FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2003
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 or (I.R.S. Employer
incorporation or organization) Identification No.)
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)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
At July 11, 2003, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 17,947,111 Common Units
EXPLANATORY NOTE
We are filing this Amendment on Form 10-Q/A in conjunction with the
filing of a Registration Statement on Form S-3 (File No. 333-107324). That
Registration Statement incorporates our quarterly report on Form 10-Q for the
quarterly period ended May 31, 2003, originally filed on July 15, 2003 (the
"Original Filing"). This Form 10-Q/A amends and restates in its entirety our
quarterly report on Form 10-Q for the quarterly period ended May 31, 2003.
This Amendment makes certain changes in the form of additional or
supplemental disclosures as follows:
- Part I -- Item 1. Financial Information and Notes to
Consolidated Financial Statements, pages 2-16: As described in
Note 2 to the Consolidated Financial Statements, we have
revised our previously reported Consolidated Statements of
Operations for the three months ended May 31, 2003 and 2002
and for the nine months ended May 31, 2003 and 2002 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. In addition, we have provided additional and
supplemental information regarding (i) the recording (loss) of
the minority interests of all partially owned subsidiaries,
(ii) a description of our Costs and Expenses, (iii) quarterly
distributions, (iv) Heritage's buying and selling of
derivative financial instruments and liquids marketing
contracts, and (v) our adoption of EITF 02-3.
- We have revised our previously reported Consolidated Balance
Sheet as of May 31, 2003 and the related Consolidated
Statements of Operations, Other Comprehensive Income (Loss),
Partners' Capital, and Cash Flows for the three and nine
months ended May 31, 2003 and have made corresponding
revisions to the Notes to Consolidated Financial Statements to
reflect the adoption of the fair value recognition provisions
of Statement of Financial Accounting Standards No. 123
Accounting for Stock-based Compensation (SFAS 123) effective
as of September 1, 2002. During the fourth quarter of 2003,
Heritage adopted the fair value recognition provisions
following the modified prospective method of adoption
described in Statement of Financial Accounting Standards No.
148, Accounting for Stock-Based Compensation - Transition and
Disclosure (SFAS 148). Following adoption, deferred
compensation expense that is 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. It was our
decision to adopt this preferable method of accounting for our
stock-based employee compensation plans, as we believe it
provides a better measurement of our compensation costs.
- Part I -- Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, pages 21-26: 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. 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.
- Part I -- Item 3. Quantitative and Qualitative Disclosure
about Market Risk, pages 27-30: We have provided additional or
supplemental disclosures about Heritage's buying and selling
of derivative financial instruments and liquids marketing
contracts,
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.
i
FORM 10-Q
HERITAGE PROPANE PARTNERS, L.P.
TABLE OF CONTENTS
Pages
-----
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets -
May 31, 2003 and August 31, 2002................................................. 1
Consolidated Statements of Operations -
Three months and nine months ended May 31, 2003 and 2002 ......................... 2
Consolidated Statements of Comprehensive Income (Loss) -
Three months and nine months ended May 31, 2003 and 2002.......................... 3
Consolidated Statement of Partners' Capital
Nine months ended May 31, 2003.................................................... 4
Consolidated Statements of Cash Flows
Nine months ended May 31, 2003 and 2002........................................... 5
Notes to Consolidated Financial Statements............................................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................... 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK....................................................................... 28
ITEM 4. CONTROLS AND PROCEDURES............................................................... 30
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................. 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................... 31
SIGNATURE
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
(unaudited)
May 31, August 31,
2003 2002
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,089 $ 4,596
Marketable securities 2,294 2,559
Accounts receivable, net of allowance for doubtful accounts 42,688 30,898
Inventories 25,726 48,187
Assets from liquids marketing 570 2,301
Prepaid expenses and other 3,044 6,846
--------- ---------
Total current assets 81,411 95,387
PROPERTY, PLANT AND EQUIPMENT, net 428,747 400,044
INVESTMENT IN AFFILIATES 9,243 7,858
GOODWILL, net of amortization prior to adoption of SFAS No. 142 157,254 155,735
INTANGIBLES AND OTHER ASSETS, net 53,751 58,240
--------- ---------
Total assets $ 730,406 $ 717,264
========= =========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Working capital facility $ - $ 30,200
Accounts payable 32,423 40,929
Accounts payable to related companies 7,653 5,002
Accrued and other current liabilities 22,020 23,962
Liabilities from liquids marketing 552 1,818
Current maturities of long-term debt 25,453 20,158
--------- ---------
Total current liabilities 88,101 122,069
LONG-TERM DEBT, less current maturities 385,950 420,021
MINORITY INTERESTS 4,763 3,564
--------- ---------
Total liabilities 478,814 545,654
--------- ---------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Common Unitholders (17,947,111 and 15,815,847 units issued and
outstanding at May 31, 2003 and August 31, 2002, respectively) 250,714 173,677
Class C Unitholders (1,000,000 units issued and outstanding at
May 31, 2003 and August 31, 2002) - -
General Partner 2,417 1,585
Accumulated other comprehensive loss (1,539) (3,652)
--------- ---------
Total partners' capital 251,592 171,610
--------- ---------
Total liabilities and partners' capital $ 730,406 $ 717,264
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
1
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)
(unaudited)
Three Months Nine Months
Ended May 31, Ended May 31,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
REVENUES:
Retail fuel $ 103,340 $ 82,312 $ 400,093 $ 317,941
Wholesale fuel 9,699 8,865 41,265 35,992
Liquids marketing, net 256 1,484 1,315 (148)
Other 12,444 11,348 46,334 42,184
---------- ---------- ---------- ----------
Total revenues 125,739 104,009 489,007 395,969
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of products sold 66,781 52,303 252,221 209,681
Operating expenses 39,460 33,823 118,090 100,624
Depreciation and amortization 9,579 9,910 28,291 28,574
Selling, general and administrative 3,764 3,539 10,941 9,648
---------- ---------- ---------- ----------
Total costs and expenses 119,584 99,575 409,543 348,527
---------- ---------- ---------- ----------
OPERATING INCOME 6,155 4,434 79,464 47,442
OTHER INCOME (EXPENSE):
Interest expense (8,950) (9,205) (27,563) (27,924)
Equity in earnings of affiliates 504 430 1,687 1,599
Gain on disposal of assets 517 227 672 942
Other (103) (150) (2,649) (342)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE MINORITY
INTERESTS AND INCOME TAXES (1,877) (4,264) 51,611 21,717
Minority interests (90) (55) (1,038) (685)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE TAXES (1,967) (4,319) 50,573 21,032
Income taxes 199 - 1,483 -
---------- ---------- ---------- ----------
NET INCOME (LOSS) (2,166) (4,319) 49,090 21,032
GENERAL PARTNER'S INTEREST IN NET INCOME (LOSS) 225 174 1,181 861
---------- ---------- ---------- ----------
LIMITED PARTNERS' INTEREST IN NET INCOME (LOSS) $ (2,391) $ (4,493) $ 47,909 $ 20,171
========== =========== ========== ===========
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ (0.14) $ (0.28) $ 2.96 $ 1.28
========== =========== ========== ===========
BASIC AVERAGE NUMBER OF UNITS OUTSTANDING 16,574,582 15,805,847 16,189,029 15,713,694
========== =========== ========== ===========
DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ (0.14) $ (0.28) $ 2.95 $ 1.28
========== =========== ========== ===========
DILUTED AVERAGE NUMBER OF UNITS OUTSTANDING 16,574,582 15,805,847 16,227,061 15,754,704
========== =========== ========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
2
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
Three Months Ended Nine Months Ended
May 31, May 31,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss) $ (2,166) $ (4,319) $ 49,090 $ 21,032
Other comprehensive income (loss)
Reclassification adjustment for gains on
derivative instruments included in net
income (125) - (552) -
Reclassification adjustment for losses on
available-for-sale securities included
in net income - - 2,376 -
Change in value of derivative instruments (406) - 551 -
Change in value of available-for-sale
securities (253) (87) (262) (702)
-------- -------- -------- --------
Comprehensive income (loss) $ (2,950) $ (4,406) $ 51,203 $ 20,330
======== ======== ======== ========
RECONCILIATION OF ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of period $ (755) $ (3,850) $ (3,652) $ (6,541)
Current period reclassification to earnings (125) 1,158 1,824 7,016
Current period change (659) (87) 289 (3,254)
-------- -------- -------- --------
Balance, end of period $ (1,539) $ (2,779) $ (1,539) $ (2,779)
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit data)
(unaudited)
Number of Units
---------------------
Accumulated
Other
General Comprehensive
Common Class C Common Class C Partner Loss Total
---------- --------- ----------- --------- ----------- ----------- -----------
BALANCE, AUGUST 31, 2002 15,815,847 1,000,000 $ 173,677 $ - $ 1,585 $ (3,652) $ 171,610
Unit distribution - - (30,600) - (977) - (31,577)
Issuance of common units 1,610,000 - 44,758 - - 44,758
General Partner capital contribution (32,692) - (957) - 476 - (481)
Conversion of phantom units 2,500 - - - - - -
Issuance of Common Units in
