Chief Executive Officer of the General
Partner of the Partnership during fiscal year 2002; (ii) the four next highly
compensated executive officers other than the Chief Executive Officer, who
served as executive officers of the General Partner of the Partnership during
fiscal year 2002 and (iii) any persons who would have been reported had they
been an executive officer of the General Partner of the Partnership at the end
of fiscal year 2002.
43
Other Annual All Other
Bonus Compensation Compensation
Name and Principal Position Year Salary (1) (2) (3)
--------------------------- ---- ------ --- --- ---
James E. Bertelsmeyer 2002 $193,500 $ -- $ 501 $ --
Chairman of the Board 2001 193,500 -- 400 --
2000 387,297 -- 695 129,306
H. Michael Krimbill 2002 $350,000 $350,000 $ 242 $ --
President and Chief 2001 350,000 280,000 242 --
Executive Officer 2000 251,678 -- 193 214,838
R. C. Mills 2002 $335,000 $350,000 $ 1,700 $ --
Executive Vice President 2001 335,000 280,000 1,066 --
and Chief Operating Officer 2000 244,732 -- 822 129,306
Michael L. Greenwood (4) 2002 $240,000 $ -- $ -- $ --
Vice President and 2001 -- -- -- --
Chief Financial Officer 2000 -- -- -- --
Larry J. Dagley (5) 2002 $325,000 $350,000 $ 372 $227,715
Vice President and 2001 325,000 280,000 372 --
Chief Financial Officer 2000 -- -- -- --
Bradley K. Atkinson 2002 $220,000 $410,944 $ 158 $ --
Vice President - 2001 200,000 280,000 145 --
Corporate Development 2000 134,836 125,000 72 131,718
(1) Bonuses are earned based on the results of operations for each fiscal
year. The payment in any one fiscal year is limited and the excess bonus
earned is deferred until the next fiscal year.
(2) Consists of life insurance premiums.
(3) Consists of the value of Common Units issued pursuant to the vesting
rights of the Restricted Unit Plan.
(4) Mr. Greenwood was named Chief Financial Officer in July of 2002. Mr.
Greenwood's 2002 salary was annualized.
(5) Mr. Dagley resigned from the position of Chief Financial Officer as of
June 30, 2002.
EMPLOYMENT AGREEMENTS
The General Partner has entered into employment agreements (the
"Employment Agreements") with Messrs. Bertelsmeyer, Krimbill, Mills, Atkinson,
Weishahn, Rose, and Darr. The summary of such Employment Agreements contained
herein does not purport to be complete and is qualified in its entirety by
reference to the Employment Agreements, which have been filed previously as
exhibits.
The Employment Agreement for Mr. Bertelsmeyer had an initial term of two
years starting August 2000, with an annual base salary of $193,500. At the
expiration of the term on August 10, 2002, Mr. Bertelsmeyer's employment
agreement became "at will." The Employment Agreements for Messrs. Krimbill,
Mills, Atkinson, Weishahn, Rose, and Darr (each an "Executive") have an initial
term of three years starting August 2000. However, for each Executive with the
three year Employment Agreement, beginning on the second anniversary of the
effective date and on each day thereafter the expiration date shall be
automatically extended one additional day unless either party (i) shall give
written notice to the other that the Term shall cease to be so extended
beginning immediately after the date of such notice or (ii) shall give a Notice
of Termination to the other by delivering notice to the Chairman of the Board,
or in the event of the Executive's death. The Employment Agreements for each of
Messrs, Krimbill, Mills, Atkinson, Weishahn, Rose, and Darr, provide for an
annual base salary of $350,000, $335,000, $200,000, $150,000, $135,000, and
$135,000, respectively. The Board shall review the Base Salary at least annually
and may
44
adjust the amount of the Base Salary at any time, as the Board may deem
appropriate in its sole discretion; provided, however, that in no event may the
Base Salary be decreased below the above stated amount without the prior written
consent of the employee. The Employment Agreements provide for the Executives to
participate in bonus and incentive plans. The Employment Agreements also provide
for the Executive and, where applicable, the Executive's dependents, to have the
right to participate in benefit plans made available to other executives of
Heritage including the Restricted Unit Plan and the Long-Term Incentive Plan
described below.
The Employment Agreements provide that in the event of a change of control
of the ownership of the General Partner or in the event an Executive (i) is
involuntarily terminated (other than for "misconduct" or "disability") or (ii)
voluntarily terminates employment for "good reason" (as defined in the
agreements), such Executive will be entitled to continue receiving his base
salary and to participate in all group health insurance plans and programs that
may be offered to executives of the General Partner for the remainder of the
term of the Employment Agreement or, if earlier, the Executive's death, and the
Executive will vest immediately in the Minimum Award of the number of Common
Units to which the Executive is entitled under the Long Term Incentive Plan to
the extent not previously awarded, and if the executive is terminated as a
result of the foregoing, all restrictions on the transferability of the units
purchased by such executive under the Subscription Agreement dated as of June
15, 2000, previously filed as an exhibit, shall automatically lapse in full on
such date. Each Employment Agreement also provides that if any payment received
by an Executive is subject to the 20% federal excise tax under Section 4999(a)
of the Code of the Internal Revenue Service, the Payment will be grossed up to
permit the Executive to retain a net amount on an after-tax basis equal to what
he would have received had the excise tax and all other federal and state taxes
on such additional amount not been payable. In addition, each Employment
Agreement contains non-competition and confidentiality provisions.
RESTRICTED UNIT PLAN
The Partnership adopted the Amended and Restated Restricted Unit Plan
dated August 10, 2000, amended February 4, 2002 as the Second Amended and
Restated Restricted Unit Plan. (the "Restricted Unit Plan"), previously filed as
exhibits, for certain directors and key employees of the General Partner and its
affiliates. The Restricted Unit Plan covers rights to acquire 146,000 Common
Units. The right to acquire the Common Units under the Restricted Unit Plan,
including any forfeiture or lapse of rights are available for grant to key
employees on such terms and conditions (including vesting conditions) as the
Compensation Committee of the General Partner shall determine. Each director
shall automatically receive a Director's grant with respect to 500 Common Units
on each September 1 that such person continues as a director. Newly elected
directors are also entitled to receive a grant with respect to 2,000 Common
Units upon election or appointment to the Board. Directors who are employees of
U.S. Propane, TECO, Atmos Energy, Piedmont Natural Gas or AGL Resources or their
affiliates are not entitled to receive a Director's grant of Common Units.
Messrs. Bertelsmeyer and Krimbill are not entitled to receive a Director's Grant
of Common Units but my receive Common Units as employees. Generally, the rights
to acquire the Common Units granted will vest upon the occurrence of specified
performance objectives established by the Compensation Committee at the time
designations of grants are made, or if later, the three-year anniversary of the
grant date. In the event of a "change of control" (as defined in the Restricted
Unit Plan), all rights to acquire Common Units pursuant to the Restricted Unit
Plan will immediately vest.
Common Units to be delivered upon the "vesting" of rights may be Common
Units acquired by the Partnership in the open market, Common Units already owned
by the General Partner, Common Units acquired by the General Partner directly
from the Partnership or any other person, or any combination of the foregoing.
Although the Restricted Unit Plan permits the grant of distribution equivalent
rights to key employees, it is anticipated that until such Common Units have
been delivered to a participant, such participant shall not be entitled to any
distributions or allocations of income or loss and shall not have any voting or
other rights in respect of such Common Units. The General Partner will be
entitled to reimbursement by the Partnership for the cost incurred in acquiring
such Common Units.
The Board of Directors, in its discretion may terminate the Restricted
Unit Plan at any time with respect to any Common Units for which a grant has not
therefore been made. The Board will also have the right to alter or amend the
Restricted Unit Plan or any part thereof from time to time; provided, however,
that no change in any Restricted Unit may be made that would impair the rights
of the participant without the consent of such participant.
45
The issuance of the Common Units pursuant to the Restricted Unit Plan is
intended to serve as a means of incentive compensation for performance and not
primarily as an opportunity to participate in the equity appreciation in respect
of the Common Units. Therefore, no consideration will be payable by the plan
participants upon vesting and issuance of the Common Units. As of August 31,
2002, 26,900 restricted units granted to non-employee directors and key
employees were outstanding. Compensation expense of $0.4 million and $0.3
million was recognized for fiscal year 2002 and fiscal year 2001, respectively.
See Note 6 -- "Partners' Capital" to the Consolidated Financial Statements,
beginning on page F-1 of this report. Compensation expense of $0.3 million was
recognized in Predecessor Heritage's financial statements for the period ended
August 9, 2000 and $0.3 million for fiscal year 1999. See Note 5 -- "Partners'
Capital" of Predecessor Heritage's Consolidated Financial Statements beginning
on page F-37 of this report.
No grants of Common Units to persons serving as executive officers of the
Partnership were made in the last fiscal year. At the time of his resignation as
an executive officer, 10,000 Common Units were issued to Larry J. Dagley, the
proportionate share of the maximum 15,000 units he would have been entitled to
receive under the Restricted Unit Plan.
LONG-TERM INCENTIVE PLAN
Effective September 1, 2000, the Partnership adopted a long-term incentive
plan whereby units will be awarded to the Executive Officers and other employees
at its discretion based on achieving certain targeted levels of Distributed Cash
(as defined in the Long Term Incentive Plan) per unit. Awards under the program
will be made starting in 2003 based upon the average of the prior three years
Distributed Cash per unit. A minimum of 250,000 units and if targeted levels are
achieved, a maximum of 500,000 units will be awarded under the Long Term
Incentive Plan. Compensation expense of $1.5 and $0.8 million was recognized for
fiscal years 2002 and 2001, respectively.
COMPENSATION OF DIRECTORS
The Partnership currently pays no additional remuneration to its employees
for serving as directors of the General Partner. Under the Restricted Unit Plan,
directors other than directors who are employees of U.S. Propane, Atmos Energy,
AGL Resources, TECO and Piedmont Natural Gas, or their affiliates, will be
awarded 500 of these restricted units annually, and newly elected directors
receive an initial award of 2,000 restricted units. The General Partner will pay
each of its non-employee and nonaffiliated directors $10,000 annually, plus
$1,000 per board meeting attended and $500 per committee meeting attended. Each
of the members of the Independent Committee received a payment of $10,000 during
fiscal year 2002, as payment for services and expenses rendered in conjunction
with the Partnership's evaluation of potential acquisition candidates. All
expenses associated with compensation of directors will be reimbursed to the
General Partner by the Partnership.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors determines
compensation of the executive officers. Royston K. Eustace, Bill W. Byrne, and
J. Patrick Reddy served as members of the Compensation Committee of the Board of
Directors of Heritage Holdings and as members of the Compensation Committee of
the Board of Directors of USPLLC beginning February 4, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of October 31, 2002,
regarding the beneficial ownership of the Partnership's securities by certain
beneficial owners and all directors and named executive officers, both
individually and as a group. The General Partner knows of no other person not
disclosed herein beneficially owning more than 5% of the Partnership's Common
Units.
46
HERITAGE PROPANE PARTNERS, L.P. UNITS
Name and Address (1) Beneficially Percent of
Title of Class of Beneficial Owner Owned (2) Class
------------ ------------------------- --------- -----
Common Units James E. Bertelsmeyer (3) 1,104,397 6.98%
H. Michael Krimbill (3) 322,559 2.04
R.C. Mills (3) 328,009 2.07
Michael L. Greenwood 10,000 *
Larry J. Dagley (7) 16,000 *
Bradley K. Atkinson 13,600 *
Bill W. Byrne 77,657 *
J. Charles Sawyer 68,157 *
Stephen L. Cropper 5,000 *
J. Patrick Reddy - *
Royston K. Eustace - *
William N. Cantrell - *
Ware F. Schiefer (4) - *
David J. Dzuricky - *
Clayton H. Preble (4) - *
J.D. Woodward - *
Richard T. O'Brien - *
Kevin M. O'Hara (4) - *
Andrew W. Evans (4) - *
All Directors and Executive
Officers as a group
(20 persons) 2,018,494 12.76%
Heritage Holdings, Inc. (5) 4,426,916 27.99%
U.S. Propane L.P. (5) (6) 4,639,636 29.33%
U.S. Propane, L.L.C. (5) (6) 4,639,636 29.33%
* Less than one percent (1%)
(1) The address for Mr. Krimbill, Mr. Greenwood, and Mr. Atkinson is 8801 S.
Yale, Suite 310, Tulsa, Oklahoma 74137. The address for U.S. Propane, L.P.
is 702 N. Franklin Street, Tampa, Florida 33602. The address for each of
Messrs. Bertelsmeyer, and Mills is 5000 Sawgrass Village Circle, Suite 4,
Ponte Vedra Beach, Florida 32082. The address for Heritage Holdings is c/o
Brett Stovern, AGL Resources, Inc., 817 W. Peachtree St., Atlanta, Georgia
30308.
(2) Beneficial ownership for the purposes of the foregoing table is defined by
Rule 13d-3 under the Securities Exchange Act of 1934. Under that rule, a
person is generally considered to be the beneficial owner of a security if
he has or shares the power to vote or direct the voting thereof ("Voting
Power") or to dispose or direct the disposition thereof ("Investment
Power") or has the right to acquire either of those powers within sixty
(60) days.
(3) Each of Messrs. Bertelsmeyer, Byrne, Mills, and Krimbill shares Voting and
Investment Power on a portion of their respective units with his spouse.
(4) Mr. O'Hara replaced Mr. Schiefer effective April 24, 2002, and Mr. Evans
replaced Mr. Preble on the Board of Directors effective October 1, 2002.
(5) U.S. Propane, L.P. owns 212,720 Common Units and, by virtue of its
ownership of 100% of Heritage Holdings, may be deemed to beneficially own
the 4,426,916 Common Units owned by Heritage Holdings. U.S. Propane
L.L.C., as the general partner of U.S. Propane, L.P., may be deemed to
beneficially own the 212,720 Common Units owned by U.S. Propane, L.P and
the 4,426,916 Common Units owned by Heritage Holdings. U.S. Propane, L.P.
disclaims any beneficial ownership with respect to the Common Units owned
by Heritage Holdings and U.S. Propane L.L.C. disclaims any beneficial
ownership with respect to the Common Units owned by U.S. Propane, L.P and
Heritage Holdings.
47
(6) U.S. Propane, L.P. owns 100% of the common stock of Heritage Holdings. AGL
Propane Services, Inc., United Cities Propane Gas, Inc., TECO Propane
Ventures, LLC and Piedmont Propane Company own a 22.358%, 18.968%, 37.976%
and 20.688%, respectively, limited partner interest in U.S. Propane, L.P.
U.S. Propane, L.L.C. is the General Partner of U.S. Propane, L.P. with a
0.01% general partner interest. The members of U.S. Propane L.L.C. and
their respective membership interest is as follows:
AGL Energy Corporation 22.36%
United Cities Propane Gas, Inc. 18.97%
TECO Propane Ventures, LLC 37.98%
Piedmont Propane Company 20.69%
(7) Mr. Dagley was not an executive officer as of August 31, 2002, having
resigned as such in June of 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Computer Energy, Inc., ("Computer Energy") is a provider of computer
software to the propane industry. During fiscal year 2002, purchases of computer
software and/or additional licenses from Computer Energy were made by and
utilized in Heritage's propane operations. The total amount of purchases made by
Heritage in fiscal year 2002 did not exceed $30,000, and were made under terms
no less favorable than those available from other computer software providers.
J. Charles Sawyer is the President and owner of 50% of the stock of Computer
Energy. The Board of Directors has determined that Mr. Sawyer's stock ownership
of Computer Energy and its relationship as a supplier of computer software to
Heritage is not significant and does not affect his independence as a director
of the General Partner of the Partnership.
Heritage has entered into an agreement with TECO Partners, Inc. ("TECO
Partners") whereby TECO Partners will provide services relating to the securing
of new propane customers in Heritage's Florida regional operations area. Under
the agreement, TECO Partners receives commissions upon the procuring of new
propane customers for Heritage. The terms of the agreement are no less favorable
to Heritage than those available from other parties providing similar services.
During fiscal year 2002, TECO Partners received commissions of less than
$180,000.
48
PART IV
ITEM 14. CONTROLS AND PROCEDURES
The Partnership maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Partnership files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC. Within 90 days prior to the filing date of this report, an
evaluation was performed under the supervision and with the participation of the
Partnership's management, including the Chief Executive Officer and the Chief
Financial Officer of the General Partner of the Partnership, of the
effectiveness of the design and operation of the Partnership's disclosure
controls and procedures. Based upon that evaluation, management, including the
Chief Executive Officer and the Chief Financial Officer of the General Partner
of the Partnership, concluded that the Partnership's disclosure controls and
procedures were adequate and effective as of August 31, 2002. No significant
changes in the Partnership's internal controls or in other factors have occurred
that could significantly affect controls subsequent to August 31, 2002.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT OF FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
See "Index to Financial Statements" set forth on page F-1.
2. FINANCIAL STATEMENT SCHEDULES.
None.
3. EXHIBITS.
See "Index to Exhibits" set forth on page E-1.
(B) REPORTS ON FORM 8-K.
The Registrant filed two reports on Form 8-K during the three months
ended August 31, 2002.
Form 8-K dated July 10, 2002, was filed to report a change in the
registrant's independent auditor. Based on the recommendation of the Audit
Committee, the Board of Directors of the Partnership approved the
dismissal of its independent auditors Arthur Andersen LLP and engaged the
firm of Grant Thornton LLP as its new independent auditors for the fiscal
year ended August 31, 2002, on July 8, 2002.
Form 8-K dated July 12, 2002, filed as exhibits the financial
statements of U.S. Propane, L.P. and subsidiaries, as the General Partner
of the Partnership
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on November 26, 2003.
HERITAGE PROPANE PARTNERS, L.P.
By U.S. Propane L.P, its General Partner.
By U.S. Propane, L.L.C., its General Partner
By: /s/ H. Michael Krimbill
-----------------------
H. Michael Krimbill
President and Chief Executive Officer and officer
duly authorized to sign on behalf of the registrant
50
INDEX TO FINANCIAL STATEMENTS
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY AND SURVIVING LEGAL ENTITY
IN THE SERIES OF TRANSACTIONS WITH U.S. PROPANE, L.P.)
PAGE
----
Report of Independent Certified Public Accountants (Fiscal Years 2002 and 2001)......................... F-2
Report of Independent Public Accountants (Period Ended August 31, 2000 and Fiscal Year 1999)............ F-4
Consolidated Balance Sheets -
August 31, 2002 and 2001............................................................................... F-5
Consolidated Statements of Operations -
Years Ended August 31, 2002 and 2001,
Eight Months Ended August 31, 2000 and 1999 (unaudited) and
Year Ended December 31, 1999 .......................................................................... F-6
Consolidated Statements of Comprehensive Income (Loss) -
Years Ended August 31, 2002 and 2001,
Eight Months Ended August 31, 2000 and 1999 (unaudited) and
Year Ended December 31, 1999........................................................................... F-7
Consolidated Statements of Partners' Capital -
Years Ended August 31, 2002 and 2001,
Eight Months Ended August 31, 2000 and
Year Ended December 31, 1999 .......................................................................... F-8
Consolidated Statements of Cash Flows -
Years Ended August 31, 2002 and 2001
Eight Months Ended August 31, 2000
Year Ended December 31, 1999........................................................................... F-9
Notes to Consolidated Financial Statements.............................................................. F-11
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES (PREDECESSOR HERITAGE)
(THE PROPANE OPERATIONS OF HERITAGE PROPANE PARTNERS, L.P.,
PRIOR TO THE SERIES OF TRANSACTIONS WITH U.S. PROPANE, L.P.)
