HERITAGE PROPANE PARTNERS L P - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Transition Period from to
---------- -----------

COMMISSION FILE NUMBER 1-11727

HERITAGE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)

DELAWARE 73-1493906
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of class Name of each exchange on
which registered
Common Units New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value as of November 5, 2001, of the registrant's common
units held by nonaffiliates of the registrant, based on the reported closing
price of such units on the New York Stock Exchange on such date, was
approximately $254,792,338.

At November 5, 2001, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 14,262,066 Common Units
1,382,514 Class B Subordinated Units

Documents Incorporated by Reference: None

HERITAGE PROPANE PARTNERS, L.P.

2001 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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PART I

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
HERITAGE, INCLUDE CERTAIN "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. SUCH STATEMENTS ARE MADE IN RELIANCE
ON THE "SAFE HARBOR" PROTECTIONS PROVIDED UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.

AS REQUIRED BY THAT LAW, HERITAGE HEREBY IDENTIFIES THE FOLLOWING
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY
RESULTS PROJECTED, FORECASTED, ESTIMATED OR BUDGETED BY HERITAGE IN
FORWARD-LOOKING STATEMENTS. THESE INCLUDE:

o CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE UNITED STATES AS
WELL AS CHANGES IN GENERAL ECONOMIC CONDITIONS AND CURRENCIES IN
FOREIGN COUNTRIES;

o WEATHER CONDITIONS THAT VARY SIGNIFICANTLY FROM HISTORICALLY
NORMAL CONDITIONS;

o ITS SUCCESS IN HEDGING ITS POSITIONS;

o THE EFFECTIVENESS OF RISK-MANAGEMENT POLICIES AND PROCEDURES AND
THE ABILITY OF HERITAGE'S LIQUIDS MARKETING COUNTERPARTIES TO
SATISFY THEIR FINANCIAL COMMITMENTS;

o THE GENERAL LEVEL OF PETROLEUM PRODUCT DEMAND, AND THE
AVAILABILITY OF PROPANE SUPPLIES;

o ENERGY PRICES GENERALLY AND SPECIFICALLY, THE PRICE OF PROPANE TO
THE CONSUMER COMPARED TO THE PRICE OF ALTERNATIVE AND COMPETING
FUELS;

o COMPETITION FROM OTHER PROPANE DISTRIBUTORS AND ALTERNATE FUELS;

o THE AVAILABILITY AND COST OF CAPITAL;

o CHANGES IN LAWS AND REGULATIONS TO WHICH HERITAGE IS SUBJECT,
INCLUDING TAX, ENVIRONMENTAL AND EMPLOYMENT REGULATIONS;

o ITS ABILITY TO GENERATE AVAILABLE CASH FOR DISTRIBUTIONS TO
UNITHOLDERS;

o THE COSTS AND EFFECTS OF LEGAL AND ADMINISTRATIVE PROCEEDINGS
AGAINST IT OR WHICH MAY BE BROUGHT AGAINST IT;

o ITS ABILITY TO SUSTAIN HISTORICAL LEVELS OF INTERNAL GROWTH; AND

o ITS ABILITY TO CONTINUE TO LOCATE AND ACQUIRE OTHER PROPANE
COMPANIES AT PURCHASE PRICES THAT ARE ACCRETIVE TO ITS FINANCIAL
RESULTS.

ITEM 1. BUSINESS

BUSINESS OF HERITAGE

Heritage Propane Partners, L.P., (the "Registrant" or "Partnership"), a
publicly traded Delaware limited partnership, was formed in April of 1996. The
general partner of Heritage Propane Partners, L.P. is Heritage

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Holdings, Inc. (Heritage Holdings), which is a wholly owned subsidiary of U.S.
Propane, L.P. (U.S. Propane). U.S. Propane is a joint venture among the
following four publicly traded southeastern utilities: TECO Energy, Inc.; AGL
Resources, Inc.; Piedmont Natural Gas Company, Inc.; and Atmos Energy
Corporation.

o TECO Energy, Inc. (TECO) is a diversified, energy-related holding
company. One of TECO's subsidiaries is Florida's largest natural
gas distributor, serving more than 260,000 customers. Its other
businesses include an electric utility that serves over 550,000
customers and an independent power company that builds, owns and
operates electric generation facilities in the United States and
Central America.

o AGL Resources, Inc. (AGL Resources), is a regional energy holding
company engaged in natural gas distribution, wholesale and retail
energy services and building telecommunications infrastructure.
AGL Resources' principal subsidiary is the second largest pure
natural gas distributor in the United States, serving more than
1.5 million customers in Georgia and portions of Tennessee and
Virginia.

o Piedmont Natural Gas Company, Inc. (Piedmont Natural Gas) is an
energy and services company primarily engaged in the
transportation, distribution and sales of natural gas. Piedmont
Natural Gas is the second largest natural gas distributor in the
Southeast, serving more than 690,000 customers in North Carolina,
South Carolina and Tennessee.

o Atmos Energy Corporation (Atmos), which owned United Cities
Propane Gas, Inc., is an energy and services company primarily
engaged in natural gas distribution and nonregulated energy
management and gas marketing services. Atmos is the fifth largest
natural gas distributor in the United States, serving
approximately 1.4 million customers in 11 states.

In order to simplify the Partnership's obligations under the laws of
several jurisdictions in which it conducts business, its business activities are
conducted through a subsidiary operating partnership, Heritage Operating, L.P.
(the "Operating Partnership"). The Partnership holds a 97.9798% limited partner
interest in the Operating Partnership. In addition, Heritage Holdings holds a
1.0101% general partner interest and U.S. Propane holds a 1.0101% limited
partner interest in the Operating Partnership. The Operating Partnership
accounts for nearly all of the consolidated assets, sales and operating earnings
of the Partnership.

The business of the Partnership starting with the formation of Heritage
Holdings, Inc. in 1989 has grown primarily through acquisitions of retail
propane operations and, to a lesser extent, through internal growth. Since its
inception in 1989 through August 31, 2001, the Partnership has completed 81
acquisitions for a total purchase price of approximately $608 million, including
the transfer by U.S. Propane of its propane operations to the Partnership for
$181.4 million, plus working capital of approximately $12.9 million. The U.S.
Propane transaction combined five of the nation's 50 largest retail propane
operations. Volumes of propane sold to retail customers have increased steadily
from 63.2 million gallons for the Partnership's fiscal year ended August 31,
1992 to 330.2 million gallons for the fiscal year ended August 31, 2001.

U.S. PROPANE MERGER

In August 2000, TECO, Atmos, Piedmont Natural Gas and AGL Resources
contributed each company's propane operations, Peoples Gas Company (Peoples
Gas), United Cities Propane Gas, Inc. (United Cities), Piedmont Propane Company
(Piedmont), and AGL Propane, Inc. (AGL), respectively, to U.S. Propane in
exchange for equity interests in U.S. Propane. The merger was accounted for as
an acquisition using the purchase method of accounting with Peoples Gas being
the accounting acquirer.

In August 2000, U.S. Propane acquired all of the outstanding common
stock of Heritage Holdings for $120 million. By virtue of Heritage Holdings'
general partner and limited partner interests in the Partnership, U.S. Propane
gained control of the Partnership. Simultaneously, U.S. Propane transferred its
propane operations, consisting of its interest in four separate limited
liability companies, AGL Propane, L.L.C., Peoples Gas Company, L.L.C., United
Cities Propane Gas, L.L.C. and Retail Propane Company, L.L.C. (former Piedmont
operations) to the Partnership for $181.4 million plus working capital. The
$181.4 million was payable $139.5 million in cash, $31.8 million of assumed
debt, and the issuance of 372,392 common units of the Partnership valued at $7.3
million and a

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1.0101% limited partner interest in the Operating Partnership valued at $2.7
million. The purchase price and the exchange price for the common units were
approved by an independent committee of the Board of Directors of Heritage
Holdings. The exchange price for the common units was $19.73125 per unit under a
formula based on the average closing price of common units on the New York Stock
Exchange for the twenty (20) day period beginning ten (10) days prior to the
public announcement of the transaction on June 15, 2000 (the "Formula Price").
Subsequent to August 31, 2000, payments totaling approximately $12.9 million
were made for the working capital adjustment, of which $5.0 million was accrued
at August 31, 2000.

Concurrent with the acquisition, the Operating Partnership borrowed
$180 million from several institutional investors and the Partnership sold
1,161,814 common units and 1,382,514 class B subordinated units in a private
placement to the former shareholders of Heritage Holdings based on the Formula
Price resulting in net proceeds of $50.2 million. The total of these proceeds
was utilized to finance the transaction and retire a portion of existing debt.

Heritage Propane Partners, L.P. is the surviving entity for legal
purposes; however, U.S. Propane's propane operations was the acquirer for
accounting purposes. For purposes of the discussion herein, Peoples Gas is
described as the accounting acquirer because Peoples Gas was the acquirer in the
transaction that formed U.S. Propane; the propane operations of Heritage Propane
Partners, L.P. prior to the series of transactions with U.S. Propane are
referred to as Predecessor Heritage; and the combined operations of U.S. Propane
and Predecessor Heritage are described as Heritage. Peoples Gas had a fiscal
year-end of December 31. The eight-month period ended August 31, 2000 was
treated as a transition period under the rules of the Securities and Exchange
Commission. However, the Form 10-K for the year ended August 31, 2000 was not a
transition report as the Registrant continues to have an August 31 fiscal
year-end.

Heritage believes it is presently the fourth largest retail marketer of
propane in the United States (as measured by retail gallons sold). Heritage
currently serves more than 600,000 active residential, commercial, industrial
and agricultural customers located in 28 states. Heritage's operations extend
from coast to coast with concentrations in the western, upper midwestern,
northeastern and southeastern regions of the United States.

GENERAL

At the time of the series of transactions that formed U.S. Propane and
combined the operations of Predecessor Heritage and U.S. Propane, Peoples Gas
was serving more than 70,000 active residential, commercial and wholesale
customers located in the Florida peninsula. Peoples Gas has grown by expanding
existing markets as well as through acquisitions of independent propane
operations located in northeast and southwest Florida. Prior to the series of
transactions, Peoples Gas believed it was among the top 25 independent propane
distributors nationally and was the largest independent propane distributor in
Florida.

Peoples Gas believed it held competitive advantages in both the
residential and commercial markets through its focus on customer service and
product reliability. Following is a summary of the retail sales volumes per
fiscal year. The transition period ended August 31, 2000 represents seven months
of Peoples Gas stand-alone and one month of Heritage.

HERITAGE PROPANE PARTNERS, L.P. (FORMERLY PEOPLES GAS):

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As a result of the implementation of the strategy described below,
Predecessor Heritage achieved the following retail sales volumes per fiscal
year:

Management believes that Heritage's competitive strengths include: (i)
experience in identifying, evaluating and completing acquisitions, (ii)
operations that are focused in areas experiencing higher-than-average population
growth, (iii) a low cost administrative infrastructure and (iv) a decentralized
operating structure and entrepreneurial workforce. These competitive strengths
have enabled Predecessor Heritage and Heritage to achieve levels of EBITDA per
retail propane gallon sold that management believes are among the highest of any
publicly traded propane partnership. Management believes that as a result of
Heritage's geographic diversity and district-level incentive compensation
program, Predecessor Heritage and Heritage have been able to reduce the effect
of adverse weather conditions on EBITDA, including those experienced by
Predecessor Heritage during the warmer-than-normal winters of 1998 - 1999 and
1999 - 2000 recorded as two of the warmest winters of this century. Management
believes that Heritage's concentration in higher-than-average population growth
areas provides a strong economic foundation for expansion through acquisitions
and internal growth. Management does not believe that Heritage is significantly
more vulnerable than its competitors to displacement by natural gas distribution
systems because the majority of Heritage's areas of operations are located in
rural areas in which natural gas is not available.

BUSINESS STRATEGY

Heritage's goal is to increase distributions to the Partnership's
unitholders by being a low-cost, growth oriented retail propane distribution
company. The three critical elements to this strategy are described below.

Acquisitions. Acquisitions will be the principal means of growth for
Heritage, as the retail propane industry is mature and overall demand for
propane is expected to experience limited growth in the foreseeable future.
Management believes that the fragmented nature of the propane industry provides
significant opportunities for growth through acquisition. Industry sources
indicate that there are over 8,000 retail propane operations, of which the 10
largest retailers, including Heritage, account for approximately 45% of the
total retail sales. Heritage follows a disciplined acquisition strategy that
concentrates on companies that (i) are located in geographic areas experiencing
higher-than-average population growth, (ii) provide a high percentage of sales
to residential customers, (iii) have a strong reputation for quality service and
(iv) own a high percentage of the propane tanks used by their customers. In
addition Heritage attempts to capitalize on the reputations of the companies it
acquires by maintaining local brand names, billing practices and employees,
thereby creating a sense of continuity and minimizing customer loss. Management
believes that this strategy has helped to make Heritage an attractive buyer for
many acquisition candidates from the seller's viewpoint.

Through August 9, 2000, Predecessor Heritage had completed 68
acquisitions for a total purchase price of approximately $297 million. Of the 68
companies acquired by Predecessor Heritage, 19 represent "core acquisitions"
with multiple plants in a specific geographic area, with the balance
representing "blend-in companies" or acquisitions of companies that operate in
an existing Heritage region. On August 10, 2000, Predecessor Heritage completed
the merger with U.S. Propane. During the period between August 10, 2000 through
August 31, 2001, Heritage completed 12 additional acquisitions, of which 3
represent core acquisitions. Heritage will focus on acquisition candidates in
its existing areas of operations, but will consider core acquisitions in other
higher-than-average population growth areas in order to further reduce the
impact on Heritage's operations of adverse weather patterns in any one region.
While Heritage is currently evaluating numerous acquisition candidates, there
can be no assurance that Heritage will identify attractive acquisition
candidates in the future, that Heritage will be able to acquire such businesses
on economically acceptable terms or successfully integrate them into existing
operations and make cost-saving changes, that any acquisition will not dilute
earnings and distributions to unitholders or that any additional debt incurred
to finance an acquisition will not adversely affect the ability of Heritage to
make distributions to unitholders.

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In order to facilitate Heritage's acquisition strategy, the Operating
Partnership maintains a Bank Credit Facility with a total of $115 million
available for borrowing. The Bank Credit Facility consists of a $50 million
Acquisition Facility to be used for acquisitions and improvements and a $65
million Working Capital Facility to be used for working capital and other
general partnership purposes. Heritage also has the ability to fund acquisitions
through the issuance of additional partnership interests and through long-term
debt. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Description of Indebtedness."

Low Cost, Decentralized Operations. Heritage focuses on controlling
costs at the corporate and district levels. While Predecessor Heritage realized
certain economies of scale as a result of its acquisitions, it attributes its
low operating costs primarily to its decentralized structure, which Heritage
plans to continue. By delegating all customer billing and collection activities
to the district level, Heritage has been able to operate without a large
corporate staff. Of Heritage's 2,340 full-time employees as of August 31, 2001,
only 91, or approximately 4%, were general and administrative. In addition
Heritage's district level incentive compensation program encourages district
employees at all levels to control costs and expand revenues.

Internal Growth. In addition to pursuing expansion through
acquisitions, Heritage has aggressively focused on internal growth at its
existing district locations. Heritage believes that, by concentrating its
operations in areas experiencing higher-than-average population growth, it is
well positioned to achieve internal growth by adding new customers. Heritage
also believes that its decentralized operations foster an entrepreneurial
corporate culture by: (i) having operational decisions made at the district and
regional level, (ii) retaining billing, collection and pricing responsibilities
at the local and regional levels, and (iii) rewarding employees for achieving
financial targets at the local level.

INDUSTRY BACKGROUND AND COMPETITION

Propane, a by-product of natural gas processing and petroleum refining,
is a clean-burning energy source recognized for its transportability and ease of
use relative to alternative forms of stand-alone energy sources. Retail propane
use falls into three broad categories: (i) residential applications, (ii)
industrial, commercial, and agricultural applications and (iii) other retail
applications, including motor fuel sales. Residential customers use propane
primarily for space and water heating. Industrial customers use propane
primarily as fuel for forklifts and stationary engines, to fire furnaces, as a
cutting gas, in mining operations and in other process applications. Commercial
customers, such as restaurants, motels, laundries and commercial buildings, use
propane in a variety of applications, including cooking, heating and drying. In
the agricultural market, propane is primarily used for tobacco curing, crop
drying, poultry brooding and weed control. Other retail uses include motor fuel
for cars and trucks, outdoor cooking and other recreational uses, propane
resales and sales to state and local governments. In its wholesale operations,
Heritage sells propane principally to large industrial end-users and other
propane distributors.

Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless: an odorant is added to allow
its detection. Like natural gas, propane is a clean burning fuel and is
considered an environmentally preferred energy source.

Propane competes with other sources of energy, some of which are less
costly for equivalent energy value. Heritage competes for customers against
suppliers of electricity, natural gas and fuel oil. Competition from alternative
energy sources has been increasing as a result of reduced regulation of many
utilities including natural gas and electricity. Except for certain industrial
and commercial applications, propane is generally not competitive with natural
gas in areas where natural gas pipelines already exist because natural gas is a
significantly less expensive source of energy than propane. The gradual
expansion of the nation's natural gas distribution systems has resulted in the
availability of natural gas in many areas that previously depended upon propane.
Although the extension of natural gas pipelines tends to displace propane
distribution in areas affected, Heritage believes that new opportunities for
propane sales arise as more geographically remote neighborhoods are developed.
Although propane is similar to fuel oil in certain applications and market
demand, propane and fuel oil compete to a lesser extent primarily because

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of the cost of converting from one to another. Based upon information provided
by the Energy Information Agency, propane accounts for approximately three
percent of household energy consumption in the United States.

In addition to competing with alternative energy sources, Heritage
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and generally
occurs on a local basis with other large full-service multi-state propane
marketers, thousands of smaller local independent marketers and farm
cooperatives. Based on industry publications, Heritage believes that the
domestic retail market for propane is approximately 8.8 billion gallons
annually, that the 10 largest retailers, including Heritage, account for
approximately 45% of the total retail sales of propane in the United States, and
that no single marketer has a greater than 10% share of the total retail market
in the United States. Most of Heritage's retail distribution branches compete
with five or more marketers or distributors. Each retail distribution outlet
operates in its own competitive environment because retail marketers tend to
locate in close proximity to customers. The typical retail distribution outlet
generally has an effective marketing radius of approximately 50 miles although
in certain rural areas the marketing radius may be extended by satellite
locations.