connection with certain
acquisitions 551,456 - 15,000 - 152 - 15,152
Other - - 927 - - - 927
Net change in accumulated other
comprehensive income per
accompanying statements - - - - - 2,113 2,113
Net income - - 47,909 - 1,181 - 49,090
---------- --------- ----------- --------- ----------- ----------- -----------
BALANCE, MAY 31, 2003 17,947,111 1,000,000 $ 250,714 $ - $ 2,417 $ (1,539) $ 251,592
========== ========= =========== ========= =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
May 31,
-----------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 49,090 $ 21,032
Reconciliation of net income to net cash provided by
operating activities-
Depreciation and amortization 28,291 28,574
Provision for loss on accounts receivable 1,978 1,030
Loss on write down of marketable securities 2,400 -
Gain on disposal of assets (672) (942)
Deferred compensation on restricted units and long-term
incentive plan 929 1,409
Undistributed earnings of affiliates (1,384) (1,599)
Minority interests 698 154
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable (10,272) 3,258
Inventories 24,392 26,449
Assets from liquids marketing 1,730 5,633
Prepaid and other expenses 3,872 11,277
Intangibles and other assets (205) (666)
Accounts payable (8,650) (10,589)
Accounts payable to related companies 2,651 (2,251)
Accrued and other current liabilites (3,011) (10,876)
Liabilities from liquids marketing (1,266) (6,393)
--------- ---------
Net cash provided by operating activities 90,571 65,500
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (23,313) (16,886)
Capital expenditures (21,200) (20,020)
Proceeds from the sale of assets 3,113 11,138
Other - (854)
--------- ---------
Net cash used in investing activities (41,400) (26,622)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 127,029 122,850
Net proceeds from issuance of Common Units 44,758 -
Principal payments on debt (187,036) (132,186)
Unit distributions (31,577) (30,747)
Other 148 (58)
--------- ---------
Net cash used in financing activities (46,678) (40,141)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,493 (1,263)
CASH AND CASH EQUIVALENTS, beginning of period 4,596 5,620
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 7,089 $ 4,357
========= =========
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 1,031 $ 2,755
========= =========
Issuance of Common Units in connection with certain
acquistions $ 15,000 $ -
========= =========
General Partner capital contribution $ 957 $ -
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 26,089 $ 26,362
========= =========
The accompanying notes are an integral part of these financial statements
5
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except unit and per unit data)
(unaudited)
1. OPERATIONS AND ORGANIZATION:
The accompanying financial statements should be read in conjunction with the
consolidated financial statements of Heritage Propane Partners, L.P. and
subsidiaries (the "Partnership") as of August 31, 2002, and the notes thereto
included in the Partnership's consolidated financial statements included in Form
10-K as filed with the Securities and Exchange Commission on November 27, 2002.
The accompanying financial statements include only normal recurring accruals and
all adjustments that the Partnership considers necessary for a fair
presentation. Due to the seasonal nature of the Partnership's business, the
results of operations for interim periods are not necessarily indicative of the
results to be expected for a full year.
In order to simplify the Partnership's obligations under the laws of several
jurisdictions in which it conducts business, the Partnership's activities are
conducted through a subsidiary operating partnership, Heritage Operating, L.P.
(the "Operating Partnership"). The Partnership and the Operating Partnership are
collectively referred to in this report as "Heritage." Heritage sells propane
and propane-related products to more than 650,000 active residential,
commercial, industrial, and agricultural customers in 29 states. Heritage is
also a wholesale propane supplier in the United States and in Canada, the latter
through participation in MP Energy Partnership. MP Energy Partnership is a
Canadian partnership, in which Heritage owns a 60% interest, engaged in
lower-margin wholesale distribution and in supplying Heritage's northern U.S.
locations. Heritage buys and sells financial instruments for its own account
through its wholly owned subsidiary, Heritage Energy Resources, L.L.C.
("Resources").
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., and Resources. 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, a propane retailer in the states of Nevada and California,
under the equity method. All significant intercompany transactions and accounts
have been eliminated in consolidation. For purposes of maintaining partner
capital accounts, the Partnership Agreement of Heritage Propane Partners, L.P.
(the "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. For the
three months and nine months ended May 31, 2003, the 1.0101% general partner
interest in the Operating Partnership held by the General Partner, U.S. Propane,
L.P. ("U.S. Propane"), was accounted for in the consolidated financial
statements as a minority interest. On February 4, 2002, at a special meeting of
the Partnership's Common Unitholders, the Common Unitholders approved the
substitution of U.S. Propane as the successor General Partner of the Partnership
and the Operating Partnership, replacing Heritage Holdings, Inc. ("Heritage
Holdings"). For the three months and the nine months ended May 31, 2002, the
1.0101% general partner interest of the former General Partner, Heritage
Holdings, 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. The
Partnership does not separately charge shipping and handling costs to customers.
6
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.
ACCOUNTS RECEIVABLE
Heritage grants credit to its customers for the purchase of propane and
propane-related products. Included in accounts receivable are trade accounts
receivable arising from the Partnership's retail and wholesale propane
operations and receivables arising from Resources' liquids marketing activities.
Accounts receivable are recorded as amounts billed to customers less an
allowance for doubtful accounts. The allowance for doubtful accounts is based on
management's assessment of the realizability of customer accounts. Management's
assessment is based on the overall creditworthiness of the Partnership's
customers and any specific disputes. Receivables related to liquids marketing
activities are $2,479 and $4,332 as of May 31, 2003 and August 31, 2002,
respectively. Accounts receivable consisted of the following:
May 31, August 31,
2003 2002
------- -------
Accounts receivable $46,192 $33,402
Less - allowance for doubtful accounts 3,504 2,504
------- -------
Total, net $42,688 $30,898
======= =======
The activity in the allowance for doubtful accounts consisted of the following:
For the Nine Months Ended
-------------------------
May 31, May 31,
2003 2002
------- -------
Balance, beginning of the period $ 2,504 $ 3,576
Provision for loss on accounts receivable 1,978 1,030
Accounts receivable written off, net of
recoveries (978) (1,096)
------- -------
Balance, end of period $ 3,504 $ 3,510
======= =======
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
customer service locations 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:
May 31, August 31,
2003 2002
------- -------
Fuel $15,055 $38,523
Appliances, parts and fittings 10,671 9,664
------- -------
Total inventories $25,726 $48,187
======= =======
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the May 31,
2003 presentation. These reclassifications have no impact on net income or net
assets.
7
INCOME TAXES
Heritage is a master 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, no recognition has been given to income
taxes in the accompanying financial statements of Heritage except those
anticipated to be incurred by corporate subsidiaries of Heritage that are
subject to income taxes. 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 (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 Units outstanding. Diluted 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 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
net income per unit is as follows:
Three Months Ended Nine Months Ended
May 31, May 31,
------------------------------ ----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Limited Partners' interest in net income (loss) $ (2,391) $ (4,493) $ 47,909 $ 20,171
============= ============= ============= =============
Weighted average limited partner units 16,574,582 15,805,847 16,189,029 15,713,694
============= ============= ============= =============
Basic net income (loss) per limited partner unit $ (0.14) $ (0.28) $ 2.96 $ 1.28
============= ============= ============= =============
DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Limited partners' interest in net income (loss) $ (2,391) $ (4,493) $ 47,909 $ 20,171
============= ============= ============= =============
Weighted average limited partner units 16,574,582 15,805,847 16,189,029 15,713,694
Dilutive effect of phantom units - - 38,032 41,010
------------- ------------- ------------- -------------
Weighted average limited partner units, assuming
dilutive effect of phantom units 16,574,582 15,805,847 16,227,061 15,754,704
============= ============= ============= =============
Diluted net income (loss) per limited partner unit $ (0.14) $ (0.28) $ 2.95 $ 1.28
============= ============= ============= =============
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
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, 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 the Partnership's business,
to comply with applicable laws or any 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 Special Meeting on February 4, 2002, distributions by the
Partnership in an amount equal to 100% of Available Cash were made 97% to the
Common 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 approval by the Common Unitholders of the substitution of
U.S. Propane as the General Partner, distributions by the Partnership in an
amount equal to 100% of Available Cash will generally be made 98% to the Common
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.