Report of Independent Public Accountants................................................................ F-37
Consolidated Statement of Operations -
Period Ended August 9, 2000 ........................................................................... F-38
Consolidated Statement of Partners' Capital -
Period Ended August 9, 2000 ........................................................................... F-39
Consolidated Statement of Cash Flows -
Period Ended August 9, 2000 ........................................................................... F-40
Notes to Consolidated Financial Statements.............................................................. F-41
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of
Heritage Propane Partners, L.P.
We have audited the accompanying consolidated balance sheets of Heritage Propane
Partners, L.P. (a Delaware limited partnership) and subsidiaries, formerly
Peoples Gas Company, as of August 31, 2002 and 2001 and the related consolidated
statements of operations, comprehensive income (loss), partners' capital, and
cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The financial
statements of Heritage Propane Partners, L.P. for the eight months ended August
31, 2000, and the year ended December 31, 1999, were audited by other auditors
who have ceased operations. Those auditors expressed an unqualified opinion on
those financial statements in their report dated October 26, 2000.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 2002 and 2001 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Heritage Propane Partners, L.P. and subsidiaries as of August 31, 2002 and 2001,
and the results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
As discussed above, the financial statements of Heritage Propane Partners, L.P.
for the eight months ended August 31, 2000, and for the year ended December 31,
1999, were audited by other auditors who have ceased operations. As described in
Note 2, these financial statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, which was adopted by the Partnership as of
September 1, 2001. Our audit procedures with respect to the disclosures in Note
2 for 2000 and 1999 included (i) agreeing the previously reported net income
(loss) to the previously issued financial statements and the adjustments to
reported net income (loss) representing amortization expense (including any
related tax effects) recognized in those periods related to goodwill, to the
Partnership's underlying records obtained from management, and (ii) testing the
mathematical accuracy of the reconciliation of adjusted net income (loss) to
reported net income (loss) and the related earnings-per-unit amounts. In our
opinion, the disclosures for 2000 and 1999 in Note 2 are appropriate. However,
we were not engaged to audit, review, or apply any procedures to the 2000 and
1999 financial statements of the Partnership other than with respect to such
disclosures and the matter discussed in the following paragraphs and,
accordingly, we do not express an opinion or any other form of assurance on the
2000 or 1999 financial statements taken as a whole.
As discussed above, the financial statements of Heritage Propane Partners, L.P.
for the eight months ended August 31, 2000, were audited by other auditors who
have ceased operations. As described in Note 2, these financial statements have
been revised to include the disclosures required by Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosures, which was adopted by the Partnership as of August
31, 2002. Our audit procedures with respect to the disclosures in Note 2 for
2000 included (i) agreeing the previously reported net loss to the previously
issued financial statements and the adjustments to reported net loss
representing compensation expense recognized in those periods under APB No. 25,
Accounting for Stock Issued to Employees and the pro forma compensation expense
under Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation, to the Partnership's underlying records obtained from
management, and (ii) testing the mathematical accuracy of the reconciliation of
pro forma net loss to reported net loss and the related earnings-per-unit
amounts. In our opinion, the disclosures for 2000 in Note 2 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2000 financial statements of the Partnership other than with respect to such
disclosures and the matters discussed in the previous and following paragraphs
and, accordingly, we do not express an opinion or any other form of assurance on
the 2000 financial statements taken as a whole
F-2
As described in Note 2, amounts have been reclassified in the 2002, 2001 and
2000 consolidated statements of operations to reflect the adoption of Emerging
Issues Task Force Issue No. 02-3, Issues Related to Accounting for Contracts
Involved in Energy Trading and Risk Management Activities, by the Partnership as
of August 31, 2002. As discussed above, the financial statements of Heritage
Propane Partners, L.P. for the eight months ended August 31, 2000, were audited
by other auditors who have ceased operations. We audited the reclassification
adjustment described in Note 2 that was applied to the 2000 consolidated
statement of operations. In our opinion, such reclassification adjustment is
appropriate and has been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the 2000 financial statements of the
Partnership other than with respect to such adjustment and the matters discussed
in the preceding two paragraphs and, accordingly, we do not express an opinion
or any other form of assurance on the 2000 financial statements taken as a
whole.
Tulsa, Oklahoma
October 16, 2003 (except for Note 12, as to which the date is November 6, 2003)
F-3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Heritage Propane Partners, L.P.:
We have audited the accompanying consolidated balance sheets of
Heritage Propane Partners, L.P. (a Delaware limited partnership) and
subsidiaries, formerly Peoples Gas Company, as of August 31, 2001 and
2000 and the related consolidated statements of operations,
comprehensive income (loss), partners' capital and cash flows for the
year ended August 31, 2001, the eight month period ended August 31,
2000, and for each of the two years in the period ended December 31,
1999. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Heritage
Propane Partners, L.P. and subsidiaries, formerly Peoples Gas Company,
as of August 31, 2001 and 2000, and the results of their operations and
their cash flows for the year ended August 31, 2001, the eight month
period ended August 31, 2000, and for each of the two years in the
period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
-----------------------
Tulsa, Oklahoma
October 19, 2001
The report of Arthur Andersen LLP shown above is a copy of a previously issued
report; Arthur Andersen LLP has not reissued this report.
F-4
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
August 31, August 31,
2002 2001
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,591 $ 5,626
Marketable securities 2,564 4,239
Accounts receivable, net of allowance for doubtful accounts 30,898 40,221
Inventories 48,187 66,814
Assets from liquids marketing 2,301 6,465
Prepaid expenses and other 6,846 14,898
--------- ---------
Total current assets 95,387 138,263
PROPERTY, PLANT AND EQUIPMENT, net 400,044 394,742
INVESTMENT IN AFFILIATES 7,858 6,920
GOODWILL, net of amortization prior to adoption of SFAS No. 142 155,735 153,404
INTANGIBLES AND OTHER ASSETS, net 58,240 64,838
--------- ---------
Total assets $ 717,264 $ 758,167
========= =========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Working capital facility $ 30,200 $ 19,900
Accounts payable 40,929 43,164
Accounts payable to related companies 5,002 7,937
Accrued and other current liabilities 23,962 33,404
Liabilities from liquids marketing 1,818 7,130
Current maturities of long-term debt 20,158 16,120
--------- ---------
Total current liabilities 122,069 127,655
LONG-TERM DEBT, less current maturities 420,021 423,748
MINORITY INTERESTS 3,564 5,350
--------- ---------
Total liabilities 545,654 556,753
--------- ---------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Common Unitholders (15,815,847 and 14,260,316 units issued and
outstanding at August 31, 2002 and 2001, respectively) 173,677 190,548
Class B Subordinated Unitholders (1,382,514 units issued and
outstanding at August 31, 2001) -- 15,532
Class C Unitholders (1,000,000 units issued and outstanding at
August 31, 2002 and 2001) -- --
General Partner 1,585 1,875
Accumulated other comprehensive loss (3,652) (6,541)
--------- ---------
Total partners' capital 171,610 201,414
--------- ---------
Total liabilities and partners' capital $ 717,264 $ 758,167
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)
For the Years For the Eight Months For the Year
Ended August 31, Ended August 31, Ended
------------------------------ ------------------------------ December 31,
2002 2001 2000 1999 1999
------------ ------------ ------------ ------------ ------------
(Unaudited)
REVENUES:
Retail fuel $ 365,334 $ 440,527 $ 43,815 $ 21,766 $ 34,045
Wholesale fuel 41,204 59,879 3,807 -- --
Liquids marketing, net 542 841 724 -- --
Other 55,245 42,728 3,188 -- --
------------ ------------ ------------ ------------ ------------
Total revenues 462,325 543,975 51,534 21,766 34,045
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of products sold 238,185 306,556 29,962 8,467 14,849
Operating expenses 133,203 126,849 16,581 8,596 13,223
Depreciation and amortization 36,998 40,431 4,686 2,037 3,088
Selling, general and administrative 12,978 15,716 1,019 -- --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 421,364 489,552 52,248 19,100 31,160
------------ ------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 40,961 54,423 (714) 2,666 2,885
OTHER INCOME (EXPENSE):
Interest expense (37,341) (35,567) (2,409) -- --
Equity in earnings (losses) of affiliates 1,338 1,250 (67) -- --
Gain on disposal of assets 812 812 121 -- --
Other (294) (394) (478) 11 10
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY
INTERESTS AND INCOME TAXES 5,476 20,524 (3,547) 2,677 2,895
Minority interests (574) (814) 80 -- --
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 4,902 19,710 (3,467) 2,677 2,895
Income taxes -- -- 379 1,035 1,127
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) 4,902 19,710 (3,846) 1,642 1,768
GENERAL PARTNER'S INTEREST IN NET
INCOME (LOSS) 918 831 (46) 4 4
------------ ------------ ------------ ------------ ------------
LIMITED PARTNERS' INTEREST IN NET
INCOME (LOSS) $ 3,984 $ 18,879 $ (3,800) $ 1,638 $ 1,764
============ ============ ============ ============ ============
BASIC NET INCOME (LOSS) PER
LIMITED PARTNER UNIT $ 0.25 $ 1.43 $ (0.37) $ 0.94 $ 1.02
============ ============ ============ ============ ============
BASIC AVERAGE NUMBER OF
UNITS OUTSTANDING 15,738,621 13,223,184 10,225,387 1,732,271 1,732,271
============ ============ ============ ============ ============
DILUTED NET INCOME (LOSS) PER
LIMITED PARTNER UNIT $ 0.25 $ 1.42 $ (0.37) $ 0.94 $ 1.02
============ ============ ============ ============ ============
DILUTED AVERAGE NUMBER OF
UNITS OUTSTANDING 15,777,307 13,254,908 10,225,387 1,732,271 1,732,271
============ ============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
For the Years For the Eight Months
Ended August 31, Ended August 31, Year Ended
--------------------------- --------------------------- December 31,
2002 2001 2000 1999 1999
-------- -------- -------- -------- --------
(Unaudited)
Net income (loss) $ 4,902 $ 19,710 $ (3,846) $ 1,642 $ 1,768
Other comprehensive income:
Transition adjustment for adoption
of SFAS No. 133 -- 5,429 -- -- --
Change in value of derivative
instruments 4,464 (9,893) -- -- --
Change in value of
available-for-sale securities (1,575) (2,077) -- -- --
-------- -------- -------- -------- --------
Comprehensive income (loss) $ 7,791 $ 13,169 $ (3,846) $ 1,642 $ 1,768
======== ======== ======== ======== ========
RECONCILIATION OF ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of period $ (6,541) $ -- $ -- $ -- $ --
Transition adjustment for adoption of
SFAS No. 133 -- 5,429 -- -- --
Current period reclassification to
earnings 7,016 (3,844) -- -- --
Current period change (4,127) (8,126) -- -- --
-------- -------- -------- -------- --------
Balance, end of period $ (3,652) $ (6,541) $ -- $ -- $ --
======== ======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit data)
Number of Units
-----------------------------------------------------------------------------
Class B
Common Subordinated Subordinated Class C
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 1,294,873 437,398 -- --
Net income -- -- -- --
Dividends paid to parent -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 1,294,873 437,398 -- --
Dividends paid to parent -- -- -- --
Liabilities retained by parent -- -- -- --
Merger with AGL, Atmos, and Piedmont -- -- -- --
Merger with Predecessor Heritage 8,379,273 1,414,073 1,382,514 1,000,000
General Partner capital contribution -- -- -- --
Other -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, AUGUST 31, 2000 9,674,146 1,851,471 1,382,514 1,000,000
Unit distribution -- -- -- --
Issuance of Common Units 2,500,000 -- -- --
Conversion of Phantom Units 72,050 -- -- --
Issuance of Restricted Common Units 216,917 -- -- --
General Partner capital contribution (54,268) -- -- --
Conversion of Subordinated Units 1,851,471 (1,851,471) -- --
Cumulative effect of the adoption of -- -- -- --
SFAS 133
Net change in accumulated other
comprehensive loss per accompanying
statements -- -- -- --
Other -- -- -- --
Net income -- -- -- --
----------- ----------- ----------- -----------
BALANCE, AUGUST 31, 2001 14,260,316 -- 1,382,514 1,000,000
Unit distribution -- -- -- --
Conversion of Phantom Units 11,750 -- -- --
Conversion of Subordinated Units 1,382,514 -- (1,382,514) --
Issuance of units upon conversion of
minority interest 162,913 -- -- --
General Partner capital contribution (1,646) -- -- --
Net change in accumulated other
comprehensive loss per accompanying
statements -- -- -- --
Other -- -- -- --
Net income -- -- -- --
----------- ----------- ----------- -----------
BALANCE, AUGUST 31, 2002 15,815,847 -- -- 1,000,000
=========== =========== =========== ===========
Class B
Common Subordinated Subordinated Class C
----------- ----------- ----------- --------
BALANCE, DECEMBER 31, 1998 $ 11,659 $ 3,898 $ -- $ --
Net income 1,323 441 -- --
Dividends paid to parent (1,688) (563) -- --
----------- ----------- ----------- --------
BALANCE, DECEMBER 31, 1999 11,294 3,776 -- --
Dividends paid to parent (1,132) (377) -- --
Liabilities retained by parent 21,080 7,051 -- --
Merger with AGL, Atmos, and Piedmont 83,410 28,085 -- --
Merger with Predecessor Heritage (4,080) (14,657) 17,167 --
General Partner capital contribution -- -- -- --
Other (1,502) (285) (213) --
Net loss (2,849) (463) (488) --
----------- ----------- ----------- --------
BALANCE, AUGUST 31, 2000 106,221 23,130 16,466 --
Unit distribution (23,183) (4,397) (3,284) --
Issuance of Common Units 66,046 -- -- --
Conversion of Phantom Units 323 -- -- --
Issuance of Restricted Common Units 6,050 -- -- --
General Partner capital contribution (1,520) -- -- --
Conversion of Subordinated Units 24,214 (24,214) -- --
Cumulative effect of the adoption of -- -- -- --
SFAS 133
Net change in accumulated other
comprehensive loss per accompanying
statements -- -- -- --
Other 1,349 -- -- --
Net income 11,048 5,481 2,350 --
----------- ----------- ----------- --------
BALANCE, AUGUST 31, 2001 190,548 -- 15,532 --
Unit distribution (38,159) -- (1,746) --
Conversion of Phantom Units -- -- -- --
Conversion of Subordinated Units 15,137 -- (15,137) --
Issuance of units upon conversion of
minority interest 1,729 -- -- --
General Partner capital contribution (32) -- -- --
Net change in accumulated other
comprehensive loss per accompanying
statements -- -- -- --
Other 1,821 -- -- --
Net income 2,633 -- 1,351 --
----------- ----------- ----------- --------
BALANCE, AUGUST 31, 2002 $ 173,677 $ -- $ -- $ --
=========== =========== =========== ========
Accumulated
Other
General Comprehensive
Partner Income (Loss) Total
----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 $ 39 $ -- $ 15,596
Net income 4 -- 1,768
Dividends paid to parent (6) -- (2,257)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 37 -- 15,107
Dividends paid to parent (4) -- (1,513)
Liabilities retained by parent 71 -- 28,202
Merger with AGL, Atmos, and Piedmont 843 -- 112,338
Merger with Predecessor Heritage (523) -- (2,093)
General Partner capital contribution 581 -- 581
Other (20) -- (2,020)
Net loss (46) -- (3,846)
----------- ----------- -----------
BALANCE, AUGUST 31, 2000 939 -- 146,756
Unit distribution (663) -- (31,527)
Issuance of Common Units -- -- 66,046
Conversion of Phantom Units -- -- 323
Issuance of Restricted Common Units -- -- 6,050
General Partner capital contribution 768 -- (752)
Conversion of Subordinated Units -- -- --
Cumulative effect of the adoption of -- 5,429 5,429
SFAS 133
Net change in accumulated other
comprehensive loss per accompanying
statements -- (11,970) (11,970)
Other -- -- 1,349
Net income 831 -- 19,710
----------- ----------- -----------
BALANCE, AUGUST 31, 2001 1,875 (6,541) 201,414
Unit distribution (1,240) -- (41,145)
Conversion of Phantom Units -- -- --
Conversion of Subordinated Units -- -- --
Issuance of units upon conversion of
minority interest -- -- 1,729
General Partner capital contribution 32 -- --
Net change in accumulated other
comprehensive loss per accompanying
statements -- 2,889 2,889
Other -- -- 1,821
Net income 918 -- 4,902
----------- ----------- -----------
BALANCE, AUGUST 31, 2002 $ 1,585 $ (3,652) $ 171,610
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended For the Eight For the Year
August 31, Months Ended Ended
------------------------ August 31, December 31,
2002 2001 2000 1999
--------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,902 $ 19,710 $ (3,846) $ 1,768
Reconciliation of net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 36,998 40,431 4,686 3,088
Provision for loss on accounts receivable 887 4,055 -- --
Gain on disposal of assets (812) (812) (121) --
Deferred compensation on restricted units and long-term
incentive plan 1,878 1,079 509 --
Undistributed earnings (losses) of affiliates (938) (1,125) 67 --
Minority interests (111) 463 700 --
Deferred income taxes -- -- -- 517
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable 9,180 (4,533) (5,109) (2,051)
Inventories 17,827 (24,158) (7,274) (413)
Assets from liquids marketing 4,164 (2,332) (3,909) --
Prepaid and other expenses 8,086 (12,331) 142 51
Intangibles and other assets 1,197 1,730 -- (97)
Accounts payable (4,094) (3,166) 17,976 511
Accounts payable to related companies (2,935) 4,123 5,057 6,064
Accrued and other current liabilities (5,464) 1,476 5,630 (85)
Liabilities from liquids marketing (5,312) 3,446 -- --
--------- --------- --------- ---------
Net cash provided by operating activities 65,453 28,056 14,508 9,353
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (19,742) (94,860) (177,067) (1,015)
Capital expenditures (27,072) (23,854) (3,559) (6,176)
Proceeds from the sale of assets 13,336 2,620 -- --
Investment in marketable securities (34) (6,219) -- --
Other 95 -- (2,411) --
--------- --------- --------- ---------
Net cash used in investing activities (33,417) (122,313) (183,037) (7,191)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 164,715 356,748 193,032 --
Principal payments on debt (156,584) (295,788) (67,898) --
Net proceeds from issuance of Common Units -- 66,046 22,924 --
Net proceeds from issuance of Subordinated Units -- -- 27,279 --
Debt issuance costs -- (441) (1,052) --
Capital contributions -- -- 581 --
Unit distributions (41,145) (31,527) -- --
Dividends paid to parent -- -- (1,513) (2,257)
Other (57) -- -- --
--------- --------- --------- ---------
Net cash provided by (used in) financing activities (33,071) 95,038 173,353 (2,257)
--------- --------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,035) 781 4,824 (95)
CASH AND CASH EQUIVALENTS, beginning of period 5,626 4,845 21 116
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 4,591 $ 5,626 $ 4,845 $ 21
========= ========= ========= =========
F-9
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended For the Eight For the
August 31, Months Ended Year Ended
-------------------------- August 31, December 31,
2002 2001 2000 1999
-------- -------- -------- --------
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 2,737 $ 10,030 $ 809 $ 200
======== ======== ======== ========
Issuance of Common Units upon conversion of
minority interest $ 1,729 $ -- $ -- $ --
======== ======== ======== ========
General Partner capital contribution $ -- $ (752) $ -- $ --
======== ======== ======== ========
Issuance of Restricted Common Units $ -- $ 6,050 $ -- $ --
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 37,610 $ 35,541 $ 581 $ --
======== ======== ======== ========
Cash paid to parent for income taxes under tax sharing
agreement, net $ -- $ -- $ 1,028 $ 851
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements
F-10
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except unit and per unit data)
1. OPERATIONS AND ORGANIZATION:
In August 2000, TECO Energy, Inc. ("TECO"), Atmos Energy Corporation ("Atmos
Energy"), Piedmont Natural Gas Co., Inc. ("Piedmont Natural Gas"), and AGL
Resources, Inc. ("AGL Resources") contributed each company's propane operations,
Peoples Gas Company ("Peoples Gas"), United Cities Propane Gas, Inc. ("United
Cities"), Piedmont Propane Company ("Piedmont") and AGL Propane, Inc., ("AGL")
respectively, to U.S. Propane L.P., ("U.S. Propane") in exchange for equity
interests in U.S. Propane. The merger was accounted for as an acquisition using
the purchase method of accounting with Peoples Gas being the acquirer.