The ability to compete effectively further depends on the reliability
of service, responsiveness to customers and the ability to maintain competitive
prices. Heritage believes that its safety programs, policies and procedures are
more comprehensive than many of its smaller, independent competitors and give it
a competitive advantage over such retailers. Heritage also believes that its
service capabilities and customer responsiveness differentiate it from many of
these smaller competitors. Heritage's employees are on call 24-hours-a-day,
7-days-a-week for emergency repairs and deliveries.

The wholesale propane business is highly competitive. For fiscal 2001,
Heritage's domestic wholesale operations (excluding M-P Energy Partnership)
accounted for only 3.7% of total volumes and less than 1% of its gross profit.
Heritage does not emphasize wholesale operations, but it believes that limited
wholesale activities enhance its ability to supply its retail operations.

PRODUCTS, SERVICES AND MARKETING

Heritage distributes propane through a nationwide retail distribution
network consisting of approximately 275 customer service locations in 28 states.
Heritage's operations are concentrated in large part in the western, upper
midwestern, northeastern and southeastern regions of the United States. Heritage
serves almost 600,000 active customers. Historically, approximately two-thirds
of Predecessor Heritage's retail propane volumes and in excess of 80% of its
EBITDA were attributable to sales during the six-month peak-heating season from
October through March, as many customers use propane for heating purposes.
Consequently, sales and operating profits are normally concentrated in the first
and second fiscal quarters. Cash flows from operations however, are generally
greatest during the second and third fiscal quarters when customers pay for
propane purchased during the six-month peak season. To the extent necessary,
Heritage will reserve cash from peak periods for distribution to unitholders
during the warmer seasons.

Typically, district locations are found in suburban and rural areas
where natural gas is not readily available. Generally, such locations consist of
a one to two acre parcel of land, an office, a small warehouse and service
facility, a dispenser and one or more 18,000 to 30,000 gallon storage tanks.
Propane is generally transported from refineries, pipeline terminals, leased
storage facilities and coastal terminals by rail or truck transports to
Heritage's district locations where it is unloaded into storage tanks. In order
to make a retail delivery of propane to a customer, a bobtail truck is loaded
with propane from the storage tank. Propane is then delivered to the customer by
the bobtail truck, which generally holds 2,500 to 3,000 gallons of propane, and
pumped into a stationary storage tank on the customer's premises. The capacity
of these customer tanks ranges from approximately 100 gallons to 1,200 gallons,
with a typical tank having a capacity of 100 to 300 gallons in milder climates
and from 500 to 1,000 gallons in colder climates. Heritage also delivers propane
to retail customers in portable cylinders, which typically have a capacity of 5
to 35 gallons. When these cylinders are delivered to customers, empty cylinders
are picked up for refilling at Heritage's distribution locations or are refilled
in place. Heritage also delivers propane to certain other bulk end users of
propane in tractor-trailers known as transports, which typically have an average
capacity of approximately 10,500 gallons. End users receiving transport
deliveries include industrial customers, large-scale heating accounts, mining
operations, and large agricultural accounts, which use propane for crop drying.

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Heritage encourages its customers whose propane needs are temperature
sensitive to implement a regular delivery schedule by, in some cases, charging
extra for non-scheduled deliveries. Many of Heritage's residential customers
receive their propane supply pursuant to an automatic delivery system which
eliminates the customer's need to make an affirmative purchase decision and
allows for more efficient route scheduling and maximization of volumes
delivered. Heritage also sells, installs and services equipment related to its
propane distribution business, including heating and cooking appliances from its
district locations.

Heritage owns, though its subsidiaries, a 60% interest in M-P Energy
Partnership, a Canadian partnership that supplies Heritage propane as described
below under "Propane Supply and Storage." When it is referred to or information
is given regarding domestic operations, amounts attributable to M-P Energy
Partnership are generally excluded, unless otherwise indicated.

Propane use falls into three broad categories: (i) residential
applications, (ii) industrial, commercial and agricultural applications and
(iii) other retail applications, including motor fuel sales. Approximately 96%
of the domestic gallons sold by Heritage in the fiscal year ended August 31,
2001 were to retail customers and 4% to wholesale customers. Of the retail
gallons sold by Heritage, 57% were to residential customers, 29% were to
industrial, commercial and agricultural customers, and 14% were to other retail
users. Sales to residential customers in the fiscal year ended August 31, 2001
accounted for 55% of total domestic gallons sold inclusive of domestic wholesale
but approximately 71% of Heritage's gross profit from propane sales. Residential
sales have a greater profit margin and a more stable customer base than other
markets served by Heritage. Industrial, commercial and agricultural sales
accounted for 21% of Heritage's gross profit from propane sales for the fiscal
year ended August 31, 2001, with all other retail users accounting for 8%.
Additional volumes sold to wholesale customers contributed less than 1% of gross
profit from propane sales. No single customer accounts for 10% or more of
revenues.

The propane business is very seasonal with weather conditions
significantly affecting demand for propane. Heritage believes that the
geographic diversity of its operations helps to minimize its nationwide exposure
to regional weather. Although overall demand for propane is affected by climate,
changes in price and other factors, Heritage believes its residential and
commercial business to be relatively stable due to the following
characteristics:

o residential and commercial demand for propane has been relatively
unaffected by general economic conditions due to the largely
non-discretionary nature of most propane purchases,

o loss of customers to competing energy sources has been low,

o the tendency of Heritage's customers to remain with Heritage due to
the product being delivered pursuant to a regular delivery schedule
and to Heritage's ownership of over 90% of the storage tanks (verify)
utilized by its customers, and

o the historic ability of Heritage to more than offset customer losses
through internal growth of its customer base in existing markets.

Since home heating usage is the most sensitive to temperature, residential
customers account for the greatest usage variation due to weather. Variations in
the weather in one or more regions in which Heritage operates can significantly
affect the total volumes of propane sold by Heritage and the margins realized
thereon and, consequently, Heritage's results of operations. Heritage believes
that sales to the commercial and industrial markets, while affected by economic
patterns, are not as sensitive to variations in weather conditions as sales to
residential and agricultural markets.

PROPANE SUPPLY AND STORAGE

Supplies of propane from Heritage's sources historically have been
readily available. Heritage purchases from over 50 oil companies and natural gas
processors at numerous supply points located in the United States and Canada. In
the fiscal year ended August 31, 2001, Enterprise Products Operating L.P.
(Enterprise) and Dynegy Liquids Marketing and Trade (Dynegy) provided
approximately 21% and 19% of Heritage's total propane supply, respectively. In
addition, M-P Oils, Ltd., one of our wholly owned subsidiaries, procured 21% of
Heritage's total

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propane supply during the fiscal year ended August 31, 2001. M-P Oils, Ltd.
holds a 60% interest in M-P Energy Partnership, a Canadian partnership that buys
and sells propane for its own account and supplies Heritage propane in the
northern United States.

Heritage believes that, if supplies from Enterprise and Dynegy were
interrupted, it would be able to secure adequate propane supplies from other
sources without a material disruption of its operations. Aside from Enterprise
and Dynegy, no single supplier provided more than 10% of Heritage's total
domestic propane supply during the fiscal year ended August 31, 2001. Heritage
believes that its diversification of suppliers will enable it to purchase all of
its supply needs at market prices if supplies are interrupted from any of the
sources without a material disruption of its operations. Although no assurances
can be given that supplies of propane will be readily available in the future,
Heritage expects a sufficient supply to continue to be available. However,
increased demand for propane in periods of severe cold weather, or otherwise,
could cause future propane supply interruptions or significant volatility in the
price of propane.

Heritage typically enters into one-year supply agreements subject to
annual renewal. The percentage of contract purchases may vary from year to year.
Supply contracts generally provide for pricing in accordance with posted prices
at the time of delivery or the current prices established at major delivery or
storage points, and some contracts include a pricing formula that typically is
based on these market prices. Most of these agreements provide maximum and
minimum seasonal purchase guidelines. Heritage receives its supply of propane
predominately through railroad tank cars and common carrier transport.

Because Heritage's profitability is sensitive to changes in wholesale
propane costs, it generally seeks to pass on increases in the cost of propane to
customers. Heritage has generally been successful in maintaining retail gross
margins on an annual basis despite changes in the wholesale cost of propane, but
there is no assurance that Heritage will always be able to pass on product cost
increases fully, particularly when product costs rise rapidly. Consequently,
Heritage's profitability will be sensitive to changes in wholesale propane
prices. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-General."

Heritage leases space in storage facilities in Michigan, Mississippi,
South Carolina, Arizona, Missouri and Texas and smaller storage facilities in
other locations and has rights to use storage facilities in additional locations
when it "pre-buys" product from these sources. Heritage believes that it has
adequate third party storage to take advantage of supply purchasing advantages
as they may occur from time to time. Access to storage facilities allows
Heritage to buy and store large quantities of propane during periods of low
demand, which generally occur during the summer months, thereby helping to
ensure a more secure supply of propane during periods of intense demand or price
instability.

PRICING POLICY

Pricing policy is an essential element in the marketing of propane.
Heritage relies on regional management to set prices based on prevailing market
conditions and product cost, as well as local management input. All regional
managers are advised regularly of any changes in the posted price of the
district's propane suppliers. In most situations, Heritage believes that its
pricing methods will permit Heritage to respond to changes in supply costs in a
manner that protects Heritage's gross margins and customer base, to the extent
possible. In some cases, however, Heritage's ability to respond quickly to cost
increases could occasionally cause its retail prices to rise more rapidly than
those of its competitors, possibly resulting in a loss of customers.

BILLING AND COLLECTION PROCEDURES

Customer billing and account collection responsibilities are retained
at the district level. Heritage believes that this decentralized approach is
beneficial for several reasons:

o the customer is billed on a timely basis;

o the customer is more apt to pay a "local" business;

8

o cash payments are received more quickly, and

o local personnel have a current account status available to them at all
times to answer customer inquiries.

GOVERNMENT REGULATION

Heritage is subject to various federal, state and local environmental,
health and safety laws and regulations. Generally, these laws impose limitations
on the discharge of pollutants and establish standards for the handling of solid
and hazardous wastes. These laws include without limitation, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the Clean Air Act, the Occupational
Safety and Health Act, the Emergency Planning and Community Right-to-Know Act,
the Clean Water Act, and comparable state statutes. CERCLA, also known as the
"Superfund" law, imposes joint and several liability in most instances, without
regard to fault or the legality of the original conduct on certain classes of
persons that are considered to have contributed to the release or threatened
release of a "hazardous substance" into the environment. Propane is not a
hazardous substance within the meaning of CERCLA. However, certain automotive
waste products generated by Heritage's truck fleet, as well as "hazardous
substances" or "hazardous waste" disposed of during past operations by third
parties on Heritage's properties, could subject Heritage to liability under
CERCLA. Such laws and regulations could result in civil or criminal penalties in
cases of non-compliance and impose liability for remediation costs. In addition,
third parties may make claims against owners or operators of properties for
personal injuries and property damage associated with releases of hazardous or
toxic substances or waste.

In connection with all acquisitions of retail propane businesses that
involve the acquisitions of any interest in real estate, Heritage conducts an
environmental review in an attempt to determine whether any substance other than
propane has been sold from, or stored on, any such real estate prior to its
purchase. Such review includes questioning the seller, obtaining representations
and warranties concerning the seller's compliance with environmental laws and
conducting inspections of the properties. Where warranted, independent
environmental consulting firms are hired to look for evidence of hazardous
substances or the existence of underground storage tanks.

Petroleum-based contamination or environmental wastes are known to be
located on or adjacent to six sites, which Heritage presently or formerly had
operations. These sites were evaluated at the time of their acquisition. In all
cases, remediation operations have been or will be undertaken by others, and in
all six cases, Heritage obtained indemnification for expenses associated with
any remediation from the former owners or related entities. Additionally,
Heritage has been named as a large deminimis generator at one superfund site,
but it believes that its exposure will not be material. Based on information
currently available to Heritage, such projects are not expected to have a
material adverse effect on Heritage's financial condition or results of
operation.

National Fire Protection Association Pamphlets No. 54 and No. 58, which
establish rules and procedures governing the safe handling of propane, or
comparable regulations, have been adopted as the industry standard in all of the
states in which Heritage operates. In some states these laws are administered by
state agencies, and in others they are administered on a municipal level. With
respect to the transportation of propane by truck, Heritage is subject to
regulations promulgated under the Federal Motor Carrier Safety Act. These
regulations cover the transportation of hazardous materials and are administered
by the United States Department of Transportation. Heritage conducts ongoing
training programs to help ensure that its operations are in compliance with
applicable regulations. Heritage maintains various permits that are necessary to
operate some of its facilities, some of which may be material to its operations.
Heritage believes that the procedures currently in effect at all of its
facilities for the handling, storage and distribution of propane are consistent
with industry standards and are in compliance in all material respects with
applicable laws and regulations.

Heritage has implemented environmental programs and policies designed
to avoid potential liability and cost under applicable environmental laws. It is
possible, however, that Heritage will have increased costs due to stricter
pollution control requirements or liabilities resulting from non-compliance with
operating or other regulatory permits. It is not anticipated that Heritage's
compliance with or liabilities under environmental, health and safety laws and
regulations, including CERCLA, will have a material adverse effect on Heritage.
To the extent that there are any environmental liabilities unknown to Heritage
or environmental, health or safety laws or regulations are made more stringent,
there can be no assurance that Heritage's results of operations will not be
materially and adversely affected.

9

EMPLOYEES

As of August 31, 2001, Heritage had 2,340 full time employees, of whom
91 were general and administrative and 2,249 were operational employees. Of its
operational employees 60 are represented by a labor union. Heritage believes
that its relations with its employees are satisfactory. Historically, Heritage
has hired as many as 100 seasonal workers to meet peak winter demands.

ITEM 2. PROPERTIES

Heritage operates bulk storage facilities at approximately 275 customer
service locations. Heritage owns substantially all of these facilities and has
entered into long-term leases for those that it does not own. Heritage believes
that the increasing difficulty associated with obtaining permits for new propane
distribution locations makes its high level of site ownership and control a
competitive advantage. Heritage owns approximately thirty-one million gallons of
above ground storage capacity at its various plant sites and have leased an
aggregate of approximately 50 million gallons of underground storage facilities
in Michigan, Mississippi, South Carolina Arizona, Missouri and Texas. Heritage
does not own or operate any underground storage facilities (excluding customer
and local distribution tanks) or pipeline transportation assets (excluding local
delivery systems).

Heritage also owns 50% of Bi-State Propane, a California general
partnership that conducts business in California and Nevada. Bi-State Propane
operates nine locations that are included on a gross basis in Heritage's site,
customer and other property descriptions contained herein.

The transportation of propane requires specialized equipment. The
trucks and railroad tank cars used for this purpose carry specialized steel
tanks that maintain the propane in a liquefied state. As of August 31, 2001,
Heritage utilized approximately 37 transport truck tractors, 41 transport
trailers, 30 railroad tank cars, 984 bobtails and 1,492 other delivery and
service vehicles, all of which Heritage owns. As of August 31, 2001, Heritage
owned approximately 540,000 customer storage tanks with typical capacities of
120 to 1,000 gallons. These customer storage tanks are collateral to secure the
obligations of Heritage under its borrowings from its banks and note holders.

Heritage believes that it has satisfactory title to or valid rights to
use all of its material properties. Although some of such properties are subject
to liabilities and leases, liens for taxes not yet due and payable, encumbrances
securing payment obligations under non-competition agreements entered in
connection with acquisitions and immaterial encumbrances, easements and
restrictions, Heritage does not believe that any such burdens will materially
interfere with the continued use of such properties by Heritage in its business,
taken as a whole. In addition, Heritage believes that it has, or is in the
process of obtaining, all required material approvals, authorizations, orders,
licenses, permits, franchises and consents of, and has obtained or made all
required material registrations, qualifications and filings with, the various
state and local government and regulatory authorities which relate to ownership
of Heritage's properties or the operations of its business.

Heritage utilizes a variety of trademarks and tradenames that it owns,
including "Heritage Propane." Heritage believes that its strategy of retaining
the names of the companies it has acquired has maintained the local
identification of these companies and has been important to the continued
success of these businesses. Some of Heritage's most significant trade names
include AGL Propane, Balgas, Bi-State Propane, Blue Flame Gas of Charleston,
Blue Flame Gas of Mt. Pleasant, Blue Flame Gas of Vermont, Carolane Propane Gas,
Gas Service Company, EnergyNorth, Gibson Propane, Holton's L. P. Gas, Ikard &
Newsom, Northern Energy, Sawyer Gas, Peoples Gas Company, Piedmont Propane
Company, ProFlame Gas, Rural Bottled Gas and Appliance, ServiGas, TECO Propane
and VGS Propane. Heritage regards its trademarks, tradenames and other
proprietary rights as valuable assets and believes that they have significant
value in the marketing of its products.

10

ITEM 3. LEGAL PROCEEDINGS.

Heritage is threatened with or is named as a defendant in various
personal injury, property damage and product liability suits. In general, these
lawsuits have arisen in the ordinary course of Heritage's business since the
formation of Heritage, and involve claims for actual damages arising from the
alleged negligence of Heritage or as a result of product defects or similar
matters. Of the pending or threatened matters, the suits currently include one
action by Heritage against a seller to Heritage and other suits against Heritage
involving property damage and serious personal injuries. Although any litigation
is inherently uncertain, based on past experience, the information currently
available to it and the availability of insurance coverage, Heritage does not
believe that these pending or threatened litigation matters issues will have a
material adverse effect on its results of operations or its financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of the security holders of Heritage
Propane Partners, L.P. during the fiscal year ended August 31, 2001.

11

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS.

MARKET PRICE OF AND DISTRIBUTIONS ON THE COMMON UNITS AND RELATED UNITHOLDER
MATTERS

The common units representing limited partners interests in the
Partnership ("common units") are listed on the New York Stock Exchange, which is
the principal trading market for such securities, under the symbol "HPG". The
following table sets forth, for the periods indicated, the high and low sales
prices per common unit, as reported on the New York Stock Exchange Composite
Tape, and the amount of cash distributions paid per common unit.

(1) Distributions are shown in the quarter with respect to which they were
declared. For each of the indicated quarters for which distributions have
been made, an identical per unit cash distribution was paid on the
subordinated units.

