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 FEBRUARY 28, 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 April 11, 2003, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 16,367,803 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 February 28, 2003, originally filed on April 14, 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 February 29,
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 February 28, 2003 and
2002 and for the six months ended February 28, 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 February 28, 2003 and the related Consolidated
Statements of Operations, Other Comprehensive Income (Loss),
Partners' Capital, and Cash Flows for the three and six months
ended February 28, 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 19-26: 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 28-30: 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 -
February 28, 2003 and August 31, 2002............................. 1
Consolidated Statements of Operations -
Three months and six months ended February 28, 2003 and 2002 ..... 2
Consolidated Statements of Comprehensive Income -
Three months and six months ended February 28, 2003 and 2002...... 3
Consolidated Statement of Partners' Capital
Six months ended February 28, 2003................................ 4
Consolidated Statements of Cash Flows
Six months ended February 28, 2003 and 2002....................... 5
Notes to Consolidated Financial Statements........................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................... 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK....................................................... 27
ITEM 4. CONTROLS AND PROCEDURES.............................................. 29
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................ 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................... 30
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)
February 28, August 31,
2003 2002
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,734 $ 4,596
Marketable securities 2,550 2,559
Accounts receivable, net of allowance for doubtful accounts 93,506 30,898
Inventories 29,047 48,187
Assets from liquids marketing 596 2,301
Prepaid expenses and other 5,030 6,846
------------ ------------
Total current assets 139,463 95,387
PROPERTY, PLANT AND EQUIPMENT, net 430,913 400,044
INVESTMENT IN AFFILIATES 9,041 7,858
GOODWILL, net of amortization prior to adoption of SFAS No. 142 156,682 155,735
INTANGIBLES AND OTHER ASSETS, net 55,233 58,240
------------ ------------
Total assets $ 791,332 $ 717,264
============ ============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Working capital facility $ 19,300 $ 30,200
Accounts payable 62,777 40,929
Accounts payable to related companies 6,162 5,002
Accrued and other current liabilities 20,354 23,962
Liabilities from liquids marketing 584 1,818
Current maturities of long-term debt 22,485 20,158
------------ ------------
Total current liabilities 131,662 122,069
LONG-TERM DEBT, less current maturities 434,769 420,021
MINORITY INTERESTS 4,176 3,564
------------ ------------
Total liabilities 570,607 545,654
------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Common Unitholders (16,367,803 and 15,815,847 units issued and
outstanding at February 28, 2003 and August 31, 2002,
respectively) 219,431 173,677
Class C Unitholders (1,000,000 units issued and outstanding at
February 28, 2003 and August 31, 2002) - -
General Partner 2,049 1,585
Accumulated other comprehensive loss (755) (3,652)
------------ ------------
Total partners' capital 220,725 171,610
------------ ------------
Total liabilities and partners' capital $ 791,332 $ 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 Six Months
Ended February 28, Ended February 28,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES:
Retail fuel $ 212,704 $ 152,429 $ 296,754 $ 235,629
Wholesale fuel 20,218 14,534 31,565 27,127
Liquids marketing, net 352 1,693 1,059 (1,632)
Other 16,535 15,346 33,891 30,836
------------ ------------ ------------ ------------
Total revenues 249,809 184,002 363,269 291,960
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of products sold 128,420 97,143 185,440 157,378
Operating expenses 45,237 34,957 78,630 66,801
Depreciation and amortization 9,447 9,606 18,713 18,664
Selling, general and administrative 4,320 3,158 7,177 6,109
------------ ------------ ------------ ------------
Total costs and expenses 187,424 144,864 289,960 248,952
------------ ------------ ------------ ------------
OPERATING INCOME 62,385 39,138 73,309 43,008
OTHER INCOME (EXPENSE):
Interest expense (9,317) (9,503) (18,613) (18,719)
Equity in earnings of affiliates 970 1,040 1,183 1,169
Gain on disposal of assets 88 248 155 715
Other (2,268) (94) (2,546) (192)
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY
INTERESTS AND INCOME TAXES 51,858 30,829 53,488 25,981
Minority interests (821) (699) (947) (630)
------------ ------------ ------------ ------------
INCOME BEFORE TAXES 51,037 30,130 52,541 25,351
Income taxes 1,285 - 1,285 -
------------ ------------ ------------ ------------
NET INCOME 49,752 30,130 51,256 25,351
GENERAL PARTNER'S INTEREST IN NET
INCOME 723 518 956 686
------------ ------------ ------------ ------------
LIMITED PARTNERS' INTEREST IN NET INCOME $ 49,029 $ 29,612 $ 50,300 $ 24,665
============ ============ ============ ============
BASIC NET INCOME PER LIMITED PARTNER UNIT $ 3.03 $ 1.89 $ 3.15 $ 1.57
============ ============ ============ ============
BASIC AVERAGE NUMBER OF UNITS OUTSTANDING 16,165,602 15,689,376 15,990,010 15,666,854
============ ============ ============ ============
DILUTED NET INCOME PER LIMITED PARTNER UNIT $ 3.03 $ 1.88 $ 3.14 $ 1.57
============ ============ ============ ============
DILUTED AVERAGE NUMBER OF UNITS OUTSTANDING 16,207,002 15,731,276 16,026,860 15,707,411
============ ============ ============ ============
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
(in thousands, unaudited)
Three Months Ended Six Months Ended
February 28, February 28,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 49,752 $ 30,130 $ 51,256 $ 25,351
Other comprehensive income
Reclassification adjustment for losses or
(gains) on derivative instruments included
in net income (427) 203 (427) (2,551)
Reclassification adjustment for losses on
available-for-sale securities included in
net income 2,376 - 2,376 -
Change in value of derivative instruments 957 - 957
Change in value of available-for-sale
securities (9) (991) (9) (615)
-------- -------- -------- --------
Comprehensive income $ 52,649 $ 29,342 $ 54,153 $ 22,185
======== ======== ======== ========
RECONCILIATION OF ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of period $ (3,652) $ (7,329) $ (3,652) $ (6,541)
Current period reclassification to
earnings 1,949 4,267 1,949 5,857
Current period change 948 (788) 948 (3,166)