Accordingly, Peoples Gas' assets and liabilities were recorded at historical
cost and the assets and liabilities of United Cities, Piedmont and AGL were
recorded at fair market value, as determined based on a valuation and appraisal.
The purchase allocations were as follows:
Purchase price of Piedmont, AGL and United Cities $112,338
Net book value of Piedmont, AGL and United Cities 82,765
--------
Step-up of net book value, allocated to property,
plant and equipment $ 29,573
========
In August 2000, U.S. Propane acquired all of the outstanding common stock of
Heritage Holdings, Inc., the former General Partner of Heritage Propane
Partners, L.P. (the "former General Partner" or "Heritage Holdings") for
$120,000. By virtue of Heritage Holdings' former general partner and limited
partner interests in Heritage Propane Partners, L.P., U.S. Propane gained
control of Heritage Propane Partners, L.P. Simultaneously, U.S. Propane
transferred its propane operations, consisting of its interest in four separate
limited liability companies, AGL Propane, L.L.C., Peoples Gas Company, L.L.C.,
United Cities Propane Gas, L.L.C. and Retail Propane Company, L.L.C. (former
Piedmont operations), (collectively, the "Propane LLCs"), to Heritage Propane
Partners, L.P. for $181,395 plus working capital. The $181,395 was payable
$139,552 in cash, $31,843 of assumed debt, and the issuance of 372,392 Common
Units of Heritage Propane Partners, L.P. valued at $7,348 and a 1.0101% limited
partner interest in Heritage Propane Partners, L.P.'s operating partnership,
Heritage Operating, L.P., valued at $2,652. The purchase price and the exchange
price for the Common Units were approved by an independent committee of the
Board of Directors of Heritage Holdings. The exchange price for the Common Units
was $19.73125 per unit under a formula based on the average closing price of
Heritage Propane Partners, L.P.'s Common Units on the New York Stock Exchange
for the twenty (20) day period beginning ten (10) days prior to the public
announcement of the transaction on June 15, 2000 (the "Formula Price").
Subsequent to August 31, 2000, payments totaling approximately $12,900 were made
for the working capital adjustment, of which $5,000 was accrued at August 31,
2000.
Concurrent with the acquisition, Heritage Operating, L.P. borrowed $180,000 from
several institutional investors and Heritage Propane Partners, L.P. sold
1,161,814 Common Units and 1,382,514 Class B Subordinated Units in a private
placement to the former shareholders of Heritage Holdings based on the Formula
Price resulting in net proceeds of $50,203. The total of these proceeds were
utilized to finance the transaction and retire a portion of existing debt.
The merger was accounted for as a reverse acquisition in accordance with
Accounting Principles Board (APB) Opinion No. 16. The propane operations of
Heritage Propane Partners, L.P. prior to the series of transactions with U.S.
Propane are referred to as Predecessor Heritage. Although Predecessor Heritage
is the surviving entity for legal purposes, U.S. Propane's propane operations is
the acquirer for accounting purposes. The assets and liabilities of Predecessor
Heritage have been recorded at fair value to the extent acquired by U.S.
Propane's propane operations, approximately 36%, in accordance with Emerging
Issues Task Force (EITF) Issue No. 90-13, Accounting for Simultaneous Common
Control Mergers. The assets and liabilities of U.S. Propane have been recorded
at historical cost, as recorded in the U.S. Propane transaction described above.
The combined operations of Predecessor Heritage and U.S. Propane are referred to
herein as "Heritage" or the "Partnership". Although the equity accounts of
Peoples Gas survive the merger, Predecessor Heritage's partnership structure and
partnership
F-11
units survive. Accordingly, the equity accounts of Peoples Gas have been
restated based on the general partner interest and Common Units received by
Peoples Gas in the merger.
The excess purchase price over Predecessor Heritage's cost was determined as
follows:
Net book value of Predecessor Heritage at August 9, 2000 $ 35,716
Equity investment 50,203
--------
85,919
Percent of Predecessor Heritage acquired by U.S. Propane 36%
--------
Equity interest acquired $ 30,931
========
Purchase price $120,000
Equity interest acquired 30,931
--------
Excess purchase price over Predecessor Heritage cost $ 89,069
========
The excess purchase price over Predecessor Heritage cost was allocated as
follows:
Property, plant and equipment (25 year life) $ 11,180
Customer lists (15 year life) 5,935
Goodwill (30 year life) 71,954
--------
$ 89,069
========
The accompanying financial statements for the period ended December 31, 1999
have been presented on a carve-out basis and reflect the historical results of
operations and cash flows of Peoples Gas. As discussed further in Note 8,
certain expenses in the financial statements include allocations from TECO and
other wholly-owned subsidiaries of TECO. Management believes that the
allocations were made on a reasonable basis; however, the allocations of costs
and expenses do not necessarily indicate the costs that would have been incurred
by Peoples Gas on a stand-alone basis. Also, the financial statements may not
necessarily reflect what the results of operations and cash flows of Peoples Gas
would have been if Peoples Gas had been a separate, stand-alone company during
the periods presented.
The following unaudited pro forma consolidated results of operations are
presented as if the series of transactions with U.S. Propane and Predecessor
Heritage had been made at the beginning of the periods presented.
8-months 12-months
Ended Ended
August 31, 2000 December 31, 1999
--------------- -----------------
Net revenues $ 305,017 $ 299,600
Net income (loss) $ 4,712 $ (1,662)
Basic and diluted earnings (loss) per Common Unit $ 0.36 $ (0.14)
The pro forma consolidated results of operations include adjustments to give
effect to amortization of goodwill, interest expense on acquisition and assumed
debt, and certain other adjustments, including the elimination of income taxes.
The unaudited pro forma information is not necessarily indicative of the results
of operations that would have occurred had the transactions been made at the
beginning of the periods presented or the future results of the combined
operations.
Peoples Gas had a fiscal year-end of December 31, however, Heritage continues to
have Predecessor Heritage's August 31 year-end. Accordingly, the eight-month
period ended August 31, 2000 is a transition period under the rules of the
Securities and Exchange Commission.
In order to simplify Heritage's obligation under the laws of several
jurisdictions in which Heritage conducts business, Heritage's activities are
conducted through a subsidiary operating partnership Heritage Operating, L.P.
(the "Operating Partnership"). The Operating Partnership sells propane and
propane-related products to more than 600,000 active residential, commercial,
industrial and agricultural customers in 28 states. Heritage is also a wholesale
propane supplier in the southwestern and southeastern United States and in
Canada, the latter through participation in MP Energy Partnership. MP Energy
Partnership is a Canadian partnership, engaged in supplying the Partnership's
northern U.S. locations and lower-margin wholesale distribution, in which
Heritage owns a 60%
F-12
interest. Heritage buys and sells financial instruments for its own account
through its wholly owned subsidiary, Heritage Energy Resources L.L.C.
("Resources").
On February 4, 2002, the Partnership's Common Unitholders, at a special meeting,
approved the substitution of U.S. Propane as the successor General Partner of
the Partnership replacing Heritage Holdings. Heritage Holdings exchanged its
general partner interest in Heritage and the Incentive Distribution Rights
(which are described in Note 6), for 158,026 Common Units, and its 1.0101%
general partner interest in the Operating Partnership for 162,913 Common Units.
The 1.0101% limited partner interest in the Operating Partnership owned by U.S.
Propane converted to a 1.0101% general partner interest in the Operating
Partnership and 158,026 of the Common Units owned by U.S. Propane converted into
a 1% general partner interest in the Partnership plus the Incentive Distribution
Rights.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Partnership include the accounts of
its subsidiaries, including the Operating Partnership, MP Energy Partnership,
Heritage Service Corp., Guilford Gas Service, Inc., Resources, and the Propane
LLCs. A minority interest liability and minority interest expense is recorded
for all partially owned subsidiaries. Heritage accounts for its 50% partnership
interest in Bi-State Propane, another propane retailer, under the equity method.
All significant intercompany transactions and accounts have been eliminated in
consolidation. The accounts of the Operating Partnership are included based on
the determination that Heritage possesses a controlling financial interest
through a direct ownership of a 98.9899% voting interest and its ability to
exert control over the Operating Partnership. For purposes of maintaining
partner capital accounts, Heritage's Partnership Agreement specifies that items
of income and loss shall be allocated among the partners in accordance with
their percentage interests. Normal allocations according to percentage interests
are made, however, only after giving effect to any priority income allocations
in an amount equal to the incentive distributions that are allocated 100% to the
General Partner. At August 31, 2002, as successor General Partner, U.S.
Propane's 1.0101% general partner interest in the Operating Partnership was
accounted for in the consolidated financial statements as a minority interest.
For the year ended August 31, 2001, Heritage Holdings' 1.0101% general partner
interest and U.S. Propane's 1.0101% limited partner interest in the Operating
Partnership were accounted for in the consolidated financial statements as
minority interests.
REVENUE RECOGNITION
Sales of propane, propane appliances, parts, and fittings are recognized at the
later of the time of delivery of the product to the customer or the time of sale
or installation. Revenue from service labor is recognized upon completion of the
service and tank rent is recognized ratably over the period it is earned.
Shipping and handling revenues are included in the price of propane charged to
customers, and thus are classified as revenues.
COSTS AND EXPENSES
Costs of products sold include actual cost of fuel sold adjusted for the effects
of qualifying cash flow hedges, storage fees and inbound freight, and the cost
of appliances, parts, and fittings. Operating expenses include all costs
incurred to provide products to customers, including compensation for operations
personnel, insurance costs, vehicle maintenance, advertising costs, shipping and
handling costs, purchasing costs, and plant operations. Selling, general and
administrative expenses include all corporate expenses and compensation for
corporate personnel.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash on hand, demand deposits, and
investments with original maturities of three months or less. The Partnership
considers cash equivalents to include short-term, highly liquid investments that
are readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.
F-13
ACCOUNTS RECEIVABLE
Heritage grants credit to its customers for the purchase of propane and
propane-related products. Accounts receivable consisted of the following:
August 31, August 31,
2002 2001
------- -------
Accounts receivable $33,402 $43,797
Less - allowance for doubtful accounts 2,504 3,576
------- -------
Total, net $30,898 $40,221
======= =======
The activity in the allowance for doubtful accounts consisted of the following
during the years ending:
August 31, August 31,
2002 2001
------- -------
Balance, beginning of the year $ 3,576 $ --
Provision for loss on accounts receivable 887 4,055
Accounts receivable written off, net of recoveries (1,959) (479)
------- -------
Balance, end of year $ 2,504 $ 3,576
======= =======
INVENTORIES
Inventories are valued at the lower of cost or market. The cost of fuel
inventories is determined using weighted-average cost of fuel delivered to the
retail districts and includes storage fees and inbound freight costs, while the
cost of appliances, parts, and fittings is determined by the first-in, first-out
method. Inventories consisted of the following:
August 31, August 31,
2002 2001
------- -------
Fuel $38,523 $56,975
Appliances, parts and fittings 9,664 9,839
------- -------
Total inventories $48,187 $66,814
======= =======
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Expenditures for maintenance and repairs are
expensed as incurred. Expenditures to refurbish tanks that either extend the
useful lives of the tanks or prevent environmental contamination are capitalized
and depreciated over the remaining useful life of the tanks. Additionally,
Heritage capitalizes certain costs directly related to the installation of
company-owned tanks, including internal labor costs. Components and useful lives
of property, plant and equipment were as follows:
August 31, August 31,
2002 2001
--------- ---------
Land and improvements $ 20,981 $ 21,244
Buildings and improvements (10 to 30 years) 29,145 27,871
Bulk storage, equipment and facilities (3 to 30 years) 39,908 34,431
Tanks and other equipment (5 to 30 years) 298,540 287,155
Vehicles (5 to 10 years) 63,755 52,177
Furniture and fixtures (5 to 10 years) 10,407 6,852
Other (5 to 10 years) 3,442 3,242
--------- ---------
466,178 432,972
Less - Accumulated depreciation (72,822) (47,036)
--------- ---------
393,356 385,936
Plus - Construction work-in-process 6,688 8,806
--------- ---------
F-14
Property, plant and equipment, net $ 400,044 $ 394,742
========= =========
INTANGIBLES AND OTHER ASSETS
Intangibles and other assets are stated at cost net of amortization computed on
the straight-line method. Heritage eliminates from its balance sheet any fully
amortized intangibles and the related accumulated amortization. Components and
useful lives of intangibles and other assets were as follows:
August 31, 2002 August 31, 2001
---------------------------- ----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets
Noncompete agreements (5 to 15 years) $ 41,994 $(10,924) $ 40,764 $ (5,933)
Customer lists (15 years) 27,245 (4,160) 26,903 (2,001)
Financing costs (3 to 15 years) 4,225 (1,291) 4,225 (704)
Consulting agreements (2 to 7 years) 618 (390) 618 (246)
-------- -------- -------- --------
Total 74,082 (16,765) 72,510 (8,884)
Unamortized intangible assets
Trademarks 864 -- -- --
Other assets 59 -- 1,212 --
-------- -------- -------- --------
Total intangibles and other assets $ 75,005 $(16,765) $ 73,722 $ (8,884)
======== ======== ======== ========
Aggregate amortization expense of intangible assets was $8,152 and $6,879 for
the years ended August 31, 2002 and 2001 respectively, and $1,108 and $199 for
the eight months ended August 31, 2000 and 1999, respectively and $200 for the
year ended December 31, 1999. The estimated aggregate amortization expense for
the next five fiscal years is $7,701 for 2003; $7,199 for 2004; $6,841 for 2005;
$6,397 for 2006; and $6,112 for 2007.
GOODWILL
Goodwill is associated with acquisitions made for Heritage's domestic retail
segment; therefore, all goodwill is recorded in this segment. Of the $155,735
balance in goodwill, $24,579 is expected to be tax deductible. Goodwill is
tested for impairment at the end of each fiscal year end in accordance with SFAS
142. The changes in the carrying amount of goodwill for the years ended August
31, 2001 and 2002 were as follows:
Balance as of August 31, 2000 $ 133,569
Goodwill acquired during the year 25,053
Accumulated amortization prior to the adoption of
SFAS No 142 (5,218)
Impairment losses --
Goodwill written off to sale of business --
---------
Balance as of August 31, 2001 153,404
Goodwill acquired during the year 6,464
Impairment losses --
Goodwill written off to sale of business (4,133)
---------
Balance as of August 31, 2002 $ 155,735
=========
F-15
LONG-LIVED ASSETS
Heritage reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If such a review should indicate that the carrying amount of
long-lived assets is not recoverable, Heritage reduces the carrying amount of
such assets to fair value. No impairment of long-lived assets was recorded
during the years ended August 31, 2002 and 2001, and December 31, 1999 or the
period ended August 31, 2000.
ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consisted of the following:
August 31, August 31,
2002 2001
------- -------
Interest payable $ 4,100 $ 4,542
Wages and payroll taxes 1,869 5,117
Deferred tank rent 3,585 3,019
Advanced budget payments and unearned revenue 8,116 5,883
Customer deposits 2,175 2,425
Taxes other than income 2,027 2,430
Derivative instruments -- 4,556
Other 2,090 5,432
------- -------
Accrued and other current liabilities $23,962 $33,404
======= =======
INCOME TAXES
Prior to the series of transactions that formed U.S. Propane, Peoples Gas
followed the liability method of accounting for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
(SFAS 109). Under SFAS 109, deferred income taxes are recorded based upon
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the underlying assets are received and liabilities are settled.
TECO retained all tax liabilities related to Peoples Gas that may have existed
as of August 9, 2000.
Heritage is a limited partnership. As a result, Heritage's earnings or losses
for federal and state income tax purposes are included in the tax returns of the
individual partners. Accordingly, because of the merger, no recognition has been
given to income taxes in the accompanying financial statements of Heritage for
the years ended August 31, 2002 and 2001 or the period ended August 31, 2000,
except those incurred by Peoples Gas prior to the series of transactions with
U.S. Propane and Predecessor Heritage. Net earnings for financial statement
purposes may differ significantly from taxable income reportable to unit holders
as a result of differences between the tax basis and financial reporting basis
of assets and liabilities and the taxable income allocation requirements under
the Partnership Agreement.
STOCK BASED COMPENSATION PLANS
The Partnership accounts for its Restricted Unit Plan and Long-Term Incentive
Plan using APB Opinion No. 25 Accounting for Stock Issued to Employees (APB 25).
These plans are classified as variable plans so that estimates of compensation
are required based on a combination of the fair market value of the Common Units
as of the end of the reporting period and the extent or degree of compliance
with the performance criteria. Heritage follows the disclosure only provisions
of Statement of Financial Accounting Standards No. 123 Accounting for
Stock-based Compensation (SFAS 123), as amended by Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure (SFAS 148). Heritage adopted the fair value
recognition provisions of SFAS 123 effective as of September 1, 2002. Heritage
adopted the fair value recognition provisions following the modified prospective
method of adoption described in SFAS 148. Following adoption, deferred
compensation expense that is recognized will be the same as that which would
have been recognized had the fair
F-16
value recognition provisions of SFAS 123 been applied to all awards under the
Restricted Unit Plan and the Long Term Incentive Plan granted after its original
effective date. Results from prior years have not been restated.
The fair value of each unit grant is estimated on the date of grant considering
the market value of a Common Unit reduced by the discounted value of expected
cash distributions to be made during the vesting period, as the units do not
receive cash distributions until the vesting period is complete. The vesting
period is assumed to be three years for all units granted and the weighted
average risk free interest rate applied to grants during each of the years was:
5.6% for 2000, 5.96% for 2001 and 6.18% for 2002. Annual average cash
distributions at the grant date were estimated to be $2.10 for 2000, $2.35 for
2001 and $2.37 for 2002. There were no units outstanding at December 31, 1999.
The following table illustrates the effect on limited partners' interest in net
income (loss) and the basic and diluted net income (loss) per limited partner
unit if Heritage had applied the fair value recognition provisions of SFAS 123
to the Restricted Unit Plan and the Long-Term Incentive Plan for all of the
periods presented.