DESCRIPTION OF UNITS

As of October 1, 2001, there were approximately 573 holders of record
of the Partnership's common units, including common units held in street name
representing over nine thousand individual common unitholders. Common units,
class B subordinated units and class C units represent limited partner interests
in the partnership that entitle the holders to the rights and privileges
specified in the Heritage Propane Partners, L.P. partnership agreement (the
"partnership agreement"). As of November 5, 2001, there were 14,262,066 common
units and 1,382,514 class B subordinated units representing, together with the
1.0101% limited partner interest in the Operating Partnership held by U.S.
Propane, an aggregate 98.9899% limited partner interest in the Partnership.
Except as described below, the common units and class B subordinated units
generally participate pro rata in Heritage's income, gains, losses deductions,
credits and distributions. There are also 1,000,000 class C units outstanding
that are entitled only to participate in any incentive distributions that
Heritage may make that are attributable to amounts received by Heritage in
connection with specified litigation.

Prior to July 6, 2001, the Partnership also had subordinated units
representing limited partner interests that were issued and outstanding, all of
which converted to common units as described below under "-- Subordinated
Units". Prior to converting into common units, and except as described below,
the subordinated units generally participated pro rata with the common units and
the class B subordinated units in Heritage's income, gains, losses, deductions,
credits and distributions.

No person is entitled to preemptive rights in respect of issuances of
securities by the Partnership, except that Heritage Holdings, the general
partner, has the right to purchase sufficient partnership securities to maintain
its equity interest in the Partnership.

12

COMMON UNITS

The Partnership's common units are registered under the Securities
Exchange Act of 1934 and are listed for trading on the New York Stock Exchange.
Each holder of a common unit is entitled to one vote per unit on all matters
presented to the limited partners for a vote. However, if at any time any person
or group (other than the general partner and its affiliates) owns beneficially
20% or more of all common units, any common units owned by that person or group
may not be voted on any matter and are not considered to be outstanding when
sending notices of a meeting of unitholders (unless otherwise required by law),
calculating required votes, determining the presence of a quorum or for other
similar purposes under our partnership agreement. The common units are entitled
to distributions of available cash as described below under "-- Cash
Distribution Policy." As of October 1, 2001 there were approximately 573 holders
of the Heritage's common units, including common units held in street name,
representing over nine thousand individual common unitholders.

SUBORDINATED UNITS

Heritage Holdings, a wholly owned subsidiary of U.S. Propane and the
general partner of the Partnership and the Operating Partnership held all of the
subordinated units. The subordinated units were a separate class of limited
partner interests and the rights of holders of subordinated units to participate
in distributions to partners differed from, and were subordinated to, the rights
of the holders of common units.

Under the partnership agreement, 925,736 subordinated units converted
into common units as of July 7, 1999, 925,736 subordinated units converted into
common units as of July 5, 2000 and the remaining 1,851,471 subordinated units
converted into common units as of July 6, 2001. The conversions of the
subordinated units occurred and the subordination period ended because the
Partnership met specified cash performance and distribution requirements during
successive four-quarter periods commencing with the initial public offering in
June of 1996. As common units issued upon conversion of the subordinated units,
the new common units share equally with other common units in distributions of
available cash.

CLASS B SUBORDINATED UNITS

The class B subordinated units represent a portion of the limited
partner interests issued to certain former stockholders of Heritage Holdings,
who are also members of management, in connection with the transaction with U.S.
Propane. The class B subordinated units have the same voting rights as the
subordinated units outstanding before the end of the subordination period. Each
class B subordinated unit is entitled to one vote on each matter with respect to
which the class B subordinated units are entitled to vote.

In connection with the transaction with U.S. Propane and because the
class B subordinated units are not convertible into common units except by
approval of the common unitholders or a change in the rules of the New York
Stock Exchange, the Partnership agreed to submit to a vote or consent of its
common unitholders a proposal to change the terms of the class B subordinated
units to provide that each class B subordinated unit is convertible into one
common unit. The Partnership intends to submit this proposal to its common
unitholders by December 31, 2001.

The rights of holders of class B subordinated units to participate in
distributions to partners differ from, and are subordinated to, the right of
holders of common units, as described below under "-- Cash distribution Policy".
If the common unitholders approve the conversion of the class B subordinated
units into common units, or if at any time the rules of the New York Stock
Exchange or staff interpretations of such rules are changed, or facts and
circumstances arise so that no vote or consent of the unitholders is required as
a condition to the listing of any common units that may be issued upon such
conversion, each class B subordinated unit will automatically convert into one
common unit. But if the common unitholders do not approve the conversion by
December 31, 2001, the terms of the class B subordinated units will
automatically be changed to provide that the amount allocated or distributed to
each class B subordinated unit will equal 115% of the amount allocated or
distributed to each common unit, except that the common units will have priority
over the class B subordinated units with respect to the minimum quarterly
distributions of $0.50 per common unit and any arrearages on the minimum
quarterly distribution.

The class B subordinated units have rights upon dissolution and
liquidation of the Partnership, including the right to share in any liquidating
distributions that are based on 100% (115% if the conversion of the class B

13

subordinated units is not approved) of the rights of the common units.
Accordingly, the amount of any liquidating distribution to each class B
subordinated unit will equal 100% (115% if the conversion of the class B
subordinated units is not approved) of the amount of such distribution to each
common units, except that the rights of the class B subordinated units will have
the same order of priority relative to the rights of the common units as
subordinated units outstanding before the end of the subordination period.

CLASS C UNITS

In conjunction with the transaction with U.S. Propane and the change of
control of the general partner, the Partnership issued 1,000,000 newly created
class C units to Heritage Holdings in conversion of that portion of its
incentive distribution rights that entitled it to receive any distribution made
by the Partnership attributable to the net amount received by the Partnership in
connection with the settlement, judgment, award or other final nonappealable
resolution of specified litigation filed by Heritage prior to the transaction
with U.S. Propane, which is referred to as the "litigation". The class C units
have zero initial capital account balance and were distributed by Heritage
Holdings to its former stockholders in connection with the transaction with U.S.
Propane. Thus, U.S. Propane will not receive any distributions made with respect
to the litigation.

All decisions of the general partner relating to the litigation will be
determined by a special litigation committee consisting of one or more
independent directors of the general partner. As soon as practicable after the
time, if any, that the Partnership receives the final cash payment as a result
of the resolution of the litigation, the special litigation committee will
determine the aggregate net amount of such proceeds distributable by the
Partnership by deducting from the amounts received all costs and expenses
incurred by the Partnership and its affiliates in connection with the litigation
and such cash reserves as are necessary or appropriate to provide for operating
expenditures. Until the special litigation committee decides to distribute the
distributable proceeds, none of the distributable proceeds will be deemed to be
"available cash" under the partnership agreement. Please read "-- Cash
Distribution Policy - General" below for a discussion of available cash. When
the special litigation committee decides to distribute the distributable
proceeds, the amount of the distribution will be deemed to be available cash and
will be distributed as described below under "-- Cash Distribution Policy,"
provided that the amount of distributable proceeds that would be distributed to
holders of incentive distribution rights will instead be distributed to the
holders of the class C units, pro rata. The Partnership cannot predict whether
it will receive any cash payments as a result of the litigation and, if so, when
such distributions might be received.

Each holder of class C units receiving a distribution of cash in any
taxable year of the partnership will be allocated items of gross income with
respect to such taxable year in an amount equal to the cash distributed to the
holder. The holders of class C units will not be allocated any other items of
income, gain, loss deduction or credit. The class C units do not have any rights
to share in any of the assets or distributions upon dissolution and liquidation
of the partnership, except for the extent that any such distributions consist of
proceeds from the litigation to which the class C unitholders would have
otherwise been entitled. The class C units do not have the privilege of
conversion into any other unit and do not have any voting rights except to the
extent provided by law, in which case the class C units will be entitled to one
vote.

The amount of cash distributions to which the incentive distribution
rights are entitled was not increased by the creation of the class C units;
rather, the class C units are a mechanism for dividing the incentive
distribution rights between Heritage Holdings and its former stockholders.

CASH DISTRIBUTION POLICY

The partnership agreement requires that the Partnership will distribute
all of its "available cash" to its unitholders and its general partner within 45
days following the end of each fiscal quarter. The term "available cash"
generally means, with respect to any fiscal quarter of the Partnership, all cash
on hand at the end of such quarter, plus working capital borrowings after the
end of the quarter, less reserves established by the general partner in its sole
discretion to provide for the proper conduct of the Partnership's business,
comply with applicable law or any Heritage debt instrument or other agreement,
or to provide funds for future distributions to partners with respect to any one
or more of the next four quarters. Available cash is more fully defined in the
partnership agreement previously filed as an exhibit.

14

The subordination period ended as a result of the conversion into
common units of all remaining outstanding subordinated units (but not class B
subordinated units) as described above. Beginning with the fiscal quarter ended
August 31, 2001, and as long as class B subordinated units are outstanding, the
Partnership will distribute available cash, excluding any available cash to be
distributed to the class C unitholders, as follows:

o First, 97% to the holders of common units, pro rata, 1% to U.S.
Propane in respect of its limited partner interest in the
Operating Partnership and 2% to the general partner, until the
holders of common units have received $0.50 per common unit for
such quarter and any prior quarter in which they failed to
receive $0.50 per common unit;

o Second, 97% to the holders of class B subordinated units, pro
rata, 1% to U.S. Propane in respect of its limited partner
interest in the Operating Partnership and 2% to the general
partner, until the holders of class B subordinated units have
received $0.50 per unit for such quarter;

o Third, 97% to all common unitholders and class B subordinated
units, pro rata, 1% to U.S. Propane in respect of its limited
partner interest in the Operating Partnership and 2% to the
general partner, until all common unitholders have received at
least $0.55 per unit for such quarter;

o Fourth, 84% to all common unitholders and class B subordinated
unitholders, 1% to U.S. Propane in respect of its limited partner
interest in the Operating Partnership and 13% to the holders of
incentive distribution rights, pro rata and 2% to the general
partner, until all common unitholders have received at least
$0.635 per unit for such quarter;

o Fifth, 74% to all common unitholders and class B subordinated
unitholders, pro rata, 1% to U.S. Propane in respect of its
limited partner interest in the Operating Partnership, 23% to the
holders of incentive distribution rights, pro rata, and 2% to the
general partner, until all common unitholders have received at
least $0.825 per unit for such quarter; and

o Sixth, thereafter 49% to all common unitholders and class B
subordinated unitholders, pro rata, 1% to U.S. Propane in respect
of its limited partner interest in the Operating Partnership, 48%
to the holders of incentive distribution rights, pro rata, and 2%
to the general partner.

If the common unitholders have not approved the conversion of class B
subordinated units into common units by December 31, 2001, then the amount
distributed to each class B subordinated unit pursuant to the second through
sixth clauses above will be equal to 115% of the amount distributed to each
common unit pursuant to each such clause.

If the conversion of the class B subordinated units is approved, each
class B subordinated unit will be converted into one common unit and will then
participate pro rata with the other common units in distributions of available
cash. After the conversion of the class B subordinated units into common units,
the Partnership will distribute available cash, excluding any available cash to
be distributed to the class C unitholders, as follows:

o First, 97% to all unitholders, pro rata, 1% to U.S. Propane in
respect of its limited partner interest in the Operating
Partnership and 2% to the general partner, until all unitholders
have received $0.50 per unit for such quarter and any prior
quarter;

o Second, 97% to all unitholders, pro rata, 1% to U.S. Propane in
respect of its limited partner interest in the Operating
Partnership and 2% to the general partner, until all unitholders
have received $0.55 per unit for such quarter;

o Third, 84% to all unitholders, pro rata, 1% to U.S. Propane in
respect of its limited partner interest in the Operating
Partnership, 13% to the holders of incentive distribution rights,
pro rata, and 2% to the general partner, until all common
unitholders have received at least $0.635 per unit for such
quarter;

15

o Fourth, 74% to unitholders, pro rata, 1% to U.S. Propane in
respect of its limited partner interest in the Operating
Partnership, 23% to the holders of incentive distribution rights,
pro rata and 2% to the general partner, until all common
unitholders have received at least $0.825 per unit for such
quarter;

o Fifth, thereafter 49% to all unitholders, pro rata, 1% to U.S.
Propane in respect of its limited partner interest in the
Operating Partnership, 48% to the holders of incentive
distribution rights, pro rata, and 2% to the general partner.

RESTRICTIONS ON TRANSFER; REGISTRATION RIGHT

The 1,161,814 common units and the 1,382,514 class B subordinated units
issued to the former stockholders of Heritage Holdings in the U.S. Propane
transaction are subject to certain restrictions on transfer. On November 8,
2000, 473,473 of these class B subordinated units and 624,212 of the common
units became transferable. An additional 266,715 of the class B subordinated
units and 165,700 of the common units became transferable on August 10, 2001. An
additional 266,715 of the class B subordinated units and 165,700 of the common
units become transferable on August 10, 2002, and 375,611 of the class B
subordinated units and 206,202 of the common units become transferable on August
10, 2003. The restrictions on transfer are also subject to exceptions contained
in the employment agreements of certain of the former stockholders and of
Heritage's management.

CHANGES IN SECURITIES AND RECENT SALES OF UNREGISTERED SECURITIES

On July 31, 2001, Heritage sold 2,500,000 common units in an
underwritten public offering at a public offering price of $28.00 per unit.
Heritage used $41 million of the approximate net proceeds of $66 million to
reduce indebtedness under the Senior Revolving Acquisition Facility, which was
incurred in the acquisition of ProFlame, Inc. (ProFlame) and related propane
distribution companies of ProFlame. The remainder of the proceeds was used for
general partnership purposes, including additional acquisitions and repayment of
debt. To effect the transfer of the contribution required by the general partner
to maintain its 1% general partner interest in the Partnership, the general
partner contributed 25,252 common units back to the Partnership and those units
were cancelled.

On August 1, 2001, the Partnership issued 129,901 common units to the
general partner in connection with the assumption of certain liabilities by the
general partner from the acquisition of certain assets of ProFlame. The general
partner was entitled to 158,917 common units as a result of this transaction but
agreed to forego the issuance of 1,638 units and 1,605 units, which represented
its capital contributions to maintain its 1% interest in the Partnership and its
1.0101% interest in the Operating Partnership, respectively, in relation to this
transaction. The general partner also agreed to forego the issuance of an
additional 25,773 common units to which it was entitled in the ProFlame
acquisition to maintain its 1.0101% interest in the Operating Partnership. The
units issued to the general partner were not registered with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, by virtue of
an exemption under Section 4(2) thereof.

During fiscal 2001, Heritage issued 58,000 common units in exchange for
certain assets in connection with the acquisition of a certain propane business,
for a total value of $1.6 million. These units were issued utilizing Heritage's
Registration Statement No. 333-40407 on Form S-4.

ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following table sets forth, for the periods and as of the dates
indicated, selected historical financial and operating data for Heritage Propane
Partners, L.P. (formerly Peoples Gas and surviving legal entity in the series of
transactions with U.S. Propane). The selected historical financial and operating
data should be read in conjunction with the financial statements of Heritage
Propane Partners, L.P. (formerly Peoples Gas Company) included elsewhere in this
Report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" also included elsewhere in this Report. The amounts in
the table below, except per unit data, are in thousands.

16

HERITAGE PROPANE PARTNERS, L.P. (FORMERLY PEOPLES GAS):

(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.

(b) Net income (loss) per unit is computed by dividing the net income by the
weighted average number of units outstanding. Although equity accounts of
Peoples Gas survive the merger, Predecessor Heritage's partnership
structure and partnership units survive. Accordingly, the equity accounts
of Peoples Gas have been restated based on general partner interest and
common units received by Peoples Gas in the merger.

(c) EBITDA is defined as operating income plus non-cash compensation,
depreciation and amortization (including the EBITDA of investees). EBITDA
should not be considered as an alternative to net income (as an indicator
of operating performance) or as an alternative to cash flow (as a measure
of liquidity or ability to service debt obligations), but provides
additional information for evaluating Heritage's ability to make the
Minimum Quarterly Distribution.

(d) Partners' Capital is anticipated to decrease to the extent depreciation and
amortization exceeds maintenance capital expenditure requirements.

(e) Capital expenditures fall generally into three categories: (i) maintenance
capital expenditures, which include expenditures for repairs that extend
the life of the assets and replacement of property, plant and equipment,
(ii) growth capital expenditures, which include expenditures for purchase
of new propane tanks and other equipment to facilitate

17

retail customer base expansion, and (iii) acquisition expenditures which
include expenditures related to the acquisition of retail propane
operations and the portion of the purchase price allocated to intangibles
associated with such acquired businesses.

HERITAGE PROPANE PARTNERS, L.P. (PREDECESSOR HERITAGE):

The following table sets forth, for the periods and as of the dates
indicated, selected historical financial and operating data for Predecessor
Heritage. The selected historical financial and operating data of Predecessor
Heritage should be read in conjunction with the financial statements of Heritage
included elsewhere in this Report and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" also included elsewhere in this
Report. The amounts in the table below, except per unit data, are in thousands.

(a) Gross profit is computed by reducing total revenues by the direct cost of
the products sold.

(b) Net income (loss) per unit is computed by dividing the limited partners'
interest in net income (loss) by the limited partners' weighted average
number of units outstanding.

18

(c) EBITDA is defined as operating income plus non-cash compensation,
depreciation and amortization (including the EBITDA of investees). EBITDA
should not be considered as an alternative to net income (as an indicator
of operating performance) or as an alternative to cash flow (as a measure
of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to make the
Minimum Quarterly Distribution. The minority interest of MP Energy
Partnership, a majority owned partnership, is deducted from the EBITDA
calculation.

(d) Capital expenditures fall generally into three categories: (i) maintenance
capital expenditures of approximately $5.1 for the period ended August 9,
2000 and $4.6, $3.6 and $2.3 million in fiscal 1999, 1998 and 1997,
respectively, which include expenditures for repairs that extend the life
of the assets and replacement of property, plant and equipment, (ii) growth
capital expenditures, which include expenditures for purchases of new
propane tanks and other equipment to facilitate retail customer base
expansion, and (iii) acquisition capital expenditures, which include
expenditures related to the acquisition of retail propane operations and
the portion of the purchase price allocated to intangibles associated with
such acquired businesses.

(e) Reflects unaudited pro forma information for Predecessor Heritage as if the
Partnership formation had occurred as of the beginning of the period
presented.

(f) Partners' Capital is anticipated to decrease to the extent depreciation and
amortization exceeds maintenance capital expenditure requirements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.

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. 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. SUCH STATEMENTS ARE MADE IN RELIANCE
ON THE "SAFE HARBOR" PROTECTIONS PROVIDED UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.