-------- -------- -------- --------
Balance, end of period $ (755) $ (3,850) $ (755) $ (3,850)
======== ======== ======== ========
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 - - (20,166) - (644) - (20,810)
Conversion of phantom units 500 - - - - - -
Issuance of Common Units in connection
with certain acquisitions 551,456 - 15,000 - 152 - 15,152
Other - - 620 - - - 620
Net change in accumulated other
comprehensive income per
accompanying statements
- - - - - 2,897 2,897
Net income - - 50,300 - 956 - 51,256
---------- --------- ---------- ------- ------- --------------- ------------
BALANCE, FEBRUARY 28, 2003 16,367,803 1,000,000 $ 219,431 $ - $ 2,049 $ (755) $ 220,725
========== ========= ========== ======= ======= =============== ============
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)
Six Months Ended
February 28,
----------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 51,256 $ 25,351
Reconciliation of net income to net cash provided by
operating activities-
Depreciation and amortization 18,713 18,664
Provision for loss on accounts receivable 1,511 523
Loss on write down of marketable securities 2,400 -
Gain on disposal of assets (155) (715)
Deferred compensation on restricted units and long-term
incentive plan 620 974
Undistributed earnings of affiliates (1,183) (1,169)
Minority interests 582 166
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (60,298) (31,506)
Inventories 21,045 14,134
Assets from liquids marketing 1,705 6,254
Prepaid and other expenses 1,863 8,808
Intangibles and other assets (41) (465)
Accounts payable 21,704 1,093
Accounts payable to related companies 1,160 (2,346)
Accrued and other current liabilities (4,654) (9,519)
Liabilities from liquids marketing (1,234) (6,404)
--------- ---------
Net cash provided by operating activities 54,994 23,843
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (21,170) (14,472)
Capital expenditures (16,510) (16,371)
Proceeds from the sale of assets 2,078 1,362
Deposit on the subsequent sale of assets - 9,730
Other - 245
--------- ---------
Net cash used in investing activities (35,602) (19,506)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 107,650 103,617
Principal payments on debt (102,247) (84,606)
Unit distributions (20,810) (20,350)
Other 153 (55)
--------- ---------
Net cash used in financing activities (15,254) (1,394)
--------- ---------
INCREASE IN CASH AND CASH
EQUIVALENTS 4,138 2,943
CASH AND CASH EQUIVALENTS, beginning of period 4,596 5,620
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 8,734 $ 8,563
========= =========
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 772 $ 2,120
========= =========
Issuance of Common Units in connection with certain
acquistions $ 15,000 $ -
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 18,302 $ 18,811
========= =========
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 six months ended February 28, 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 six months ended February 28, 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 $9,863 and $4,332 as of February 28, 2003 and August 31, 2002,
respectively. Accounts receivable consisted of the following:
February 28, August 31,
2003 2002
------------ ------------
Accounts receivable $ 97,010 $ 33,402
Less - allowance for doubtful accounts 3,504 2,504
------------ ------------
Total, net $ 93,506 $ 30,898
============ ============
The activity in the allowance for doubtful accounts consisted of the following:
For the Six Months Ended
----------------------------
February 28, February 28,
2003 2002
------------ ------------
Balance, beginning of the period $ 2,504 $ 3,576
Provision for loss on accounts receivable 1,511 523
Accounts receivable written off, net of
recoveries (511) (504)
------------ ------------
Balance, end of period $ 3,504 $ 3,595
============ ============
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:
February 28, August 31,
2003 2002
------------ ------------
Fuel $ 18,621 $ 38,523
Appliances, parts and fittings 10,426 9,664
------------ ------------
Total inventories $ 29,047 $ 48,187
============ ============
INCOME TAXES
Heritage is a limited partnership. As a result, Heritage's earnings or losses
for federal and state income tax purposes are included in the tax returns of the
individual partners. Accordingly, 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
7
financial reporting basis of assets and liabilities and the taxable income
allocation requirements under the Partnership Agreement.
INCOME PER LIMITED PARTNER UNIT
Basic net income per limited partner unit is computed by dividing net income,
after considering the General Partner's interest, by the weighted average number
of Common Units outstanding. Diluted net income per limited partner unit is
computed by dividing net income, 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 and weighted average units
used in computing basic and diluted net income per unit is as follows:
Three Months Ended Six Months Ended
February 28, February 28,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
BASIC NET INCOME PER LIMITED PARTNER UNIT:
Limited Partners' interest in net income $ 49,029 $ 29,612 $ 50,300 $ 24,665
=========== =========== =========== ===========
Weighted average limited partner units 16,165,602 15,689,376 15,990,010 15,666,854
=========== =========== =========== ===========
Basic net income per limited partner unit $ 3.03 $ 1.89 $ 3.15 $ 1.57
=========== =========== =========== ===========
DILUTED NET INCOME PER LIMITED PARTNER UNIT:
Limited partners' interest in net income $ 49,029 $ 29,612 $ 50,300 $ 24,665
=========== =========== =========== ===========
Weighted average limited partner units 16,165,602 15,689,376 15,990,010 15,666,854
Dilutive effect of phantom units 41,400 41,900 36,850 40,557
----------- ----------- ----------- -----------
Weighted average limited partner units, assuming
dilutive effect of phantom units 16,207,002 15,731,276 16,026,860 15,707,411
=========== =========== =========== ===========
Diluted net income per limited partner unit $ 3.03 $ 1.88 $ 3.14 $ 1.57
=========== =========== =========== ===========
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.
On October 15, 2002, a quarterly distribution of $0.6375 per unit, or $2.55 per
unit annually, was paid to Unitholders of record at the close of business on
October 8, 2002. On January 14, 2003, a quarterly distribution of $0.6375 per
unit, or $2.55 per unit annually, was paid to Unitholders of record at the close
of business on December 30, 2002. On March 24, 2003, the Partnership declared a
cash distribution for the second quarter ended February 28, 2003 of $0.6375 per
unit, or $2.55 per unit annually, payable on April 14, 2003 to Unitholders of
record at the close of business on April 4, 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
8
distributions to the extent the quarterly distribution exceeded $0.55 per unit.