Eight Months
Year Ended Year Ended Ended August 31, Year Ended
August 31, August 31, ---------------------------- December 31,
2002 2001 2000 1999 1999
------------ ------------ ------------ ----------- -----------
NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Limited partners' interest in net income (loss) $ 3,984 $ 18,879 $ (3,800) $ 1,638 $ 1,764
Add: Deferred compensation expense net of General
Partner's and minority interest included in
limited partners' interest in net income (loss) 1,841 1,057 499 -- --
Deduct: Deferred compensation expense net of
General Partner's and minority interest
determined under the fair value based method (968) (1,079) (410) -- --
------------ ------------ ------------ ----------- -----------
Pro forma limited partners' interest in net income
(loss) $ 4,857 $ 18,857 $ (3,711) $ 1,638 $ 1,764
============ ============ ============ =========== ===========
Weighted average limited partner units 15,738,621 13,223,184 10,225,387 1,732,271 1,732,271
============ ============ ============ =========== ===========
Basic net income (loss) per limited partner unit
as reported $ 0.25 $ 1.43 $ (0.37) $ 0.94 $ 1.02
============ ============ ============ =========== ===========
Basic net income (loss) per limited partner unit
pro forma $ 0.31 $ 1.43 $ (0.36) $ 0.94 $ 1.02
============ ============ ============ =========== ===========
Weighted average limited partner units, assuming
dilutive effect of Phantom Units
15,777,307 13,254,908 10,225,387 1,732,271 1,732,271
============ ============ ============ =========== ===========
Diluted net income (loss) per limited partner unit
as reported $ 0.25 $ 1.42 $ (0.37) $ 0.94 $ 1.02
============ ============ ============ =========== ===========
Diluted net income (loss) per limited partner unit
pro forma $ 0.31 $ 1.42 $ (0.36) $ 0.94 $ 1.02
============ ============ ============ =========== ===========
INCOME (LOSS) PER LIMITED PARTNER UNIT
Basic net income (loss) per limited partner unit is computed by dividing net
income (loss), after considering the General Partner's interest, by the weighted
average number of Common and Subordinated Units outstanding. Diluted net income
(loss) per limited partner unit is computed by dividing net income, after
considering the General Partner's interest, by the weighted average number of
Common and Subordinated Units outstanding and the weighted average number of
restricted units ("Phantom Units") granted under the Restricted Unit Plan. A
reconciliation of net income (loss) and weighted average units used in computing
basic and diluted earnings (loss) per unit is as follows:
F-17
Eight Months
Year Ended Year Ended Ended August 31, Year Ended
August 31, August 31, ---------------------------- December 31,
2002 2001 2000 1999 1999
------------ ------------ ------------ ----------- -----------
(Unaudited)
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Limited partners' interest in net income (loss) $ 3,984 $ 18,879 $ (3,800) $ 1,638 $ 1,764
============ ============ ============ =========== ===========
Weighted average limited partner units 15,738,621 13,223,184 10,225,387 1,732,271 1,732,271
============ ============ ============ =========== ===========
Basic net income (loss) per limited partner unit $ 0.25 $ 1.43 $ (0.37) $ 0.94 $ 1.02
============ ============ ============ =========== ===========
Eight Months
Year Ended Year Ended Ended August 31, Year Ended
August 31, August 31, ----------------------------- December 31,
2002 2001 2000 1999 1999
------------ ------------ ------------ ------------ ------------
(Unaudited)
DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Limited partners' interest in net income (loss) $ 3,984 $ 18,879 $ (3,800) $ 1,638 $ 1,764
============ ============ ============ ============ ============
Weighted average limited partner units 15,738,621 13,223,184 10,225,387 1,732,271 1,732,271
Dilutive effect of Phantom Units 38,686 31,724 -- -- --
------------ ------------ ------------ ------------ ------------
Weighted average limited partner units, assuming
dilutive effect of Phantom Units 15,777,307 13,254,908 10,225,387 1,732,271 1,732,271
============ ============ ============ ============ ============
Diluted net income (loss) per limited partner unit $ 0.25 $ 1.42 $ (0.37) $ 0.94 $ 1.02
============ ============ ============ ============ ============
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Some of the more significant estimates made by
management include, but are not limited to, allowances for doubtful accounts,
derivative hedging instruments, liquids marketing assets and liabilities, and
general business and medical self-insurance reserves. Actual results could
differ from those estimates.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the 2002
presentation. These reclassifications have no impact on net income or net
assets.
FAIR VALUE
The carrying amounts of accounts receivable and accounts payable approximate
their fair value. Based on the estimated borrowing rates currently available to
Heritage for long-term loans with similar terms and average maturities, the
aggregate fair value and carrying amount of long-term debt at August 31, 2002
was $470,264 and $440,179, respectively. The fair value and carrying amount of
long-term debt at August 31, 2001 was approximately $465,690 and $439,868,
respectively.
SFAS 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS
133). SFAS 133 requires that all derivatives be recognized in the balance sheet
as either an asset or liability measured at fair value. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statement of operations. Heritage adopted the
provisions of SFAS 133 on September 1, 2000. The cumulative effect of adopting
SFAS 133 was an adjustment to accumulated other comprehensive income of $5,429.
F-18
Heritage had certain financial swap instruments that settled during the year
ended August 31, 2002 that were designated as cash flow hedging instruments in
accordance with SFAS 133. The swap instruments were contractual agreements to
exchange obligations of money between the buyer and seller of the instruments as
propane volumes during the pricing period are purchased. The swaps were tied to
a set fixed price for the buyer and floating price determinants for the seller
priced on certain indices at the end of the relevant trading period. Heritage
entered into these instruments to hedge the forecasted propane volumes to be
purchased during each of the one-month periods ending October 2001 through March
2002. Heritage utilized hedging transactions to provide price protection against
significant fluctuations in propane prices. During the years ended August 31,
2002 and 2001, Heritage reclassified into earnings through cost of products
sold, a loss of $7,016 and a gain of $3,844, respectively, that were previously
reported in accumulated other comprehensive income (loss). There were no such
financial instruments outstanding as of August 31, 2002.
SFAS 142 GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible
Assets (SFAS 142). Under SFAS 142, goodwill is no longer subject to amortization
over its estimated useful life. Rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value-based test.
Additionally, any acquired intangible assets should be separately recognized if
the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented or exchanged, regardless of the acquirer's intent to do so. Those assets
will be amortized over their useful lives, other than assets that have an
indefinite life.
Heritage adopted SFAS 142 on September 1, 2001 and accordingly has discontinued
the amortization of goodwill. Under the provisions of SFAS 142, Heritage was
required to perform a transitional goodwill impairment appraisal within six
months from the time of adoption. Management engaged an independent appraisal
firm to perform an assessment of the fair value of each of Heritage's operating
segments, which were compared with the carrying value of each segment to
determine whether any impairment existed on the date of adoption. Heritage has
completed the transitional goodwill impairment appraisal and has determined that
based on the fair value of Heritage's operating segments, Heritage's goodwill
was not impaired as of September 1, 2001. Management has determined that a
detailed evaluation of the Partnership's operating segments as of August 31,
2002 is not necessary based on the fact that there has not been a significant
change in the components of the Partnership's operating segments since the last
evaluation, the previous fair value of the Partnership's operating segments
substantially exceeded the carrying value, and the likelihood that the
Partnership's operating segments current carrying value exceeds its current fair
value is remote based on an analysis of events and circumstances since the
Partnership's most recent evaluation. Accordingly, no impairment of the
Partnership's goodwill was recorded for the year ended August 31, 2002. The
Partnership will continue to test goodwill for impairment as of the end of each
fiscal year. The adoption of SFAS 142 eliminated goodwill amortization that
would have totaled approximately $5,704 for the year ended August 31, 2002,
based on the balances of August 31, 2001, totaled approximately $4,910 for the
year ended August 31, 2001, and totaled $308 for the eight months ended August
31, 2000. There was no goodwill amortization for the eight months ended August
31, 1999 or the year ended December 31, 1999.
The following table reflects the effect of the adoption of SFAS 142 on net
income (loss) as if SFAS 142 had been in effect for all of the periods
presented:
Eight Months
Year Ended Year Ended Ended August 31, Year Ended
August 31, August 31, ------------------------- December 31,
2002 2001 2000 1999 1999
---------- ---------- ---------- ---------- ----------
(Unaudited)
Net income (loss) as reported $ 4,902 $ 19,710 $ (3,846) $ 1,642 $ 1,768
Add back: goodwill amortization -- 4,910 308 -- --
---------- ---------- ---------- ---------- ----------
Adjusted net income (loss) 4,902 24,620 (3,538) 1,642 1,768
Adjusted General Partner's interest in net
income (loss) 918 880 (43) 4 4
---------- ---------- ---------- ---------- ----------
Adjusted Limited Partners' interest in net
income (loss) $ 3,984 $ 23,740 $ (3,495) $ 1,638 $ 1,764
========== ========== ========== ========== ==========
Basic net income (loss) per limited partner unit
As reported $ 0.25 $ 1.43 $ (0.37) $ 0.94 $ 1.02
Goodwill amortization $ -- $ 0.37 $ 0.03 $ -- $ --
As adjusted $ 0.25 $ 1.80 $ (0.34) $ 0.94 $ 1.02
F-19
Diluted net income (loss) per limited partner unit: --
As reported $ 0.25 $ 1.42 $ (0.37) $ 0.94 $ 1.02
Goodwill amortization $ -- $ 0.37 $ 0.03 $ -- $ --
As adjusted $ 0.25 $ 1.79 $ (0.34) $ 0.94 $ 1.02
MARKETABLE SECURITIES
Heritage's marketable securities are classified as available-for-sale securities
and are reflected as a current asset on the consolidated balance sheet at their
fair value. Unrealized holding losses of $1,575 and $2,077 for the years ended
August 31, 2002 and 2001, respectively, were recorded through accumulated other
comprehensive income (loss) based on the market value of the securities.
Management does not consider the decline in market value of the
available-for-sale securities to be other than temporary.
LIQUIDS MARKETING ACTIVITIES
Heritage buys and sells derivative financial instruments which are within the
scope of SFAS 133 and that are not designated as accounting hedges. Heritage
also enters into energy trading contracts, which are not derivatives, and
therefore are not with in the scope of SFAS 133. EITF Issue No. 98-10,
Accounting for Contracts Involved in Energy Trading and Risk Management
Activities (EITF 98-10), applied to energy trading contracts not within the
scope of SFAS 133 that were entered into prior to October 25, 2002. The types of
contracts Heritage utilizes in its liquids marketing segment include energy
commodity forward contracts, options, and swaps traded on the over-the-counter
financial markets. In accordance with the provisions of SFAS 133, financial
instruments utilized in connection with Heritage's liquids marketing activity
are accounted for using the mark-to-market method. Additionally all energy
trading contracts entered into prior to October 25, 2002 were accounted for
using the mark-to-market method in accordance with provision of EITF 98-10.
Under the mark-to-market method of accounting, forwards, swaps, options, and
storage contracts are reflected at fair value, and are shown in the consolidated
balance sheet as assets and liabilities from liquids marketing activities. As of
August 31, 2002, Heritage adopted the applicable provisions of EITF Issue No.
02-3, Issues Related to Accounting for Contracts Involved in Energy Trading and
Risk Management Activities (EITF 02-3), which requires that gains and losses on
derivative instruments be shown net in the statement of operations if the
derivative instruments are held for trading purposes. EITF 02-3 also specifies
certain disclosure requirements. Net realized and unrealized gains and losses
from the financial contracts and the impact of price movements are recognized in
the statement of operations as liquids marketing revenue. Changes in the assets
and liabilities from the liquids marketing activities result primarily from
changes in the market prices, newly originated transactions, and the timing of
settlement of contracts. EITF 02-03 also rescinds EITF 98-10 for all energy
trading contracts entered into after October 25, 2002 and specifies certain
disclosure requirements. Consequently, Heritage does not apply mark-to-market
accounting for any contract entered into after October 25, 2002 that are not
within the scope of SFAS 133. Heritage attempts to balance its contractual
portfolio in terms of notional amounts and timing of performance and delivery
obligations. However, net unbalanced positions can exist or are established
based on management's assessment of anticipated market movements.
The adoption of EITF 02-3 requires that realized and unrealized gains and losses
be shown net for all periods presented. The adoption of EITF 02-3 did not impact
the eight months ended August 31, 1999 or the year ended December 31, 1999. The
following table summarizes the amounts that have been reclassified in the
statement of operations:
For the
Eight
Months
Ended
For the Years Ended August 31 , August 31,
2002 2001 2000
--------- --------- ---------
Revenue - liquids marketing $ 159,607 $ 172,875 $ 12,262
Revenue - other -- (556) --
Costs and expenses - liquids marketing (159,065) (171,478) (11,538)
--------- --------- ---------
Net, as reclassified $ 542 $ 841 $ 724
========= ========= =========
F-20
The notional amounts and terms of these financial instruments as of August 31,
2002 and 2001 include fixed price payor for 1,180 and 2,130 barrels of propane,
respectively, and fixed price receiver of 1,076 and 1,820 barrels of propane,
respectively. Notional amounts reflect the volume of the transactions, but do
not represent the amounts exchanged by the parties to the financial instruments.
Accordingly, notional amounts do not accurately measure Heritage's exposure to
market or credit risks.
The fair value of the financial instruments related to liquids marketing
activities as of August 31, 2002 and 2001 was assets of $2,301 and $6,465,
respectively, and liabilities of $1,818 and $7,130, respectively.
Estimates related to Heritage's liquids marketing activities are sensitive to
uncertainty and volatility inherent in the energy commodities markets and actual
results could differ from these estimates. A theoretical change of 10% in the
underlying commodity value of the liquids marketing contracts would result in an
approximate $181 change in the market value of the contracts as there were
approximately 4.3 million gallons of net unbalanced positions at August 31,
2002.
Inherent in the resulting contractual portfolio are certain business risks,
including market risk and credit risk. Market risk is the risk that the value of
the portfolio will change, either favorably or unfavorably, in response to
changing market conditions. Credit risk is the risk of loss from nonperformance
by suppliers, customers, or financial counterparties to a contract. Heritage
takes active roles in managing and controlling market and credit risk and have
established control procedures, which are reviewed on an ongoing basis. Heritage
monitors market risk through a variety of techniques, including routine
reporting to senior management. Heritage attempts to minimize credit risk
exposure through credit policies and periodic monitoring procedures.
The following table summarizes the fair value of Heritage's' contracts,
aggregated by method of estimating fair value of the contracts as of August 31,
2002, and 2001 where settlement had not yet occurred. Heritage's contracts all
have a maturity of less than 1 year. The market prices used to value these
transactions reflect management's best estimate considering various factors
including closing average spot prices for the current and outer months plus a
differential to consider time value and storage costs.
August 31, August 31,
Source of Fair Value 2002 2001
-------------------------------- ---------- ----------
Prices actively quoted $1,276 $ 827
Prices based on other valuation methods 1,025 5,638
---------- ----------
Assets from liquids marketing $2,301 $6,465
========== ==========
Prices actively quoted $ 669 $1,297
Prices based on other valuation methods 1,149 5,833
---------- ----------
Liabilities from liquids marketing $1,818 $7,130
========== ==========
Unrealized gains (losses) $ 483 $ (665)
====== =======
The following table summarizes the changes in the unrealized fair value of
Heritage's contracts where settlement had not yet occurred for the fiscal years
ended August 31, 2002 and 2001 and the 8-months ended August 31, 2000.
2002 2001 2000
------- ------- -------
Unrealized gains (losses) in fair
value of contracts outstanding at $ (665) $ 591 $ --
the beginning of the period
Unrealized gains (losses) recognized
at inception of contracts -- -- --
Unrealized gains (losses) recognized
as a result of changes in -- -- --
valuation techniques and
assumptions
Other unrealized gains (losses)
recognized during the period 1,207 250 724
Less: Realized gains (losses)
recognized during the period 59 1,506 133
------- ------- -------
F-21
Unrealized gains (losses) in fair
value of contracts outstanding at
the end of the period $ 483 $ (665) $ 591
======= ======= =======
The following table summarizes the gross transaction volumes in barrels for
liquids marketing contracts that were physically settled for the years ended
August 31, 2002, 2001 and 2000:
(in thousands)
Fiscal year ended August 31, 2002 350
Fiscal year ended August 31, 2001 1,193
Fiscal year ended August 31, 2000 --
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement
Obligations (SFAS 143). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. Heritage adopted the provisions of SFAS
143 on September 1, 2002. The adoption of SFAS 143 did not have a material
impact on the Partnership's consolidated financial condition or results of
operations.
In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (SFAS 121), and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS 144 retains the fundamental
provisions of SFAS 121 for recognition and measurement of the impairment of
long-lived assets to be held and used, and measurement of long-lived assets to
be disposed of by sale. SFAS 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years, with early application encouraged. Heritage adopted the
provisions of SFAS 144 on September 1, 2002. The adoption of SFAS 144 did not
have a material impact on the Partnership's consolidated financial condition or
results of operations.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
(SFAS 145). SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that Statement, FASB Statement
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS
145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of
Motor Carriers, amends FASB Statement No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions and also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. SFAS 145 is effective for fiscal years beginning after May 15, 2002
with early application encouraged. Heritage adopted the provisions of SFAS 145
on September 1, 2002. The adoption did not have a material impact on the
Partnership's consolidated financial condition or results of operations.
In December 2002, the FASB issued Statement No. 148 Accounting for Stock-Based
Compensation - Transition and Disclosure (SFAS 148). The statement amends SFAS
123 to provide alternative methods of transitions for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS 148 are
effective for fiscal years ending after July 31, 2003, with earlier application
permitted, and the interim disclosure requirements of SFAS 148 are effective for
periods beginning after December 15, 2002. Heritage adopted the fair value
recognition provisions of SFAS 123 effective as of September 1, 2002. Under the
modified prospective method of adoption selected by Heritage, the deferred
compensation expense that will be recognized in fiscal 2003 will be the same as
that which would have
F-22
been recognized had the fair value recognition provisions of SFAS 123 been
applied to all awards granted under the Restricted Unit Plan and the Long Term
Incentive Plan granted after its original effective date. Results from prior
years have not been restated.
In October 2002, the EITF of the FASB discussed EITF Issue No. 02-3, Issues
Related to Accounting for Contracts Involved in Energy Trading and Risk
Management Activities (EITF 02-3). The EITF reached a consensus to rescind EITF
Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk
Management Activities (EITF 98-10), the impact of which is to preclude
mark-to-market accounting for energy trading contracts not within the scope of
SFAS 133. The EITF also reached a consensus that gains and losses on derivative
instruments within the scope of SFAS 133 should be shown net in the statement of
operations if the derivative instruments are held for trading purposes and what
disclosure requirements should be. This consensus was effective for financial
statements issued for periods ending after July 15, 2002. Heritage has adopted
EITF 02-03 as of August 31, 2002, and upon application reclassified comparative
financial statements for prior periods to conform to the consensus. This
adoption did not have a material impact on Heritage's financial position or
results of operations. The consensus regarding the rescission of EITF 98-10 is
applicable for fiscal periods beginning after December 15, 2002. Energy trading
contracts not within the scope of SFAS 133 purchased after October 25, 2002, but
prior to the implementation of the consensus are not permitted to apply
mark-to-market accounting. Management does not expect the adoption of EITF 02-3
as it relates to the rescission of EITF 98-10 to have a material affect on
Heritage's financial position or results of operations.
In November 2002, the FASB issued Financial Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 expands the existing
disclosure requirements for guarantees and requires that companies recognize a
liability for guarantees issued after December 31, 2002. The implementation of
FIN 45 did not have a significant impact on Heritage's financial position or
results of operations.
In January 2003, the FASB issued Financial Interpretation No. 46 Consolidation
of Variable Interest Entities - An Interpretation of ARB No. 51 (FIN 46). FIN 46
clarifies Accounting Research Bulletin No. 51, Consolidated Financial
Statements. If certain conditions are met, this interpretation requires the
primary beneficiary to consolidate certain variable interest entities in which
equity investors lack the characteristics of a controlling interest or do not
have sufficient equity investment at risk to permit the variable interest entity
to finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective immediately for variable interest entities
created or obtained after January 31, 2003. For variable interest entities
acquired before February 1, 2003, the interpretation is effective for the first
fiscal year or interim period beginning after June 15, 2003. Management does not
believe FIN 46 will have a significant impact on the Partnership's financial
position.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. Heritage adopted the provisions of SFAS 146 effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption did not have a material impact on the Partnership's consolidated
financial position or results of operations.
In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments embedded
in other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS 133. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. Heritage adopted SFAS 149 as of July 1, 2003. The adoption of
SFAS 149 did not have a material impact on the Partnership's consolidated
financial position or results of operations.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within the scope
of SFAS 150 as a liability (or an asset in some circumstances). This statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. Heritage adopted the provisions of SFAS 150 as of
September 1, 2003. The adoption did not have a material impact on the
Partnership's consolidated financial position or results of operations.