8
Distributions are made approximately 45 days following November 30, February 28,
May 31, and August 31 to unitholders on the applicable record date. On June 23,
2003, the Partnership declared a cash distribution for the third quarter ended
May 31, 2003 of $0.6375 per unit, or $2.55 per unit annually, payable on July
15, 2003 to Unitholders of record at the close of business on July 7, 2003. In
addition to these quarterly distributions, the General Partner received
quarterly distributions for its general partner interest in the Partnership, its
minority interest, and incentive distributions to the extent the quarterly
distribution exceeded $0.55 per unit. The total amount of distributions for the
third quarter ended May 31, 2003 on Common Units, the general partner interests
and the Incentive Distribution Rights totaled $11.4 million, $0.2 million and
$0.3 million, respectively. The total amount of distributions for the nine
months ended May 31, 2003 on Common Units, the general partner interests and the
Incentive Distribution Rights totaled $31.9 million, $0.6 million and $0.7
million, respectively. All such distributions were made from Available Cash from
Operating Surplus.
STOCK BASED COMPENSATION PLANS
During the fourth quarter of 2003, Heritage adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123 Accounting for
Stock-based Compensation (SFAS 123) effective as of September 1, 2002. Heritage
adopted the fair value recognition provisions following the modified prospective
method of adoption described in Statement of Financial Accounting Standards No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS
148). Following adoption, deferred compensation expense that is recognized in
the financial statements 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 under the Restricted Unit Plan and the Long Term Incentive Plan
granted after October 1, 1995.
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 November 30,
2002, 41,400 restricted units were outstanding and 15,800 were available for
grants to non-employee directors and key employees.
Deferred compensation expense of $81 and $243 was recognized for the three and
nine months ended May 31, 2003, respectively. For the nine months ended May 31,
2002, Heritage followed the disclosure only provisions of SFAS 123, as amended
by SFAS 148 and APB Opinion No. 25 Accounting for Stock Issued to Employees (APB
25). Under APB 25 the Restricted Unit Plan was classified as a variable plan so
that an estimate of compensation was 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 $88 and $284 was recognized for the three and nine
months ended May 31, 2002, respectively based on the fair value of such units at
the end of each period.
9
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. 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.
Deferred compensation expense on this plan of $228 and $686 was recognized for
the three and nine months ended May 31, 2003, respectively. For the nine months
ended May 31, 2002, Heritage followed the disclosure only provisions of SFAS
123, and APB 25. Under APB 25, the Long Term Incentive Plan was classified as a
variable plan so that an estimate of compensation was 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 $347 and $1,125 was recognized for
the three and nine months ended May 31, 2002, 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.
SFAS 123 requires that significant assumptions be used during the year to
estimate the fair value, which includes the risk-free interest rate used, the
expected life of the grants under each of the plans, the expected volatility,
and the expected distributions on each of the grants. Heritage assumed a
weighted average risk free interest rate of 5.72% for the three and nine months
ended May 31, 2003 and 5.90% for the three and nine months ended May 31, 2002 in
estimating the present value of the future cash flows of the distributions
during the vesting period on the measurement date of each grant. Annual average
cash distributions at the grant date were estimated to be $2.39 for the three
and nine months ended May 31, 2003, and $2.37 for the three and nine months
ended May 31, 2002. The expected life of each grant is assumed to be the minimum
vesting period under certain performance criteria of each grant. 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 periods presented.
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
May 31, 2003 May 31, 2002 May 31, 2003 May 31, 2002
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Limited Partners' interest in net income (loss) $ (2,391) $ (4,493) $ 47,909 $ 20,171
Add: Deferred compensation expense, net of General
Partner's and minority interest included in
limited partners' interest in net income (loss) 304 426 911 1,381
Deduct: Deferred compensation expense determined
under the fair value based method, net of
General Partner's and minority interest (304) (293) (911) (878)
------------- ------------- ------------- -------------
Pro forma limited partners' interest in net income $ (2,391) $ (4,360) $ 47,909 $ 20,674
============= ============= ============= =============
Weighted average limited partner units 16,574,582 15,805,847 16,189,029 15,713,694
============= ============= ============= =============
Basic net income per limited partner unit as
reported $ (0.14) $ (0.28) $ 2.96 $ 1.28
============= ============= ============= =============
Basic net income per limited partner unit pro forma $ (0.14) $ (0.28) $ 2.96 $ 1.32
============= ============= ============= =============
Weighted average limited partner units, assuming
dilutive effect of phantom units 16,574,582 15,805,847 16,227,061 15,754,704
============= ============= ============= =============
Diluted net income per limited partner unit as
reported $ (0.14) $ (0.28) $ 2.95 $ 1.28
============= ============= ============= =============
Diluted net income per limited partner unit pro
forma $ (0.14) $ (0.28) $ 2.95 $ 1.31
============= ============= ============= =============
As stated above, during the fourth quarter of 2003, Heritage adopted the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123 Accounting for Stock-based Compensation (SFAS 123) effective as of September
1, 2002. Accordingly, the following information compares the originally reported
10
consolidated statement of operations, reclassified for the adoption of EITF 02-3
for the three and nine months ended May 31, 2003 and as adjusted for the
adoption of SFAS 123:
Three Months Nine Months
Ended May 31, 2003 Ended May 31, 2003
------------------------------- -------------------------------
As adjusted for As adjusted for
As originally the adoption of As originally the adoption of
reported SFAS 123 reported SFAS 123
REVENUES:
Retail fuel $ 103,340 $ 103,340 $ 400,093 $ 400,093
Wholesale fuel 9,699 9,699 41,265 41,265
Liquids marketing, net 256 256 1,315 1,315
Other 12,444 12,444 46,334 46,334
------------ ------------ ------------ ------------
Total revenues 125,739 125,739 489,007 489,007
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of products sold 66,781 66,781 252,221 252,221
Operating expenses 39,535 39,460 118,230 118,090
Depreciation and amortization 9,579 9,579 28,291 28,291
Selling, general and administrative 4,603 3,764 12,451 10,941
------------ ------------ ------------ ------------
Total costs and expenses 120,498 119,584 411,193 409,543
------------ ------------ ------------ ------------
OPERATING INCOME 5,241 6,155 77,814 79,464
OTHER INCOME (EXPENSE):
Interest expense (8,950) (8,950) (27,563) (27,563)
Equity in earnings of affiliates 504 504 1,687 1,687
Gain on disposal of assets 517 517 672 672
Other (103) (103) (2,649) (2,649)
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY
INTERESTS AND INCOME TAXES (2,791) (1,877) 49,961 51,611
Minority interests (80) (90) (1,021) (1,038)
------------ ------------ ------------ ------------
INCOME BEFORE TAXES (2,871) (1,967) 48,940 50,573
Income taxes 199 199 1,483 1,483
------------ ------------ ------------ ------------
NET INCOME (3,070) (2,166) 47,457 49,090
GENERAL PARTNER'S INTEREST IN NET INCOME 216 225 1,164 1,181
------------ ------------ ------------ ------------
LIMITED PARTNERS' INTEREST IN NET INCOME $ (3,286) $ (2,391) $ 46,293 $ 47,909
============ ============ ============ ============
BASIC NET INCOME PER LIMITED PARTNER UNIT $ (0.20) $ (0.14) $ 2.86 $ 2.96
============ ============ ============ ============
BASIC AVERAGE NUMBER OF UNITS OUTSTANDING 16,574,582 16,574,582 16,189,029 16,189,029
============ ============ ============ ============
DILUTED NET INCOME PER LIMITED PARTNER UNIT $ (0.20) $ (0.14) $ 2.85 $ 2.95
============ ============ ============ ============
DILUTED AVERAGE NUMBER OF UNITS OUTSTANDING 16,574,582 16,574,582 16,227,061 16,227,061
============ ============ ============ ============
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Heritage applies Financial Accounting Standards Board ("FASB") 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.