The total amount of distributions for the second quarter ended February 28, 2003
on Common Units, the general partner interests and the Incentive Distribution
Rights totaled $10.4 million, $0.2 million and $0.2 million, respectively. The
total amount of distributions for the six months ended February 28, 2003 on
Common Units, the general partner interests and the Incentive Distribution
Rights totaled $20.5 million, $0.4 million and $0.4 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 $162 was recognized for the three and
six months ended February 28, 2003, respectively. For the six months ended
February 28, 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) for the six months ended February 28, 2002. 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 of $98 and $196 was
recognized for the three and six months ended February 28, 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 $229 and $458 was recognized for
the three and six months ended February 28, 2003, respectively. For the six
months ended February 28, 2002, Heritage followed the disclosure only provisions
of SFAS 123, as amended by SFAS 148,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 of $389 and $778 was
recognized for the three and six months ended February 28, 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 six months
ended February 28, 2003 and 5.90% for the three and six months ended February
28, 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 six months ended February 28, 2003, and $2.37 for the three
and six months ended February 28, 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 and the basic and diluted net income 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 Six Months
Ended February 28, Ended February 28,
2003 2002 2003 2002
------------ ------------ ------------ ------------
BASIC NET INCOME PER LIMITED PARTNER UNIT:
Limited Partners' interest in net income $ 49,029 $ 29,612 $ 50,300 $ 24,665
Add: Deferred compensation expense included in
limited partners' interest in net income 303 477 607 955
Deduct: Deferred compensation expense determined
under the fair value based method (303) (293) (607) (585)
------------ ------------ ------------ ------------
Pro forma limited partners' interest in net income $ 49,029 $ 29,796 $ 50,300 $ 25,035
============ ============ ============ ============
Weighted average limited partner units 16,165,602 15,689,376 15,990,010 15,666,854
============ ============ ============ ============
Basic net income per limited partner unit as reported $ 3.03 $ 1.89 $ 3.15 $ 1.57
============ ============ ============ ============
Basic net income per limited partner unit pro forma $ 3.03 $ 1.90 $ 3.15 $ 1.60
============ ============ ============ ============
Weighted average limited partner units, assuming
dilutive effect of phantom units 16,207,002 15,731,276 16,026,860 15,707,411
============ ============ ============ ============
Diluted net income per limited partner unit as reported $ 3.03 $ 1.88 $ 3.14 $ 1.57
============ ============ ============ ============
Diluted net income per limited partner unit pro forma $ 3.03 $ 1.89 $ 3.14 $ 1.59
============ ============ ============ ============
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 six months ended February 28, 2003 and as adjusted for the
adoption of SFAS 123:
10
Three Months Six Months
Ended February 28, 2003 Ended February 28,2003
-------------------------------------- --------------------------------------
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 $ 212,704 $ 212,704 $ 296,754 $ 296,754
Wholesale fuel 20,218 20,218 31,565 31,565
Liquids marketing, net 352 352 1,059 1,059
Other 16,535 16,535 33,891 33,891
----------------- ----------------- ----------------- -----------------
Total revenues 249,809 249,809 363,269 363,269
----------------- ----------------- ----------------- -----------------
COSTS AND EXPENSES:
Cost of products sold 128,420 128,420 185,440 185,440
Operating expenses 45,270 45,237 78,695 78,630
Depreciation and amortization 9,447 9,447 18,713 18,713
Selling, general and administrative 4,656 4,320 7,848 7,177
----------------- ----------------- ----------------- -----------------
Total costs and expenses 187,793 187,424 290,696 289,960
----------------- ----------------- ----------------- -----------------
OPERATING INCOME 62,016 62,385 72,573 73,309
OTHER INCOME (EXPENSE):
Interest expense (9,317) (9,317) (18,613) (18,613)
Equity in earnings of affiliates 970 970 1,183 1,183
Gain on disposal of assets 88 88 155 155
Other (2,268) (2,268) (2,546) (2,546)
----------------- ----------------- ----------------- -----------------
INCOME BEFORE MINORITY
INTERESTS AND INCOME TAXES 51,489 51,858 52,752 53,488
Minority interests (817) (821) (940) (947)
----------------- ----------------- ----------------- -----------------
INCOME BEFORE TAXES 50,672 51,037 51,812 52,541
Income taxes 1,285 1,285 1,285 1,285
----------------- ----------------- ----------------- -----------------
NET INCOME 49,387 49,752 50,527 51,256
GENERAL PARTNER'S INTEREST IN NET
INCOME 719 723 948 956
----------------- ----------------- ----------------- -----------------
LIMITED PARTNERS' INTEREST IN NET INCOME $ 48,668 $ 49,029 $ 49,579 $ 50,300
================= ================= ================= =================
BASIC NET INCOME PER LIMITED PARTNER UNIT $ 3.01 $ 3.03 $ 3.10 $ 3.15
================= ================= ================= =================
BASIC AVERAGE NUMBER OF UNITS OUTSTANDING 16,165,602 16,165,602 15,990,010 15,990,010
================= ================= ================= =================
DILUTED NET INCOME PER LIMITED PARTNER UNIT $ 3.00 $ 3.03 $ 3.09 $ 3.14
================= ================= ================= =================
DILUTED AVERAGE NUMBER OF UNITS OUTSTANDING 16,207,002 16,207,002 16,026,860 16,026,860
================= ================= ================= =================
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 was the holder of certain call options at February 28, 2003 that have
been designated as cash flow hedging instruments in accordance with SFAS 133.
The 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 options to hedge pricing
on the forecasted propane volumes to be purchased during each of the one-month
periods ending February 2003 through March 2003. Heritage utilizes hedging
transactions to provide price protection against significant fluctuations in
propane prices. These call options had a fair value of $572 as of February 28,
2003, which was recorded in accounts receivable on the balance sheet through
other comprehensive income net of minority interest liability. There were no
ineffective hedges or discontinued hedges as of February 28, 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 three months ended February 28, 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, net of minority
interest, which is recorded in other expense. Unrealized holding losses of $9
for the three and six months ended February 28, 2003, and $991 and $615 for the
three and six months ended February 28, 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 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.
12
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 Six Months Ended
Ended February 28, February 28,
2003 2002 2003 2002
--------- --------- --------- -----------
Revenue - liquids marketing $ 79,587 $ 47,326 $ 140,317 $ 98,146
Costs and expenses - liquids
marketing (79,235) (45,633) (139,258) (99,778)
--------- --------- --------- -----------
Net, as reclassified $ 352 $ 1,693 $ 1,059 $ (1,632)
========= ========= ========= ===========
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.
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 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
13
January 2, 2003 to February 28, 2003 are included in the consolidated statement
of operations of Heritage for the three and six months ended February 28, 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 Six months ended
February 28, February 28,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Total revenues $ 253,403 $ 196,474 $ 374,483 $ 311,415
Limited partners' interest in net income $ 49,661 $ 31,141 $ 51,896 $ 26,952
Basic net income per limited partner unit $ 3.07 $ 1.92 $ 3.25 $ 1.66
Diluted net income per limited partner unit $ 3.06 $ 1.91 $ 3.24 $ 1.66
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:
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 weighted average interest
rate was 3.13% for the amount outstanding at February 28, 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 Working Capital
Facility. As of February 28, 2003, the Senior Revolving Working Capital
Facility had a balance outstanding of $19,300.
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 3.13% for the amount outstanding at February 28, 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 February 28, 2003, the Senior Revolving Acquisition
Facility had a balance outstanding of $32,300.