3. ACQUISITIONS
During the year ended August 31, 2002, Heritage purchased the stock of Virginia
Gas Propane Company Inc., in Virginia, Mt Pleasant Propane, Inc. in Tennessee
and two other smaller companies. Heritage also acquired substantially all of the
assets of six companies, which included Tri-County Propane, Inc., located in
North Carolina, Franconia Gas Corporation located in New Hampshire and Quality
Gas, Inc. also located in North Carolina. The aggregate purchase price for these
acquisitions totaled $24,915, which included liabilities assumed and non-compete
F-23
agreements of $5,173 for periods ranging from five to ten years. These
acquisitions were financed primarily with the acquisition facility and were
accounted for by the purchase method under SFAS 141. Heritage has historically
accounted for business combinations using the purchase method; therefore, the
guidelines of SFAS 141 did not have a significant impact on how the Partnership
accounted for these acquisitions.
Heritage recorded the following intangible assets in conjunction with these
acquisitions:
Customer lists (15 years) $ 1,066
Non-compete agreements (5 to 10 years) 2,800
-------
Total amortized intangible assets 3,866
Trademarks and tradenames 864
Goodwill 6,464
Other assets 96
-------
Total intangible assets acquired $11,290
=======
Goodwill was warranted because these acquisitions enhance Heritage's current
operations and certain acquisitions are expected to reduce costs through
synergies with existing operations. Heritage assigned all of the goodwill
acquired to the retail operating segment of the Partnership. The results of
operations from these acquisitions are included on the Partnership's statement
of operations from the dates acquired
On July 31, 2001, Heritage purchased the propane operations of ProFlame, Inc.
and subsidiaries and affiliates (ProFlame) located in California and Nevada, in
a series of mergers, stock purchases, and asset purchases. The aggregate
purchase price was $56,201 net of cash acquired of $6,518. The purchase price
included $42,695 paid in cash, of which $2,958 related to preliminary working
capital, and liabilities assumed of $9,056. In addition, a total of 158,917
Common Units valued at $4,450 were payable in connection with the assumption of
certain liabilities by Heritage Holdings. Although Heritage Holdings was
entitled to 158,917 Common Units as a result of this transaction, it agreed to
forego the issuance of 1,605 units and 1,638 units, which represented its
capital contributions to maintain its 1% interest in the Partnership and its
1.0101% interest in the Operating Partnership, respectively, in relation to this
transaction. Heritage Holdings also agreed to forego the issuance of an
additional 25,773 Common Units to which it was entitled in the ProFlame
acquisition to maintain its 1.0101% interest in the Operating Partnership as a
result of the July 31, 2001 public offering. The Partnership issued 129,901
Common Units to Heritage Holdings with a fair value of $28.00 per unit.
The results of operations of ProFlame are included in the consolidated statement
of operations of Heritage for the year ended August 31, 2002.
The following unaudited pro forma consolidated results of operations are
presented as if the series of transactions with ProFlame and Heritage had been
made at the beginning of the period presented:
Eight Months
Year Ended Ended
August 31, 2001 August 31, 2000
--------------- ---------------
Total revenues $595,317 $99,160
Limited partners' interest in net income $ 19,492 $(5,938)
Basic and diluted net income per
limited partner unit $ 1.47 $ (.55)
The pro forma consolidated results of operations include adjustments to give
effect to amortization of non-competes and customer lists, interest expense on
acquisition and assumed debt, and certain other adjustments, including the
elimination of income taxes. The unaudited pro forma information is not
necessarily indicative of the results of operations that would have occurred had
the transactions been made at the beginning of the period presented or the
future results of the combined operations.
During 2001, Heritage purchased all of the common stock of EnergyNorth Propane,
Inc. and its VGS Propane, LLC subsidiary in northern New England, and all of the
stock of one other small company. Heritage acquired substantially all of the
assets of seven other companies during the fiscal year ended August 31, 2001.
These acquisitions totaled $60,473, which included liabilities assumed and
noncompete agreements of $3,010 for periods
F-24
ranging up to ten years. These acquisitions were financed primarily with the
acquisition facility and the issuance of 58,000 Common Units with a fair market
value of $1,600.
In August 2000, Heritage purchased substantially all of the assets of two
companies for $1,887 in cash and noncompete agreements with the prior owners for
$309. In January 2000, Peoples Gas purchased substantially all of the fixed
assets of a company for approximately $3,300 in cash and noncompete agreements
with the prior owners for $500.
4. WORKING CAPITAL FACILITY AND LONG-TERM DEBT:
Long-term debt consists of the following:
August 31, August 31,
2002 2001
---------- ----------
1996 8.55% Senior Secured Notes $108,000 $120,000
1997 Medium Term Note Program:
7.17% Series A Senior Secured Notes 12,000 12,000
7.26% Series B Senior Secured Notes 20,000 20,000
6.50% Series C Senior Secured Notes 2,857 3,571
6.59% Series D Senior Secured Notes 4,444 5,000
6.67% Series E Senior Secured Notes 5,000 5,000
2000 and 2001 Senior Secured
Promissory Notes:
8.47% Series A Senior Secured Notes 16,000 16,000
8.55% Series B Senior Secured Notes 32,000 32,000
8.59% Series C Senior Secured Notes 27,000 27,000
8.67% Series D Senior Secured Notes 58,000 58,000
8.75% Series E Senior Secured Notes 7,000 7,000
8.87% Series F Senior Secured Notes 40,000 40,000
7.21% Series G Senior Secured Notes 26,500 26,500
7.89% Series H Senior Secured Notes 27,500 27,500
7.99% Series I Senior Secured Notes 16,000 16,000
Senior Revolving Acquisition Facility 14,000 --
Notes Payable on noncompete
agreements with interest imputed at
rates averaging 8%, due in
installments through 2010,
collateralized by a first security
lien on certain assets of Heritage 22,314 22,579
Other 1,564 1,718
Current maturities of long-term debt (20,158) (16,120)
---------- ----------
$420,021 $423,748
========== ==========
Maturities of the Senior Secured Notes, the Medium Term Note Program and the
Senior Secured Promissory Notes are as follows:
1996 8.55% Senior Secured Notes:
mature at the rate of $12,000 on June 30 in
each of the years 2002 to and including
2011. Interest is paid semi-annually.
1997 Medium Term Note Program:
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Series A Notes: mature at the rate of $2,400 on November 19
in each of the years 2005 to and including
2009. Interest is paid semi-annually.
Series B Notes: mature at the rate of $2,000 on November 19
in each of the years 2003 to and including
2012. Interest is paid semi-annually.
Series C Notes: mature at the rate of $714 on March 13 in each
of the years 2000 to and including 2003, $357 on March
13, 2004, $1,073 on March 13, 2005, and $357 in each of
the years 2006 and 2007. Interest is paid semi-annually.
Series D Notes: mature at the rate of $556 on March 13 in
each of the years 2002 to and including
2010. Interest is paid semi-annually.
Series E Notes: mature at the rate of $714 on March 13 in
each of the years 2007 to and including
2013. Interest is paid semi-annually.
2000 and 2001 Senior Secured Promissory Notes:
Series A Notes: mature at the rate of $3,200 on August 15 in
each of the years 2003 to and including
2007. Interest is paid quarterly.
Series B Notes: mature at the rate of $4,571 on August 15 in
each of the years 2004 to and including
2010. Interest is paid quarterly.
Series C Notes: mature at the rate of $5,750 on August 15 in
each of the years 2006 to and including 2007, $4,000 on
August 15, 2008 and $5,750 on August 15, 2009 to and
including 2010. Interest is paid quarterly.
Series D Notes: mature at the rate of $12,450 on August 15 in
each of the years 2008 and 2009, $7,700 on August 15,
2010, $12,450 on August 15, 2011 and $12,950 on August
15, 2012. Interest is paid quarterly.
Series E Notes: mature at the rate of $1,000 on August 15 in
each of the years 2009 to and including
2015. Interest is paid quarterly.
Series F Notes: mature at the rate of $3,636 on August 15 in
each of the years 2010 to and including
2020. Interest is paid quarterly.
Series G Notes: mature at the rate of $5,300 on May 15 in
each of the years 2004 to and including
2008. Interest is paid quarterly.
Series H Notes: mature at the rate of $2,500 on May 15 in
each of the years 2006 to and including
2016. Interest is paid quarterly.
Series I Notes: mature in one payment of $16,000 on May 15,
2013. Interest is paid quarterly.
The Note Agreements for each of the Notes, Medium Term Note Program and Senior
Secured Promissory Notes, and the Bank Credit Facility contain customary
restrictive covenants applicable to the Operating Partnership, including
limitations on the level of additional indebtedness, creation of liens, and sale
of assets. These covenants require the Operating Partnership to maintain ratios
of Consolidated Funded Indebtedness to Consolidated EBITDA (as these terms are
similarly defined in the Bank Credit Facility and the Note Agreements) of not
more than 5.00 to 1 for the Bank Credit Facility and not more than 5.25 to 1 for
the Note Agreements and Consolidated EBITDA to Consolidated Interest Expense (as
these terms are similarly defined in the Bank Credit Facility and the Note
Agreements) of not less than 2.25 to 1. The Consolidated EBITDA used to
determine these ratios is calculated in accordance with these debt agreements.
For purposes of calculating the ratios under the Bank Credit Facility and the
Note Agreements, Consolidated EBITDA is based upon Heritage's EBITDA, as
adjusted for the most recent four quarterly periods, and modified to give pro
forma effect for acquisitions and divestitures made during the test period and
is compared to Consolidated Funded Indebtedness as of the test date and the
Consolidated Interest Expense for the most recent twelve months. These debt
agreements also provide that the Operating Partnership may declare, make, or
incur a liability to make, a restricted payment during each fiscal quarter, if:
(a) the amount of such restricted payment, together with all other restricted
payments during such quarter, do not exceed Available Cash with respect to the
immediately preceding quarter; and (b) no default or event of default exists
before such restricted payment and after giving effect thereto. The debt
agreements further provide that Available Cash is required to reflect a reserve
equal to 50% of the interest to be paid on the notes. In addition, in the third,
second and first quarters preceding a quarter in which a scheduled principal
payment is to be made on the notes, Available Cash is required to reflect a
reserve equal to 25%, 50%, and 75%, respectively, of the principal amount to be
repaid on such payment dates.
Failure to comply with the various restrictive and affirmative covenants of the
Operating Partnership's Bank Credit Facility and the Note Agreements could
negatively impact the Operating Partnership's ability to incur additional
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debt and/or Heritage's ability to pay distributions. The Operating Partnership
is required to measure these financial tests and covenants quarterly and was in
compliance with all requirements, tests, limitations, and covenants related to
the Notes, Medium Term Note Program and Senior Secured Promissory Notes, and the
Bank Credit Facility at August 31, 2002.
Effective July 16, 2001, the Operating Partnership entered into the Fifth
Amendment to the First Amended and Restated Credit Agreement. The terms of the
Agreement as amended are as follows:
A $65,000 Senior Revolving Working Capital Facility, expiring June 30,
2004 with $30,200 outstanding at August 31, 2002. The interest rate and
interest payment dates vary depending on the terms Heritage agrees to when
the money is borrowed. Heritage must be free of all working capital
borrowings for 30 consecutive days each fiscal year. The weighted average
interest rate was 3.675% for the amount outstanding at August 31, 2002.
The maximum commitment fee payable on the unused portion of the facility
is 0.50%. All receivables, contracts, equipment, inventory, general
intangibles, cash concentration accounts, and the capital stock of
Heritage's subsidiaries secure the Senior Revolving Working Capital
Facility.
A $50,000 Senior Revolving Acquisition Facility is available through
December 31, 2003, at which time the outstanding amount must be paid in
ten equal quarterly installments beginning March 31, 2004, with $14,000
outstanding as of August 31, 2002. The interest rate and interest payment
dates vary depending on the terms Heritage agrees to when the money is
borrowed. The weighted average interest rate was 3.675% for the amount
outstanding at August 31, 2002. The maximum commitment fee payable on the
unused portion of the facility is 0.50%. All receivables, contracts,
equipment, inventory, general intangibles, cash concentration accounts,
and the capital stock of Heritage's subsidiaries secure the Senior
Revolving Acquisition Facility.
Future maturities of long-term debt for each of the next five fiscal years and
thereafter are $20,158 in 2003; $33,399 in 2004; $37,921 in 2005; $47,811 in
2006; $44,232 in 2007, and $256,658 thereafter.
5. COMMITMENTS AND CONTINGENCIES:
Certain property and equipment is leased under noncancelable leases, which
require fixed monthly rental payments and expire at various dates through 2020.
Rental expense under these leases totaled approximately $2,977 and $2,708 for
the years ended August 31, 2002 and August 31, 2001, respectively, $245 for the
eight months ended August 31, 2000, and $184 for fiscal 1999 and has been
included in operating expenses in the accompanying statements of operations.
Certain of these leases contain renewal options and also contain escalation
clauses, which are accounted for on a straight-line basis over the minimum lease
term. Fiscal year future minimum lease commitments for such leases are $2,864 in
2003; $1,625 in 2004; $1,274 in 2005; $616 in 2006; $422 in 2007 and $714
thereafter.
The General Partner has entered into employment agreements with seven employees,
(each an "Executive"). One of the Employment Agreements had an initial term of
two years with an annual base salary or $193 starting August 2000. At the
expiration of the term on August 10, 2002, this Employment Agreement became "at
will." The Employment Agreements for the other six Executives have an initial
term of three years starting August 2000. However, for each Executive with a
three year Employment Agreement, beginning on the second anniversary of the
effective date and on each day thereafter, the expiration date shall be
automatically extended one additional day unless either party (i) shall give
written notice to the other that the Term shall cease to be so extended
beginning immediately after the date of such notice or (ii) shall give a Notice
of Termination to the other by delivering notice to the Chairman of the Board,
or in the event of the employee's death. The Employment Agreements for the other
six executives provide for an annual base salary of $350, $335, $200, $150,
$135, and $135. The Employment Agreements provide for the Executives to
participate in bonus and incentive plans.
The Employment Agreements provide that in the event of a change of control of
the ownership of the General Partner or in the event an Executive (i) is
involuntarily terminated (other than for "misconduct" or "disability") or (ii)
voluntarily terminates employment for "good reason" (as defined in the
agreements), such Executive will be entitled to continue receiving his base
salary and to participate in all group health insurance plans and programs that
may be offered to executives of the General Partner for the remainder of the
term of the Employment Agreement or, if earlier, the Executive's death, and the
Executive will vest immediately in the Minimum Award of the number of Common
Units to which the Executive is entitled under the Long Term Incentive Plan to
the extent not previously
F-27
awarded, and if the Executive is terminated as a result of the foregoing, all
restrictions on the transferability of the units purchased by such executive
under the Subscription Agreement dated as of June 15, 2000, shall automatically
lapse in full on such date. If such change were to occur during fiscal year
2003, the General Partner would be required to pay the remaining portion of
$1,305 in base salary for the six Executives whose employment agreements have
the three-year terms and a maximum of 250,000 Common Units or approximately
$6,750 based on a per unit price of $27.00 would be awarded under the Long Term
Incentive Plan, of which $1,500 and $750 has been included in operating expenses
in the accompanying statements of operations for the years ending August 31,
2002 and 2001, respectively. Each Employment Agreement also provides that if any
payment received by an Executive is subject to the 20% federal excise tax under
Section 4999(a) of the Code of the Internal Revenue Service, the payment will be
grossed up to permit the Executive to retain a net amount on an after-tax basis
equal to what he would have received had the excise tax and all other federal
and state taxes on such additional amount not been payable. In addition, each
Employment Agreement contains non-competition and confidentiality provisions.
Heritage is a party to various legal proceedings incidental to its business.
Certain claims, suits and complaints arising in the ordinary course of business
have been filed or are pending against Heritage. In the opinion of management,
all such matters are either covered by insurance, are without merit or involve
amounts, which, if resolved unfavorably, would not have a significant effect on
the financial position or results of operations of Heritage. Once management
determines that information pertaining to a legal proceeding indicates that it
is probable that a liability has been incurred, an accrual is established equal
to management's estimate of the likely exposure. For matters that are covered by
insurance, the Partnership accrues the related deductible. As of August 31, 2002
and 2001, an accrual of $671 and $500, respectively, was recorded as accrued and
other current liabilities on the Partnership's consolidated balance sheets.
Petroleum-based contamination or environmental wastes are known to be located on
or adjacent to six sites, which Heritage presently or formerly had operations.
These sites were evaluated at the time of their acquisition. In all cases,
remediation operations have been or will be undertaken by others, and in all six
cases, Heritage obtained indemnification for expenses associated with any
remediation from the former owners or related entities. Heritage has not been
named as a potentially responsible party at any of these sites, nor has the
Partnership's operations contributed to the environmental issues at these sites.
Accordingly, no amounts have been recorded in the Partnership's August 31, 2002
or 2001 consolidated balance sheet. Based on information currently available to
Heritage, such projects are not expected to have a material adverse effect on
Heritage's financial condition or results of operations.
In July 2001, Heritage acquired a company that had previously received a request
for information from the U.S. Environmental Protection Agency (the "EPA")
regarding potential contribution to a widespread groundwater contamination
problem in San Bernardino, California, known as the Newmark Groundwater
Contamination. Although the EPA has indicated that the groundwater contamination
may be attributable to releases of solvents from a former military base located
within the subject area that occurred long before the facility acquired by
Heritage was constructed, it is possible that the EPA may seek to recover all or
a portion of groundwater remediation costs from private parties under the
Comprehensive Environmental Response, Compensation, and Liability Act (commonly
called "Superfund"). Based upon information currently available to Heritage, it
is not believed that Heritage's liability if such action were to be taken by the
EPA would have a material adverse effect on Heritage's financial condition or
results of operations.
Heritage has entered into several purchase and supply commitments with varying
terms as to quantities and prices, which expire at various dates through March
2003.
6. PARTNERS' CAPITAL:
The Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P. ("Partnership Agreement") contains specific provisions for the
allocation of net earnings and losses to each of the partners for purposes of
maintaining the partner capital accounts.
At the time of the Partnership's Initial Public Offering, Heritage Holdings held
all of the Partnership's Subordinated Units. The Subordinated Units were a
separate class of limited partner interests and the rights of holders of
Subordinated Units to participate in distributions to partners differed from,
and were subordinated to, the rights of the holders of Common Units.
F-28
Pursuant to the provisions of the Partnership Agreement relating to requirements
that the Partnership meet specified cash performance and distribution
requirements during successive four-quarter periods commencing with the Initial
Public Offering in June of 1996, all of the Subordinated Units converted into
Common Units and the Subordination Period ended. Under the Partnership
Agreement, 925,736 Subordinated Units converted into Common Units as of July 7,
1999, 925,736 Subordinated Units converted into Common Units as of July 5, 2000
and the remaining 1,851,471 Subordinated Units converted into Common Units as of
July 6, 2001. Common Units issued upon conversion of the Subordinated Units
share equally with other Common Units in distributions of Available Cash.
Prior to February 4, 2002, the Partnership had Class B Subordinated Units
representing limited partner interests that were issued to certain former
stockholders of Heritage Holdings, who are or were also members of management,
in connection with the transaction with U.S. Propane. The Class B Subordinated
Units had the same voting rights as the Subordinated Units outstanding before
the end of the Subordination Period, and generally participated pro rata with
the Common Units in Heritage's income, gains, losses, deductions, credits, and
distributions. Each Class B Subordinated Unit was entitled to one vote on each
matter with respect to which the Class B Subordinated Units were entitled to
vote.