11
Heritage had certain call options that settled during the nine months ended May
31, 2003 that were designated as cash flow hedging instruments in accordance
with SFAS 133. The call options gave Heritage the right, but not the obligation,
to buy a specified number of gallons of propane at a specified price at any time
until a specified expiration date. Heritage entered into these options to hedge
pricing on the forecasted propane volumes to be purchased during each of the
one-month periods ending February 2003 and March 2003. Heritage utilizes hedging
transactions to provide price protection against significant fluctuations in
propane prices. Heritage reclassified into earnings through cost of products
sold, gains of $125 and $552 for the three and nine months ended May 31, 2003,
and losses of $1,158 and $7,016 for the three and nine months ended May 31, 2002
that were previously reported in accumulated other comprehensive income (loss).
There were no such financial instruments outstanding as of May 31, 2003.
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. During the nine months ended May 31, 2003, Heritage determined there
was a non-temporary decline in the market value of its available-for-sale
securities, and reclassified into earnings a loss of $2,376, which is net of
minority interest and is recorded in other expense. Unrealized holding losses of
$253 and $262 for the three and nine months ended May 31, 2003, and $87 and $702
for the three and nine months ended May 31, 2002, respectively, were recorded
through accumulated other comprehensive loss based on the market value of the
securities.
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 position 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. 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 position 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. 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 position 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
12
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 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.
The adoption of EITF 02-3 requires that realized and unrealized gains and losses
be shown net for all periods presented. The following table summarizes the
amounts that have been reclassified in the statement of operations:
For the Three Months For the Nine Months Ended
Ended May 31, May 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Revenue - liquids marketing $ 22,961 $ 40,113 $ 163,278 $ 138,259
Costs and expenses - liquids
marketing (22,705) (38,629) (161,963) (138,407)
--------- --------- --------- ---------
Net, as reclassified $ 256 $ 1,484 $ 1,315 $ (148)
========= ========= ========= =========
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 is not expected to have a significant impact on Heritage's financial
position or results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
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. Management does not believe that the adoption will 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. Management does not believe that the adoption
will have a material impact on the Partnership's consolidated financial position
or results of operations.
13
PROFORMA RESULTS
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. The results of
operations of V-1 from January 2, 2003 to May 31, 2003 are included in the
consolidated statement of operations of Heritage for the three and nine months
ended May 31, 2003.
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition of V-1 had been made at the beginning of the
periods presented:
Three Months Ended Nine Months Ended
May 31, May 31,
----------- --------------------------
2002 2003 2002
----------- ----------- -----------
Total revenues $ 110,780 $ 500,221 $ 422,195
Limited partners' interest in net income (loss) $ (4,574) $ 49,505 $ 22,378
Basic net income(loss) per limited partner unit $ (0.28) $ 3.06 $ 1.38
Diluted net income per limited partner unit $ (0.28) $ 3.06 $ 1.37
The pro forma consolidated results of operations include adjustments to give
effect to depreciation on the step-up of property, plant and equipment,
amortization of customer lists, interest expense on acquisition debt, and
certain other adjustments. 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.
3. WORKING CAPITAL FACILITY AND LONG-TERM DEBT:
During the quarter ended May 31, 2003, Heritage used approximately $35.9 million
of the $44.8 million net proceeds from the sale of the Partnership's Common
Units to repay a portion of the indebtedness outstanding under various tranches
of its Senior Secured Notes. Long-term debt consists of the following:
May 31, August 31,
2003 2002
--------- ---------
1996 8.55% Senior Secured Notes $ 108,000 $ 108,000
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 2,143 2,857
6.59% Series D Senior Secured Notes - 4,444
6.67% Series E Senior Secured Notes - 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 19,000 26,500
7.89% Series H Senior Secured Notes 8,000 27,500
7.99% Series I Senior Secured Notes 16,000 16,000
14
Senior Revolving Acquisition Facility 24,100 14,000
Notes Payable on noncompete agreements with interest imputed at rates
averaging 7%, due in installments through 2012, collateralized by a first
security lien on certain assets of Heritage 21,035 22,314
Other 1,125 1,564
Current maturities of long-term debt (25,453) (20,158)
--------- ---------
Total $ 385,950 $ 420,021
========= =========
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 is available
through June 30, 2004. 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 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. As
of May 31, 2003, the Senior Revolving Working Capital Facility had no
outstanding balance.
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. 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 3.04% for the amount outstanding at May 31, 2003. 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. As of
May 31, 2003, the Senior Revolving Acquisition Facility had a balance
outstanding of $24,100.
4. REPORTABLE SEGMENTS:
The Partnership'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 retail and
wholesale fuel segments are strategic business units that sell products and
services to retail and wholesale customers. Intersegment sales by the foreign
wholesale segment to the domestic segment are priced in accordance with the
partnership agreement of MP Energy Partnership. 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 $3,764 and $3,539 for the three months ended May 31, 2003 and 2002,
respectively, or $10,941 and $9,648 for the nine months ended May 31, 2003 and
2002, respectively. 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 5), and is part of the
domestic retail fuel segment. The following table presents the unaudited
financial information by segment for the following periods:
15
For the Three Months Ended For the Nine Months Ended
May 31, May 31,
-------------------------- -------------------------
2003 2002 2003 2002
------- ------- ------- -------
Gallons:
Domestic retail fuel 77,997 74,947 321,340 284,195
Domestic wholesale fuel 2,337 3,526 12,694 14,001
Foreign wholesale fuel
Affiliated 45,449 18,414 83,280 57,229
Unaffiliated 10,518 14,470 53,071 57,462
Elimination (45,449) (18,414) (83,280) (57,229)
------- -------- ------- -------
Total 90,852 92,943 387,105 355,658
======= ======== ======= =======
For the Three Months ended For the Nine Months ended
May 31, May 31,
-------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues:
Domestic retail fuel $ 103,340 $ 82,312 $ 400,093 $ 317,941
Domestic wholesale fuel 2,029 1,967 8,784 8,303
Foreign wholesale fuel
Affiliated 14,420 8,612 52,252 29,128
Unaffiliated 7,670 6,898 32,481 27,689
Elimination (14,420) (8,612) (52,252) (29,128)
Liquids marketing 256 1,484 1,315 (148)
Other 12,444 11,348 46,334 42,184
--------- --------- --------- ---------
Total $ 125,739 $ 104,009 $ 489,007 $ 395,969
========= ========= ========= =========
Operating Income (Loss):
Domestic retail $ 9,907 $ 7,259 $ 89,620 $ 58,817
Domestic wholesale fuel (659) (1,182) (2,028) (2,881)
Foreign wholesale fuel
Affiliated 208 147 692 419
Unaffiliated 582 524 2,209 1,576
Elimination (208) (147) (692) (419)
Liquids marketing 89 1,372 604 (422)
--------- --------- --------- ---------
Total $ 9,919 $ 7,973 $ 90,405 $ 57,090
========= ========= ========= =========
Gain on Disposal of Assets:
Domestic retail fuel $ 522 $ 224 $ 686 $ 716
Domestic wholesale fuel (5) 3 (14) 226
--------- --------- --------- ---------
Total $ 517 $ 227 $ 672 $ 942
========= ========= ========= =========
Minority Interest Expense:
Corporate $ (21) $ (44) $ 502 $ 378
Foreign wholesale 111 99 536 307
--------- --------- --------- ---------
Total $ 90 $ 55 $ 1,038 $ 685
========= ========= ========= =========
16
For the Three Months ended For the Nine Months ended
May 31, May 31,
-------------------------- -------------------------
Depreciation and amortization:
Domestic retail $ 9,450 $ 9,757 $27,900 $28,283
Domestic wholesale 123 148 375 277
Foreign wholesale 6 5 16 14
------- ------- ------- -------
Total $ 9,579 $ 9,910 $28,291 $28,574
======= ======= ======= =======
As of As of
May 31, August 31,
2003 2002
-------- --------
Total Assets:
Domestic retail $694,083 $667,978
Domestic wholesale 6,677 14,372
Foreign wholesale 7,440 10,564
Liquids marketing 3,255 6,919
Corporate and other 18,951 17,431
-------- --------
Total $730,406 $717,264
======== ========
As of As of
May 31, August 31,
2003 2002
------- -------
Additions to property, plant and
equipment including acquisitions:
Domestic retail fuel $52,497 $39,904
Domestic wholesale 166 -
Foreign wholesale - 46
Corporate 969 1,441
------- -------
Total $53,632 $41,391
======= =======
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.
5. SIGNIFICANT INVESTEE:
Heritage holds a 50% interest in Bi-State Propane. Heritage accounts for this
50% interest in Bi-State Propane under the equity method. Heritage's investment
in Bi-State Propane totaled $8,798 and $7,485 at May 31, 2003 and August 31,
2002 respectively. Heritage received distributions of $303 and $125 from
Bi-State Propane as of May 31, 2003 and August 31, 2002, 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.