AS REQUIRED BY THAT LAW, HERITAGE HEREBY IDENTIFIES THE FOLLOWING
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY
RESULTS PROJECTED, FORECASTED, ESTIMATED OR BUDGETED BY HERITAGE IN
FORWARD-LOOKING STATEMENTS. THESE INCLUDE:

o CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE UNITED STATES AS
WELL AS CHANGES IN GENERAL ECONOMIC CONDITIONS AND CURRENCIES IN
FOREIGN COUNTRIES;

o WEATHER CONDITIONS THAT VARY SIGNIFICANTLY FROM HISTORICALLY
NORMAL CONDITIONS;

o ITS SUCCESS IN HEDGING ITS POSITIONS;

o THE EFFECTIVENESS OF RISK-MANAGEMENT POLICIES AND PROCEDURES AND
THE ABILITY OF HERITAGE'S LIQUIDS MARKETING COUNTERPARTIES TO
SATISFY THEIR FINANCIAL COMMITMENTS;

o THE GENERAL LEVEL OF PETROLEUM PRODUCT DEMAND, AND THE
AVAILABILITY OF PROPANE SUPPLIES;

o ENERGY PRICES GENERALLY AND SPECIFICALLY, THE PRICE OF PROPANE TO
THE CONSUMER COMPARED TO THE PRICE OF ALTERNATIVE AND COMPETING
FUELS;

o COMPETITION FROM OTHER PROPANE DISTRIBUTORS AND ALTERNATE FUELS;

19

o THE AVAILABILITY AND COST OF CAPITAL;

o CHANGES IN LAWS AND REGULATIONS TO WHICH HERITAGE IS SUBJECT,
INCLUDING TAX, ENVIRONMENTAL AND EMPLOYMENT REGULATIONS;

o ITS ABILITY TO GENERATE AVAILABLE CASH FOR DISTRIBUTIONS TO
UNITHOLDERS;

o THE COSTS AND EFFECTS OF LEGAL AND ADMINISTRATIVE PROCEEDINGS
AGAINST IT WHICH MAY BE BROUGHT AGAINST IT;

o ITS ABILITY TO SUSTAIN HISTORICAL LEVELS OF INTERNAL GROWTH; AND

o ITS ABILITY TO CONTINUE TO LOCATE AND ACQUIRE OTHER PROPANE
COMPANIES AT PURCHASE PRICES THAT ARE ACCRETIVE TO ITS FINANCIAL
RESULTS.

WEATHER AND SEASONALITY

Heritage's propane distribution business is seasonal and dependent upon
weather conditions in its service areas. Propane sales to residential and
commercial customers are affected by winter heating season requirements. This
generally results in higher operating revenues and net income during the period
from October through March of each year and lower operating revenues and either
net losses or lower net income during the period from April through September of
each year. Sales to industrial and agricultural customers are much less weather
sensitive.

Gross profit margins are not only affected by weather patterns but also
by changes in customer mix. For example, sales to residential customers
ordinarily generate higher margins than sales to other customer groups, such as
commercial or agricultural customers. In addition, gross profit margins vary by
geographic region. Accordingly, gross profit margins could vary significantly
from year to year in a period of identical sales volumes.

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY AND SURVIVING LEGAL ENTITY IN THE SERIES OF
TRANSACTIONS WITH U.S. PROPANE)

GENERAL

The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales price over propane supply costs. The
market price of propane is often subject to volatile changes as a result of
supply or other market conditions over which Heritage will have no control.
Product supply contracts are one-year agreements subject to annual renewal and
generally permit suppliers to charge posted prices (plus transportation costs)
at the time of delivery or the current prices established at major delivery
points. Since rapid increases in the wholesale cost of propane may not be
immediately passed on to retail customers, such increases could reduce gross
profits. Heritage generally has and Predecessor Heritage generally had attempted
to reduce price risk by purchasing propane on a short-term basis. Heritage has
and Predecessor Heritage had on occasion purchased significant volumes of
propane during periods of low demand, which generally occur during the summer
months, at the then current market price, for storage both at its service
centers 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 retail distribution outlets 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 that burns in internal combustion engines that
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. Through August 9, 2000, Predecessor Heritage completed 68

20

acquisitions for an aggregate purchase price of approximately $297 million.
Predecessor Heritage completed 40 of these acquisitions since its initial public
offering on June 25, 1996. During the period from August 10, 2000 and August 31,
2001, Heritage completed 12 additional acquisitions, for an aggregate purchase
price of $119.1 million, not including the merger of U.S. Propane and
Predecessor Heritage. On August 1, 2001, Heritage acquired the operations of
ProFlame, Inc. (ProFlame) and related propane distribution companies in
California and Nevada. ProFlame delivered approximately 38 million retail and
wholesale gallons of propane for its fiscal year ended August 31, 2000 to over
32,000 customers. ProFlame's propane distribution network includes 20 customer
service locations throughout California and Nevada, as well as 11 additional
sites that are either railcar terminals and/or storage facilities located in
areas such as the San Francisco Bay, San Joaquin Valley, Redding and Barstow,
California, and in Reno and Las Vegas, Nevada. The general partner believes that
Heritage is the fourth largest retail marketer of propane in the United States,
based on retail gallons sold. As of November 5, 2001, Heritage serves over
600,000 customers through approximately 275 customer service locations in 28
states.

The retail propane distribution business is largely seasonal due to
propane's use as a heating source in residential and commercial buildings.
Historically, approximately two-thirds of Heritage's retail propane volume and
in excess of 80% of Heritage's EBITDA is attributable to sales during the
six-month peak-heating season of October through March. Consequently, sales and
operating profits are concentrated in the first and second fiscal quarters. Cash
flow from operations, however, is generally greatest during the second and third
fiscal quarters when customers pay for propane purchased during the six-month
peak-heating season.

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 therefore 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, which assumes that normal weather will prevail in each of
the regions in which it operates.

Gross profit margins vary according to customer mix. For example, sales
to residential customers generate higher margins than sales to certain other
customer groups, such as 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.

Peoples Gas engaged in the sale, distribution and marketing of propane
and other related products. Revenues are derived primarily from the retail
propane marketing business. Peoples Gas believed that prior to the series of
transactions with Atmos, AGL, Piedmont and Predecessor Heritage, it was among
the top 25 retail propane marketers nationally and was the largest independent
propane distributor in Florida. At the time of the merger of U.S. Propane and
Predecessor Heritage, Peoples Gas was serving more than 70,000 residential,
commercial and industrial customers located in the Florida peninsula.

In August 2000, TECO Energy, Inc., Atmos Energy Corporation, Piedmont
Natural Gas Company, Inc. and AGL Resources, Inc. contributed each company's
propane operations, Peoples Gas, United Cities Propane Gas, Inc. (United
Cities), Piedmont Propane Company (Piedmont), and AGL Propane, Inc. (AGL),
respectively, to U.S. Propane, L.P. (U.S. Propane) in exchange for equity
interests in U.S. Propane. The merger was accounted for as an acquisition using
the purchase method of accounting with Peoples Gas being the accounting
acquirer.

In August 2000, U.S. Propane acquired all of the outstanding common
stock of Heritage Holdings, Inc., Heritage Propane Partner, L.P.'s general
partner, for $120 million. By virtue of Heritage Holdings, Inc.'s general
partner and limited partner interests in Heritage Propane Partners, L.P., U.S.
Propane gained control of Heritage Propane Partners, L.P. Simultaneously, U.S.
Propane transferred its propane operations, consisting of its interest in four
separate limited liability companies, AGL Propane, L.L.C., Peoples Gas Company,
L.L.C., United Cities Propane Gas, L.L.C. and Retail Propane Company, L.L.C.
(former Piedmont operations) to Heritage Propane Partners, L.P. for $181.4
million plus working capital. The $181.4 million was payable $139.5 million in
cash, $31.8 million of assumed debt, and the issuance of 372,392 common units of
the Heritage Propane Partners, L.P. valued at $7.3 million and a 1.0101% limited
partner interest in Heritage Operating, L.P. valued at $2.7 million. An
independent committee of the Board of Directors of Heritage Holdings, Inc,
approved the purchase price and the

21

exchange price for the common units. Subsequent to August 31, 2000, additional
payments of approximately $12.9 million were made for working capital. The
exchange price for the common units was $19.73125 per unit under a formula based
on the average closing price of Heritage Propane Partners, L.P.'s common units
on the New York Stock Exchange for the twenty (20) day period beginning ten (10)
days prior to the public announcement of the transaction on June 15, 2000.

ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS - HERITAGE PROPANE PARTNERS, L.P.
(FORMERLY PEOPLES GAS)

The following discussion of the historical financial condition and
results of operations of Heritage Propane Partners, L.P., formerly Peoples Gas,
should be read in conjunction with the Selected Historical Financial and
Operating Data and notes thereto, and the historical financial statements and
notes thereto included elsewhere herein. The formation of U.S. Propane and the
merger with Predecessor Heritage affect the comparability of the fiscal year
ended August 31, 2001 and the eight months ended August 31, 2000, because the
volumes and results of operations of fiscal 2001 include a full year of the
volumes and results of operations of the propane operations of the combined
operations and also the comparability of the results of the eight months ended
August 31, 2000 and August 31, 1999, because the volumes and results of
operations for the period from August 10, 2000 through August 31, 2000 also
include the volumes and results of operations of AGL Propane, United Cities,
Piedmont Propane and Predecessor Heritage. The increases in the line items
discussed below are a result of these transactions. Amounts discussed below
reflect 100% of the results of M-P Energy Partnership during the period from
August 9, 2000 through August 31, 2000 and the fiscal year ended August 31,
2001. M-P Energy Partnership is a general partnership in which Heritage owns a
60% interest. Because M-P 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 calculation.

FISCAL YEAR ENDED AUGUST 31, 2001 COMPARED TO THE EIGHT MONTHS ENDED AUGUST 31,
2000

Volume. Total retail gallons sold in the year ended August 31, 2001
were 330.2 million, an increase of 291.9 million over the 38.3 million gallons
sold in the eight months ended August 31, 2000. Predecessor Heritage sold 170.9
million retail gallons in the approximate 11-month period ended August 9, 2000.
A return to more normal weather during the peak-heating season plus acquisitions
were responsible for the increase.

Heritage sold approximately 101.6 million wholesale gallons during
fiscal 2001 of which 12.7 million were domestic wholesale and 88.9 million were
foreign wholesale. In the eight months ended August 31, 2000, Heritage sold 0.6
million domestic wholesale gallons and 6.2 million foreign wholesale gallons.
The increase in wholesale gallons is attributable to having a full year of the
operations of Predecessor Heritage reported in fiscal 2001, as Peoples Gas did
not have any wholesale gallons that were reported in the eight months ended
August 31, 2000. As a comparison, Predecessor Heritage sold approximately 82.6
million wholesale gallons in the 11-month period ended August 9, 2000 of which
7.1 million were domestic wholesale and 75.5 million were foreign wholesale.

Revenues. Total revenues for the fiscal year ended August 31, 2001 were
$715.5 million an increase of $652.4 million as compared to $63.1 million in the
eight months ended August 31, 2000. Revenues for the propane operations of
Predecessor Heritage for the approximate 11-month period ended August 9, 2000
were $242.5 million. Retail revenues for the fiscal year ended August 31, 2001
were $440.5 million as compared to $43.8 million for the eight months ended
August 31, 2000, an increase of $396.7 million. Predecessor Heritage reported
retail fuel revenues of $178.9 million were in the 11-months ended August 9,
2000. Domestic wholesale revenues were $9.9 million, foreign wholesale revenues
were $50.0 million and other revenues were $42.2 for the fiscal year ended
August 31, 2001. Heritage also had revenues from its liquids marketing of $172.9
million for fiscal 2001, which began operations in June of 2000. For the eight
months ended August 31, 2000, Heritage reported domestic wholesale revenues of
$.4 million, foreign wholesale revenues of $3.4 million and revenues from the
liquids marketing of $12.3 million. A full year of the combined operations of
the propane operations of U.S. Propane, Predecessor Heritage and the additional
acquisitions made by Heritage attributed to the increases in the revenues, along
with the increase in gallons, due to the return of more normal weather patterns,
higher selling prices and the effect of the operations of previous acquisitions
in fiscal 2001 as compared to periods reported last year.

Cost of Products Sold. Total cost of products sold in fiscal 2001
increased $436.5 million to $478.0 million as compared to $41.5 million for the
eight months ended August 31, 2000. Of this increase, $160.0 million is the
result of the liquids marketing due to the increased related revenues. Retail
fuel cost of sales were $238.1 million for

22

the fiscal year ended August 31, 2001, an increase of $212.7 million, as
compared to $25.4 million for the eight months ended August 31, 2000.
Predecessor Heritage reported total cost of sales of $140.8 million in the
11-month period ended August 9, 2000, of which $95.1 million was for retail fuel
cost of sales. Wholesale cost of sales increased $53.4 million of which $44.7
million was related to foreign cost of sales. Other cost of sales increased to
$11.4 million as compared to $1.0 million due to a full year of the combined
operations of the propane operations of U.S. Propane and Predecessor Heritage
coupled with the acquisitions made during fiscal 2001. Fuel cost of sales
increased due to the increases in volumes described above and due to the
significantly higher wholesale cost of propane for fiscal year ended August 31,
2001 as compared to the eight-month period last year.

Gross Profit. Total gross profit increased to $237.4 million in fiscal
2001 as compared to $21.6 million for the eight months ended August 31, 2000.
This increase is due to the aforementioned increases in volumes and revenues,
offset by the increase in product costs. For the fiscal year ended August 31,
2001, retail fuel gross profit was $202.4 million, domestic wholesale was $.8
million, and other gross profit was $30.7 million. Foreign wholesale gross
profit was $2.0 million and liquids marketing gross profit was $1.4 million for
the fiscal year ended August 31, 2001. As a comparison, for the eleven month
period ended August 9, 2000, Predecessor Heritage recorded retail fuel gross
profit of $83.8 million, wholesale fuel gross profit of $.6 million, foreign
gross profit of $1.5 million and other of $15.8 million, for a total gross
profit of $101.7 million.

Operating Expenses. Operating expenses were $126.8 million for fiscal
2001 as compared to $16.6 million for the eight-month period ended August 31,
2000. The increase of $110.2 million is the result of the additional operating
expenses related to a full year of the combined propane operations of U.S.
Propane, Predecessor Heritage and the additional acquisitions made by Heritage.
Predecessor Heritage reported operating expenses of $55.1 million in the
eleven-month period ended August 9, 2000.

Selling, General and Administrative. Selling, general and
administrative expenses were $15.7 million for the fiscal year ended August 31,
2001 as compared to $1.0 million for the eight months ended August 31, 2000.
Peoples Gas did not classify any of its operating expenses as selling, general
and administrative, so as a comparison Predecessor Heritage had selling, general
and administrative, expenses of $6.0 million for the eleven month period ended
August 31, 2000. The increase in selling, general and administrative expenses is
primarily due to the growth of Heritage resulting from the merger of U.S.
Propane and Predecessor Heritage, other acquisitions and the additional
executive compensation that relates to this fiscal year's operating performance.

Depreciation and Amortization. Depreciation and amortization for the
fiscal year ended August 31, 2001 was $40.4 million, an increase of $35.7
millions as compared to $4.7 million in the eight months ended August 31, 2000.
The increase is primarily attributable to the addition of property, plant and
equipment, and intangible assets from the transactions referred to above.

Operating Income (Loss). Heritage reported net income of $54.4 million
in fiscal 2001 as compared to the operating loss of $.7 million for the eight
months ended August 31, 2000. Predecessor Heritage reported operating income of
$23.5 million for the eleven-month period ended August 9, 2000. The increases in
gross profit above, offset by the increases in operating and selling, general
and administrative expenses and depreciation and amortization, attributed to the
increase in operating income.

Provision for Income Taxes. Heritage did not report a provision for
income taxes for fiscal 2001. Heritage is a limited partnership and as a result,
its earnings or loss for federal income tax purposes is included in the tax
returns of the individual partners. Provision for income taxes was $.4 million
in the eight months ended August 31, 2000, which represents the provision for
income taxes incurred prior to the transactions with Predecessor Heritage. Prior
to the transaction with Predecessor Heritage, Peoples Gas filed a consolidated
federal income tax return with TECO and, based on a tax sharing agreement,
included, in its statements of operations, a provision for income taxes
calculated on a separate return basis.

Net Income (Loss). Heritage reported a record net income of $19.7
million, or $1.43 per limited partner unit, for the fiscal year ended August 31,
2001, an increase of $23.5 million over the net loss of $3.8 million for the
eight-month period ended August 31, 2000. Predecessor Heritage reported net
income of $6.5 million or $0.66 per limited partner unit for the eleven-month
period ended August 9, 2000. The increase in net income over the eight-month
period ended August 31, 2000 and the eleven-month period ended August 9, 2000,
was the result of the increase in operating income described above, plus a
nonrecurring gain of $.8 million on the sale of excess property offset by an

23

increase of $33.2 million of interest expense over the interest expense reported
in eight months ended August 31, 2000. Interest expense for fiscal 2001
increased due to the increase of debt incurred in the transaction with U.S.
Propane.

EIGHT MONTHS ENDED AUGUST 31, 2000 COMPARED TO THE EIGHT MONTHS ENDED AUGUST 31,
1999 (UNAUDITED)

Volume. Total retail gallons sold in the eight months ended August 31,
2000 were 38.3 million, an increase of 16.2 million over the 22.1 million
gallons sold in the eight months ended August 31, 1999. Heritage sold 16.3
million retail gallons in the period from August 10, 2000 through August 31,
2000, thus the increase in retail gallons is primarily attributable to the
transactions referred to above.

Revenues. Total revenues for the eight months ended August 31, 2000
were $63.1 million, an increase of $41.3 million as compared to $21.8 million
for the eight months ended August 31, 1999. Revenues for the former propane
operations of Predecessor Heritage for the period from August 10, 2000 through
August 31, 2000 were $36.4 million, of which $11.7 million was due to the
liquids marketing activity conducted through Heritage Energy Resources and the
remainder related to increased volumes. The increase in revenue is primarily
attributable to the transactions referred to above.

Cost of Products Sold. Total cost of products sold increased $33.0
million to $41.5 million for the eight months ended August 31, 2000. Of this
increase, $11.5 million is the result of the liquids marketing activity for the
period from August 10, 2000 through August 31, 2000, with the remainder relating
to the increased volumes described above.