On February 4, 2002, at the Special Meeting of the Common Unitholders of the
Registrant, the Common Unitholders approved the amendment of the Partnership
Agreement that converted all of the 1,382,514 outstanding Class B Subordinated
Units into 1,382,514 Common Units. The Common Units issued upon conversion of
the Class B Subordinated Units share equally with other Common Units in
distributions of Available Cash.
In conjunction with the transaction with U.S. Propane and the change of control
of the former General Partner, Heritage Holdings, the Partnership issued
1,000,000 newly created Class C Units to Heritage Holdings in conversion of that
portion of its Incentive Distribution Rights that entitled it to receive any
distribution made by Heritage attributable to the net amount received in
connection with the settlement, judgment, award or other final nonappealable
resolution of the SCANA litigation filed by Heritage prior to the transaction
with U.S. Propane. The Class C Units have zero initial capital account balance
and were distributed by Heritage Holdings to its former stockholders in
connection with the transaction with U.S. Propane. Thus, U.S. Propane will not
receive any distributions made with respect to the SCANA litigation that would
have gone to Heritage Holdings with respect to its General Partner interest and
Incentive Distribution Rights had it remained the General Partner of the
Partnership. Upon receiving final cash payment as a result of the resolution of
the SCANA litigation, the special litigation committee will determine the amount
of litigation proceeds to be distributed, after deducting all costs and expenses
of the litigation incurred by the Partnership and its affiliates and such
reserves as the special committee deems necessary or advisable. The resulting
amount of distributable proceeds will be distributed in the same manner as the
Partnership's distribution of "Available Cash" pursuant to the Partnership
Agreement, except that the amount that would normally be distributed to the
holders of Incentive Distribution Rights will be distributed to the holders of
Class C Units, pro rata. Each holder of Class C Units receiving a distribution
of cash in any taxable year will be allocated items of gross income with respect
to such taxable year in an amount equal to the cash distributed to the holder.
Holders of Class C Units will not be allocated any other items of income, gain,
loss deduction or credit and have no other rights except the right to share in
any distributions upon dissolution and liquidation of the Partnership if such
distributions consist of proceeds from the SCANA litigation and to which the
Class C Units would have otherwise been entitled. The Class C Units may not be
converted into any other unit. The Class C Units have no voting rights, except
to the extent provided by Delaware law with respect to a vote as a class, in
which case each Class C Unit will be entitled to one vote.
In conjunction with the Common Unitholder approval of the substitution of U.S.
Propane as the General Partner of the Partnership, the Partnership issued
162,913 Common Units to the former General Partner Heritage Holdings in exchange
for its 1.0101% general partner interest in the Operating Partnership. The
Partnership also issued 158,026 Common Units to Heritage Holdings in conversion
of its 1% general partner interest in the Partnership and cancelled 158,026
Common Units held by U.S. Propane upon their conversion into Incentive
Distribution Rights and a 1% general partner interest in the Partnership and
1,646 Common Units held by U.S. Propane to maintain its general partner interest
in the Partnership. The additional units are not registered with the Securities
and Exchange Commission under the Securities Act of 1933, as amended, but are
issued based upon an exemption from registration.
On September 1, 2001 and June 30, 2002, an additional 1,750 and 10,000 Common
Units, respectively, were issued by the Partnership to holders of grants that
had previously been awarded under the terms of the Partnership's Restricted Unit
Plan.
F-29
On July 31, 2001, the Partnership sold 2,500,000 Common Units in an underwritten
public offering at a price of $28.00 per unit. Heritage used $41 million of the
approximate net proceeds of $66 million to reduce indebtedness under the Senior
Revolving Acquisition Facility, which was incurred in the acquisition of
ProFlame. The remainder of the proceeds was used for general partnership
purposes, including additional acquisitions and repayment of debt. To effect the
transfer of the contribution required by the General Partner to maintain its 1%
general partner interest in the Partnership, the General Partner contributed
25,252 Common Units to the Partnership and those units were cancelled.
On August 1, 2001, the Partnership issued 129,901 Common Units with a fair value
of $28.00 per unit to Heritage Holdings in connection with the assumption of
certain liabilities by Heritage Holdings from Heritage's acquisition of certain
assets of ProFlame. Heritage Holdings was entitled to 158,917 Common Units as a
result of this transaction but agreed to forego the issuance of 1,605 units and
1,638 units, which represented its capital contributions to maintain its 1%
interest in the Partnership and its 1.0101% interest in the Operating
Partnership, respectively, in relation to this transaction. Heritage Holdings
also agreed to forego the issuance of an additional 25,773 Common Units to which
it was entitled in the ProFlame acquisition to maintain its 1.0101% interest in
the Operating Partnership as a result of the July 31, 2001 public offering.
These units were not registered with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, by virtue of an exemption under
Section 4(2) thereof. These units carry a restrictive legend with regard to
transfer of the units.
During fiscal 2001, the Partnership issued 58,000 Common Units in exchange for
certain assets in connection with the acquisitions of certain propane
businesses, for a total value of $1.6 million. These units were issued utilizing
the Partnership's Registration Statement No. 333-40407 on Form S-4.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership Agreement requires that Heritage will distribute all of its
Available Cash to its Unitholders and its General Partner within 45 days
following the end of each fiscal quarter, subject to the payment of incentive
distributions to the holders of Incentive Distribution Rights to the extent that
certain target levels of cash distributions are achieved. The term Available
Cash generally means, with respect to any fiscal quarter of the Partnership, all
cash on hand at the end of such quarter, plus working capital borrowings after
the end of the quarter, less reserves established by the General Partner in its
sole discretion to provide for the proper conduct of Heritage's business, to
comply with applicable laws or any Heritage debt instrument or other agreement,
or to provide funds for future distributions to partners with respect to any one
or more of the next four quarters. Available Cash is more fully defined in the
Partnership Agreement.
Prior to the Unitholder vote on February 4, 2002, distributions by Heritage in
an amount equal to 100% of Available Cash were made 97% to the common and Class
B Subordinated Unitholders, 1.0101% to U.S. Propane for its limited partner
interest in the Operating Partnership and 1.9899% to the former General Partner,
Heritage Holdings. After the Unitholder vote, distributions by Heritage in an
amount equal to 100% of Available Cash will generally be made 98% to the Common
Unitholders and 2% to U.S. Propane, subject to the payment of incentive
distributions to the holders of Incentive Distribution Rights to the extent that
certain target levels of cash distributions are achieved.
The Minimum Quarterly Distribution was made to the Common and Subordinated
Unitholders for the quarters ended November 30, 1996 through August 31, 1998.
For the quarter ended November 30, 1998, a quarterly distribution of $0.5125 was
paid to the Common and Subordinated Unitholders. For each of the quarters ended
February 28, 1999 through and including May 31, 2000, quarterly distributions of
$0.5625, respectively, were paid to the Common and Subordinated Unitholders.
Heritage raised the quarterly distribution $0.0125 per unit each quarter
beginning with the quarter ended August 31, 2000, to $0.6375 per unit (or $2.55
annually) for the quarter ended November 30, 2001. The distribution remained at
$0.6375 per unit for each of the quarters ended February 28, 2002 through and
including August 31, 2002. The quarterly distributions for the quarters ended
February 28, 1999 through August 31, 2002 included incentive distributions
payable to the General Partner to the extent the quarterly distribution exceeded
$0.55 per unit.
After the conversion of the Class B Subordinated Units was approved on February
4, 2002, each Class B Subordinated unit converted into one Common Unit and then
participates pro rata with the other Common Units in distributions of Available
Cash. Heritage currently distributes Available Cash, excluding any Available
Cash to be distributed to the Class C Unitholders as follows:
F-30
- First, 98% to all Unitholders, pro rata, and 2% to the General
Partner, until all Unitholders have received $0.50 per unit
for such quarter and any prior quarter;
- Second, 98% to all Unitholders, pro rata, and 2% to the
General Partner, until all Unitholders have received $0.55 per
unit for such quarter;
- Third, 85% to all Unitholders, pro rata, 13% to the holders of
Incentive Distribution Right, pro rata, and 2% to the General
Partner, until all Common Unitholders have received at least
$0.635 per unit for such quarter;
- Fourth, 75% to all Unitholders, pro rata, 23% to the holders
of Incentive Distribution Right, pro rata and 2% to the
General Partner, until all Common Unitholders have received at
least $0.825 per unit for such quarter;
- Fifth, thereafter 50% to all Unitholders, pro rata, 48% to the
holders of Incentive Distribution Right, pro rata, and 2% to
the General Partner.
RESTRICTED UNIT PLAN
The General Partner has adopted the Amended and Restated Restricted Unit Plan
dated August 10, 2000, amended February 4, 2002 as the Second Amended and
Restated Restricted Unit Plan (the "Restricted Unit Plan"), for certain
directors and key employees of the General Partner and its affiliates. The
Restricted Unit Plan covers rights to acquire 146,000 Common Units. The right to
acquire the Common Units under the Restricted Unit Plan, including any
forfeiture or lapse of rights is available for grant to key employees on such
terms and conditions (including vesting conditions) as the Compensation
Committee of the General Partner shall determine. Each director shall
automatically receive a Director's grant with respect to 500 Common Units on
each September 1 that such person continues as a director. Newly elected
directors are also entitled to receive a grant with respect to 2,000 Common
Units upon election or appointment to the Board. Directors who are employees of
U.S. Propane, TECO, Atmos Energy, Piedmont Natural Gas or AGL Resources or their
affiliates are not entitled to receive a Director's grant of Common Units.
Generally, the rights to acquire the Common Units will vest upon the later to
occur of (i) the three-year anniversary of the grant date, or on such terms as
the Compensation Committee may establish, which may include the achievement of
performance objectives. In the event of a "change of control" (as defined in the
Restricted Unit Plan), all rights to acquire Common Units pursuant to the
Restricted Unit Plan will immediately vest.
The issuance of the Common Units pursuant to the Restricted Unit Plan is
intended to serve as a means of incentive compensation for performance and not
primarily as an opportunity to participate in the equity appreciation in respect
of the Common Units. Therefore, no consideration will be payable by the plan
participants upon vesting and issuance of the Common Units. As of August 31,
2002, 26,900 restricted units are outstanding and 30,800 are available for
grants to non-employee directors and key employees. Subsequent to August 31,
2002, 500 additional Phantom Units vested pursuant to the vesting rights of the
Restricted Unit Plan and Common Units were issued.
During fiscal 2000, 21,300 of these Phantom Units were granted by Predecessor
Heritage to non-employee directors and key employees of Predecessor Heritage. As
of August 31, 2000, 80,800 Phantom Units were awarded of which 4,500 grants
vested pursuant to the vesting rights of the Restricted Unit Plan and 71,300
vested in accordance with the change of control that occurred with U.S.
Propane's acquisition of the capital stock of the former General Partner,
Heritage Holdings. Individuals holding the remaining 5,000 grants waived their
rights to vesting under the change of control and compensation cost related to
such units will be recognized over the vesting period of the related awards.
During fiscal 2002, 11,750 additional Phantom Units vested pursuant to the
vesting rights of the Restricted Unit Plan and Common Units were issued, and
5,000 Phantom Units previously granted were forfeited. Heritage applied the
provisions of APB 25 as of August 31, 2002. This plan is classified as a
variable plan so that an estimate of compensation is required based on a
combination of the fair market value of the Common Units as of the end of the
reporting period and an assessment of meeting certain performance criteria.
Deferred compensation expense of $378 and $323 was recognized for fiscal year
2002 and 2001, respectively on the units based on the fair value of such units
at the end of each period.
LONG-TERM INCENTIVE PLAN
Effective September 1, 2000, Heritage adopted a long-term incentive plan whereby
Common Units will be awarded based on achieving certain targeted levels of
Distributed Cash (as defined in the Long Term Incentive Plan) per unit.
F-31
Awards under the program will be made starting in 2003 based upon the average of
the prior three years' Distributed Cash per unit. A minimum of 250,000 Common
Units and if certain targeted levels are achieved, a maximum of 500,000 Common
Units will be awarded. Heritage applied the provisions of APB 25 as of August
31, 2002. The Long Term Incentive Plan is classified as a variable plan so that
an estimate of compensation is required based on a combination of the fair
market value of the Common Units as of the end of the reporting period and an
assessment of meeting certain performance criteria. Deferred compensation
expense on this plan of $1,500 and $756 was recognized for the years ended
August 31, 2002 and 2001, respectively based on the fair value of such units at
the end of each period. The expense was determined based on the Partnership
achieving the minimum award available under the plan.
7. PROFIT SHARING AND 401(K) SAVINGS PLAN:
Heritage sponsors a defined contribution profit sharing and 401(k) savings plan
(the "Plan"), which covers all employees subject to service period requirements.
Contributions are made to the Plan at the discretion of the Board of Directors
and are allocated to eligible employees as of the last day of the plan year
based on their pro rata share of total contributions. Employer matching
contributions are calculated using a discretionary formula based on employee
contributions. Prior to 2001, employer-matching contributions were entirely
discretionary. Heritage did not recognize any expense under the profit sharing
provision of the Plan during the years ended August 31, 2002 or 2001, or the
eight months ended August 31, 2000. Heritage made matching contributions of
$2,339, $2,260,and $0 to the 401(k) savings plan for the years ended August 31,
2002 and 2001, and the period ended August 31, 2000, respectively.
8. RELATED PARTY TRANSACTIONS:
Heritage has no employees and is managed by the General Partner. Pursuant to the
Partnership Agreement, the General Partner is entitled to reimbursement for all
direct and indirect expenses incurred or payments it makes on behalf of
Heritage, and all other necessary or appropriate expenses allocable to Heritage
or otherwise reasonably incurred by the General Partner in connection with
operating Heritage's business. These costs, which totaled approximately $95,749
for the year ended August 31, 2002 and $93,442 for the year ended August 31,
2001, include compensation and benefits paid to officers and employees of the
General Partner.
TECO performed certain services for Peoples Gas, which were billed at actual
cost. In addition, common general and administrative salary and other operating
costs and expenses were allocated to Peoples Gas based upon methods considered
reasonable by management of TECO. Such charges for employee services amounted to
$1,836 and $1,697 for the eight months ended August 31, 2000 and 1999,
respectively, and $2,906 for the year ended December 31, 1999.
Accounts payable to related companies include non-interest bearing amounts
payable from Heritage to the General Partner of $3,356 and $6,360 as of August
31, 2002 and 2001 respectively and interest bearing amounts payable of $1,646
and $1,577 to Bi-State Propane as of August 31, 2002 and 2001, respectively.
9. REPORTABLE SEGMENTS:
Heritage's financial statements reflect four reportable segments: the domestic
retail operations of Heritage, the domestic wholesale operations of Heritage,
the foreign wholesale operations of MP Energy Partnership, and the liquids
marketing activities of Resources. Heritage's reportable domestic and wholesale
fuel segments are strategic business units that sell products and services to
different types of users: retail and wholesale customers. Intersegment sales by
the foreign wholesale segment to the domestic segment are priced in accordance
with the partnership agreement. Resources is a liquids marketing company that
buys and sells financial instruments for its own account. Heritage manages these
segments separately as each segment involves different distribution, sale and
marketing strategies. Heritage evaluates the performance of its operating
segments based on operating income, exclusive of selling, general, and
administrative expenses of $12,978 and $15,716 for the years ended August 31,
2002 and 2001, respectively, and $1,019 for the eight-month period ended August
31, 2000. Selling, general and administrative expenses, interest expense and
other expenses are not allocated by segment. Investment in affiliates and equity
in earnings (losses) of affiliates relates primarily to Heritage's investment in
Bi-State Propane (see Note 10), and is part of the domestic retail fuel segment.
The following table presents the unaudited financial information by segment for
the following periods:
F-32
For the Years Ended For the Eight Months Ended For the Year Ended
August 31, August 31, December 31,
---------- ---------- ------------
2002 2001 2000 1999 1999
---- ---- ---- ---- ----
(Unaudited)
Gallons:
Domestic retail fuel 329,574 330,242 38,268 22,118 33,608
Domestic wholesale fuel 16,798 12,741 562 - -
Foreign wholesale fuel
Affiliated 67,265 86,166 5,118 - -
Unaffiliated 65,309 88,882 6,245 - -
Elimination (67,265) (86,166) (5,118) - -
--------- --------- --------- --------- ---------
Total 411,681 431,865 45,075 22,118 33,608
========= ========= ========= ========= =========
Revenues:
Domestic retail fuel $ 65,334 $ 440,527 $ 43,815 $ 21,766 $ 34,045
Domestic wholesale fuel 9,956 9,902 415 - -
Foreign wholesale fuel
Affiliated 33,561 55,798 3,132 - -
Unaffiliated 31,248 49,977 3,392 - -
Elimination (33,561) (55,798) (3,132) - -
Liquids marketing,net 542 841 724 - -
Other domestic revenues 55,245 42,728 3,188 - -
--------- --------- --------- --------- ---------
Total $ 462,325 $ 543,975 $ 51,534 $ 21,766 $ 34,045
========= ========= ========= ========= =========
Operating Income:
Domestic retail fuel $ 55,901 $ 69,416 $ (578) $ 2,666 $ 2,885
Domestic wholesale fuel (3,940) (1,163) 17 - -
Foreign wholesale fuel
Affiliated 500 578 - - -
Unaffiliated 1,914 1,996 142 - -
Elimination (500) (578) - - -
Liquids marketing 64 (110) 724 - -
--------- --------- --------- --------- ---------
Total $ 53,939 $ 70,139 $ 305 $ 2,666 $ 2,885
========= ========= ========= ========= =========
Gain on Disposal of Assets:
Domestic retail fuel 544 791 121 - -
Domestic wholesale fuel 268 21 - - -
Foreign wholesale fuel
Affiliated - - - - -
Unaffiliated - - - - -
Elimination - - - - -
Liquids marketing - - - - -
--------- --------- --------- --------- ---------
Total $ 812 $ 812 $ 121 $ - $ -
========= ========= ========= ========= =========
Minority Interest Expense:
Corporate 213 408 (95) - -
Foreign wholesale 361 406 15 - -
--------- --------- --------- --------- ---------
Total $ 574 $ 814 $ (80) $ - $ -
========= ========= ========= ========= =========
Depreciation and amortization:
Domestic retail fuel $ 36,550 $ 40,135 $ 4,673 $ 2,037 $ 3,088
Domestic wholesale 426 277 8 - -
Foreign wholesale 22 19 5 - -
--------- --------- --------- --------- ---------
Total $ 36,998 $ 40,431 $ 4,686 $ 2,037 $ 3,088
========= ========= ========= ========= =========
F-33
As of August 31,
----------------
2002 2001
---- ----
Total Assets:
Domestic retail $667,978 $682,906
Domestic wholesale 14,372 19,533
Foreign wholesale 10,564 8,467
Liquids marketing 6,919 35,127
Corporate 17,431 12,134
-------- --------
Total $717,264 $758,167
======== ========
Additions to property, plant and equipment including acquisitions:
Domestic retail fuel $ 39,904 $ 78,597
Domestic wholesale - 2,837
Foreign wholesale 46 -
Corporate 1,441 765
-------- --------
Total $ 41,391 $ 82,199
======== ========
Corporate assets include vehicles, office equipment and computer software for
the use of administrative personnel. These assets are not allocated to segments.
Corporate minority interest expense relates to U.S. Propane's general partner
interest in the Operating Partnership.
10. SIGNIFICANT INVESTEE:
Heritage holds a 50% interest in Bi-State Propane. Heritage accounts for its 50%
interest in Bi-State Propane under the equity method. Heritage's investment in
Bi-State Propane totaled $7,485 and $6,611 at August 31, 2002 and 2001,
respectively. Heritage received distributions from Bi-State Propane of $400 and
$125 for the years ended August 31, 2002 and 2001 respectively. On March 1,
2002, the Operating Partnership sold certain assets acquired in the ProFlame
acquisition to Bi-State Propane for approximately $9,730 plus working capital.