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, management considers the
likelihood of Heritage incurring a liability resulting from the guarantee to be
remote. Heritage has not recorded a liability on the balance sheets as of May
31, 2003 or August 31, 2002 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:
17
May 31, August 31,
2003 2002
------- -------
Current assets $ 4,920 $ 3,321
Noncurrent assets 22,703 23,105
------- -------
Total $27,623 $26,426
======= =======
Current liabilities $ 2,778 $ 3,344
Long-term debt 8,600 9,450
Partners' capital:
Heritage 8,798 7,485
Other partner 7,447 6,147
------- -------
Total $27,623 $26,426
======= =======
Bi-State Propane's results of operations for the three months and nine months
ended May 31, 2003 and 2002, respectively are summarized below:
For the Three Months Ended For the Nine Months Ended
May 31, May 31,
-------------------------- -------------------------
2003 2002 2003 2002
------- ------- ------- -------
Revenues $ 6,441 $ 4,910 $19,542 $14,267
Gross profit 2,906 2,606 9,172 7,390
Net income:
Heritage 478 407 1,617 1,548
Other Partner 475 423 1,603 1,598
6. PARTNER'S CAPITAL:
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERTIONS
Heritage Propane Partners, L.P. (the "Registrant" or "Partnership"), is a
Delaware limited partnership. The Partnership's common units are listed on the
New York Stock Exchange. The Partnership's business activities are primarily
conducted through its subsidiary, Heritage Operating, L.P. (the "Operating
Partnership"), a Delaware limited partnership. The Partnership is the sole
limited partner of the Operating Partnership, with a 98.9899% limited partner
interest. The Partnership and the Operating Partnership are sometimes referred
to collectively in this report as "Heritage."
The following is a discussion of the historical financial condition and results
of operations of the Partnership and its subsidiaries, and should be read in
conjunction with the Partnership's historical consolidated financial statements
and accompanying notes thereto included elsewhere in this Quarterly Report on
Form 10-Q.
18
FORWARD-LOOKING STATEMENTS
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;
19
- HERITAGE'S ABILITY TO GENERATE AVAILABLE CASH FOR
DISTRIBUTIONS TO UNITHOLDERS;
- 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 cost. 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 attempted to reduce price risk by purchasing propane on a short-term basis.
Heritage has 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 to power vehicles and forklifts and as a heating source in
manufacturing and mining processes.
Since its formation in 1989, Heritage has grown primarily through acquisitions
of retail propane operations and, to a lesser extent, through internal growth.
Since its inception through August 31, 2002, Heritage completed 91 acquisitions
for an aggregate purchase price approximating $633 million. During the nine
months ended May 31, 2003, Heritage completed five acquisitions for an aggregate
purchase price of $40.5 million, which includes $23.3 million in cash, $15.0
million in Common Units issued, and $2.2 million in notes payable on non-compete
agreements and liabilities assumed. Heritage serves more than 650,000 customers
from nearly 300 customer service locations in 29 states.
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
lower net income or net losses 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
20
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 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.
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.
Amounts discussed below reflect 100% of the results of MP Energy Partnership. 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.
As stated above, during the fourth quarter of 2003, Heritage adopted the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123 Accounting for Stock-based Compensation (SFAS 123) effective as of September
1, 2002. Accordingly, the following information compares the originally reported
consolidated statement of operations, reclassified for the adoption of EITF 02-3
for the three and nine months ended May 31, 2003 and as adjusted for the
adoption of SFAS 123:
Three Months Nine Months
Ended May 31, 2003 Ended May 31, 2003
------------------------------- -----------------------------
As adjusted for As adjusted for
As originally the adoption of As originally the adoption of
reported SFAS 123 reported SFAS 123
REVENUES:
Retail fuel $ 103,340 $ 103,340 $ 400,093 $ 400,093
Wholesale fuel 9,699 9,699 41,265 41,265
Liquids marketing, net 256 256 1,315 1,315
Other 12,444 12,444 46,334 46,334
------------ ------------ ------------ ------------
Total revenues 125,739 125,739 489,007 489,007
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of products sold 66,781 66,781 252,221 252,221
Operating expenses 39,535 39,460 118,230 118,090
Depreciation and amortization 9,579 9,579 28,291 28,291
Selling, general and administrative 4,603 3,764 12,451 10,941
------------ ------------ ------------ ------------
Total costs and expenses 120,498 119,584 411,193 409,543
------------ ------------ ------------ ------------
OPERATING INCOME 5,241 6,155 77,814 79,464
OTHER INCOME (EXPENSE):
Interest expense (8,950) (8,950) (27,563) (27,563)
Equity in earnings of affiliates 504 504 1,687 1,687
Gain on disposal of assets 517 517 672 672
Other (103) (103) (2,649) (2,649)
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY
INTERESTS AND INCOME TAXES (2,791) (1,877) 49,961 51,611
Minority interests (80) (90) (1,021) (1,038)
------------ ------------ ------------ ------------
INCOME BEFORE TAXES (2,871) (1,967) 48,940 50,573
Income taxes 199 199 1,483 1,483
------------ ------------ ------------ ------------
NET INCOME (3,070) (2,166) 47,457 49,090
21
GENERAL PARTNER'S INTEREST IN NET INCOME 216 225 1,164 1,181
------------ ------------ ------------ ------------
LIMITED PARTNERS' INTEREST IN NET INCOME $ (3,286) $ (2,391) $ 46,293 $ 47,909
============ ============ ============ ============
BASIC NET INCOME PER LIMITED PARTNER UNIT $ (0.20) $ (0.14) $ 2.86 $ 2.96
============ ============ ============ ============
BASIC AVERAGE NUMBER OF UNITS OUTSTANDING 16,574,582 16,574,582 16,189,029 16,189,029
============ ============ ============ ============
DILUTED NET INCOME PER LIMITED PARTNER UNIT $ (0.20) $ (0.14) $ 2.85 $ 2.95
============ ============ ============ ============
DILUTED AVERAGE NUMBER OF UNITS OUTSTANDING 16,574,582 16,574,582 16,227,061 16,227,061
============ ============ ============ ============
THREE MONTHS ENDED MAY 31, 2003 COMPARED TO THE THREE MONTHS ENDED MAY 31, 2002
Volume. Total retail gallons sold in the three months ended May 31,
2003 were 78.0 million, an increase of 3.0 million over the 75.0 million gallons
sold in the three months ended May 31, 2002. Of the increase in volume,
approximately 6.3 million gallons reflects the benefits of the volume added
through acquisitions offset by an approximate decrease of 3.3 million gallons
due to the weather for the quarter ended May 31, 2003 being 8.6% warmer than the
same period last year. The Partnership also sold approximately 12.8 million
wholesale gallons in this third quarter of fiscal 2003, a decrease of 5.2
million gallons from the 18.0 million wholesale gallons sold in the third
quarter of fiscal year 2002. U.S. wholesale volumes decreased 1.2 million
gallons to 2.3 million gallons, while the foreign volumes of MP Energy
Partnership decreased 4.0 million gallons to 10.5 million gallons for the third
quarter, primarily due to an exchange contract that was in effect during the
three months ended May 31, 2002 which was not economical to renew during the
three months ended May 31, 2003.
Revenues. Total revenues for the three months ended May 31, 2003 were
$125.7 million, an increase of $21.7 million, as compared to $104.0 million in
the three months ended May 31, 2002. The current period's domestic retail
propane revenues increased $21.0 million to $103.3 million as compared to the
prior year's revenues of $82.3 million of which approximately $17.0 million was
due to higher selling prices in the current period, approximately $8.4 million
was due to acquisitions, offset by an approximate $4.4 million decrease as a
result of warmer weather for the quarter ended May 31, 2003. Selling prices in
each of Heritage's reportable segments increased as compared to the same period
last year as a result of higher supply costs. The U.S. wholesale revenues
remained the same at $2.0 million for the three months ended May 31, 2003 as
compared the three months ended May 31, 2002, due to an approximate increase of
$1.1 million due to higher selling prices offset by decreased volumes described
above. Other domestic revenues increased $1.1 million to $12.4 million, as
compared to $11.3 million in the prior year as a result of acquisitions. Foreign
revenues increased $0.8 million for the three months ended May 31, 2003 to $7.7
million as compared to $6.9 million for the three months ended May 31, 2002, of
which, approximately $3.6 million was a result of higher selling prices offset
by an approximate $2.9 million decrease in volume. Net revenues from the liquids
marketing activity conducted through Resources decreased $1.2 million to $0.3
million as compared to the prior year's activity of $1.5 million due to a
decrease in the number and volume of contracts sold because of unfavorable
market liquidity which occurred during the third quarter of fiscal year 2003.