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 $4,320 and $3,158 for the three months ended February 28, 2003 and 2002,
respectively, or $7,177 and $6,109 for the six months ended February 28, 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:
14
For the Three Months ended For the Six Months ended
February 28, February 28,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Gallons:
Domestic retail fuel 166,622 134,458 243,343 209,248
Domestic wholesale fuel 5,467 5,478 10,357 10,475
Foreign wholesale fuel
Affiliated 17,452 23,744 37,832 38,815
Unaffiliated 25,358 24,728 42,553 42,992
Elimination (17,452) (23,744) (37,832) (38,815)
------------ ------------ ------------ ------------
Total 197,447 164,664 296,253 262,715
============ ============ ============ ============
Revenues:
Domestic retail fuel $ 212,704 $ 152,429 $ 296,754 $ 235,629
Domestic wholesale fuel 4,345 3,265 6,755 6,336
Foreign wholesale fuel
Affiliated 27,424 11,576 37,832 20,516
Unaffiliated 15,873 11,269 24,810 20,791
Elimination (27,424) (11,576) (37,832) (20,516)
Liquids marketing, net 352 1,693 1,059 (1,632)
Other 16,535 15,346 33,891 30,836
------------ ------------ ------------ ------------
Total $ 249,809 $ 184,002 $ 363,269 $ 291,960
============ ============ ============ ============
For the Three Months ended For the Six Months ended
February 28, February 28,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Operating Income
Domestic retail $ 66,277 $ 41,036 $ 79,713 $ 51,559
Domestic wholesale fuel (885) (1,064) (1,369) (1,699)
Foreign wholesale fuel
Affiliated 374 272 484 272
Unaffiliated 1,121 713 1,627 1,051
Elimination (374) (272) (484) (272)
Liquids marketing 192 1,611 515 (1,794)
------------ ------------ ------------ ------------
Total $ 66,705 $ 42,296 $ 80,486 $ 49,117
============ ============ ============ ============
Gain on Disposal of Assets:
Domestic retail fuel $ 84 $ 275 $ 164 $ 492
Domestic wholesale fuel 4 (27) (9) 223
------------ ------------ ------------ ------------
Total $ 88 $ 248 $ 155 $ 715
============ ============ ============ ============
Minority Interest Expense:
Corporate $ 508 $ 521 $ 522 $ 422
Foreign wholesale 313 178 425 208
------------ ------------ ------------ ------------
Total $ 821 $ 699 $ 947 $ 630
============ ============ ============ ============
15
Depreciation and amortization:
Domestic retail $ 9,318 $ 9,537 $ 18,451 $ 18,526
Domestic wholesale 124 65 252 129
Foreign wholesale 5 4 10 9
------------ ------------ ------------ ------------
Total $ 9,447 $ 9,606 $ 18,713 $ 18,664
============ ============ ============ ============
As of As of
February 28, August 31,
2003 2002
------------ ------------
Total Assets:
Domestic retail $ 739,075 $ 667,978
Domestic wholesale 8,488 14,372
Foreign wholesale 16,789 10,564
Liquids marketing 10,460 6,919
Corporate 16,520 17,431
------------ ------------
Total $ 791,332 $ 717,264
============ ============
Additions to property, plant and
equipment including
acquisitions:
Domestic retail fuel $ 46,723 $ 39,904
Domestic wholesale 166 -
Foreign wholesale - 46
Corporate 669 1,441
------------ ------------
Total $ 47,558 $ 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 $7,691 and $7,485 at February 28, 2003 and August
31, 2002 respectively. Heritage did not receive any distributions from Bi-State
Propane for the six months ended February 28, 2003 or 2002. 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
February 28, 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:
February 28, August 31,
2003 2002
------------ ------------
Current assets $ 4,676 $ 3,321
Noncurrent assets 23,048 23,105
------------ ------------
$ 27,724 $ 26,426
============ ============
16
Current liabilities $ 3,225 $ 3,344
Long-term debt 8,600 9,450
Partners' capital:
Heritage 8,624 7,485
Other partner 7,275 6,147
------------ ------------
$ 27,724 $ 26,426
============ ============
Bi-State Propane's results of operations for the three months and six months
ended February 28, 2003 and 2002, respectively are summarized below:
For the Three Months Ended For the Six Months Ended
February 28, February 28,
-------------------------- ------------------------
2003 2002 2003 2002
---------- ----------- --------- ----------
Revenues $ 8,460 $ 6,497 $ 13,101 $ 9,357
Gross profit 3,981 3,329 6,266 4,784
Net income:
Heritage 933 1,015 1,139 1,141
Other Partner 913 1,031 1,128 1,174
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
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;
17
- HERITAGE'S SUCCESS IN HEDGING ITS PRODUCT SUPPLY POSITIONS;
- THE EFFECTIVENESS OF RISK-MANAGEMENT POLICIES AND PROCEDURES
AND THE ABILITY OF HERITAGE'S LIQUIDS MARKETING
COUNTER-PARTIES TO SATISFY THEIR FINANCIAL COMMITMENTS;
- THE GENERAL LEVEL OF PETROLEUM PRODUCT DEMAND AND THE
AVAILABILITY AND PRICE OF PROPANE SUPPLIES;
- SUDDEN AND SHARP PROPANE PRICE INCREASES AND MARKET VOLATILITY
MAY ADVERSELY AFFECT HERITAGE'S OPERATING RESULTS;
- THE POLITICAL AND ECONOMIC STABILITY OF PETROLEUM PRODUCING
NATIONS;
- HERITAGE'S ABILITY TO CONDUCT BUSINESS IN FOREIGN COUNTRIES;
- HERITAGE'S ABILITY TO OBTAIN ADEQUATE SUPPLIES OF PROPANE FOR
RETAIL SALE IN THE EVENT OF AN INTERRUPTION IN SUPPLY OR
TRANSPORTATION;
- ENERGY PRICES GENERALLY AND SPECIFICALLY, THE PRICE OF PROPANE
TO THE CONSUMER COMPARED TO THE PRICE OF ALTERNATIVE AND
COMPETING FUELS;
- THE MATURITY OF THE PROPANE INDUSTRY AND COMPETITION FROM
OTHER PROPANE DISTRIBUTORS AND OTHER ENERGY SOURCES;
- ENERGY EFFICIENCIES AND TECHNOLOGICAL TRENDS MAY AFFECT DEMAND
FOR PROPANE;
- THE AVAILABILITY AND COST OF CAPITAL;
- HERITAGE'S ABILITY TO ACCESS CERTAIN CAPITAL SOURCES MAY
REQUIRE IT TO OBTAIN A DEBT RATING;
- CHANGES IN LAWS AND REGULATIONS TO WHICH HERITAGE IS SUBJECT,
INCLUDING TAX, ENVIRONMENTAL, TRANSPORTATION, AND EMPLOYMENT
REGULATIONS;
- OPERATING RISKS INCIDENTAL TO TRANSPORTING, STORING, AND
DISTRIBUTING PROPANE, INCLUDING LITIGATION RISKS WHICH MAY NOT
BE COVERED BY INSURANCE;
- HERITAGE'S ABILITY TO GENERATE AVAILABLE CASH FOR
DISTRIBUTIONS TO UNITHOLDERS;
- 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.