There was no gain or loss recorded on the transaction. This sale was made
pursuant to the provision in the Bi-State Propane partnership agreement that
requires each partner to offer to sell any newly acquired businesses within
Bi-State Propane's area of operations to Bi-State Propane. In conjunction with
this sale, the Operating Partnership guaranteed $5 million of debt incurred by
Bi-State Propane to a financial institution. Based on the current financial
condition of Bi-State Propane, Heritage considers the likelihood of the
Partnership incurring a liability resulting from the guarantee to be remote.
Heritage has not recorded a liability on the balance sheets as of August 31,
2002 or 2001 for this guarantee because the guarantee was in effect prior to the
issuance of FIN 45, and there have been no amendments to the original guarantee.
Bi-State Propane's financial position is summarized below:
August 31, August 31,
2002 2001
----------- -----------
Current assets $ 3,321 $ 3,250
Noncurrent assets 23,105 14,008
----------- -----------
$ 26,426 $ 17,258
=========== ===========
Current liabilities $ 3,344 $ 2,454
Long-term debt 9,450 2,975
Partners' capital:
Heritage 7,485 6,611
Other partner 6,147 5,218
----------- -----------
$ 26,426 $ 17,258
=========== ===========
Bi-State Propane's results of operations for the years ended August 31, 2002 and
2001, respectively are summarized below:
F-34
For the Years Ended
August 31,
----------
2002 2001
---- ----
Revenues $ 16,815 $ 19,184
Gross profit 8,934 8,055
Net income:
Heritage 1,274 1,186
Other Partner 1,329 1,353
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized unaudited quarterly financial data is presented below. The sum of net
income (loss) per limited partner unit by quarter may not equal the net income
(loss) per limited partner unit for the year due to variations in the weighted
average units outstanding used in computing such amounts. Heritage's business is
seasonal due to weather conditions in its service areas. Propane sales to
residential and commercial customers are affected by winter heating season
requirements, which generally results in higher operating revenues and net
income during the period from October through March of each year and lower
operating revenues and either net losses or lower net income during the period
from April through September of each year. Sales to industrial and agricultural
customers are much less weather sensitive.
Quarter Ended
-------------
Fiscal 2002:
November 30 February 28 May 31 August 31
----------- ----------- ------ ---------
Revenues $ 107,958 $ 184,002 $ 104,009 $ 66,356
Gross Profit 47,723 86,859 51,706 37,852
Operating income (loss) 3,870 39,138 4,434 (6,481)
Net income (loss) (4,779) 30,130 (4,319) (16,131)
Basic and diluted net income
(loss) per limited partner unit $ (0.32) $ 1.89 $ (0.28) $ (1.02)
Quarter Ended
-------------
Fiscal 2001:
November 30 February 28 May 31 August 31
----------- ----------- ------ ---------
Revenues $ 118,055 $ 250,304 $ 106,134 $ 69,482
Gross Profit 48,116 111,598 46,299 31,406
Operating income (loss) 10,573 52,630 2,476 (11,256)
Net income (loss) 1,963 43,330 (5,845) (19,738)
Basic and diluted net income
(loss) per limited partner unit $ 0.15 $ 3.30 $ (0.48) $ (1.41)
12. SUBSEQUENT EVENTS:
On January 2, 2003, Heritage purchased the propane assets of V-1 Oil Co. ("V-1")
of Idaho Falls, Idaho for total consideration of $34.2 million after
post-closing adjustments. The acquisition price was payable $19.2 million in
cash, with $17.3 million of that amount financed by the Acquisition Facility,
and by the issuance of 551,456 Common Units of Heritage valued at $15.0 million.
V-1's propane distribution network included 35 customer service locations in
Colorado, Idaho, Montana, Oregon, Utah, Washington, and Wyoming.
F-35
On May 20, 2003, the Partnership sold 1,610,000 Common Units in an underwritten
public offering at a public offering price of $29.26 per unit. This sale
included the exercise of the underwriters' over-allotment option to purchase an
additional 210,000 Common Units. Heritage used approximately $35.9 million of
the $44.8 million net proceeds from the sale of the Common Units to repay a
portion of the indebtedness outstanding under various tranches of its Senior
Secured Notes. The remainder of the proceeds was used for general partnership
purposes, including repayment of additional debt. The Common Units were issued
utilizing the Partnership's existing shelf registration statement on Form S-3.
To effect the transfer of the contribution required by the General Partner to
maintain its 1% general partner interest in the Partnership and its 1.0101%
general partner interest in the Operating Partnership, the General Partner
contributed 32,692 previously issued Common Units back to the Partnership and
those units were cancelled.
On November 6, 2003, Heritage signed a definitive agreement with La Grange
Energy, L.P. to purchase substantially all of its midstream natural gas assets
by acquiring La Grange Energy, L.P.'s interests in its subsidiary, La Grange
Acquisition, L.P. whose midstream operations are conducted under the name Energy
Transfer Company, in exchange for approximately $300 million in cash, repayment
of outstanding indebtedness, and a combination of Partnership Common Units,
Class D Units and Special Units. The transaction is valued at approximately $980
million. The Partnership will also acquire the stock of Heritage Holdings, Inc.,
which owns approximately 4.4 million common units of the Partnership for $100
million. La Grange Energy, L.P. will also purchase U.S. Propane, L.P., the
General Partner of the Partnership, and U.S. Propane, L.L.C. from subsidiaries
of AGL Resources, Atmos Energy Corporation, TECO Energy, Inc. and Piedmont
Natural Gas Company, Inc.
F-36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Heritage Propane Partners, L.P.:
We have audited the accompanying consolidated statements of operations,
partners' capital and cash flows of Heritage Propane Partners, L.P.
("Predecessor Heritage" a Delaware limited partnership) and
subsidiaries for the period ended August 9, 2000 and the year ended
August 31, 1999. These financial statements are the responsibility of
Predecessor Heritage's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash
flows of Heritage Propane Partners, L.P. ("Predecessor Heritage") and
subsidiaries for the period ended August 9, 2000, and the year ended
August 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
Tulsa, Oklahoma
October 26, 2000
(except with respect to
the matter discussed in Note
12, as to which the date is
October 19, 2001)
The report of Arthur Andersen LLP shown above is a copy of a previously issued
report; Arthur Andersen LLP has not reissued this report.
F-37
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per unit and unit data)
For the Period
Ended August 9,
2000
-----------
REVENUES:
Retail fuel $ 178,906
Wholesale fuel 35,145
Liquids marketing 4,300
Other 24,140
-----------
Total revenues 242,491
-----------
COSTS AND EXPENSES:
Cost of products sold 136,462
Cost of liquids marketing 4,283
Operating expenses 55,154
Depreciation and amortization 17,143
Selling, general and administrative 5,974
-----------
Total costs and expenses 219,016
-----------
OPERATING INCOME 23,475
OTHER INCOME (EXPENSE):
Interest expense (17,664)
Equity in earnings of affiliates 614
Gain on disposal of assets 514
Other (3)
-----------
INCOME BEFORE MINORITY INTERESTS 6,936
Minority interests (432)
-----------
NET INCOME 6,504
GENERAL PARTNER'S INTEREST IN
NET INCOME 65
-----------
LIMITED PARTNERS' INTEREST IN
NET INCOME $ 6,439
===========
BASIC NET INCOME PER LIMITED
PARTNER UNIT $ 0.66
===========
BASIC WEIGHTED AVERAGE NUMBER OF
UNITS OUTSTANDING 9,712,927
===========
DILUTED NET INCOME PER LIMITED
PARTNER UNIT $ 0.66
===========
DILUTED WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 9,788,093
===========
The accompanying notes are an integral part of this consolidated financial
statement.
F-38
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(in thousands, except unit data)
Accumulated
Number of Units Other Total
------------------------ Common Subordinated General Comprehensive Partners'
Common Subordinated Unitholders Unitholders Partner Income Capital
---------- ------------ ----------- ----------- ---------- ---------- ----------
BALANCE, AUGUST 31, 1999 5,825,674 2,777,207 $ 17,077 $ 1,809 $ 176 $ -- $ 19,062
Unit distribution -- -- (15,393) (6,248) (256) -- (21,897)
Issuance of Restricted Common Units 184,030 -- 4,064 -- -- -- 4,064
Issuance of Common Units 1,200,000 -- 24,054 -- -- -- 24,054
General Partner contribution -- -- -- -- 278 -- 278
Conversion of Subordinated Units 925,736 (925,736) (1,480) 1,480 -- -- --
Conversion of Phantom Units 4,500 -- 29 (28) (1) -- --
Other -- -- 283 75 4 -- 362
Other comprehensive income - net
gain on hedging instruments -- -- -- -- -- 3,289 3,289
Net income -- -- 5,246 1,193 65 -- 6,504
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, AUGUST 9, 2000 8,139,940 1,851,471 $ 33,880 $ (1,719) $ 266 $ 3,289 $ 35,716
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of this consolidated financial
statement.
F-39
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
For the
Period Ended
August 9,
2000
---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,504
Reconciliation of net income to net cash provided by
operating activities-
Depreciation and amortization 17,143
Provision for losses on accounts receivable 328
Gain on disposal of assets (514)
Deferred compensation on restricted units 362
Undistributed earnings of affiliates (654)
Minority interests 91
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (7,138)
Inventories (5,627)
Prepaid expenses (541)
Intangibles and other assets (851)
Accounts payable 5,901
Accrued and other current liabilities (860)
---------
Net cash provided by operating activities 14,144
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (46,801)
Capital expenditures (12,931)
Proceeds from asset sales 1,449
---------
Net cash used in investing activities (58,283)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 159,070
Principal payments on debt (116,918)
Unit distribution (21,897)
Net proceeds from issuance of Common Units 24,054
Capital contribution from General Partner 278
---------
Net cash provided by financing activities 44,587
---------
INCREASE IN CASH 448
CASH, beginning of period 1,679
---------
CASH, end of period $ 2,127
=========
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 3,575
=========
Issuance of restricted Common Units in connection with certain
acquisitions $ 4,064
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 18,377
=========
Other comprehensive income $ 3,289
=========
The accompanying notes are an integral part of this consolidated financial
statement.
F-40
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except unit and per unit data)
1. OPERATIONS AND ORGANIZATION:
Heritage Propane Partners, L.P. ("Predecessor Heritage") was formed April 24,
1996, as a Delaware limited partnership, to acquire, own and operate the propane
business of Heritage Holdings, Inc. ("General Partner") In order to simplify
Predecessor Heritage's obligation under the laws of several jurisdictions in
which Predecessor Heritage conducts business, Predecessor Heritage's activities
are conducted through a subsidiary operating partnership, Heritage Operating,
L.P. (the "Operating Partnership"). Predecessor Heritage holds a 98.9899%
limited partner interest and the General Partner holds a 1.0101% general partner
interest in the Operating Partnership.
The Operating Partnership sells propane and propane-related products to
approximately 286,000 retail customers in 27 states throughout the United
States. Predecessor Heritage is also a wholesale propane supplier in the
southwestern United States and in Canada, the latter through participation in MP
Energy Partnership. MP Energy Partnership is a Canadian partnership primarily
engaged in lower-margin wholesale distribution in which Predecessor Heritage
owns a 60% interest. Predecessor Heritage grants credit to its customers for the
purchase of propane and propane-related products.
In August 2000, U.S. Propane acquired all of the outstanding common stock of
Heritage Holdings, Inc., ("General Partner"), the General Partner of Heritage
Propane Partners, L.P. By virtue of Heritage Holdings, Inc.'s general partner
and limited partner interests in Heritage Propane Partners, L.P., U.S. Propane
gained control of Heritage Propane Partners, L.P. Simultaneously, U.S. Propane
transferred its propane operations, consisting of its interest in four separate
limited liability companies, AGL Propane, L.L.C., Peoples Gas Company, L.L.C.,
United Cities Propane Gas, L.L.C. and Retail Propane Company, L.L.C. (former
Piedmont operations) to Heritage Propane Partners, L.P. for $181,395 plus
working capital. The $181,395 was payable $139,552 in cash, $31,843 of assumed
debt, and the issuance of 372,392 Common Units of Heritage Propane Partners,
L.P. valued at $7,348 and a 1.0101% limited partner interest in the Operating
Partnership valued at $2,652. The purchase price and the exchange price for the
Common Units were approved by an independent committee of the Board of Directors
of Heritage Holdings, Inc. The exchange price for the Common Units was $19.73125
per unit under a formula based on the average closing price of the Heritage
Propane Partners, L.P.'s Common Units on the New York Stock Exchange for the
twenty (20) day period beginning ten (10) days prior to the public announcement
of the transaction on June 15, 2000 (the "Formula Price"). The working capital
adjustment is estimated at $5,000 and is anticipated to be settled in December
2000.
Concurrent with the acquisition, Heritage Propane Partners, L.P. borrowed
$180,000 from several institutional investors and sold 1,161,814 Common Units
and 1,382,514 Class B Subordinated Units in a private placement to the former
shareholders of Heritage Holdings, Inc., based on the Formula Price, resulting
in net proceeds of $50,203. The total of these proceeds were utilized to finance
the transaction and retire a portion of existing debt.
The merger was accounted for as a reverse acquisition in accordance with
Accounting Principles Board Opinion No. 16. Although Heritage Propane Partners,
L.P. is the surviving entity for legal purposes, U.S. Propane's propane
operations will be the acquirer for accounting purposes. U.S. Propane retained
the name Heritage Propane Partners, L.P. subsequent to the transactions
("Successor Heritage"). The assets and liabilities and results of operations of
Predecessor Heritage are included in the financial statements of Successor
Heritage as of August 10, 2000.
2. SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Predecessor
Heritage, its subsidiaries, including the Operating Partnership, MP Energy
Partnership, and Heritage Energy Resources, L.L.C. ("Resources"). Predecessor
Heritage accounts for its 50% partnership interest in Bi-State Propane, another
propane retailer, using the equity method. All significant intercompany
transactions and accounts have been eliminated in consolidation. The
F-41
General Partner's 1.0101% interest in the Operating Partnership is accounted for
in the consolidated financial statements as a minority interest.
REVENUE RECOGNITION
Sales of propane, propane appliances, parts and fittings are recognized at the
time of delivery of the product to the customer or at the time of sale or
installation. Revenue from service labor is recognized upon completion of the
service and tank rent is recognized ratably over the period it is earned.
INCOME TAXES
Predecessor Heritage is a limited partnership. As a result, Predecessor
Heritage's earnings or losses for federal income tax purposes are included in
the tax returns of the individual partners. Accordingly, no recognition has been
given to income taxes in the accompanying financial statements. Net earnings for
financial statement purposes may differ significantly from taxable income
reportable to Unitholders as a result of differences between the tax basis and
financial reporting basis of assets and liabilities and the taxable income
allocation requirements under the Partnership Agreement.
INCOME PER LIMITED PARTNER UNIT
Basic net income per limited partner unit is computed by dividing net income,
after considering the General Partner's 1% interest, by the weighted average
number of Common and Subordinated Units outstanding. Diluted net income per
limited partner unit is computed by dividing net income, after considering the
General Partner's 1% interest, by the weighted average number of Common and
Subordinated Units outstanding and the weighted average number of restricted
units ("Phantom Units") granted under the Restricted Unit Plan (see Note 5). A
reconciliation of net income and weighted average units used in computing basic
and diluted earnings per unit is as follows:
Period
Ended
August 9,
2000
----------
BASIC NET INCOME PER LIMITED PARTNER UNIT:
Limited partners' interest in net income $ 6,439
==========
Weighted average limited partner units 9,712,927
==========
Basic net income per limited partner unit $ 0.66
==========
DILUTED NET INCOME PER LIMITED PARTNER UNIT:
Limited partners' interest in net income $ 6,439
==========
Weighted average limited partner units 9,712,927
Dilutive effect of Phantom Units 75,166
----------
Weighted average limited partner units, assuming
dilutive effect of Phantom Units 9,788,093
==========
Diluted net income per limited partner unit $ 0.66
==========
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
3. ACQUISITIONS:
During the period ended August 9, 2000, Predecessor Heritage acquired certain
assets of W. T. Johnson, Inc. in Yulee, FL, J & J Propane Gas, Inc. in various
locations in Alabama and Tennessee; ServiGas with operations
F-42
located in Texas, New Mexico, and Arizona; Petro San Juan Leasing, Inc.; and two
other small companies. Heritage Holdings, Inc. purchased all of the outstanding
stock of Eaves Oil Company, Inc. of New Ellenton, SC; Blue Flame Gas Co. Inc. of
Charleston, SC; Lake County Gas of Lower Lake, CA; Cumberland LP Gas, Inc. of
Cookeville, TN; and one small company and conveyed the net assets to Predecessor
Heritage. The acquisitions totaled $54,904, which includes notes payable on
noncompete agreements of $3,575 for periods ranging from three to ten years and
liabilities assumed. These acquisitions were financed primarily with the
acquisition facility and the issuance of $4,064 of Common Units.
The acquisitions have been accounted for by the purchase method and,
accordingly, the purchase prices have been allocated to assets acquired and
liabilities assumed based on the fair market values at the date of acquisitions.
Predecessor Heritage capitalized as part of the purchase price allocation
certain legal and other costs directly related to the acquisitions. The excess
of the purchase price over the fair market values of the net assets acquired has
been recorded as goodwill.
The results of operations of the acquired entities have been included in the
consolidated financial statements from the date of acquisition.
4. COMMITMENTS AND CONTINGENCIES:
Certain property and equipment is leased under noncancelable leases, which
require fixed monthly rental payments and expire at various dates through 2008.
Rental expense under these leases totaled approximately $1,366 for the period
ended August 9, 2000.
5. PARTNERS' CAPITAL:
The Agreement of Limited Partnership of Heritage Propane Partners, L.P.
("Partnership Agreement") contains specific provisions for the allocation of net
earnings and loss to each of the partners for purposes of maintaining the
partner capital accounts.
During the Subordination Period (as defined below), Predecessor Heritage may
issue up to 2,012,500 additional Common Units (excluding Common Units issued in
connection with conversion of Subordinated Units into Common Units) or an
equivalent number of securities ranking on a parity with the Common Units and an
unlimited number of partnership interests junior to the Common Units without a
Unitholder vote. Predecessor Heritage may also issue additional Common Units
during the Subordination Period in connection with certain acquisitions or the
repayment of certain indebtedness. After the Subordination Period, the
Partnership Agreement authorizes the General Partner to cause Predecessor
Heritage to issue an unlimited number of limited partner interests of any type
without the approval of any Unitholders. Pursuant to the terms of the
Partnership Agreement, 925,736 Subordinated Units held by the General Partner
converted to Common Units on July 7, 1999 and an additional 925,736 converted on
July 5, 2000.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
Predecessor Heritage is expected to make quarterly cash distributions of all of
its Available Cash, generally defined as consolidated cash receipts less
consolidated operating expenses, debt service payments, maintenance capital
expenditures and net changes in reserves established by the General Partner for
future requirements. These reserves are retained to provide for the proper
conduct of Predecessor Heritage's business, or to provide funds for
distributions with respect to any one or more of the next four fiscal quarters.
Distributions by Predecessor Heritage in an amount equal to 100% of its
Available Cash will generally be made 98% to the common and Subordinated
Unitholders and 2% to the General Partner, subject to the payment of incentive
distributions to the holders of Incentive Distribution Rights to the extent that
certain target levels of cash distributions are achieved. To the extent there is
sufficient Available Cash, the holders of Common Units have the right to receive
the Minimum Quarterly Distribution ($0.50 per Unit), plus any arrearages, prior
to any distribution of Available Cash to the holders of Subordinated Units.