Cost of Products Sold. Total cost of products sold increased to $66.8
million for the three months ended May 31, 2003 as compared to $52.3 million for
the three months ended May 31, 2002. The current period's domestic retail cost
of sales increased $13.5 million to $54.6 million as compared to $41.1 million
in the prior year of which, approximately $2.1 million was due to the net
increased volumes described above and an approximate $11.4 million increase
resulting from higher supply costs of product as compared to the same period
last fiscal year. The U.S. wholesale cost of sales decreased $0.1 million to
$1.8 million for the three months ended May 31, 2003 as compared to $1.9 million
for the period ended May 31, 2002, due to an approximate $0.9 decrease in
volume, offset by higher wholesale fuel costs. Foreign cost of sales increased
$0.7 million to $7.1 million as compared to $6.4 million in the prior year due
to an approximate $3.4 million increase in wholesale fuel costs offset by an
approximate $2.7 million decrease in volume. Other cost of sales increased $0.4
million to $3.3 million as compared to $2.9 million for the three months ended
May 31, 2002 primarily due to acquisitions.
Gross Profit. Total gross profit for the three months ended May 31,
2003 was $58.9 million as compared to $51.7 million for the three months ended
May 31, 2002. For the three months ended May 31, 2003, retail fuel gross profit
was $48.7 million, U.S. wholesale gross profit was $0.2 million, and other gross
profit was $9.1 million.
22
Foreign wholesale gross profit was $0.6 million and liquids marketing gross
profit was $0.3 million. As a comparison, for the three months ended May 31,
2002, Heritage recorded retail fuel gross profit of $41.2 million, U.S.
wholesale of $0.1 million and other gross profit of $8.4 million. Foreign
wholesale gross profit was $0.5 million, and liquids marketing gross profit was
$1.5 million for the three months ended May 31, 2002. The increase in gross fuel
profit is primarily attributable to increased volumes as described above and
higher selling prices, offset by higher product costs.
Operating Expenses. Operating expenses were $39.5 million an increase
of $5.7 million, for the three months ended May 31, 2003 as compared to $33.8
million for the three months ended May 31, 2002. The increase is the result of
various factors, which include an increase of $2.2 million in employee-related
costs due to acquisitions, an increase in the performance-based compensation
plan expense of $1.0 million due to higher operating performance, an increase in
general operating costs of approximately $2.1 million due to acquisitions, and
industry-wide increases in business insurance costs of $0.4 million..
Selling, General, and Administrative. Selling, general, and
administrative expenses were $3.8 million for the three months ended May 31,
2003, a $0.3 million increase from the $3.5 million for the same three month
period last year. This increase is primarily related to an increase in
stock-based compensation expense, offset by a $0.1 million decrease related to
the adoption of SFAS 123.
Depreciation and Amortization. Depreciation and amortization was $9.6
million in the three months ended May 31, 2003 a slight decrease as compared to
$9.9 million in the three months ended May 31, 2002.
Operating Income. For the three months ended May 31, 2003, Heritage had
operating income of $6.1 million as compared to operating income of $4.4 million
for the three months ended May 31, 2002. This increase is a combination of
increased gross profit and a $0.1 million decrease in expenses related to the
adoption of SFAS 123, offset by increased operating expenses described above.
Interest Expense. Interest expense decreased $0.2 million for the three
months ended May 31, 2003 to $9.0 million from $9.2 million for the same
three-month period last year.
Taxes. Taxes for the three months ended May 31, 2003 were $0.2 million
due to the franchise taxes owed. There was no tax expense for the three months
ended May 31, 2002.
Net Loss. For the three-month period ended May 31, 2003, Heritage
recorded a net loss of $2.2 million, an improvement of $2.1 million as compared
to a net loss for the three months ended May 31, 2002 of $4.3 million. The
improvement is primarily due to a $0.1 decrease in operating expenses due to the
adoption of SFAS 123 and the result of the increase in operating income
described above.
EBITDA, as adjusted. EBITDA, as adjusted, increased $1.4 million to
$16.7 million for the three months ended May 31, 2003, as compared to EBITDA, as
adjusted of $15.3 million for the period ended May 31, 2002. This increase is
due to the operating performance described above and is a record level of
EBITDA, as adjusted for the third quarter results of Heritage. EBITDA, as
adjusted for the three months ended May 31, 2003 and May 31, 2002 is computed as
follows:
Three Months
Ended May 31,
NET INCOME RECONCILIATION ---------------------
(in millions) 2003 2002
-------- ---------
Net loss $ (2.2) $ (4.3)
Depreciation and amortization 9.6 9.9
Interest 9.0 9.2
Taxes 0.2 -
Non-cash compensation expense 0.3 0.5
Other expense 0.1 0.1
Depreciation, amortization, and interest of investee 0.2 0.2
Minority interest in the Operating Partnership - (0.1)
Less : Gain on disposal of assets (0.5) (0.2)
-------- -------
EBITDA, as adjusted (a) $ 16.7 $ 15.3
======== =======
23
(a) 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 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" included in the Partnership's
Form 10-K/A for the fiscal year ended August 31, 2002, as filed with
the Securities and Exchange Commission on November 26, 2003.
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.
We have provided a reconciliation of EBITDA, as adjusted to net income
(loss).
NINE MONTHS ENDED MAY 31, 2003 COMPARED TO THE NINE MONTHS ENDED MAY 31, 2002
Volume. Total retail gallons sold in the nine months ended May 31, 2003
were 321.3 million, an increase of 37.1 million over the 284.2 million gallons
sold in the nine months ended May 31, 2002. Of the increase in volume,
approximately 17.1 million gallons reflects the benefits of the volume added
through acquisitions and approximately 20 million gallons is due to more
favorable weather conditions in some of Heritage's areas of operations, offset
by warmer than normal weather conditions in other areas of operations. Heritage
also sold
24
approximately 65.8 million wholesale gallons in the nine months ended May 31,
2003, a decrease of 5.7 million gallons from the 71.5 million wholesale gallons
sold in the nine months ended May 31, 2002. U.S. wholesale gallons decreased 1.3
million gallons to 12.7 million gallons and the foreign volumes of MP Energy
Partnership decreased 4.4 million gallons to 53.1 million for the nine months
ended May 31, 2003, primarily due to an exchange contract that was in effect
during the nine months ended May 31, 2002 which was not economical to renew
during the nine months ended May 31, 2003.
Revenues. Total revenues for the nine months ended May 31, 2003 were
$489.0 million, an increase of $93.0 million, as compared to $396.0 million in
the nine months ended May 31, 2002. The current period's domestic retail propane
revenues increased $82.2 million to $400.1 million as compared to the prior
year's revenues of $317.9 million of which approximately $46.3 million was due
to increased retail volumes described above and approximately $35.9 million was
due to higher selling prices in the current period. Selling prices in each of
Heritage's reportable segments increased as compared to the same period last
year as a result of higher supply costs. The U.S. wholesale revenues increased
to $8.8 million, as compared to $8.3 million for the nine-month period ended May
31, 2002, due to higher selling prices. Foreign revenues increased $4.8 million
for the nine months ended May 31, 2003 to $32.5 million as compared to $27.7
million for the nine months ended May 31, 2002, also as a result of higher
selling prices. The net liquids marketing activity conducted through Resources
increased $1.4 million to $1.3 million as compared to the prior year's activity
of $(0.1) million due to more favorable movement in product prices during the
current fiscal period. Other domestic revenues increased $4.1 million to $46.3
million as compared to $42.2 million in the prior year as a result of
acquisitions.
Cost of Products Sold. Total cost of products sold increased to $252.2
million for the nine months ended May 31, 2003 as compared to $209.7 million for
the nine months ended May 31, 2002. The current period's domestic retail cost of
sales increased $36.0 million to $201.1 million as compared to $165.1 million in
the prior year of which approximately $23.3 million was due to increased volumes
and approximately $12.7 million related to higher supply costs of product as
compared to the same period last fiscal year. The U.S. wholesale cost of sales
decreased to $7.8 million as compared to $8.0 million in the prior year. Foreign
cost of sales increased $4.2 million to $30.3 million as compared to $26.1
million in the prior year primarily due to an increase in foreign wholesale fuel
costs. Other cost of sales increased $2.5 million to $13.0 million as compared
to $10.5 million for the nine months ended May 31, 2002 primarily due to
acquisitions.