18
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 six
months ended February 28, 2003, Heritage completed three acquisitions for an
aggregate purchase price of $37.4 million, which includes $21.2 million in cash,
$15.0 million in Common Units issued, and $1.2 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
net losses or lower net income during the period from April through September of
each year. Consequently, sales and operating profits are concentrated in the
first and second fiscal quarters, however, cash flow from operations is
generally greatest during the second and third fiscal quarters when customers
pay for propane purchased during the six-month peak-heating season. Sales to
industrial and agricultural customers are much less weather sensitive.
A substantial portion of Heritage's propane is used in the heating-sensitive
residential and commercial markets causing the temperatures realized in
Heritage's areas of operations, particularly during the six-month peak-heating
season, to have a significant effect on its financial performance. In any given
area, sustained warmer-than-normal temperatures will tend to result in reduced
propane use, while sustained colder-than-normal temperatures will tend to result
in greater propane use. Heritage uses information 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.
19
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 six months ended February 28, 2003 and as adjusted for the
adoption of SFAS 123:
Three Months Six Months
Ended February 28, 2003 Ended February 28,2003
------------------------------------ ------------------------------------
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 $ 212,704 $ 212,704 $ 296,754 $ 296,754
Wholesale fuel 20,218 20,218 31,565 31,565
Liquids marketing, net 352 352 1,059 1,059
Other 16,535 16,535 33,891 33,891
---------------- ---------------- ---------------- ----------------
Total revenues 249,809 249,809 363,269 363,269
---------------- ---------------- ---------------- ----------------
COSTS AND EXPENSES:
Cost of products sold 128,420 128,420 185,440 185,440
Operating expenses 45,270 45,237 78,695 78,630
Depreciation and amortization 9,447 9,447 18,713 18,713
Selling, general and administrative 4,656 4,320 7,848 7,177
---------------- ---------------- ---------------- ----------------
Total costs and expenses 187,793 187,424 290,696 289,960
---------------- ---------------- ---------------- ----------------
OPERATING INCOME 62,016 62,385 72,573 73,309
OTHER INCOME (EXPENSE):
Interest expense (9,317) (9,317) (18,613) (18,613)
Equity in earnings of affiliates 970 970 1,183 1,183
Gain on disposal of assets 88 88 155 155
Other (2,268) (2,268) (2,546) (2,546)
---------------- ---------------- ---------------- ----------------
INCOME BEFORE MINORITY
INTERESTS AND INCOME TAXES 51,489 51,858 52,752 53,488
Minority interests (817) (821) (940) (947)
---------------- ---------------- ---------------- ----------------
INCOME BEFORE TAXES 50,672 51,037 51,812 52,541
Income taxes 1,285 1,285 1,285 1,285
---------------- ---------------- ---------------- ----------------
NET INCOME 49,387 49,752 50,527 51,256
GENERAL PARTNER'S INTEREST IN NET
INCOME 719 723 948 956
---------------- ---------------- ---------------- ----------------
LIMITED PARTNERS' INTEREST IN NET INCOME $ 48,668 $ 49,029 $ 49,579 $ 50,300
================ ================ ================ ================
BASIC NET INCOME PER LIMITED PARTNER UNIT $ 3.01 $ 3.03 $ 3.10 $ 3.15
================ ================ ================ ================
BASIC AVERAGE NUMBER OF UNITS OUTSTANDING 16,165,602 16,165,602 15,990,010 15,990,010
================ ================ ================ ================
DILUTED NET INCOME PER LIMITED PARTNER UNIT $ 3.00 $ 3.03 $ 3.09 $ 3.14
================ ================ ================ ================
DILUTED AVERAGE NUMBER OF UNITS OUTSTANDING 16,207,002 16,207,002 16,026,860 16,026,860
================ ================ ================ ================
20
THREE MONTHS ENDED FEBRUARY 28, 2003 COMPARED TO THE THREE MONTHS ENDED FEBRUARY
28, 2002
Volume. Total retail gallons sold in the three months ended February
28, 2003 were 166.6 million, an increase of 32.1 million over the 134.5 million
gallons sold in the three months ended February 28, 2002. Of the increase in
volume, 9.1 million gallons reflects the benefits of the volume added through
acquisitions and 23.0 million gallons reflects the increase 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. The
Partnership also sold approximately 30.9 million wholesale gallons in this
second quarter of fiscal 2003, an increase of 0.7 million gallons from the 30.2
million wholesale gallons sold in the second quarter of fiscal year 2002. U.S.
wholesale volumes remained the same at 5.5 million gallons while the foreign
volumes of MP Energy Partnership increased 0.7 million gallons to 25.4 million
gallons for the second quarter.
Revenues. Total revenues for the three months ended February 28, 2003
were $249.8 million, an increase of $65.8 million, as compared to $184.0 million
in the three months ended February 28, 2002. The current period's domestic
retail propane revenues increased $60.3 million to $212.7 million as compared to
the prior year's revenues of $152.4 million of which $11.6 million was due to
acquisitions, $19.2 million was due to higher selling prices in the current
period, and $29.5 was due to the increased retail volumes described above.
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 $1.0 million to $4.3 million for the three months
ended February 28, 2003 as compared to $3.3 million for the period ended
February 28, 2002, due to higher selling prices. Other domestic revenues
increased $1.2 million to $16.5 million, as compared to $15.3 million in the
prior year as a result of acquisitions. Foreign revenues increased $4.6 million
for the three months ended February 28, 2003 to $15.9 million as compared to
$11.3 million for the three months ended February 28, 2002, of which $4.2
million was a result of higher selling prices and $0.4 million was due to the
increased volumes described above. Net revenues from the liquids marketing
activity conducted through Resources decreased $1.3 million to $0.4 million as
compared to the prior year's activity of $1.7 million due to less favorable
movement in product prices in the current fiscal period.