Operating Expenses. Operating expenses were $16.6 million for the
eight-month period ended August 31, 2000 as compared to $8.6 million for the
eight months ended August 31, 1999. The increase of $8.0 million is the result
of the additional operating expense related to the merger.

Depreciation and Amortization. Depreciation and amortization was $4.7
million in the eight months ended August 31, 2000 as compared to $2.0 million in
the eight months ended August 31, 1999. The increase is attributable to the
transactions referred to above.

Operating Income (Loss). Heritage had an operating loss of $.7 million
for the eight months ended August 31, 2000 as compared to operating income of
$2.7 million for the eight months ended August 31, 1999. The decrease is the
result of the additional operating expenses and depreciation and amortization
resulting from the merger.

Provision for Income Taxes. Provision for income taxes decreased $.6
million, to $.4 million for the eight months ended August 31, 2000, as compared
to $1.0 million for the eight months ended August 31, 1999. This decrease is a
result of the decrease in income before provision for income taxes in the
comparable eight-month period of Peoples Gas. Prior to the transaction with
Predecessor Heritage, Peoples Gas filed a consolidated federal income tax return
with TECO and, based on a tax sharing agreement, included, in its statements of
operations, a provision for income taxes calculated on a separate return basis.

Net Income (Loss). For the eight-month period ended August 31, 2000,
Heritage had a net loss of $3.8 million, a decrease of $5.4 million as compared
to net income for the eight months ended August 31, 1999 of $1.6 million. This
decrease is the result of decreased operating income described above.

FISCAL YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO FISCAL YEAR 1998

Volume. Peoples Gas sold 33.6 million gallons in fiscal 1999, an
increase of 2.7 million gallons, or 9% from the 30.9 million gallons sold in
fiscal 1998, primarily as a result of the July 1999 acquisition of Commercial
Propane, Inc. The increase in volumes was net of the effects of unseasonably
warm weather.

Revenues. Total revenues for Peoples Gas increased $3.8 million, or
12.6% to $34.0 million from fiscal 1998's total revenues of $30.2 million. The
increase is primarily the result of increased volumes associated with the July
1999 acquisition of Commercial Propane, Inc. and the effects of higher cost of
fuel.

24

Cost of Products Sold. Total cost of product sold increased $2.5
million, or 20.3% to $14.8 million for fiscal 1999 as compared to $12.3 for
fiscal 1998. The increase is primarily the result of increased volumes
associated with the July 1999 acquisition of Commercial Propane, Inc. and the
effects of higher cost of propane that was passed through to customers.

Operating Expenses. Operating expenses for fiscal 1999 increased $2.1
million, or 18.9% to $13.2 million as compared to $11.1 million in fiscal 1998.
This increase is primarily the result of increased costs related to additional
marketing efforts and costs related to the July 1999 acquisition of Commercial
Propane, Inc.

Depreciation and Amortization. Depreciation and amortization was $3.1
million for fiscal 1999, a $0.2 million increase over fiscal 1998's $2.9
million. This increase is the result of additional depreciation on maintenance
and growth capital expenditures and fixed assets recorded in relation to
acquisitions.

Operating Income. Operating income decreased $1.1 million, or 27.5% to
$2.9 million as compared to $4.0 million in fiscal 1998. The increased revenues
described above were more than offset by the increases in operating expenses,
depreciation and amortization, also described above, which resulted in this
decrease.

Provision for Income Taxes. Provision for income taxes decreased $0.3
million, or 21.4% to $1.1 million as compared to $1.4 million for 1998. This
decrease is a result of the decrease in income before provision for income
taxes.

Net Income. Net income for fiscal year 1999 decreased $0.3 million, or
14.3% to $1.8 million as compared to fiscal 1998's net income of $2.1 million.
This decrease is the result of decreased operating income being somewhat offset
by lower taxes, as discussed above.

ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS - PREDECESSOR HERITAGE

The following discussion of the historical financial condition and
results of operations of Predecessor Heritage should be read in conjunction with
the Selected Historical Financial and Operating Data and notes thereto, and the
historical financial statements and notes thereto included elsewhere herein.

The following discussion reflects for the periods indicated the results
of operations and operating data for Predecessor Heritage. Most of the increases
in the line items discussed below result from the acquisitions made by
Predecessor Heritage during the periods discussed. During the approximate
11-month period ended August 9, 2000, Predecessor Heritage completed 11
acquisitions for a total purchase price of $54.9 million. In fiscal 1999,
Predecessor Heritage consummated six acquisitions for a total purchase price of
$22.7 million. These acquisitions affect the comparability of prior period
financial matters, as the volumes are not included in the prior period's results
of operations. Amounts discussed below reflect 100% of the results of M-P Energy
Partnership, a general partnership in which the Predecessor Heritage owns a 60%
interest. Because M-P Energy Partnership is primarily engaged in lower-margin
wholesale distribution, its contribution to Predecessor Heritage's net income is
not significant and the minority interest of this partnership is excluded from
the EBITDA calculation. As a result of the series of transactions between
Predecessor Heritage and U.S Propane, the results of Predecessor Heritage are
included in the results of Heritage beginning August 10, 2000.

PERIOD SEPTEMBER 1, 1999 TO AUGUST 9, 2000 COMPARED TO FISCAL YEAR 1999

The following discussion compares the period September 1, 1999 to
August 9, 2000, an approximate eleven-month period for Predecessor Heritage to
its full fiscal year ended August 31, 1999. The pro forma amounts include the
"stand alone" results of Predecessor Heritage without the effect of the series
of transactions with U.S. Propane.

Volume. Predecessor Heritage sold 170.9 million retail gallons during
the period ended August 9, 2000, an increase of 11.0 million gallons or 6.9%
from the 159.9 million gallons sold in fiscal 1999 primarily as a result of
acquisitions. The increases in volumes were net of the effects of one of the
warmest winters this century. The pro forma retail gallons for Predecessor
Heritage sold through August 31, 2000 were approximately 180.6 million, an
increase of 20.7 million gallons or 12.9% as compared to fiscal 1999.

25

Predecessor Heritage also sold approximately 82.6 million wholesale
gallons during the period ended August 9, 2000, an increase of 1.5 million
gallons from fiscal 1999's 81.1 million gallons. The increase in the wholesale
volumes was attributable to the net of an increase of 2.2 million gallons in the
foreign operations of M-P Energy Partnership and the decline of .7 million
gallons in the U.S. wholesale operations.

Revenues. Total revenues for Predecessor Heritage increased $58.5
million or 31.8% to $242.5 million for the period ended August 9, 2000 as
compared to $184.0 million for fiscal 1999. The current period's domestic retail
propane revenues increased $41.5 million or 30.2% to $178.9 million versus
fiscal 1999's results of $137.4 million, due to increased volumes and higher
selling prices. The U.S. wholesale revenues increased slightly in this
comparison to $4.3 million as compared to $3.4 million for fiscal 1999, due to
higher selling prices. Other revenues increased $1.5 million or 6.6% to $24.1
million as a result of acquisitions and internal growth. Foreign revenues
increased $10.2 million for the period ended August 9, 2000, to $30.8 million as
compared to $20.6 million for the fiscal year ended August 31, 1999, primarily
as a result of higher selling prices and to a lesser degree, increased volume.
Sales price per gallon during the period ended August 9, 2000 continued to
remain above the previous year's level due to the higher cost of propane, which
was passed through to customers, as compared to the same period the previous
year. Total revenues included $4.3 million of liquids marketing activity for the
period ended August 9, 2000, which Predecessor Heritage did not have the
previous fiscal year. The pro forma results for Predecessor Heritage for the
period ended August 31, 2000, would reflect total revenues of approximately
$271.1 million, an $87.1 million increase or 47.3% as compared to fiscal 1999.
This pro forma amount includes $15.9 million of trading revenues, which are new
to Predecessor Heritage as of July 1, 2000.

Cost of Sales. Total cost of sales increased $53.5 million or 61.3% to
$140.8 million for the period ended August 9, 2000 as compared to $87.3 million
for the fiscal year ended August 31, 1999. This increase is the result of a
significant increase in the wholesale propane prices which began increasing
during the first fiscal quarter as compared to the low wholesale costs
experienced in the fiscal year ended August 31, 1999, the increase in gallons
sold and $4.3 million of trading cost of sales which were not in fiscal 1999
cost of sales. Retail fuel cost of sales increased $37.5 million or 65.1% to
$95.1 million during the period ended August 9, 2000, as compared to $57.6
million for the fiscal year ended August 31, 1999. Foreign wholesale cost of
sales also reflected an increase, going from $19.1 million for the fiscal year
ended August 31, 1999 to $29.3 million for the period ended August 9, 2000 due
to the impact of the increase in the cost of propane and increased volumes in
this area. U. S. wholesale cost of sales increased $.9 million as a result of
the higher cost of fuel. Other cost of sales also increased $.7 million due to
an increase in other revenues. The pro forma cost of sales for the period ended
August 31, 2000, for Predecessor Heritage is approximately $162.8 million, of
which $15.8 million represents trading cost of sales that are not in 1999's cost
of sales.

Gross Profit. Total gross profit increased $4.9 million or 5.1% to
$101.7 million for the period ended August 9, 2000, as compared to $96.8 million
for the fiscal year ended August 31, 1999 due to the increases in volumes sold
and revenues discussed above, offset by the increase in product costs. The pro
forma gross profit for Predecessor Heritage for the twelve months ended August
31, 2000 is approximately $108.3 million as compared to $96.8 million for the
fiscal year ended August 31, 1999, an increase of $11.5 million or 11.9%.

Operating Expenses. Operating expenses increased $3.9 million or 7.6%
to $55.1 million in the period ended August 9, 2000 as compared to $51.2 million
in the fiscal year ended August 31, 1999 primarily due to acquisition related
operating expenses. Pro forma operating expenses for Predecessor Heritage for
the period ended August 31, 2000, were approximately $61.3, a 19.7% increase
over fiscal 1999.

Selling, General and Administrative. Selling, general and
administrative expenses were $6.0 million for the period ended August 9, 2000, a
decrease of $.2 million from the $6.2 million reported for the fiscal year ended
August 31, 1999. Selling, general and administrative expenses for the pro forma
period ended August 31, 2000 for Predecessor Heritage were approximately $6.5
million, a $.3 million increase over fiscal 1999.

Depreciation and Amortization. Depreciation and amortization increased
$2.4 million for the period ended August 9, 2000 to $17.1 million as compared to
$14.7 million for the same period last year. This increase is primarily the
result of additional depreciation and amortization costs on the fixed assets and
intangible assets recorded in connection with acquisitions. Pro forma
depreciation and amortization for the period ended August 31, 2000 was
approximately $19.0 million.

26

Operating Income. Operating income for the period ended August 9, 2000
decreased $1.1 million to $23.5 million as compared to $24.6 million for the
fiscal year ended August 31, 1999. The pro forma operating income for
Predecessor Heritage for the period ended August 31, 2000 was $21.5 million.
This decrease is primarily attributable to the increased operating expenses and
depreciation and amortization related to acquisitions, as well as lower volumes
in existing operations as a result of unusually warm weather.

Interest Expense. Interest expense increased $1.8 million or 11.3% to
$17.7 million for the period ended August 9, 2000 as compared to $15.9 million
for the twelve-month ended August 31, 1999. The increase was primarily due to
borrowings related to acquisitions and to a lesser extent, increased borrowings
as a result of higher product costs. Interest expense for the pro forma twelve
month period ended August 31, 2000, was approximately $19.5 million, a $3.6
million increase over fiscal 1999's interest expense.

Net Income. Net income for the period ended August 9, 2000 was $6.5
million as compared to the net income of $9.7 million for the fiscal year ended
August 31, 1999. The $3.2 million decrease is the result of the decrease in
operating income described above together with an increase in interest costs.
Net income for the pro forma period ended August 31, 2000 for Predecessor
Heritage was approximately $3.2 million, a $6.5 million decrease from fiscal
1999.

EBITDA. Earnings before interest, taxes, depreciation and amortization
increased $1.4 million to $42.4 million for the period ended August 9, 2000, as
compared to fiscal 1999's EBITDA of $41.0 million. The pro forma EBITDA for
Predecessor Heritage for the twelve months ended August 31, 2000 was $42.3
million. Heritage's EBITDA includes the EBITDA of investees, but does not
include the EBITDA of the minority interest of M-P Energy Partnership. EBITDA
should not be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating the Partnership's ability to make the Minimum
Quarterly Distribution.

LIQUIDITY AND CAPITAL RESOURCES

The ability of Heritage to satisfy its obligations will depend on its
future performance, which will be subject to prevailing economic, financial,
business and weather conditions and other factors, many of which are beyond its
control. Future capital requirements of Heritage are expected to be provided by
cash flows from operating activities. To the extent future capital requirements
exceed cash flows from operating activities:

a) working capital will be financed by the working capital line of
credit and repaid from subsequent seasonal reductions in
inventory and accounts receivable;

b) growth capital, mainly for customer tanks, expended will be
financed by the revolving acquisition line of credit; and

c) acquisition capital expenditures will be financed by the
revolving acquisition line of credit; other lines of credit,
long-term debt, the issuance of additional common units or a
combination thereof.

Cash Flows

Operating Activities. Cash provided by operating activities for fiscal
year ended August 31, 2001 was $28.1 million as compared to cash provided by
operating activities of $14.5 million for the eight months ended August 31,
2000. The net cash provided from operations of $28.1 million for the fiscal year
ended August 31, 2001 consisted of net income of $19.7 million and noncash
charges of $44.1 million, principally depreciation and amortization offset by
the increase in working capital items of $35.7 million. Working capital items
have increased in fiscal 2001 over the eight-month period ended August 31, 2000
as Heritage has secured more inventory and inventory positions for the coming
fiscal year than it had at the same time last year.

Investing Activities. Heritage has completed 10 acquisitions during the
fiscal year ended August 31, 2001 investing $94.9 million, net of cash received,
to purchase propane companies. This capital expenditure amount is reflected in
the cash used in investing activities of $122.3 million along with $23.8 million
invested for maintenance

27

needed to sustain operations at current levels and customer tanks to support
growth of operations and $6.2 million on the investment in marketable
securities, offset by proceeds of $2.6 million from the sale of excess assets.

Financing Activities. Cash provided by financing activities of $95.0
million during the fiscal year ended August 31, 2001, was primarily from the net
proceeds of $66.0 million from the issuance of 2.5 million of common units in an
equity offering on July 31, 2001 and the increase in long term debt of $61
million, offset by $31.5 million of cash distributions paid to unitholders and
the general partner. The proceeds were used to repay the outstanding
indebtedness under the Acquisition Facility, substantially all of which was
incurred in the acquisition of ProFlame, with the balance used for general
partnership purposes, including additional acquisitions and repayment of debt.
On May 24, 2001, Heritage issued an additional $70 million (Series G through I)
of the fixed rate senior secured notes. Heritage used the net proceeds from the
notes to repay the balance then outstanding under the senior revolving
acquisition facility and to reduce other debt (See "Description of Indebtedness"
below).

Financing and Sources of Liquidity

Heritage has a Bank Credit Facility, which includes a Working Capital
Facility, a revolving credit facility providing for up to $65.0 million of
borrowings to be used for working capital and other general partnership
purposes, and an Acquisition Facility, a revolving credit facility providing for
up to $50.0 million of borrowings to be used for acquisitions and improvements.
On July 16, 2001, the Working Capital Facilities was amended to extend its
expiration date from June 30, 2002 to June 30, 2004 and the Acquisition Facility
was amended to extend its initial expiration date from December 31, 2001 to
December 31, 2003, at which time the facility will convert to a term loan
payable in quarterly installments with a final maturity of June 30, 2006. See
Note 4 - Working Capital Facility and Long-Term Debt of the Consolidated
Financial Statements starting on Page F-1 of this report.

Heritage uses its cash provided by operating and financing activities
to provide distributions to unitholders and to fund acquisition, maintenance and
growth capital expenditures. Acquisition capital expenditures, which include
expenditures related to the acquisition of retail propane operations and
intangibles associated with such acquired businesses, were $94.9 million for the
fiscal year ended August 31, 2001 as compared to Predecessor Heritage's $46.8
million for the period ended August 9, 2000, $17.9 million for fiscal year 1999
and $23.3 million during fiscal 1998. In addition to the $94.9 million of cash
expended for acquisitions during fiscal 2001, $6.0 million of common units and
$10.0 million for notes payable on non-compete agreements were issued in
connection with certain acquisitions. In comparison, in addition to the $46.8
million of cash expended for acquisitions during the period ended August 9,
2000, $4.1 million of common units and $3.6 million for notes payable on
non-compete agreements were issued in connection with certain acquisitions. In
addition to the $17.9 million of cash expended for acquisitions during fiscal
1999 for Predecessor Heritage, $.5 million of common units and $3.3 million for
notes payable on non-compete agreements were issued in connection with certain
acquisitions.

Under the partnership agreement, Heritage will distribute to its
partners, 45 days after the end of each fiscal quarter, an amount equal to all
of its Available Cash for such quarter. Available cash generally means, with
respect to any quarter of the Partnership, all cash on hand at the end of such
quarter less the amount of cash reserves established by the general partner in
its reasonable discretion that is necessary or appropriate to provide for future
cash requirements. Heritage's commitment to its unitholders is to distribute the
increase in its cash flow while maintaining prudent reserves for the
Partnership's operations. Heritage raised the quarterly distribution $0.0125 per
unit each quarter during fiscal 2001 from the $0.575 distribution paid on
October 16, 2000 for the fourth quarter ended August 31, 2000, to the current
level of $0.625 per unit (or $2.50 annually) for the fourth quarter ended August
31, 2001, the fifth consecutive increase. The decision to increase the quarterly
distribution resulted from a review of Heritage's and Predecessor Heritage's
past financial performance and current projections for available cash due to the
merger between U.S. Propane and Heritage. The current distribution level
includes incentive distributions payable to the general partner to the extent
the quarterly distribution exceeds $.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.

28

DESCRIPTION OF INDEBTEDNESS

Predecessor Heritage assumed $120 million principal amount of 8.55%
Senior Secured Notes (the "Notes") at the formation of the Partnership in a
private placement with institutional investors. Interest is payable
semi-annually in arrears on each December 31 and June 30. The Notes have a final
maturity of June 30, 2011, with ten equal mandatory repayments of principal
beginning on June 30, 2002.