Gross Profit. Total gross profit for the nine months ended May 31, 2003
increased by $50.5 million to $236.8 million as compared to $186.3 million for
the nine months ended May 31, 2002. For the nine months ended May 31, 2003,
retail fuel gross profit was $199.0 million, U.S. wholesale gross profit was
$0.9 million, and other gross profit was $33.3 million. Foreign wholesale gross
profit was $2.2 million and liquids marketing gross profit was $1.3 million. As
a comparison, for the nine months ended May 31, 2002, Heritage recorded retail
fuel gross profit of $152.8 million, U.S. wholesale of $0.3 million, and other
gross profit of $31.7 million. Foreign wholesale gross profit was $1.6 million
and liquids marketing recorded a loss of $0.1 million for the nine months ended
May 31, 2002. The increase in gross profit is primarily attributable to
increased volumes and higher selling prices, offset by higher fuel costs.
Operating Expenses. Operating expenses were $118.1 million for the nine
months ended May 31, 2003 as compared to $100.6 million for the nine months
ended May 31, 2002. The increase of $17.5 million is the result of various
factors, which include an increase of $6.2 million in employee-related costs due
to acquisitions, an increase of $3.9 million in the performance-based
compensation plan expense due to higher operating performance, a general
increase of approximately $6.2 million in operating expenses in certain areas of
the Partnership's operations due to acquisitions and to accommodate increased
winter demand, and industry-wide increases in business insurance costs of $1.2
million.
Selling, General, and Administrative. Selling, general, and
administrative expenses were $10.9 million for the nine months ended May 31,
2003, a $1.3 million increase from the $9.6 million for the same nine-month
period last year. This increase is primarily related to the performance-based
compensation plan expense in 2003 that was not incurred in 2002, offset by a
$0.5 million decrease due to the adoption of SFAS 123.
Depreciation and Amortization. Depreciation and amortization decreased
slightly to $28.3 million in the nine months ended May 31, 2003 as compared to
$28.6 million in the nine months ended May 31, 2002.
Operating Income. For the nine months ended May 31, 2003, Heritage had
operating income of $79.5 million as compared to operating income of $47.4
million for the nine months ended May 31, 2002. This increase is
25
a combination of a $0.5 million decrease in expenses related to the adoption of
SFAS 123, and increased gross profit offset by increased operating expenses
described above.
Other Expense. For the nine months ended May 31, 2003, Heritage
recorded other expense of $2.6 million as compared to $0.3 million for the nine
months ended May 31, 2002. This increase is primarily due to the
reclassification into earnings of a loss on marketable securities in the nine
months ended May 31, 2003 that was previously recorded as accumulated other
comprehensive income loss on the balance sheet.
Interest Expense. Interest expense decreased $0.3 million for the nine
months ended May 31, 2003 to $27.6 million from $27.9 million for the same
nine-month period last year.
Taxes. Taxes for the nine months ended May 31, 2003 were $1.5 million
due to the tax expense anticipated to be incurred by Heritage's corporate
subsidiaries and other franchise taxes owed. There was no tax expense in these
subsidiaries for the nine months ended May 31, 2002.
Net Income. For the nine-month period ended May 31, 2003, Heritage had
net income of $49.1 million, an increase of $28.1 million, as compared to a net
income for the nine months ended May 31, 2002 of $21.0 million. The increase is
primarily the result of a $0.5 million decrease in expenses due to the adoption
of SFAS 123, and the increase in operating income, partially offset by the
increase in other expenses and taxes described above.
EBITDA, as adjusted. EBITDA, as adjusted increased $31.3 million to
$110.5 million for the nine months ended May 31, 2003, as compared to EBITDA, as
adjusted of $79.2 million for the nine months ended May 31, 2002. This increase
is due to the operating conditions described above and is a record level of
EBITDA, as adjusted for the nine-month results of Heritage. EBITDA, for the nine
months ended May 31, 2003 and May 31, 2002 as adjusted is computed as follows:
Nine Months
Ended May 31,
NET INCOME RECONCILIATION -------------------
(in millions) 2003 2002
-------- -------
Net income $ 49.1 $ 21.0
Depreciation and amortization 28.3 28.6
Interest 27.6 27.9
Taxes 1.5 -
Non-cash compensation expense 0.9 1.4
Other expense 2.6 0.3
Depreciation, amortization, and interest of investee 0.7 0.5
Minority interest in the Operating Partnership 0.5 0.4
Less : Gain on disposal of assets (0.7) (0.9)
-------- -------
EBITDA, as adjusted $ 110.5 $ 79.2
======== =======
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 management's
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 expenditures, mainly for customer tanks, will be
financed by the revolving acquisition bank line of credit; and
c) acquisition capital expenditures will be financed by the revolving
acquisition bank line of credit; other lines of credit, long-term
debt, issuance of additional Common Units or a combination thereof.
Operating Activities. Net cash provided by operating activities during
the nine months ended May 31, 2003, was $90.6 million as compared to $65.5
million for the same nine-month period ended May 31, 2002. The net cash
26
provided by operations for the nine months ended May 31, 2003 consisted of net
income of $49.1 million, non-cash charges of $32.2 million, principally
depreciation and amortization, and the impact of a decrease in working capital
of $9.3 million. Various components of working capital changed significantly
from the prior nine-month period due to factors such as the variance in the
timing of accounts receivable collections and prepayments on inventory, and
working capital used to provide for the operations of acquired companies.
Investing Activities. Heritage completed five acquisitions during the
nine months ended May 31, 2003 spending a net of $23.3 million, after deducting
cash received in such acquisitions. This capital expenditure amount is reflected
in the net cash used in investing activities of $41.4 million along with $21.2
million invested for maintenance needed to sustain operations at current levels
and for customer tanks to support growth of operations. Net cash used in
investing activities also includes proceeds from the sale of idle property of
$3.1 million.
Financing Activities. Net cash used in financing activities during the
nine months ended May 31, 2003 of $46.7 million resulted mainly from a net
decrease in the outstanding balance under the Working Capital Facility of $30.2
million, cash distributions to Unitholders of $31.6 million, and payments on
other long-term debt of $39.8 million. These decreases were offset by the
issuance of Common Units of $44.8 million, a net increase in the outstanding
balance under the Acquisition Facility of $10.1 million used to acquire other
propane businesses, and other financing activities of $0.1 million.
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 for working capital and other general partnership purposes, and an
Acquisition Facility providing for up to $50.0 million of borrowings for
acquisitions and improvements. The weighted average interest rate was 3.04% for
the amounts outstanding at May 31, 2003 on the Acquisition Facility. As of May
31, 2003, the Working Capital Facility had $65.0 million available for
borrowings and the Acquisition Facility had $25.9 million available to fund
future acquisitions.
Heritage uses its cash provided by operating and financing activities to provide
distributions to the Partnership's 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 $23.3
million for the nine months ended May 31, 2003. In addition to the $23.3 million
of cash expended for acquisitions, $15.0 million in Partnership units were
issued, $1.0 million for notes payable on non-compete agreements were issued,
and liabilities of $1.2 million were assumed in connection with certain
acquisitions, for an aggregate purchase price of $40.5 million.
Under the Partnership Agreement, the Partnership will distribute to its partners
within 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 paid quarterly distributions of
$0.6375 per unit (or $2.55 annually) on October 15, 2002 for the fourth quarter
ended August 31, 2002, on January 14, 2003 for the quarter ended November 30,
2002, and on April 14, 2003 for the quarter ended February 28, 2003. On June 23,
2003, the Partnership declared a distribution for the third quarter ended May
31, 2003 of $0.6375 per unit (or $2.55 annually) payable on July 15, 2003 to the
Unitholders of record at the close of business on July 7, 2003. In addition to
these quarterly distributions, the General Partner received quarterly
distributions for its general partner interest in the Partnership, its minority
interest, and incentive distributions to the extent the quarterly distribution
exceeded $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.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Heritage has little cash flow exposure due to rate changes for long-term debt
obligations. The Operating Partnership had $24.1 million of variable rate debt
outstanding as of May 31, 2003 through its Bank Credit Facility described
elsewhere in this report. The balance outstanding in the Bank Credit Facility
generally fluctuates throughout the year. A theoretical change of 1% in the
interest rate on the balance outstanding at May 31, 2003 would result in an
approximate $241 thousand change in annual net income. Heritage primarily enters
debt obligations to support general corporate purposes including capital
expenditures and working capital needs. The Operating Partnership's long-term
debt instruments were 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 market conditions over which
management will have no control. In the past, price changes have generally been
passed along to Heritage's customers to maintain gross margins, mitigating the
commodity price risk. In order to help ensure that adequate supply sources are
available to Heritage during periods of high demand, Heritage will, from time to
time, 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 centers 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 in
the past used derivative commodity instruments such as price swap and option
contracts. 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. 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. Call options give Heritage
the right, but not the obligation, to buy a specified number of gallons of
propane at a specified price at any time until a specified expiration date.