Cost of Products Sold. Total cost of products sold increased to $128.4
million for the three months ended February 28, 2003 as compared to $97.1
million for the three months ended February 28, 2002. The current period's
domestic retail cost of sales increased $25.2 million to $104.9 million as
compared to $79.7 million in the prior year, of which $20.3 million was due to
increased volumes and $4.9 million was due to higher supply costs of product as
compared to the same period last year. The U.S. wholesale cost of sales
increased $0.7 million to $3.9 million for the three months ended February 28,
2003 as compared to $3.2 million for the period ended February 28, 2002, due to
higher wholesale fuel costs. Foreign cost of sales increased $4.2 million to
$14.8 million as compared to $10.6 million in the prior year, of which $3.8
million was due to an increase in wholesale fuel costs and $0.4 million was due
to higher volumes. Other cost of sales increased $1.2 million to $4.8 million as
compared to $3.6 million for the three months ended February 28, 2002 primarily
due to acquisitions.
Gross Profit. Total gross profit for the three months ended February
28, 2003 was $121.3 million as compared to $86.9 million for the three months
ended February 28, 2002. For the three months ended February 28, 2003, retail
fuel gross profit was $107.8 million, U.S. wholesale was $0.4 million, and other
gross profit was $11.6 million. Foreign wholesale gross profit was $1.1 million
and liquids marketing gross profit was $0.4 million. As a comparison, for the
three months ended February 28, 2002, Heritage recorded retail fuel gross profit
of $72.7 million, U.S. wholesale of $0.1 million and other gross profit of $11.7
million. Foreign wholesale gross profit was $0.7 million, and liquids marketing
gross profit was $1.7 million for the three months ended February 28, 2002. The
increase in gross fuel profit is primarily attributable to increased volumes as
described above and higher selling prices, partially offset by higher product
costs.
Operating Expenses. Operating expenses were $45.2 million an increase
of $10.2 million, for the three months ended February 28, 2003 as compared to
$35.0 million for the three months ended February 28, 2002. The increase is the
result of various factors, which include a $3.6 million increase in
employee-related costs due to acquisitions, a $2.4 million increase in incentive
plan expense due to operating performance, a $4.1 million general increase in
operating expenses in certain areas of the Partnership's operations to
accommodate increased winter demand, a $0.1 million increase due to
industry-wide increases in business insurance costs.
Selling, General and Administrative. Selling, general and
administrative expenses were $4.3 million for the three months ended February
28, 2003, a $1.1 million increase from the $3.2 million for the same three month
21
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
$0.2 million decrease related to the adoption of SFAS 123.
Depreciation and Amortization. Depreciation and amortization was $9.4
million in the three months ended February 28, 2003 a slight decrease as
compared to $9.6 million in the three months ended February 28, 2002.
Operating Income. For the three months ended February 28, 2003,
Heritage had operating income of $62.4 million as compared to operating income
of $39.1 million for the three months ended February 28, 2002. This increase is
a combination of a $0.2 million increase related to the adoption of SFAS 123 and
the increased gross profit offset by increased operating expenses described
above.
Other Expense. For the three months ended February 28, 2003, Heritage
recorded other expense of $2.3 million as compared to $0.1 million for the three
months ended February 28, 2002. This increase is primarily due to the
reclassification into earnings of a loss on marketable securities in the six
months ended February 28, 2003 that was previously recorded as accumulated other
comprehensive loss on the balance sheet.
Interest Expense. Interest expense decreased $0.2 million for the three
months ended February 28, 2003 to $9.3 million from $9.5 million for the same
three-month period last year.
Taxes. Taxes for the three months ended February 28, 2003 were $1.3
million due to the tax expense anticipated to be incurred by Heritage's
corporate subsidiaries. There was no tax expense in these subsidiaries for the
three months ended February 28, 2002.
Net Income. For the three-month period ended February 28, 2003,
Heritage recorded net income of $49.8 million, an increase of $19.7 million as
compared to net income for the three months ended February 28, 2002 of $30.1
million. The increase is primarily the result of a $0.2 increase related 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 $22.8 million to
$73.0 million for the three months ended February 28, 2003, as compared to
EBITDA, as adjusted of $50.2 million for the period ended February 28, 2002.
This increase is due to the operating performance described above and is a
record level EBITDA, as adjusted for the second quarter results of Heritage.
EBITDA, as adjusted for the three months ended February 28, 2003 and February
28, 2002 is computed as follows:
NET INCOME RECONCILIATION Three Months
(in millions) Ended February 28,
----------------------
2003 2002
--------- ---------
Net income $ 49.8 $ 30.1
Depreciation and amortization 9.4 9.6
Interest 9.3 9.5
Taxes 1.3 -
Non-cash compensation expense 0.3 0.5
Other expense 2.3 0.1
Depreciation, amortization, and interest of investee 0.2 0.1
Minority interest in the Operating Partnership 0.5 0.5
Less : Gain on disposal of assets (0.1) (0.2)
--------- ---------
EBITDA, as adjusted (a) $ 73.0 $ 50.2
========= =========
(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.
22
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).
SIX MONTHS ENDED FEBRUARY 28, 2003 COMPARED TO THE SIX MONTHS ENDED FEBRUARY 28,
2002
Volume. Total retail gallons sold in the six months ended February 28,
2003 were 243.3 million, an increase of 34.1 million over the 209.2 million
gallons sold in the six months ended February 28, 2002. Of the $34.1 million
increase, $10.7 million reflects the benefits of the volume added through
acquisitions and $ 23.4 million 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 approximately 53.0
million wholesale gallons in the six months ended February 28, 2003, a decrease
of 0.5 million gallons from the 53.5 million wholesale gallons sold in the six
months ended February 28, 2002. U.S. wholesale gallons decreased 0.1 million
gallons to 10.4 million gallons and the foreign volumes of MP Energy Partnership
decreased 0.4 million gallons to 42.6 million for the six months ended February
28, 2003.
Revenues. Total revenues for the six months ended February 28, 2003
were $363.3 million, an increase of $71.3 million, as compared to $292.0 million
in the six months ended February 28, 2002. The current period's
23
domestic retail propane revenues increased $61.2 million to $296.8 million as
compared to the prior year's revenues of $235.6 million of which $41.6 million
was due to increased retail volumes and $19.6 million was due to higher selling
prices in the current period. The U.S. wholesale revenues increased to $6.7
million, as compared to $6.3 million for the six-month period ended February 28,
2002, due to higher selling prices. Foreign revenues increased $4.0 million for
the six months ended February 28, 2003 to $24.8 million as compared to $20.8
million for the six months ended February 28, 2002, also as a result of higher
selling prices. The net liquids marketing activity conducted through Resources
increased $2.7 million to $1.1 million as compared to the prior year's activity
of $(1.6) million due to more favorable movement in the product prices in the
first quarter of fiscal year 2003, offset by the second quarter decrease. Other
domestic revenues increased $3.1 million to $33.9 million as compared to $30.8
million in the prior year as a result of acquisitions.