On November 19, 1997, Predecessor Heritage entered into a Note Purchase
Agreement ("Medium Term Note Program") that provides for the issuance of up to
$100 million of senior secured promissory notes if certain conditions are met.
An initial placement of $32 million (Series A and B) at an average interest rate
of 7.23% with an average 10-year maturity was completed at the closing of the
Medium Term Note Program. Interest is payable semi-annually in arrears on each
November 19 and May 19. An additional placement of $15 million (Series C, D and
E) at an average interest rate of 6.59% with an average 12-year maturity was
completed in March 1998. Interest is payable on Series C, D and E semi-annually
in arrears on each September 13 and March 13. The proceeds of the placements
were used to refinance amounts outstanding under the Acquisition Facility. No
future placements are permitted under the unused portion of the Medium Term Note
Program.

On August 10, 2000, Heritage entered into a Note Purchase Agreement
("Senior Secured Promissory Notes") that provides for the issuance of up to $250
million of fixed rate senior secured promissory notes if certain conditions are
met. An initial placement of $180 million (Series A through F) at an average
rate of 8.66% with an average 13-year maturity was completed in conjunction with
the merger with U.S. Propane. Interest is payable quarterly commencing November
15, 2000. The proceeds were used to finance the transaction with U.S. Propane
and retire a portion of existing debt. On May 24, 2001, Heritage issued an
additional $70 million (Series G through I) of the fixed rate senior secured
notes. The Senior Secured Promissory Notes were sold to a group of institutional
lenders and have 7-, 12- and 15-year maturities with an average coupon rate of
7.66%. Heritage used the net proceeds from the Senior Secured Promissory Notes
to repay the balance outstanding under the Acquisition Facility and to reduce
other debt. Interest is payable quarterly commencing August 15, 2001.

The Note Agreements for each of the Notes, Medium Term Note Program,
Senior Secured Promissory Notes and Bank Credit Facility contain customary
restrictive covenants applicable to the Operating Partnership including
limitations on the level of additional indebtedness, creation of liens and sale
of assets. In addition, the Operating Partnership must maintain certain ratios
of Consolidated Funded Indebtedness to Consolidated EBITDA and Consolidated
EBITDA to Consolidated Interest Expense. These Agreements also provide that the
Operating Partnership may declare, make or incur a liability to make a
restricted payment during each fiscal quarter, if: (a) the amount of such
restricted payment, together with all other restricted payments during such
quarter, do not exceed Available Cash with respect to the immediately preceding
quarter; and (b) no default or event of default exists before such restricted
Payment and after giving effect thereto. The Agreements provide that Cash is
required to reflect a reserve equal to 50% of the interest to be paid on the
notes. In addition, in the third, second and first quarters preceding a quarter
in which a scheduled principal payment is to be made on the notes, Available
Cash is required to reflect a reserve equal to 25%, 50% and 75%, respectively,
of the principal amount to be repaid on such payment dates.

The Operating Partnership is in compliance with all requirements,
tests, limitations and covenants related to the Notes, Medium Term Note Program,
Senior Secured Promissory Notes and Bank Credit Facility.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Heritage has very little cash flow exposure due to rate changes for
long-term debt obligations. Heritage primarily enters debt obligations to
support general corporate purposes including capital expenditures and working
capital needs. Heritages long-term debt instruments are typically issued at
fixed interest rates. When these debt obligations mature, Heritage may refinance
all or a portion of such debt at then-existing market interest rates which may
be more or less than the interest rates on the maturing debt.

Commodity price risk arises from the risk of price changes in the
propane inventory that Heritage buys and sells. The market price of propane is
often subject to volatile changes as a result of supply or other market
conditions over which Heritage will have no control. In the past, price changes
have generally been passed along to Heritage's and Predecessor Heritage's
customers to maintain gross margins, mitigating the commodity price risk. In
order to help ensure adequate supply sources are available to Heritage during
periods of high demand, Heritage at

29

times will purchase significant volumes of propane during periods of low demand,
which generally occur during the summer months, at the then current market
price, for storage both at its 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. The swap instruments are a contractual agreement to exchange
obligations of money between the buyer and seller of the instruments as propane
volumes during the pricing period are purchased. The swaps are tied to a fixed
price bid by the buyer and a floating price determination for the seller based
on certain indices at the end of the relevant trading period. Heritage enters
into these swap instruments to hedge the projected propane volumes to be
purchased during each of the one-month periods during the projected heating
season.

At August 31, 2001, Heritage had outstanding propane hedges (swap
agreements) for a total of 33.4 million gallons of propane at a weighted average
price of $.5575 per gallon. The fair value of the swap agreement is the amount
at which they could be settled, based on estimated market prices. At August 31,
2001, Heritage would have had to pay approximately $4.6 million to terminate the
swap agreements then in place, which was recorded as accrued and other
liabilities on the balance sheet through other comprehensive income. Also at
August 31, 2001, Heritage had outstanding options to purchase 14.7 million
gallons of propane during December 2001 and January 2002 at a weighted average
price of $.48 per gallon. The fair value of $.2 million of the option contracts
was recorded as current assets on the balance sheet. Heritage continues to
monitor propane prices and may enter into additional propane hedges in the
future. Inherent in the portfolio from the liquids marketing activities of the
Partnership is certain business risks, including market risk and credit risk.
Market risk is the risk that the value of the portfolio will change, either
favorably or unfavorably, in response to changing market conditions. Credit risk
is the risk of loss from nonperformance by suppliers, customers, or financial
counter parties to a contract. Heritage takes an active role in managing and
controlling market and credit risk and has established control procedures, which
are reviewed on an ongoing basis. Heritage monitors market risk through a
variety of techniques, including routine reporting to senior management.
Heritage attempts to minimize credit risk exposure through credit policies and
periodic monitoring procedures.

LIQUIDS MARKETING

Heritage buys and sells financial instruments for its own account
through its wholly owned subsidiary, Heritage Energy Resources ("Resources").
Financial instruments utilized in connection with the liquids marketing activity
are accounted for using the mark-to-market method. 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. Unrealized gains and
losses from the financial contracts and the impact of price movements are
recognized in the income statement, as other income (expense). Changes in the
assets and liabilities from the liquids marketing activities result primarily
from changes in the market prices, newly originated transactions and the timing
of settlement related to the receipt of cash for certain contracts. Resources
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 assessment of anticipated market
movements.

Notional Amounts and Terms -

The notional amounts and terms of these financial instruments as of
August 31, 2001 include fixed price payor for 2,130,000 barrels of propane and
butane and fixed price receiver of 1,820,000 barrels of propane and butane.
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.

Fair Value -

The fair value of the financial instruments related to liquids
marketing activities as of August 31, 2001, was assets of $6.5 million and
liabilities of $7.1 million related to propane and butane. The unrealized loss
related to

30

liquids marketing activities for the fiscal year ended August 31, 2001, was $665
and is recorded through the income statement as other expense. The liquids
marketing also had entered an option contract, which the counter party has the
option to purchase 6.3 million gallons of propane from October 1, 2001 through
December 31, 2001 at $.62 per gallon.

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.

SENSITIVITY ANALYSIS

A theoretical change of 10 percent in the underlying commodity value of
the liquids marketing contracts would not have a significant impact in the
Partnership's financial position as there were approximately 1.3 million gallons
of net unbalanced positions at August 31, 2001. Similarly, a theoretical change
of 10 percent in the underlying commodity values of the hedge instruments would
not have a significant impact, as a change in their fair value would be equally
offset by a change in value of the hedged item.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Financial statements set forth on pages F-1 to F-36 of this Report
are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

31

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

PARTNERSHIP MANAGEMENT

The Board of Directors of the general partner appoints members of the
Board to serve on the Independent Committee with the authority to review
specific matters to which the Board of Directors believes there may be a
conflict of interest in order to determine if the resolution of such conflict
proposed by the general partner is fair and reasonable to the Partnership. Any
matters approved by the Independent Committee will be conclusively deemed to be
fair and reasonable to the Partnership, approved by all partners of the
Partnership and not a breach by the general partner or its Board of Directors of
any duties they may owe the Partnership or the unitholders. Bill W. Byrne,
Stephen L. Cropper and J. Charles Sawyer were appointed to serve as the members
of the Independent Committee in September 2000 and reappointed in October of
2001.

In April 2000, in order to avoid and resolve any potential conflict of
interest between the shareholders of the general partner and the Partnership and
it's unitholders in conjunction with the transactions with U.S. Propane, the
Board of Directors of the general partner appointed independent directors J.T.
Atkins and Stephen L. Cropper to serve as members of the Special Committee. The
Special Committee was granted the authority to evaluate and negotiate the
transactions with U.S. Propane on behalf of the Partnership, to retain
independent counsel and other advisors for the purpose of receiving a fairness
opinion and to recommend to the Board of Directors whether the transactions
should be completed and the terms thereof.

The Board of Directors of the general partner has appointed persons who
are neither officers nor employees of the Partnership or any affiliates of the
Partnership to serve on its Audit Committee. The Audit Committee has the
authority and responsibility to review external financial reporting of the
Partnership, to engage the Partnership's independent accountants and to review
the Partnership's procedures for internal auditing and the adequacy of the
Partnership's internal accounting controls. Any matters approved by the Audit
Committee will be conclusively deemed to be fair and reasonable to the
Partnership, approved by all partners of the Partnership and not a breach by the
general partner or its Board of Directors of any duties they may owe the
Partnership or the unitholders. In September 2000, Bill W. Byrne, Stephen L.
Cropper and J. Charles Sawyer were appointed to serve as member of the Audit
Committee. The same individuals were reappointed in October of 2001.

Eight of the thirteen directors are filled by the appointment of two
designees of each of the four joint venture members of U.S. Propane: TECO; AGL
Resources; Piedmont Natural Gas; and Atmos pursuant to an agreement amount the
joint venture members. In addition, Mr. Bertelsmeyer's employment agreement
specifies that he serve as Chairman of the Board.

The Partnership does not directly employ any of the persons responsible
for managing or operating the Partnership. At August 31, 2001, the general
partner employed 2,340 full time individuals.

DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER

The following table sets forth certain information with respect to the
executive officers and members of the Board of Directors of the general partner.
Executive officers and directors are elected for one-year terms.

32

(1) Elected to the Board of Directors August 2000.

(2) Elected to the Board of Directors April 2000.

(3) Elected Vice President and Chief Financial Officer August 2000.

(4) Elected an Executive Officer July 2000.

(5) Elected to the Board of Directors August 2000 and resigned October 2001.

(6) Elected to the Board of Directors October 2001.

H. Michael Krimbill. Mr. Krimbill was Treasurer of a publicly traded,
fully integrated oil company prior to joining Heritage as Vice President and
Chief Financial Officer in 1990. Mr. Krimbill was promoted to President of
Heritage in April 1999 and to Chief Executive Officer in March 2000. Mr.
Krimbill is a director of the National Propane Gas Association, (the
"Association").

James E. Bertelsmeyer. Mr. Bertelsmeyer has over 25 years of experience
in the propane industry, including six years as President of Buckeye Gas
Products Company, at the time the nation's largest retail propane marketer. Mr.
Bertelsmeyer served as Chief Executive Officer of Heritage since its formation
until the election of H. Michael Krimbill in March 2000. Mr. Bertelsmeyer began
his career with Conoco Inc. where he spent ten years in positions of increasing
responsibility in the pipeline and gas products departments. Mr. Bertelsmeyer
has been a director of the Association for the past 25 years, and is a former
president of the Association.

R. C. Mills. Mr. Mills has over 40 years of experience in the propane
industry. Mr. Mills joined Heritage in 1991 as Executive Vice President and
Chief Operating Officer. Before coming to Heritage, Mr. Mills spent 25

33

years with Texgas Corporation and its successor, Suburban Propane, Inc. At the
time he left Suburban in 1991, Mr. Mills was Vice President of Supply and
Wholesale.

Larry J. Dagley. Mr. Dagley became Heritage's Vice President and Chief
Financial Officer in August 2000, following with transaction with U.S. Propane.
Prior to joining Heritage, Mr. Dagley was Chief Operating Officer of U.S.
Propane, LLC for approximately three months during its transition in the
transaction between U.S. Propane and Heritage. Prior to that time, Mr. Dagley
served as Executive Vice President and Chief Financial Officer of Atmos Energy
Corporation, a Dallas-based gas distribution company from May 1998 until April
2000 and Senior Vice President and Chief Financial Officer of Pacific
Enterprises, a California-based holding company whose primary subsidiary is
Southern California Gas Company from August 1995 until April 1997; and Senior
Vice President and Chief Financial Officer for Transco Energy Company, a
Houston-based natural gas pipeline company; and as Audit Partner with Arthur
Andersen & Co., where he supervised audit and financial consulting engagements
in the energy industry.

Bradley K. Atkinson. Mr. Atkinson joined Heritage on April 16, 1998 as
Vice President Administration. Prior to joining Heritage, Mr. Atkinson spent
twelve years with MAPCO/Thermogas, eight of which were spent in the acquisitions
and business development of Thermogas. Mr. Atkinson was promoted to Vice
President of Corporate Development in August 2000.

Mark A. Darr. Mr. Darr has 17 years in the propane industry. Mr. Darr
joined Heritage in 1991 and has held various positions including District
Manager and Vice President and Regional Manager before his election to Vice
President - Southern Operations, in July 2000. Prior to joining Heritage, Mr.
Darr held various positions with Texgas Corporation, and its successor, Suburban
Propane. He is currently serving as President of the Florida Propane Gas
Association and is the Florida Director of the National Propane Gas Association.

Thomas H. Rose. Mr. Rose has 26 years of experience in the propane
industry. Mr. Rose joined Heritage in November 1994 as Vice President and
Regional Manager. Prior to joining Heritage, Mr. Rose held Regional Manager
positions with Texgas Corporation, its successor, Suburban Propane, and later
Vision Energy of Florida. Mr. Rose was appointed Vice President - Northern
Operations in July 2000.

Curtis L. Weishahn. Mr. Weishahn has 24 years experience in the propane
industry. Mr. Weishahn joined Heritage in 1995 as Vice President and Regional
Manager and was elected Vice President - Western Operations in July 2000. Prior
to joining Heritage, Mr. Weishahn owned his own propane business, which was
acquired by Heritage. Prior to that time, Mr. Weishahn spent twelve years with
Amerigas/CalGas where, at the time of departing, he was Director of
Marketing/Strategic Development for the Western United States.

Bill W. Byrne. Mr. Byrne is the principal of Byrne & Associates, LLC, a
gas liquids consulting group based in Tulsa, Oklahoma, and has held that
position since 1992. Prior to that time, he served as Vice President of Warren
Petroleum Company, the gas liquids division of Chevron Corporation, from
1982-1992. Mr. Byrne has served as a director of Heritage since 1992 and is
Chairman of the Audit Committee. Mr. Byrne is a former president and director of
the Association.

J. Charles Sawyer. Mr. Sawyer is the President and Chief Executive
Officer of Computer Energy, Inc., a provider of software of the propane
industry, and has held that position since 1984. Mr. Sawyer was Chief Executive
Officer of Sawyer Gas Co., a regional propane distributor, until it was
purchased by Heritage in 1991. Mr. Sawyer has served as a director of Heritage
since 1991 and is a member of the Audit Committee. Mr. Sawyer is a former
president and director of the Association.

Stephen L. Cropper. Mr. Cropper spent 25 years with The Williams
Companies before retiring in 1998. From January 1996 until the time of his
retirement in December 1998, Mr. Cropper was President and Chief Executive
Officer of Williams Energy Services. Mr. Cropper has served as a director of
Heritage since April 2000 and is a member of the both the Independent and the
Audit Committee.

J. Patrick Reddy. Mr. Reddy is the Senior Vice President and Chief
Financial Officer of Atmos Energy Corporation ("Atmos") and has held that
position since October 2000. Prior to being named to that position, Mr. Reddy
served as Atmos' Senior Vice President, Chief Financial Officer and Treasurer
from April 2000 to September 2000, and prior to that time he served as Atmos'
Vice President and Treasurer from December 1998 to April 2000.

34

Prior to joining Atmos in August 1998 as Vice President, Corporate Development,
Mr. Reddy held a number of management positions with Pacific Enterprises, Inc.
for 18 years, including Vice President, Planning & Advisory Services from 1995
to August 1998. Mr. Reddy has served as a director of Heritage since August 2000
and is a member of the Compensation Committee.

Tom S. Hawkins, Jr. Mr. Hawkins is the President of Energas Company, a
division of Atmos Energy Corporation, and has held that position since November
2000. Prior to being named to that position, he was Vice President - Planning of
Atmos Energy Corporation from September 1997 through November 2000, and prior to
that time he served as the Vice President - Finance of United Cities Gas Company
from June 1995 through September 1997. Mr. Hawkins served as a director of
Heritage from August 2000 to October 2001.

Royston K. Eustace. Mr. Eustace is the Senior Vice President of
Business Development for TECO Energy, Inc. ("TECO") and has held that position
since 1998. Mr. Eustace is also the President of TECO Coalbed Methane and TECO
Oil & Gas and has held those positions since 1991 and 1995, respectively. Mr.
Eustace joined TECO in 1987 as its Vice President of Strategic Planning and
Business Development. Mr. Eustace has served as a director of Heritage since
August 2000.

William N. Cantrell. Mr. Cantrell is the President of Peoples Gas
System, a gas distribution company. He has held that position since June 1997.
Mr. Cantrell is also the President of TECO Solutions, an energy services company
providing services primarily in Florida. Peoples Gas System and TECO Solutions
are subsidiaries of TECO Energy, where Mr. Cantrell has been employed since
1975. Mr. Cantrell has served as a director of Heritage since August 2000.

Ware F. Schiefer. Mr. Schiefer is the President and Chief Executive
Officer of Piedmont Natural Gas Company, Inc. ("Piedmont") and has held that
position since February 2000. Mr. Schiefer is also a director of Piedmont. From
February 1999 to February 2000, he served as Piedmont's Chief Operating Officer.
From 1995 to 1999, Mr. Schiefer served as Executive Vice President, and prior to
that time her served as Piedmont's Vice President - Marketing and Gas Supply.
Mr. Schiefer has served as a director of Heritage since August 2000.

Clayton H. Preble. Mr. Preble is the Senior Vice President of AGL
Resources, Inc. ("AGL") since and has held that position since June 1999. Prior
to being named to that position, Mr. Preble served as the Senior Vice President
- - Direct Marketing of SouthStar Energy Services, L.L.C. and as the President of
The Energy Spring, Inc., both affiliates of AGL. Mr. Preble joined AGL in 1970
and served in various executive capacities prior to these positions. Mr. Preble
has served as a director of Heritage since August 2000.