Heritage entered into these financial instruments to hedge pricing on the
projected propane volumes to be purchased during each of the one-month periods
during the projected heating season.
At May 31, 2003, Heritage had no outstanding propane financial contracts.
Heritage continues to monitor propane prices and may enter into propane
financial contracts in the future. Inherent in the portfolio from the liquids
marketing activities 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 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
28
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 adoption of EITF 02-3 requires that realized and unrealized gains and losses
be shown net for all periods presented. The following table summarizes the
amounts that have been reclassified in the statement of operations:
For the Three Months For the Nine Months Ended
Ended May 31, May 31,
2003 2002 2003 2002
----------- ------------ -------------- ------------
Revenue - liquids marketing $ 22,961 $ 40,113 $ 163,278 $ 138,259
Costs and expenses - liquids
marketing (22,705) (38,629) (161,963) (138,407)
----------- ------------ -------------- ------------
Net, as reclassified $ 256 $ 1,484 $ 1,315 $ (148)
=========== ============ ============== ============
The notional amounts and terms of these financial instruments as of May 31, 2003
and 2002 include fixed price payor for 340,000 barrels of propane and 645,000
barrels of propane and butane, respectively, and fixed price receiver of 315,000
barrels of propane and 660,000 barrels of propane and butane, 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 May 31, 2003 and August 31, 2002, was assets of $0.6 and $2.3
million, respectively, and liabilities of $0.6 and $1.8 million 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 $55 thousand change in the market value of the contracts as there
were approximately 1.0 million gallons of net unbalanced positions at May 31,
2003.
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 an active role 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 May 31,
2003 and August 31, 2002 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.
29
May 31, August 31,
Source of Fair Value 2003 2002
-------------------- ---------- ----------
Prices actively quoted $ 425 $ 1,276
Prices based on other valuation methods 145 1,025
---------- ----------
Assets from liquids marketing $ 570 $ 2,301
========== ==========
Prices actively quoted $ 437 $ 669
Prices based on other valuation methods 115 1,149
---------- ----------
Liabilities from liquids marketing $ 552 $ 1,818
========== ==========
Unrealized gains (losses) in fair value of contracts
outstanding as of August 31 $ 18 $ 483
========== ==========
The following table summarizes the changes in the unrealized fair value of
Heritage's contracts where settlement had not yet occurred for the three and
nine months ended May 31, 2003 and 2002.
Three Months Ended Nine Months Ended
May 31, May 31,
2003 2002 2003 2002
---------- --------- ---------- ----------
Unrealized gains (losses) in fair value of contracts
outstanding at the beginning of the period $ 12 $ (516) $ 483 $ (665)
Other unrealized gains recognized during the period 256 1,484 832 517
Less: Realized gains (losses) recognized during the
period 250 875 1,297 (241)
---------- ---------- ---------- ----------
Unrealized gains in fair value of contracts outstanding
at the end of the period $ 18 $ 93 $ 18 $ 93
========== ========= ========== ==========
The following table summarizes the gross transaction volumes in barrels for
liquids marketing contracts that were physically settled for the three and six
months ended May 31, 2003, and 2002.
(in thousands) Three Months Nine Months
------------ -----------
May 31, 2003 9 73
May 31, 2002 35 280
ITEM 4. 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 Securities and Exchange Commission. 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 (as such terms are defined in
Rule 13a - 14(c) and 15d - 14(c) of the Exchange Act). 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 May 31, 2003. There have been no significant changes in the Partnership's
internal controls or in other factors subsequent to such evaluation, and there
have been no corrective actions with respect to significant deficiencies and
material weaknesses in our internal controls.
30
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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
31
Exhibit
Number Description
------- -----------
(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)
(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
(21) 10.7.2 Amendment 1 of Employment Agreement for James E. Bertelsmeyer dated August 10, 2002
32
Exhibit
Number Description
------- -----------
(**) 10.7.3 Amendment 2 of Employment Agreement for James E. Bertelsmeyer dated April 1, 2003
(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) 10.10 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
(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
33
Exhibit
Number Description
------- -----------
(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
(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.
34
Exhibit
Number Description
------- -----------
(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
(22) 10.28 Assignment for Contribution of Assets in Exchange for Partnership Interest dated December 9, 2002 among V-1
Oil Co., the shareholders of V-1 Oil Co., Heritage Propane Partners, L.P. and Heritage Operating, L.P.
(23) 10.29 Employment Agreement for Michael L. Greenwood dated as of July 1, 2002
(21) 21.1 List of Subsidiaries
(*) 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.
------------------
(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.
35
(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.
(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.
(21) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2002.
(22) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated January 6, 2003.
(23) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended November 30, 2002.
(*) Filed herewith.
(**) Filed with the July 15, 2003 Original Filing.
(b) Reports on Form 8-K
The Partnership filed or furnished five reports on Form 8-K during the
three months ended May 31, 2003:
Form 8-K/A dated March 18, 2003 was filed amending the form 8-K filed with
the Securities and Exchange Commission on January 6, 2003 to provide the
financial statements and pro forma financial information required by Item 7
for the acquisition of the propane distribution assets of V-1 Oil Co. of
Idaho Falls, Idaho. Attached as exhibits to the Form 8-K were the consent
of Grant Thornton LLP, and the required financial statements and pro forma
financial information.
36
Form 8-K dated April 14, 2003 was furnished to the Securities and Exchange
Commission in connection with a press release dated April 14, 2003
announcing Heritage's financial results for the second quarter and six
months ended February 28, 2003.
Form 8-K dated May 12, 2003 was filed announcing Heritage's intention to
commence an underwritten offering of its Common Units pursuant to an
existing effective shelf registration statement.
Form 8-K dated May 13, 2003 was filed in connection with the public
offering of up to 1,610,000 Common Units representing limited partner
interests in the Partnership, under the Partnership's shelf registration
statement on Form S-3. Attached as exhibits to the Form 8-K was a copy of
the underwriting agreement with A.G. Edwards & Sons, Inc. and Lehman
Brothers Inc., the consent and opinions of Baker Botts L.L.P. as to the
legality of the securities registered and as to certain tax matters, and
the press release dated May 14, 2003 announcing the offering.
Form 8-K dated May 20, 2003 was filed in connection with a press release
dated May 20, 2003 announcing the completion of a public offering of
1,610,000 Common Units, representing limited partner interests in the
Partnership.
37
SIGNATURE
Pursuant to the requirements 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.
HERITAGE PROPANE PARTNERS, L.P.
By: U.S. Propane, L.P.., General Partner
By: U.S. Propane, L.L.C., General Partner
Date: November 26, 2003 By: /s/ Michael L. Greenwood
------------------------------------
Michael L. Greenwood
(Vice President, Chief Financial
Officer and officer duly
authorized to sign on behalf of
the registrant)
38
INDEX TO EXHIBITS
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
Exhibit
Number Description
------- -----------
(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)
(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
(21) 10.7.2 Amendment 1 of Employment Agreement for James E. Bertelsmeyer dated August 10, 2002
Exhibit
Number Description
------- -----------
(**) 10.7.3 Amendment 2 of Employment Agreement for James E. Bertelsmeyer dated April 1, 2003
(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) 10.10 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
(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
Exhibit
Number Description
------- -----------
(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
(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.
Exhibit
Number Description
------- -----------
(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
(22) 10.28 Assignment for Contribution of Assets in Exchange for Partnership Interest dated December 9, 2002 among V-1
Oil Co., the shareholders of V-1 Oil Co., Heritage Propane Partners, L.P. and Heritage Operating, L.P.
(23) 10.29 Employment Agreement for Michael L. Greenwood dated as of July 1, 2002
(21) 21.1 List of Subsidiaries
(*) 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.
------------------
(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.
(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.
(21) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2002.
(22) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated January 6, 2003.
(23) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended November 30, 2002.
(*) Filed herewith.
(**) Filed with the July 15, 2003 Original Filing.