Cost of Products Sold. Total cost of products sold increased to $185.4
million for the six months ended February 28, 2003 as compared to $157.4 million
for the six months ended February 28, 2002. The current period's domestic retail
cost of sales increased $22.5 million to $146.5 million as compared to $124.0
million in the prior year of which $20.6 million was due to increased volumes,
and $1.9 million was due to higher product costs compared to the same period
last fiscal year. The U.S. wholesale cost of sales remained the same as last
year at $6.1 million. Foreign cost of sales increased $3.5 million to $23.2
million as compared to $19.7 million in the prior year primarily due to an
increase in foreign wholesale fuel costs. Other cost of sales increased $2.0
million to $9.6 million as compared to $7.6 million for the six months ended
February 28, 2002.
Gross Profit. Total gross profit for the six months ended February 28,
2003 increased by $43.2 million to $177.8 million as compared to $134.6 million
for the six months ended February 28, 2002. For the six months ended February
28, 2003, retail fuel gross profit was $150.3 million, U.S. wholesale was $0.6
million, and other gross profit was $24.2 million. Foreign wholesale gross
profit was $1.6 million and liquids marketing gross profit was $1.1 million. As
a comparison, for the six months ended February 28, 2002, Heritage recorded
retail fuel gross profit of $111.6 million, U.S. wholesale of $0.3 million, and
other gross profit of $23.3 million. Foreign wholesale gross profit was $1.1
million and liquids marketing was a loss of $1.7 million for the six months
ended February 28, 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 $78.6 million for the six
months ended February 28, 2003 as compared to $66.8 million for the six months
ended February 28, 2002. The increase of $11.8 million is the result of various
factors, which include a $4.0 million increase in employee-related costs due to
acquisitions, a $2.8 million increase in incentive plan expense due to operating
performance, a $4.3 million general increase in operating expenses in certain
areas of the Partnership's operations to accommodate increased winter demand and
a $0.7 million increase due to industry-wide increases in business insurance
costs.
Selling, General and Administrative. Selling, general and
administrative expenses were $7.2 million for the six months ended February 28,
2003, a $1.1 million increase from the $6.1 million for the same six 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
decrease of $0.3 related to the adoption of SFAS 123.
Depreciation and Amortization. Depreciation and amortization was $18.7
million in each of the six months ended February 28, 2003 and February 28, 2002.
Operating Income. For the six months ended February 28, 2003, Heritage
had operating income of $73.3 million as compared to operating income of $43.0
million for the six months ended February 28, 2002. This increase is a
combination of a $0.3 increase related to the adoption of SFAS 123 and increased
gross profit offset by increased operating expenses described above.
Other Expense. For the six months ended February 28, 2003, Heritage
recorded other expense of $2.5 million as compared to $0.2 million for the six
months ended February 28, 2002. This increase is primarily due to the
reclassification into earnings of a loss on marketable securities in the six
months ended February 28, 2003 that was previously recorded as accumulated other
comprehensive income loss on the balance sheet.
Interest Expense. Interest expense decreased $0.1 million for the six
months ended February 28, 2003 to $18.6 million from $18.7 million for the same
six-month period last year.
24
Taxes. Taxes for the six months ended February 28, 2003 were $1.3
million due to the tax expense anticipated to be incurred by Heritage's
corporate subsidiaries. There was no tax expense in these subsidiaries for the
six months ended February 28, 2002.
Net Income. For the six month period ended February 28, 2003, Heritage
had net income of $51.3 million, an increase of $25.9 million, as compared to a
net income for the six months ended February 28, 2002 of $25.4 million. The
increase is primarily the result of a $0.3 increase related 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 $29.9 million to
$93.8 million for the six months ended February 28, 2003, as compared to EBITDA,
as adjusted of $63.9 million for the six months ended February 28, 2002. This
increase is due to the operating conditions described above and is a record
level EBITDA, as adjusted for the six-month results of Heritage. EBITDA, as
adjusted for the six months ended February 28, 2003 and February 28, 2002 is
computed as follows:
Six Months
Ended February 28,
(in millions) ----------------------
NET INCOME RECONCILIATION 2003 2002
--------- ---------
Net income $ 51.3 $ 25.4
Depreciation and amortization 18.7 18.7
Interest 18.6 18.7
Taxes 1.3 -
Non-cash compensation expense 0.6 1.0
Other expense 2.5 0.2
Depreciation, amortization, and interest of investee 0.5 0.2
Minority interest in the Operating Partnership 0.5 0.4
Less : Gain on disposal of assets (0.2) (0.7)
--------- ---------
EBITDA, as adjusted $ 93.8 $ 63.9
========= =========
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. Cash provided by operating activities during the
six months ended February 28, 2003, was $55.0 million as compared to cash
provided by operating activities of $23.8 million for the same six-month period
ended February 28, 2002. The net cash provided by operations for the six months
ended February 28, 2003 consisted of net income of $51.3 million and non-cash
charges of $22.4 million, principally depreciation and amortization, offset by
the impact of an increase in working capital of $18.7 million. Although the
increase in working capital for the six months ended February 28, 2003 is
comparable to the increase for the six months ended February 28, 2002, the
changes in components of working capital varied significantly due to an increase
in the demand for fuel resulting from the colder winter temperatures this fiscal
year in various areas of Heritage's operations. The increase in fuel demand
affects working capital as accounts receivable increases, inventory decreases,
accounts payable to purchase product increases, and customer prebought gallons
and prepayments decrease.
25
Investing Activities. Heritage completed three acquisitions during the
six months ended February 28, 2003 spending a net of $21.2 million, after
deducting cash received in such acquisitions. This capital expenditure amount is
reflected in the cash used in investing activities of $35.6 million along with
$16.5 million invested for maintenance needed to sustain operations at current
levels and for customer tanks to support growth of operations. Cash used in
investing activities also includes proceeds from the sale of idle property of
$2.1 million.
Financing Activities. Cash used in financing activities during the six
months ended February 28, 2003 of $15.2 million resulted mainly from a net
decrease in the outstanding balance under the Working Capital Facility of $10.9
million, cash distributions to Unitholders of $20.8 million, and payments on
other long-term debt of $1.9 million. These decreases were offset by a net
increase in the outstanding balance under the Acquisition Facility of $18.3
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 3.13% for
the amounts outstanding at February 28, 2003 on both the Working Capital
Facility and the Acquisition Facility. As of February 28, 2003, the Working
Capital Facility had $45.7 million available for borrowings and the Acquisition
Facility had $17.7 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 $21.2
million for the six months ended February 28, 2003. In addition to the $21.2
million of cash expended for acquisitions, $15 million in Partnership units were
issued, $0.8 million for notes payable on non-compete agreements were issued,
and liabilities of $0.4 million were assumed in connection with certain
acquisitions.