David J. Dzuricky. Mr. Dzuricky is the Senior Vice President and Chief
Financial Officer of Piedmont Natural Gas Company and has served in that
capacity since May 1995. Prior to being named to that position, Mr. Dzuricky
held a variety of executive officer positions with Consolidated Natural Gas
Company during the period from 1982 to 1995. Mr. Dzuricky has served as a
Director of Heritage since August 2000.

Paul Shlanta. Mr. Shlanta is Senior Vice President and General Counsel
of AGL Resources, Inc., and has held that position since September 1998. Prior
to being named to that position, he was a partner in the law firm of Rowe, Fultz
& Martin, P.C. in Atlanta, Georgia. Mr. Shlanta also serves as a director of
SouthStar Energy Services, L.L.C. Mr. Shlanta served as a director of Heritage
from August 2000 to October 2001.

J.D. Woodward. Mr. Woodward is Senior Vice President of Non Utility
Operations Atmos Energy and has held that position since April 2000. Prior to
being named to that position, he was President of Woodward Marketing, in Houston
Texas from 1986-1995. Mr. Woodward was named a director of Heritage October
2001.

Richard T. O'Brien. Mr. O'Brien is Senior Vice President and Chief
Financial Officer of AGL Resources, Inc. and has held that position since May
2001. Prior to being named to that position, he was Vice President of Mirant
(formerly Southern Energy) and President of Mirant Capital Management, LLC from
March 2000 to April 2001 in Atlanta, Georgia and held various executive
positions with PacifiCorp in Portland, Oregon during the period of 1983 to
2000. Mr. O'Brien was named a director of Heritage October 2001.

35

COMPENSATION OF THE GENERAL PARTNER.

The general partner does not receive any management fee or other
compensation in connection with its management of Heritage. The general partner
and its affiliates performing services for Heritage are reimbursed at cost for
all expenses incurred on behalf of Heritage, including the costs of compensation
allocable to Heritage, and all other expenses necessary or appropriate to the
conduct of the business of, and allocable to, Heritage.

The general partner has a 1.9899% general partner interest in the
combined operations of the Partnership and the Operating Partnership.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES AND EXCHANGE ACT

Section 16(a) of the Securities and Exchange Act of 1934 requires the
general partner's officers and directors, and persons who own more than 10% of a
registered class of the Partnership's equity securities, to file reports of
beneficial ownership and changes in beneficial ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors and greater than 10%
unitholders are required by SEC regulations to furnish the general partner with
copies of all Section 16(a) forms.

Based solely on its review of the copies of such forms received by the
general partner, or written representations from certain reporting persons that
no Form 5's were required for those persons, the general partner believes that
during fiscal year ending August 31, 2001, all filing requirements applicable to
its officers, directors, and greater than 10% beneficial owners were met in a
timely manner other than one late Form 4 filing for Bradley K. Atkinson.

ITEM 11. EXECUTIVE COMPENSATION.

The following table sets forth the annual salary, bonus and all other
compensation awards and payouts for each of the past three fiscal years earned
by: (i) all persons serving as the general partner's Chief Executive Officer
during fiscal year 2001; (ii) the four next highly compensated executive
officers other than the Chief Executive Officer, who served as executive
officers of the general partner during the 2001 fiscal year; and (iii) any
persons who would have been reported had they been an executive officer of the
general partner at the end of the 2001 fiscal year.

36

(1) Consists of life insurance premiums.

(2) Consists of the value of common units issued pursuant to the vesting rights
of the Restricted Unit Plan.

EMPLOYMENT AGREEMENTS

The general partner has entered into employment agreements (the
"Employment Agreements") with Messrs. Bertelsmeyer, Krimbill, Mills, Dagley,
Atkinson, Weishahn, Rose and M. Darr. The summary of such Employment Agreements
contained herein does not purport to be complete and is qualified in its
entirety by reference to the Employment Agreements, which have been filed
previously as exhibits.

The Employment Agreement for Mr. Bertelsmeyer has an initial term of
two years starting August 2000. The Employment Agreements for Messrs. Krimbill,
Mills, Dagley, Atkinson, Weishahn, Rose and M. Darr (each an "Executive") have
an initial term of three years starting August 2000. However, for each Executive
with the three year Employment Agreement, beginning on the second anniversary of
the effective date and on each day thereafter the expiration date shall be
automatically extended one additional day unless either party (i) shall give
written notice to the other that the Term shall cease to be so extended
beginning immediately after the date of such notice or (ii) shall give a Notice
of Termination to the other by delivering notice to the Chairman of the Board,
or in the event of the Executive's death. The Employment Agreements provide for
an annual base salary of $193,500, $350,000, $335,000, $325,000, $200,000,
$150,000, $135,000 and $135,000 ("Base Salary") for each of Messrs.
Bertelsmeyer, Krimbill, Mills, Dagley, Atkinson, Weishahn, Rose and M. Darr,
respectively. The Board shall review the Base Salary at least annually and may
adjust the amount of the Base Salary at any time, as the Board may deem
appropriate in its sole discretion; provided, however, that in no event may the
Base Salary be decreased below the above stated amount without the prior written
consent of the employee. The Employment Agreements provide the Executives to
participate in bonus and incentive plans. The Employment Agreements also provide
for the Executive and, where applicable, the Executive's dependents, to have the
right to participate in benefit plans made available to other executives of
Heritage including the Restricted Unit Plan and the Long-Term Incentive Plan
described below.

The Employment Agreements provide that in the event of a change of
control of the ownership of the general partner or in the event an Executive (i)
is involuntarily terminated (other than for "misconduct" or "disability") or
(ii) voluntarily terminates employment for "good reason" (as defined in the
agreements), such Executive will be entitled to continue receiving his base
salary and to participate in all group health insurance plans and programs that
may be offered to executives of the general partner for the remainder of the
term of the Employment Agreement or, if earlier, the Executive's death, all
restrictions on the transferability of the units (as defined in the Subscription
Agreement dated as of June 15, 2000, previously filed as an exhibit) purchased
by such employee on the Closing shall automatically lapse in full on such date,
and the Executive will vest immediately in the Minimum Award of the number of
common units to which the Executive is entitled under the Long Term Incentive
Plan to the extent not previously awarded. Each Employment Agreement also
provides that if any payment received by an Executive is subject to the 20%
federal excise tax under Section 4999(a) of the Code of the Internal Revenue
Service, the Payment will be grossed up to permit the Executive to retain a net
amount on an after-tax basis equal to what he would have received had the excise
tax and all other federal and state taxes on such additional amount not been
payable. In addition, each Employment Agreement contains non-competition and
confidentiality provisions.

RESTRICTED UNIT PLAN

The general partner has adopted the Amended and Restated Restricted
Unit Plan dated August 10, 2000 (the "Restricted Unit Plan"), previously filed
as an exhibit, for certain directors and key employees of the general partner
and its affiliates. The Restricted Unit Plan covers rights to acquire 146,000
common units. The right to acquire the common units under the Restricted Unit
Plan, including any forfeiture or lapse of rights are available for grant to key
employees on such terms and conditions (including vesting conditions) as the
Compensation Committee of the general partner shall determine. Each director
shall automatically receive a Director's grant with respect to 500 common units
on each September 1 that such person continues as a director. Newly elected
directors are also entitled to receive a grant with respect to 2,000 common
units upon election or appointment to the Board.

37

Messrs. Bertelsmeyer and Krimbill are not entitled to receive a Director's Grant
of common units but may receive common units as employees. Directors who are
employees of TECO, Atmos, Piedmont or AGL 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 (ii) the conversion of the Subordinated units
to common units. Grants made after the conversion of all of the Subordinated
units to common units shall vest on such terms as the 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.

Common units to be delivered upon the "vesting" of rights may be common
units acquired by the general partner in the open market, common units already
owned by the general partner, common units acquired by the general partner
directly from the Partnership, or any other person, or any combination of the
foregoing. Although the Restricted Unit Plan permits the grant of distribution
equivalent rights to key employees, it is anticipated that until such common
units have been delivered to a participant, such participant shall not be
entitled to any distributions or allocations of income or loss and shall not
have any voting or other rights in respect of such common units.

The Board of Directors, in its discretion may terminate the Restricted
Unit Plan at any time with respect to any common units for which a grant has not
therefore been made. The Board will also have the right to alter or amend the
Restricted Unit Plan or any part thereof from time to time; provided, however,
that no change in any Restricted Unit may be made that would impair the rights
of the participant without the consent of such participant; and provide further,
that, during the Subordination Period, without the approval of a majority of the
unitholders no amendment or alteration will be made that would (i) increase the
total number of units available for awards under the Restricted Unit Plan; (ii)
change the class of individuals eligible to receive restricted unit awards;
(iii) extend the maximum period which Restricted Units may be granted under the
Restricted Unit Plan; or (iv) materially increase the cost of the Restricted
Unit Plan.

The issuance of the common units pursuant to the Restricted Unit Plan
is intended to serve as a means of incentive compensation for performance and
not primarily as an opportunity to participate in the equity appreciation in
respect of the common units. Therefore, no consideration will be payable by the
plan participants upon vesting and issuance of the common units. As of August
31, 2001, 34,050 restricted units granted to non-employee directors and key
employees were outstanding. Compensation expense of $.3 million and $.5 million
was recognized for fiscal year 2001 and the eight months ended August 31, 2000,
respectively. See Note 6 of the Consolidated Financial Statements, which begin
on page F-1 of this Report. Compensation expense of $.3 million was recognized
in Predecessor Heritage's financial statements for the period ended August 9,
2000 and $.4 million and $.2 million for fiscal years 1999 and 1998,
respectively. See Note 5 of Predecessor Heritage's Consolidated Financial
Statements that begin on page F-26 of this Report.

The following table sets forth the number of grants awarded in the last
fiscal year that may result in the issuance of common units under the Restricted
Unit Plan to persons serving as executive officers of the Company:

(1) In accordance with the change in control provision of the Restricted Unit
Plan, this grant specifies the terms and conditions for the participant to
become vested in the units. Unless earlier terminated, the rights to
acquire the phantom units granted October 2000, will vest on the later of
the third anniversary of this grant.

LONG-TERM INCENTIVE PLAN

Effective September 1, 2000, Heritage adopted a long-term incentive
plan whereby units will be awarded based on achieving certain targeted levels of
Distributed Cash per unit to the Executive Officers and other employees at their
discretion. Awards under the program will be made starting in 2003 based upon
the average of the prior

38

there years Distributed Cash per unit. A minimum of 250,000 units and a maximum
of 500,000 units will be awarded if the targeted levels are achieved.
Compensation expense of $.8 million was recognized for the fiscal year 2001.

COMPENSATION OF DIRECTORS

The Partnership currently pays no additional remuneration to its
employees for serving as directors of the general partner. Under the Restricted
Unit Plan, directors other than directors who are employees of Heritage
Holdings, Inc., Atmos, AGL, TECO and Piedmont, or their affiliates, will be
awarded 500 of these restricted units annually, and newly elected directors
receive an initial award of 2,000 restricted units. The general partner will pay
each of its non-employee and nonaffiliated directors $10,000 annually, plus
$1,000 per board meeting attended and $500 per committee meeting attended. All
expenses associated with compensation of directors will be reimbursed to the
general partner by Heritage.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors of the general
partner determines compensation of the executive officers of Heritage. Royston
K. Eustace, Bill W. Byrne and J. Charles Sawyer served as members of the
Compensation Committee.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of November 2,
2001, regarding the beneficial ownership by certain beneficial owners, all
directors and named executive officers of the general partner and Heritage, each
of the named executive officers and all directors and executive officers of the
general partner as a group, of (i) the common and Subordinated units of Heritage
Propane Partners, L.P., and (ii) the common stock of the general partner. The
general partner knows of no other person beneficially owning more than 5% of the
common units.

HERITAGE PROPANE PARTNERS, L.P. UNITS

39

* Less than one percent (1%)

(1) The address for Heritage Holdings, Inc., Mr. Krimbill, Mr. Dagley and Mr.
Atkinson is 8801 S. Yale, Suite 310, Tulsa, Oklahoma 74137. The address for
U.S. Propane is 702 N. Franklin Street, Tampa, Florida 33602. The address
for each of Messrs. Bertelsmeyer and Mills is 5000 Sawgrass Village
Circle, Suite 4, Ponte Vedra Beach, Florida 32082.

(2) Beneficial ownership for the purposes of the foregoing table is defined by
Rule 13d-3 under the Securities Exchange Act of 1934. Under that rule, a
person is generally considered to be the beneficial owner of a security if
he has or shares the power to vote or direct the voting thereof ("Voting
Power") or to dispose or direct the disposition thereof ("Investment
Power") or has the right to acquire either of those powers within sixty
(60) days.

(3) Each of Messrs. Bertelsmeyer, Byrne, Mills and Krimbill shares Voting and
Investment Power on a portion of their respective units with his spouse.

(4) Mr. Woodward replaced Mr. Hawkins and Mr. O'Brien replaced Mr. Shlanta on
the Board of Directors effective as of October 20, 2001.

(5) U.S. Propane, L.P. owns 100% of the common stock of Heritage Holdings, Inc.
and may be deemed to beneficially own the common units owned by Heritage
Holdings. AGL Propane Services, Inc., United Cities Propane Gas, Inc., TECO
Propane Ventures, LLC and Piedmont Propane Company own a 22.358%, 18.968%,
37.976% and 20.688%, respectively, limited partner interest in U.S.
Propane, L.P. U.S. Propane, L.L.C. is the general partner of U.S. Propane,
L.P. with a .01% general partner interest. The members of U.S. Propane
L.L.C. and their respective membership interest is as follows:

AGL Energy Corporation 22.36%
United Cities Propane Gas, Inc. 18.97%
TECO Propane Ventures, LLC 37.98%
Piedmont Propane Company 20.69%

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT OF FORM 8-K.

(a) 1. FINANCIAL STATEMENTS.

See "Index to Financial Statements" set forth on page F-1.

40

2. FINANCIAL STATEMENT SCHEDULES.

None.

3. EXHIBITS.

See "Index to Exhibits" set forth on page E-1.

(b) REPORTS ON FORM 8-K.

Heritage Propane Partners, L.P. filed five reports on Form 8-K during
the three months ended August 31, 2001. Form 8-K dated July 12, 2001,
was filed reporting the announcement that Heritage had entered into
definitive agreements to acquire the operations of ProFlame, Inc.
(ProFlame) and related propane distribution companies in California and
Nevada. Attached as an exhibit to this Form 8-K was the press release
dated July 5, 2001 making the announcement.

Form 8-K dated July 24, 2001, filed as exhibits the financial
statements and the pro forma financial information of ProFlame, Inc.
and Subsidiaries and Affiliates under Item 5. Other Events. This report
provided the (i) Unaudited ProForma Combines Financial Statements for
the Nine months Ended May 31, 2001 and the Year Ended August 31, 2000
and related notes and (ii) ProFlame, Inc. and Subsidiaries and
Affiliates Consolidated and Combined Financial Statements for the Years
Ended August 31, 2000 and 1999 and related notes and for the Nine
Months ended May 31, 2001 and 2000 (unaudited). This Form 8-K also
filed as an exhibit the consent of Arthur Andersen LLP.

Form 8-K dated July 27, 2001, was filed in connection with the public
offering (the "Offering") of up to 2,875,000 common units (the "Offered
Units") representing limited partner interests in the Partnership,
including common units issuable pursuant to an over-allotment option
granted to underwriters, under the Partnership's shelf registration
statement on Form S-3 (Registration No. 333-86057) (the "Registration
Statement") as supplemented by the Prospectus Supplement dated July 26,
2001 relating to the Offered Units filed with the Securities and
Exchange Commission pursuant to Rule 424(b) under the Securities Act of
1933, as amended. In connection with the Offering, the Partnership,
Heritage Holdings, Inc. and Heritage Operating, L.P. entered into an
underwriting agreement with Salomon Smith Barney Inc., A.G. Edwards &
Sons, Inc. Dain Rauscher Incorporated and First Union Securities, Inc.
on July 26, 2001, which was filed as an exhibit to the Form 8-K.
Opinions of Baker Botts L.L.P. as to the legality of the securities
registered and as to certain tax matters, along with their consent were
also included as exhibits to this Form 8-K. The opinion as to certain
tax matters replaced the opinions as to tax matters previously filed as
exhibits to the Registration Statement. The opinions of Baker Botts
L.L.P. were filed as exhibits to the Form 8-K Report in lieu of filing
them as exhibits to the Registration Statement by means of a
post-effective amendment, and incorporated by reference into the
Registration Statement.

Form 8-K/A to the August 10, 2000 Form 8-K was filed on July 27, 2001
to amend the Form 8-K of Heritage Propane Partners, L.P. dated August
10, 2000 and filed with Securities and Exchange Commission on August
23, 2000, as amended by the Form 8-K/A of Heritage dated August 10,
2000 and filed with the Commission on October 24, 3000, by filing the
consents of Deloitte and Touch LLP (two separate consents), Ernst &
Young LLP and Arthur Andersen LLP.

From 8-K dated August 15, 2001 was filed to report the acquisition of
the propane operations of ProFlame, Inc., and subsidiaries and
affiliates in a series of mergers, stock purchases and asset purchases.
The report described the transaction and attached as exhibits the Stock
Purchase Agreement dated July 5, 2001 among the shareholders of
ProFlame Inc. and Heritage Holdings, Inc., the Stock Purchase Agreement
dated as of July 5, 2001 among the shareholders of Coast Liquid Gas,
Inc. and Heritage Holdings, Inc., the 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,

41

Inc. and California Western Merger Corp., the Agreement and Plan of
Merger dated as of July 5, 2001 among Growth Properties the Majority
Shareholders of Growth Properties signatories thereto, Heritage
Holdings, Inc. and Growth Properties Merger Corp., the 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., the
Asset Purchase Agreement dated as of July 5, 2001 among WMJB, Inc. the
Shareholders of WMJB, Inc. and Heritage Operating, L.P., the Amendment
to Asset Purchase Agreement dated as of July 5, 2001 among WMJB, Inc.,
the Shareholders of WMJB, Inc. and Heritage Operating, L.P. and the
Press Release dated August 31, 2001 announcing the transaction.

42

INDEX TO FINANCIAL STATEMENTS

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY AND SURVIVING LEGAL ENTITY
IN THE SERIES OF TRANSACTIONS WITH U.S. PROPANE, L.P.)