Common Units will not accrue arrearages for any quarter after the Subordination
Period and Subordinated Units will not accrue any arrearages with respect to
distributions for any quarter.
F-43
In general, the Subordination Period will continue indefinitely until the first
day of any quarter beginning after May 31, 2001, in which distributions of
Available Cash equal or exceed the Minimum Quarterly Distribution ("MQD") on the
Common Units and the Subordinated Units for each of the three consecutive
four-quarter periods immediately preceding such date. Pursuant to the terms of
the Partnership Agreement, 925,736 Subordinated Units held by the General
Partner converted to Common Units on July 7, 1999, and an additional 925,736
converted on July 5, 2000. The conversion of these units was dependent on
meeting certain cash performance and distribution requirements during the period
that commenced with Predecessor Heritage's public offering in June of 1996. The
subordination period applicable to the remaining Subordinated Units will end the
first day of any quarter ending after May 31, 2001, in which certain cash
performance and distribution requirements have been met. Upon expiration of the
Subordination Period, all remaining Subordinated Units will convert to Common
Units.
Predecessor Heritage is expected to make distributions of its Available Cash
within 45 days after the end of each fiscal quarter ending November, February,
May and August to holders of record on the applicable record date. A pro rata
MQD of $0.353 per common and Subordinated Unit was made on October 15, 1996 for
the two-month period between Predecessor Heritage's initial public offering and
the quarter ended August 31, 1996. The MQD was made to the common and
Subordinated Unitholders for the quarters ended November 30, 1996 through August
31, 1998. For the quarter ended November 30, 1998, a quarterly distribution of
$0.5125 was paid to the common and Subordinated Unitholders. For each of the
quarters ended February 28, 1999 through and including May 31, 2000, quarterly
distributions of $0.5625, respectively, were paid to the common and Subordinated
Unitholders. The quarterly distributions for the quarters ended February 28,
1999 through May 31, 2000 included incentive distributions payable to the
General Partner to the extent the quarterly distribution exceeded $0.55 per
unit.
RESTRICTED UNIT PLAN
The General Partner adopted a Restricted Unit Plan (the "Restricted Unit Plan")
for its non-employee directors and key employees of the General Partner and its
affiliates effective June 1996. Rights to acquire 146,000 Common Units ("Phantom
Units") are available under the Restricted Unit Plan and may be granted to
employees from time to time at the discretion of the Restricted Unit Plan
Committee. Commencing on September 1, 1996 and on each September 1 thereafter
that the Restricted Unit Plan is in effect, each director who is in office
automatically receives 500 units. The Phantom Units vest upon, and in the same
proportions as (1) the conversion of Predecessor Heritage's Subordinated Units
into Common Units or if later, (2) the third anniversary of their grant date,
and (3) terms and conditions specified by each grant. During fiscal 1999, 21,300
of these Phantom Units were granted to non-employee directors and key employees.
During fiscal 1998, 20,200 of these Phantom Units were granted to non-employee
directors and key employees. As of August 31, 1999, Phantom Units with a value
of $1,346 have been awarded and the compensation cost related to such units will
be recognized over the vesting period of the related awards. Predecessor
Heritage applies APB Opinion No. 25, Accounting for Stock Issued to Employees.
Compensation cost and directors' fee expense of $362 and $358 was recorded for
the period ended August 9, 2000 and fiscal 1999, respectively, related to the
issuance of the units. Subsequent to August 31, 1999, 4,500 of Phantom Unit
grants vested pursuant to the vesting rights of the Restricted Unit Plan.
Predecessor Heritage follows the disclosure only provision of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-based Compensation
("SFAS 123"). Proforma net income and net income per limited partner unit under
the fair value method of accounting for equity instruments under SFAS 123 would
be the same as reported net income and net income per limited partner unit.
6. REGISTRATION STATEMENTS:
Effective November 19, 1997, Predecessor Heritage registered 2,000,000
additional Common Units on Form S-4 that may be issued from time to time by
Predecessor Heritage by means of a prospectus delivered in connection with its
negotiations for acquisition of other businesses, properties or securities in
business combination transactions. During the period ended August 9, 2000,
76,152 Common Units were issued from this registration statement in connection
with acquisitions.
Effective September 13, 1999, Predecessor Heritage registered $150.0 million of
Common Units and Debt Securities on Form S-3 that may be offered for sale in one
or more offerings. On October 25, 1999, Predecessor Heritage issued a prospectus
supplement offering 1,200,000 Common Units, representing limited partner
interests in Predecessor Heritage. The underwriters delivered the Common Units
to purchasers on October 28, 1999 at a public offering price of $22.00 per
Common unit. Predecessor Heritage used the net proceeds of approximately $24.0
F-44
million from this offering to repay a portion of the outstanding indebtedness
under its acquisition facility that was incurred to acquire propane businesses.
7. PROFIT SHARING AND 401(K) SAVINGS PLAN:
Predecessor Heritage sponsors a defined contribution profit sharing and 401(k)
savings plan (the "Plan"), which covers all employees subject to service period
requirements. Contributions are made to the Plan at the discretion of the Board
of Directors. There was no expense under the profit sharing provision of the
Plan during the period ended August 9, 2000.
8. RELATED PARTY TRANSACTIONS:
Predecessor Heritage has no employees and is managed by the General Partner.
Pursuant to the Partnership Agreement, the General Partner is entitled to
reimbursement for all direct and indirect expenses incurred or payments it makes
on behalf of Predecessor Heritage, and all other necessary or appropriate
expenses allocable to Predecessor Heritage or otherwise reasonably incurred by
the General Partner in connection with operating Predecessor Heritage's
business. These costs, which totaled approximately $40,742 for the period ended
August 9, 2000, include compensation and benefits paid to officers and employees
of the General Partner.
9. REPORTABLE SEGMENTS:
Predecessor Heritage's financial statements reflect four reportable segments:
the domestic retail operations of Predecessor Heritage, the domestic wholesale
operations of Predecessor Heritage, the foreign wholesale operations of MP
Energy Partnership, and the trading activities of Resources. Predecessor
Heritage's reportable domestic and wholesale fuel segments are strategic
business units that sell products and services to different types of users:
retail and wholesale customers. Intersegment sales by the foreign wholesale
segment to the domestic segment are priced in accordance with the partnership
agreement. Resources is a trading company that buys and sells financial
instruments for its own account. Predecessor Heritage manages these segments
separately as each segment involves different distribution, sale and marketing
strategies. Predecessor Heritage evaluates the performance of its operating
segments based on operating income. The operating income below does not reflect
domestic and foreign selling, general, and administrative expenses of $5,974 for
the period ended August 9, 2000.
The following table presents financial information by segment for the period
ended August 9, 2000:
August 9,
2000
---------
Gallons:
Domestic retail fuel 170,891
Domestic wholesale fuel 7,113
Foreign wholesale fuel
Affiliated 63,390
Unaffiliated 75,514
Elimination (63,390)
---------
Total 253,518
=========
Revenues:
Domestic retail fuel $ 178,906
Domestic wholesale fuel 4,342
Foreign wholesale fuel
Affiliated 29,038
Unaffiliated 30,803
Elimination (29,038)
Liquids marketing 4,300
Other domestic revenues 24,140
---------
Total $ 242,491
=========
F-45
Operating Income:
Domestic retail fuel $ 27,670
Domestic wholesale fuel 259
Foreign wholesale fuel
Affiliated 541
Unaffiliated 1,528
Elimination (541)
Liquids marketing (8)
---------
Total $ 29,449
=========
Depreciation and amortization:
Domestic retail fuel $ 17,105
Domestic wholesale fuel 31
Foreign wholesale fuel 7
---------
Total $ 17,143
=========
10. SIGNIFICANT INVESTEE:
At August 9, 2000, Predecessor Heritage held a 50% interest in Bi-State Propane.
Predecessor Heritage accounts for its 50% interest in Bi-State Propane under the
equity method. Predecessor Heritage received distributions from Bi-State Propane
in the amount of $200 for the period ended August 9, 2000.
Bi-State Propane's results of operations for the period ended August 9, 2000 is
summarized below:
Revenues $ 12,298
Gross profit 6,008
Net income:
Heritage 613
Other partner 753
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
The retail propane distribution business is largely seasonal due to propane's
use as a heating source in residential and commercial buildings. Historically,
approximately two-thirds of Predecessor Heritage's retail propane volume and
more than 80% of the EBITDA, as adjusted is attributable to sales during the
six-month peak-heating season of October through March. Consequently, sales and
operating profits are concentrated in Predecessor Heritage's first and second
fiscal quarters. Cash flow from operations, however, is greatest during the
second and third fiscal quarters when customers pay for propane purchased during
the six-month peak-heating season.
Fiscal 2000: Quarter Ended
----------------------------------------- Period Ended
November 30 February 28 May 31 August 9,
----------- ----------- ------ ---------
Revenues $ 51,890 $102,160 $ 57,224 $ 31,217
Operating income (loss) 3,430 21,253 2,732 (3,940)
Net income (loss) (808) 16,971 (2,198) (7,461)
Net income (loss) per unit-
basic and diluted (0.09) 1.70 (0.22) (0.72)
F-46
12. SUBSEQUENT EVENT:
On August 22, 2001, the final payment to settle the working capital adjustment
was made to the partners of U.S. Propane. Total payments made to settle the
working capital adjustment were approximately $12,900. Accordingly, an
additional amount of approximately $7,900 was recorded as goodwill (See Note 1).
F-47
The exhibits listed on the following Exhibit Index are filed as part of
this report. Exhibits required by Item 601 of Regulation S-K, but which are not
listed below, are not applicable.
Exhibit
Number Description
------ -----------
(1) 3.1 Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(10) 3.1.1 Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(16) 3.1.2 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(19) 3.1.3 Amendment No. 3 to Amended and Restated Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(19) 3.1.4 Amendment No. 4 to Amended and Restated Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(1) 3.2 Agreement of Limited Partnership of Heritage Operating, L.P.
(12) 3.2.1 Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Heritage Operating, L.P.
(19) 3.2.2 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage Operating, L.P.
(18) 3.3 Amended Certificate of Limited Partnership of Heritage Propane Partners, L.P.
(18) 3.4 Amended Certificate of Limited Partnership of Heritage Operating, L.P.
(20) 4.1 Registration Rights Agreement for Limited Partner Interests of Heritage Propane Partners, L.P.
(7) 10.1 First Amended and Restated Credit Agreement with Banks Dated May 31, 1999
(8) 10.1.1 First Amendment to the First Amended and Restated Credit Agreement dated as of October 15, 1999
(9) 10.1.2 Second Amendment to First Amended and Restated Credit Agreement dated as of May 31, 2000
(10) 10.1.3 Third Amendment dated as of August 10, 2000 to First Amended and Restated Credit Agreement
(13) 10.1.4 Fourth Amendment to First Amended and Restated Credit Agreement dated as of December 28, 2000
(16) 10.1.5 Fifth Amendment to First Amended and Restated Credit Agreement dated as of July 16, 2001
(1) 10.2 Form of Note Purchase Agreement (June 25, 1996)
E-1
Exhibit
Number Description
------ -----------
(3) 10.2.1 Amendment of Note Purchase Agreement (June 25, 1996) dated as of July 25, 1996
(4) 10.2.2 Amendment of Note Purchase Agreement (June 25, 1996) dated as of March 11, 1997
(6) 10.2.3 Amendment of Note Purchase Agreement (June 25, 1996) dated as of October 15, 1998
(8) 10.2.4 Second Amendment Agreement dated September 1, 1999 to June 25, 1996 Note Purchase Agreement
(11) 10.2.5 Third Amendment Agreement dated May 31, 2000 to June 25, 1996 Note Purchase Agreement and November 19,
1997 Note Purchase Agreement
(10) 10.2.6 Fourth Amendment Agreement dated August 10, 2000 to June 25, 1996 Note Purchase Agreement and November
19, 1997 Note Purchase Agreement
(13) 10.2.7 Fifth Amendment Agreement dated as of December 28, 2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August 10, 2000 Note Purchase Agreement
(1) 10.3 Form of Contribution, Conveyance and Assumption Agreement among Heritage Holdings, Inc., Heritage
Propane Partners, L.P. and Heritage Operating, L.P.
(1) 10.6 Restricted Unit Plan
(4) 10.6.1 Amendment of Restricted Unit Plan dated as of October 17, 1996
(12) 10.6.2 Amended and Restated Restricted Unit Plan dated as of August 10, 2000
(18) 10.6.3 Second Amended and Restated Restricted Unit Plan dated as of February 4, 2002
(12) 10.7 Employment Agreement for James E. Bertelsmeyer dated as of August 10, 2000
(18) 10.7.1 Consent to Assignment of Employment Agreement for James E. Bertelsmeyer dated February 3, 2002
(**) 10.7.2 Amendment 1 of Employment Agreement for James E. Bertelsmeyer dated August 10, 2002
(12) 10.8 Employment Agreement for R. C. Mills dated as of August 10, 2000
(18) 10.8.1 Consent to Assignment of Employment Agreement for R.C. Mills dated February 3, 2002
(12) 10.9 Employment Agreement for Larry J. Dagley dated as of August 10, 2000
(18) 10.9.1 Consent to Assignment of Employment Agreement for Larry J. Dagley dated February 3, 2002
(12) 10.10 Employment Agreement for H. Michael Krimbill dated as of August 10, 2000
(18) 10.10.1 Consent to Assignment of Employment Agreement for H. Michael Krimbill dated February 3, 2002
(12) 10.11 Employment Agreement for Bradley K. Atkinson dated as of August 10, 2000
E-2
Exhibit
Number Description
------ -----------
(18) 10.11.1 Consent to Assignment of Employment Agreement for Bradley K. Atkinson dated February 3, 2002
(7) 10.12 First Amended and Restated Revolving Credit Agreement between Heritage Service
Corp. and Banks Dated May 31, 1999
(16) 10.12.1 First Amendment to First Amended and Restated Revolving Credit Agreement, dated October 15, 1999
(16) 10.12.2 Second Amendment to First Amended and Restated Revolving Credit Agreement, dated August 10, 2000
(16) 10.12.3 Third Amendment to First Amended and Restated Revolving Credit Agreement, dated December 28, 2000
(16) 10.12.4 Fourth Amendment to First Amended and Restated Revolving Credit Agreement, dated July 16, 2001
(12) 10.13 Employment Agreement for Mark A. Darr dated as of August 10, 2000
(18) 10.13.1 Consent to Assignment of Employment Agreement for Mark A. Darr dated February 3, 2002
(12) 10.14 Employment Agreement for Thomas H. Rose dated as of August 10, 2000
(18) 10.14.1 Consent to Assignment of Employment Agreement for Thomas H. Rose dated February 3, 2002
(12) 10.15 Employment Agreement for Curtis L. Weishahn dated as of August 10, 2000
(18) 10.15.1 Consent to Assignment of Employment Agreement for Curtis L. Weishahn dated February 3, 2002
(5) 10.16 Note Purchase Agreement dated as of November 19, 1997
(6) 10.16.1 Amendment dated October 15, 1998 to November 19, 1997 Note Purchase Agreement
(8) 10.16.2 Second Amendment Agreement dated September 1, 1999 to November 19, 1997 Note Purchase Agreement and June
25, 1996 Note Purchase Agreement
(9) 10.16.3 Third Amendment Agreement dated May 31, 2000 to November 19, 1997 Note Purchase Agreement and June 25,
1996 Note Purchase Agreement
(10) 10.16.4 Fourth Amendment Agreement dated August 10, 2000 to November 19, 1997 Note Purchase Agreement and June
25, 1996 Note Purchase Agreement
(13) 10.16.5 Fifth Amendment Agreement dated as of December 28, 2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August 10, 2000 Note Purchase Agreement
(10) 10.17 Contribution Agreement dated June 15, 2000 among U.S. Propane, L.P., Heritage Operating, L.P. and
Heritage Propane Partners, L.P.
(10) 10.17.1 Amendment dated August 10, 2000 to June 15, 2000 Contribution Agreement
E-3
Exhibit
Number Description
------ -----------
(10) 10.18 Subscription Agreement dated June 15, 2000 between Heritage Propane Partners, L.P. and individual investors
(10) 10.18.1 Amendment dated August 10, 2000 to June 15, 2000 Subscription Agreement
(16) 10.18.2 Amendment Agreement dated January 3, 2001 to the June 15, 2000 Subscription Agreement.
(17) 10.18.3 Amendment Agreement dated October 5, 2001 to the June 15, 2000 Subscription
Agreement.
(10) 10.19 Note Purchase Agreement dated as of August 10, 2000
(13) 10.19.1 Fifth Amendment Agreement dated as of December 28, 2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August 10, 2000 Note Purchase Agreement
(14) 10.19.2 First Supplemental Note Purchase Agreement dated as of May 24, 2001 to the August 10, 2000 Note Purchase
Agreement
(15) 10.20 Stock Purchase Agreement dated as of July 5, 2001 among the shareholders of ProFlame, Inc. and Heritage
Holdings, Inc.
(15) 10.21 Stock Purchase Agreement dated as of July 5, 2001 among the shareholders of Coast Liquid Gas, Inc. and
Heritage Holdings, Inc.
(15) 10.22 Agreement and Plan of Merger dated as of July 5, 2001 among California Western Gas Company, the Majority
Stockholders of California Western Gas Company signatories thereto, Heritage Holdings, Inc. and
California Western Merger Corp.
(15) 10.23 Agreement and Plan of Merger dated as of July 5, 2001 among Growth Properties, the Majority Shareholders
signatories thereto, Heritage Holdings, Inc. and Growth Properties Merger Corp.
(15) 10.24 Asset Purchase Agreement dated as of July 5, 2001 among L.P.G. Associates, the Shareholders of L.P.G.
Associates and Heritage Operating, L.P.
(15) 10.25 Asset Purchase Agreement dated as of July 5, 2001 among WMJB, Inc., the Shareholders of WMJB, Inc. and
Heritage Operating, L.P.
(15) 10.25.1 Amendment to Asset Purchase Agreement dated as of July 5, 2001 among WMJB, Inc., the Shareholders of
WMJB, Inc. and Heritage Operating, L.P.
(18) 10.26 Assignment, Conveyance and Assumption Agreement between U.S. Propane, L.P. and Heritage Holdings, Inc.,
as the former General Partner of Heritage Propane Partners, L.P. dated as of February 4, 2002
(18) 10.27 Assignment, Conveyance and Assumption Agreement between U.S. Propane, L.P. and Heritage Holdings, Inc.,
as the former General Partner of Heritage Operating, L.P., dated as of February 4, 2002
(**) 21.1 List of Subsidiaries
(*) 23.3 Consent of Grant Thornton LLP
E-4
Exhibit
Number Description
------ -----------
(*) 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(*) 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(*) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(*) 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(*) 99.1 Financial Statements of U.S. Propane, L.P. as of August 31, 2002
(**) 99.2 Financial Statements of Bi-State Propane Partnership
----------------
(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement of Form S-1, File No.
333-04018, filed with the Commission on June 21, 1996.
(2) Incorporated by reference to Exhibit 10.11 to Registrant's Registration
Statement on Form S-1, File No. 333-04018, filed with the Commission on
June 21, 1996.
(3) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 1996.
(4) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended February 28, 1997.
(5) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended May 31, 1998.
(6) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1998.
(7) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 1999.
(8) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1999.
(9) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2000.
(10) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 23, 2000.
(11) File as Exhibit 10.16.3.
(12) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2000.
E-5
(13) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2001.
(14) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2001.
(15) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 15, 2001.
(16) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2001.
(17) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended November 30, 2001.
(18) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2002.
(19) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2002.
(20) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated February 4, 2002.
(*) Filed herewith.
(**) Filed with the November 27, 2002 Original Filing.
E-6