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, and on January 14, 2003 for the quarter ended November
30, 2002. On March 24, 2003, the Partnership declared a distribution for the
second quarter ended February 28, 2003 of $0.6375 per unit (or $2.55 annually)
payable on April 14, 2003 to the unitholders of record at the close of business
on April 4, 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.
26
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 $51.6 million of variable rate debt
outstanding as of February 28, 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 February 28, 2003 would result in an
approximate $516 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
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 the 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 enters
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 February 28, 2003, Heritage had outstanding propane hedges (call options) for
a total of 2.1 million gallons of propane. The fair value of the call options is
based on the market price of propane. At February 28, 2003, the fair value of
the options was $572,000 and is recorded in accounts receivable. 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,
27
Heritage adopted the applicable provisions of EITF Issue No. 02-3, Issues
Related to Accounting for Contracts Involved in Energy Trading and Risk
Management Activities (EITF 02-3), which requires that gains and losses on
derivative instruments be shown net in the statement of operations if the
derivative instruments are held for trading purposes. Net realized and
unrealized gains and losses from the financial contracts and the impact of price
movements are recognized in the statement of operations as liquids marketing
revenue. Changes in the assets and liabilities from the liquids marketing
activities result primarily from changes in the market prices, newly originated
transactions, and the timing and settlement of contracts. EITF 02-3 also
rescinds EITF 98-10 for all energy trading contracts entered into after October
25, 2002 and specifies certain disclosure requirements. Consequently, Heritage
does not apply mark-to-market accounting for any contracts entered into after
October 25, 2002, that are not within the scope of SFAS 133. Heritage attempts
to balance its contractual portfolio in terms of notional amounts and timing of
performance and delivery obligations. However, net unbalanced positions can
exist or are established based on management's assessment of anticipated market
movements.
The 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 Six Months
Ended February 28, Ended February 28,
2003 2002 2003 2002
---- ---- ---- ----
Revenue - liquids marketing $ 79,587 $ 47,326 $ 140,317 $ 98,146
Costs and expenses - liquids
marketing (79,235) (45,633) (139,258) (99,778)
----------- ----------- ----------- -----------
Net, as reclassified $ 352 $ 1,693 $ 1,059 $ (1,632)
=========== =========== =========== ===========
The notional amounts and terms of these financial instruments as of February 28,
2003 and 2002 include fixed price payor for 65,000 barrels of propane and
355,000 barrels of propane and butane, respectively, and fixed price receiver of
65,000 barrels of propane and 225,000 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 February 28, 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 no
change in the market value of the contracts as there are no net unbalanced
positions at February 28, 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 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.
The following table summarizes the fair value of Heritage's contracts,
aggregated by method of estimating fair value of the contracts as of February
28, 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.
28
February 28, August 31,
Source of Fair Value 2003 2002
-------------------- ------------ ----------
Prices actively quoted $ 596 $ 1,276
Prices based on other valuation methods - 1,025
---------- ----------
Assets from liquids marketing $ 596 $ 2,301
========== ==========
Prices actively quoted $ 584 $ 669
Prices based on other valuation methods - 1,149
---------- ----------
Liabilities from liquids marketing $ 584 $ 1,818
========== ==========
Unrealized gains in fair value of contracts outstanding
as of August 31 $ 12 $ 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 six
months ended February 28, 2003 and 2002.
Three Months Ended Six Months Ended
February 28 February 28
2003 2002 2003 2002
---------- ---------- ---------- ----------
Unrealized gains (losses) in fair value of contracts
outstanding at the beginning of the period $ 41 $ (2,524) $ 483 $ (665)
Other unrealized gains (losses) recognized during the
period 352 1,693 576 (967)
Less: Realized gains (losses) recognized during the
period 381 (315) 1,047 (1,116)
---------- ---------- ---------- ----------
Unrealized gains (losses) in fair value of contracts
outstanding at the end of the period $ 12 $ (516) $ 12 $ (516)
========== ========== ========== ==========
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 February 28, 2003, and 2002.
(in thousands) Three Months Six Months
February 28, 2003 20 64
February 28, 2002 133 245
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 SEC. Within 90 days prior to the filing date of this report, an
evaluation was performed under the supervision and with the participation of the
Partnership's management, including the Chief Executive Officer and the Chief
Financial Officer of the General Partner of the Partnership, of the
effectiveness of the design and operation of the Partnership's disclosure
controls and procedures (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 February 28, 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.
29
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 2, 2003, the Partnership issued 551,456 Common Units, with a total
value of $15 million, in exchange for certain assets acquired in connection with
the acquisition of the propane distribution assets of V-1 Oil Co. The Units were
issued utilizing the Partnership's Registration Statement No. 333-40407 on Form
S-4.
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
(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
30
Exhibit
Number Description
------- -----------
(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
(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
31
Exhibit
Number Description
------- -----------
(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
(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
32
Exhibit
Number Description
------- -----------
(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.
(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
33
Exhibit
Number Description
------- -----------
(22) 10.28 Assignment for Contribution of Assets in Exchange for Partnership Interest dated
December 9, 2002 amount 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.
34
(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.
(b) Reports on Form 8-K
The Partnership filed two reports on Form 8-K during the three months
ended February 28, 2003:
Form 8-K dated December 11, 2002, was filed reporting the Partnership
had entered into a definitive agreement to acquire the retail propane
assets of V-1 Oil Co. of Idaho Falls, Idaho. Attached as an exhibit to
the Form 8-K was the press release dated December 10, 2002 announcing
the transaction.
Form 8-K dated January 6, 2003, was filed reporting the acquisition of
the propane distribution assets of V-1 Oil Co. The report described the
transaction and advised that the financial statements required to be
filed in connection with the business acquisition would be filed within
the prescribed time periods. Attached as exhibits to the Form 8-K were
the Agreement for Contribution of Assets in Exchange for Partnership
Interests 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., and the Press Release dated January 6, 2003 announcing the
completion of the acquisition.
35
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)
36
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
(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
Exhibit
Number Description
------- -----------
(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
(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
Exhibit
Number Description
------- -----------
(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
(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
Exhibit
Number Description
------- -----------
(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.
(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
Exhibit
Number Description
------- -----------
(22) 10.28 Assignment for Contribution of Assets in Exchange for Partnership Interest dated
December 9, 2002 amount 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.