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
Heritage Propane Partners, L.P.:

We have audited the accompanying consolidated balance sheets of Heritage Propane
Partners, L.P. (a Delaware limited partnership) and subsidiaries, formerly
Peoples Gas Company, as of August 31, 2001 and 2000 and the related consolidated
statements of operations, comprehensive income (loss), partners' capital and
cash flows for the year ended August 31, 2001, the eight month period ended
August 31, 2000, and for each of the two years in the period ended December 31,
1999. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Heritage Propane Partners, L.P.
and subsidiaries, formerly Peoples Gas Company, as of August 31, 2001 and 2000,
and the results of their operations and their cash flows for the year ended
August 31, 2001, the eight month period ended August 31, 2000, and for each of
the two years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.

/s/ Arthur Andersen LLP
-----------------------

Tulsa, Oklahoma
October 19, 2001

F-2

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)

CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)

The accompanying notes are an integral part of
these consolidated financial statements.

F-3

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)

The accompanying notes are an integral part of
these consolidated financial statements.

F-4

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)

The accompanying notes are an integral part of
these consolidated financial statements.

F-5

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit data)

The accompanying notes are an integral part of
these consolidated financial statements.

F-6

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

The accompanying notes are an integral part of these financial statements.

F-7

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except unit and per unit data)
(Unaudited as to August 31, 1999 data)

1. OPERATIONS AND ORGANIZATION:

In August 2000, TECO Energy, Inc., Atmos Energy Corporation, Piedmont Natural
Gas Co., Inc., and AGL Resources, Inc. contributed each company's propane
operations, Peoples Gas Company (Peoples Gas), United Cities Propane Gas, Inc.
(United Cities), Piedmont Propane Company (Piedmont) and AGL Propane, Inc.,
(AGL) respectively, to U.S. Propane L.P., (U.S. Propane) in exchange for equity
interests in U.S. Propane. The merger was accounted for as an acquisition using
the purchase method of accounting with Peoples Gas being the acquirer.
Accordingly, Peoples Gas' assets and liabilities were recorded at historical
cost and the assets and liabilities of United Cities, Piedmont and AGL were
recorded at fair market value, as determined based on a valuation and appraisal.
The purchase allocations were as follows:

Purchase price of Piedmont, AGL and United Cities $ 112,338
Net book value of Piedmont, AGL and United Cities 82,765
----------
Step-up of net book value, allocated to property,
plant and equipment $ 29,573
==========

In August 2000, U.S. Propane acquired all of the outstanding common stock of
Heritage Holdings, Inc., (the "General Partner" or "Heritage Holdings"), the
General Partner of Heritage Propane Partners, L.P. for $120,000. By virtue of
Heritage Holdings, Inc.'s general partner and limited partner interests in
Heritage Propane Partners, L.P., U.S. Propane gained control of Heritage Propane
Partners, L.P. Simultaneously, U.S. Propane transferred its propane operations,
consisting of its interest in four separate limited liability companies, AGL
Propane, L.L.C., Peoples Gas Company, L.L.C., United Cities Propane Gas, L.L.C.
and Retail Propane Company, L.L.C. (former Piedmont operations), (collectively,
the "Propane LLCs"), to Heritage Propane Partners, L.P. for $181,395 plus
working capital. The $181,395 was payable $139,552 in cash, $31,843 of assumed
debt, and the issuance of 372,392 Common Units of Heritage Propane Partners,
L.P. valued at $7,348 and a 1.0101 percent limited partner interest in Heritage
Propane Partners, L.P.'s operating partnership, Heritage Operating, L.P., valued
at $2,652. The purchase price and the exchange price for the Common Units were
approved by an independent committee of the Board of Directors of Heritage
Holdings, Inc. The exchange price for the Common Units was $19.73125 per unit
under a formula based on the average closing price of Heritage Propane Partners
L.P.'s Common Units on the New York Stock Exchange for the twenty (20) day
period beginning ten (10) days prior to the public announcement of the
transaction on June 15, 2000 (the "Formula Price"). Subsequent to August 31,
2000, payments totaling approximately $12,900 were made for the working capital
adjustment, of which $5,000 was accrued at August 31, 2000.

Concurrent with the acquisition, Heritage Operating, L.P. borrowed $180,000 from
several institutional investors and Heritage Propane Partners, L.P. sold
1,161,814 Common Units and 1,382,514 Class B Subordinated Units in a private
placement to the former shareholders of Heritage Holdings, Inc. based on the
Formula Price resulting in net proceeds of $50,203. The total of these proceeds
were utilized to finance the transaction and retire a portion of existing debt.

The merger was accounted for as a reverse acquisition in accordance with
Accounting Principles Board Opinion No. 16. The propane operations of Heritage
Propane Partners, L.P. prior to the series of transactions with U.S. Propane are
referred to as Predecessor Heritage. Although Predecessor Heritage is the
surviving entity for legal purposes, U.S. Propane's propane operations is the
acquirer for accounting purposes. The assets and liabilities of Predecessor
Heritage have been recorded at fair value to the extent acquired by U.S.
Propane's propane operations, approximately 36 percent, in accordance with
Emerging Issues Task Force Issue No. 90-13, "Accounting for Simultaneous Common
Control Mergers." The assets and liabilities of U.S. Propane have been recorded
at historical cost, as recorded in the U.S. Propane transaction described above.
The combined operations of Predecessor Heritage and U.S. Propane are referred to
herein as "Heritage." Although the equity accounts of Peoples Gas survive the
merger, Predecessor Heritage's partnership structure and partnership units
survive.

F-8

Accordingly, the equity accounts of Peoples Gas have been restated based on the
general partner interest and common units received by Peoples Gas in the merger.

The excess purchase price over Predecessor Heritage's cost was determined as
follows:

Net book value of Predecessor Heritage at August 9, 2000 $ 35,716
Equity investment 50,203
--------
85,919
Percent of Predecessor Heritage acquired by U.S. Propane 36%
--------
Equity interest acquired $ 30,931
========

Purchase price $120,000
Equity interest acquired 30,931
--------
Excess purchase price over Predecessor Heritage cost $ 89,069
========

The excess purchase price over Predecessor Heritage cost was allocated as
follows:

Property, plant and equipment (25 year life) $ 11,180
Customer lists (15 year life) 5,935
Goodwill (30 year life) 71,954
--------
$ 89,069
========

The accompanying financial statements for the eight month period ended August
31, 2000 include the results of operations for Peoples Gas and the results of
operations of Predecessor Heritage, Piedmont, AGL and United Cities beginning
August 10, 2000. The financial statements of Peoples Gas are the financial
statements of the registrant as Peoples Gas was the acquirer in the transaction
in which U.S. Propane was formed. The accompanying financial statements for the
periods ended December 31, 1999 and 1998 have been presented on a carve-out
basis and reflect the historical results of operations, financial position and
cash flows of Peoples Gas. As discussed further in Note 8, certain expenses in
the financial statements include allocations from TECO Energy, Inc. (TECO) and
other wholly-owned subsidiaries of TECO. Management believes that the
allocations were made on a reasonable basis; however, the allocations of costs
and expenses do not necessarily indicate the costs that would have been incurred
by Peoples Gas on a stand-alone basis. Also, the financial statements may not
necessarily reflect what the financial position, results of operations and cash
flows of Peoples Gas would have been if Peoples Gas had been a separate,
stand-alone company during the periods presented.

The following unaudited pro forma consolidated results of operations are
presented as if the series of transactions with U.S. Propane and Predecessor
Heritage had been made at the beginning of the periods presented.

The pro forma consolidated results of operations include adjustments to give
effect to amortization of goodwill, interest expense on acquisition and assumed
debt and certain other adjustments, including the elimination of income taxes.
The unaudited pro forma information is not necessarily indicative of the results
of operations that would have occurred had the transactions been made at the
beginning of the periods presented or the future results of the combined
operations.

Peoples Gas had a fiscal year-end of December 31, however, Heritage will
continue to have Predecessor Heritage's August 31 year-end. Accordingly, the
eight-month period ended August 31, 2000 is a transition period under the rules
of the Securities and Exchange Commission.

In order to simplify Heritage's obligation under the laws of several
jurisdictions in which Heritage conducts business, Heritage's activities are
conducted through a subsidiary operating partnership, Heritage Operating, L.P.
(the "Operating Partnership"). Heritage holds a 97.9798 percent limited partner
interest in the Operating

F-9

Partnership. In addition, the General Partner holds a 1.0101 percent general
partner interest and U.S. Propane holds a 1.0101 percent limited partner
interest in the Operating Partnership.

The Operating Partnership sells propane and propane-related products to more
than 600,000 active residential, commercial, industrial and agricultural
customers in 29 states. Heritage is also a wholesale propane supplier in the
southwestern and southeastern United States and in Canada, the latter through
participation in M-P Energy Partnership. M-P Energy Partnership is a Canadian
partnership primarily engaged in lower-margin wholesale distribution in which
Heritage owns a 60 percent interest.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of Heritage include the accounts of its
subsidiaries, including the Operating Partnership, M-P Energy Partnership,
Heritage Energy Resources, L.L.C. ("Resources") and the Propane LLCs. Heritage
accounts for its 50 percent partnership interest in Bi-State Partnership,
another propane retailer, under the equity method. All significant intercompany
transactions and accounts have been eliminated in consolidation. The General
Partner's 1.0101 percent general partner interest and U.S. Propane's 1.0101
percent limited partner interest in the Operating Partnership are 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.

ACCOUNTS RECEIVABLE

Heritage grants credit to its customers for the purchase of propane and
propane-related products. Accounts receivable consisted of the following:

INVENTORIES

Inventories are valued at the lower of cost or market. The cost of fuel
inventories is determined using weighted-average cost, while the cost of
appliances, parts and fittings is determined by the first-in, first-out method.
Inventories consisted of the following:

F-10

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the assets. Expenditures for maintenance and repairs
are expensed as incurred. Additionally, Heritage capitalizes certain costs
directly related to the installation of company-owned tanks, including internal
labor costs. Components and useful lives of property, plant and equipment were
as follows:

INTANGIBLES AND OTHER ASSETS

Intangibles and other assets are stated at cost net of amortization computed on
the straight-line method. Heritage eliminates from its balance sheet any fully
amortized intangibles and the related accumulated amortization. Components and
useful lives of intangibles and other assets were as follows:

LONG-LIVED ASSETS

Heritage reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If such a review should indicate that the carrying amount of
long-lived assets is not recoverable, Heritage reduces the carrying amount of
such assets to fair value. No impairment of long-lived assets was required
during the year ended August 31, 2001, the period ended August 31, 2000 or the
years ended December 31, 1999 and 1998.

F-11

ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and other current liabilities consisted of the following:

INCOME TAXES

Prior to the series of transactions that formed U.S. Propane, Peoples Gas
followed the liability method of accounting for income taxes in accordance with
Statement of Financial Accounting Standards (Statement) No. 109, "Accounting for
Income Taxes" (SFAS 109). Under SFAS 109, deferred income taxes are recorded
based upon differences between the financial reporting and tax basis of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the underlying assets are received and liabilities are
settled. TECO retained all tax liabilities related to Peoples Gas that may have
existed as of August 9, 2000.

Heritage is a limited partnership. As a result, Heritage's earnings or losses
for federal income tax purposes are included in the tax returns of the
individual partners. Accordingly, because of the merger, no recognition has been
given to income taxes in the accompanying financial statements of Heritage for
the year ended August 31, 2001 or the period ended August 31, 2000, except those
incurred by Peoples Gas prior to the series of transactions with U.S. Propane
and Predecessor Heritage. Net earnings for financial statement purposes may
differ significantly from taxable income reportable to unit holders as a result
of differences between the tax basis and financial reporting basis of assets and
liabilities and the taxable income allocation requirements under the partnership
agreement.

INCOME (LOSS) PER LIMITED PARTNER UNIT

Basic net income (loss) per limited partner unit is computed by dividing net
income (loss), after considering the General Partner's interest, by the weighted
average number of Common and Subordinated Units outstanding. Diluted net income
(loss) per limited partner unit is computed by dividing net income, after
considering the General Partner's interest, by the weighted average number of
Common and Subordinated Units outstanding and the weighted average number of
Restricted Units (Phantom Units) granted under the Restricted Unit Plan. A
reconciliation of net income (loss) and weighted average units used in computing
basic and diluted earnings (loss) per unit is as follows:

F-12

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Some of the more significant estimates include allowances for
doubtful accounts, derivative hedging instruments and liquids marketing assets
and liabilities. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain prior period amounts have been reclassified to conform with the 2001
presentation. These reclassifications have no impact on net income or net
assets.

FAIR VALUE

The carrying amounts of accounts receivable and accounts payable approximate
their fair value. Based on the estimated borrowing rates currently available to
Heritage for long-term loans with similar terms and average maturities, the
aggregate fair value at August 31, 2000 of long-term debt approximated the
aggregate carrying amount. The fair value and carrying amount of long-term debt
at August 31, 2001 was approximately $465,690 and $439,868, respectively. The
fair value is determined using estimated borrowing rates currently available to
the Company for loans with similar terms and maturities.

SFAS 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS
133). SFAS 133 establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments embedded
in other contracts, and for hedging activities, be recorded on the balance sheet
as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. Heritage adopted the provisions of SFAS 133
effective September 1, 2000. The cumulative effect of adopting SFAS 133 was an
adjustment to beginning other comprehensive income of $5,429.

Heritage had certain financial swap instruments outstanding at August 31, 2001
that have been designated as cash flow hedging instruments in accordance with
SFAS 133. A financial swap is a contractual agreement to exchange obligations of
money between the buyer and seller of the instruments as propane volumes during
the pricing period are purchased. The swaps are tied to a set fixed price for
the buyer and floating price determinants for the seller priced on certain
indices. Heritage entered into these instruments to hedge the forecasted propane
volumes to be purchased during each of the one-month periods ending October 2001
through March 2002. Heritage utilizes hedging transactions to provide price
protection against significant fluctuations in propane prices. These instruments
had a fair value of ($4,556) as of August 31, 2001, which was recorded as
accrued and other liabilities on the balance sheet through other comprehensive
income, exclusive of ($92) of minority interest. Also at August 31, 2001,
Heritage had outstanding options to purchase 14.7 million gallons of propane
during December 2001 and January 2002 at a weighted average price of $.48 per
gallon. The fair value of $.2 million of the option contracts was recorded as
current assets on the balance sheet. During the year ended August 31, 2001,
Heritage reclassified into earnings a gain of $3,844 that was reported in
accumulated other comprehensive income. There were no ineffective hedges or
discontinued hedges as of August 31, 2001.

F-13

MARKETABLE SECURITIES

Heritage's marketable securities are classified as available-for-sale securities
and are reflected as a current asset on the consolidated balance sheet at their
fair value. Unrealized holding losses of $2,077 for the year ended August 31,
2001 was recorded through accumulated other comprehensive income based on the
market value of the securities.

LIQUIDS MARKETING ACTIVITIES

Heritage buys and sells financial instruments for its own account through
Resources. Financial instruments utilized in connection with liquids marketing
activities are accounted for using the mark-to-market method. 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
sheets as assets and liabilities from liquids marketing activities. Unrealized
gains and losses from the financial contracts and the impact of price movements
are recognized in the income statement as other income (expense). Changes in the
assets and liabilities from liquids marketing activities result primarily from
changes in the market prices, newly originated transactions and the timing of
settlement. Resources 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 assessment of
anticipated market movements.

Heritage has recorded its liquids marketing activities at fair value in
accordance with Emerging Issues Task Force Issue No. 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities" ("EITF
98-10"). EITF 98-10 requires energy trading contracts to be recorded at fair
value on the balance sheet, with the changes in fair value included in earnings.

Notional Amounts and Terms -

The notional amounts and terms of these financial instruments as of August 31,
2001 include fixed price payor for 2,130,000 barrels of propane and butane, and
fixed price receiver of 1,820,000 barrels of propane and butane. 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.

Fair Value -

The fair value of the financial instruments related to liquids marketing
activities as of August 31, 2001, was assets of $6,465 and liabilities of
$7,130. The unrealized loss related to liquids marketing activities for the year
ended August 31, 2001, was $665 and is recorded through the income statement as
other income (loss). Resources also entered an option contract in which the
counter party has the option to purchase 6.3 million gallons of propane from
October 1, 2001 through December 31, 2001 at $.62 per gallon.

Market and Credit Risk -

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 and
Resources take active roles in managing and controlling market and credit risk
and have established control procedures, which are reviewed on an ongoing basis.
Heritage monitors market risk through a variety of techniques, including routine
reporting to senior management. Heritage attempts to minimize credit risk
exposure through credit policies and periodic monitoring procedures.

The 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.

RECENTLY ISSUED ACCOUNTING STANDARD NOT YET ADOPTED

In June 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141
requires all business combinations initiated after June 30, 2001, to be
accounted for using the purchase method of accounting. Under Statement 142,
goodwill is no longer subject to amortization over its estimated useful life.
Rather, goodwill will be subject to at least an annual assessment for impairment
by applying a fair-value-based test. Additionally, an acquired intangible asset
should be separately

F-14

recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented or exchanged, regardless of the acquirer's intent
to do so. There will be more recognized intangible assets, such as unpatented
technology and database content, being separated from goodwill. Those assets
will be amortized over their useful lives, other than assets that have an
indefinite life. Statement No. 142 is required to be applied starting with
fiscal years beginning after December 15, 2001. Early application is permitted
for entities with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not previously been issued.

Heritage adopted Statement No. 142 on September 1, 2001 and accordingly has
discontinued the amortization of goodwill existing at the time of adoption.
Management has engaged an independent appraisal firm to perform an assessment of
the fair value of each of Heritage's operating segments, which will be compared
with the carrying value of each segment to determine whether any impairment
exists on the date of adoption. Under the provisions of Statement No. 142,
Heritage has six months from the time of adoption to have its appraisals
completed. However, management does not believe that any impairment existed at
adoption. The adoption of Statement No. 142 will eliminate goodwill amortization
that would have totaled approximately $5,704 in fiscal 2002, based on the
balances of August 31, 2001, and totaled approximately $5,051 in fiscal 2001.

In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement
Obligations. Statement No. 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. This statement amends FASB Statement No. 19, Financial
Accounting and Reporting by Oil and Gas Producing Companies. Heritage will adopt
the provisions of Statement No. 143 effective September 1, 2002. Management has
not determined the impact of adopting Statement No. 143.

In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This Statement supersedes FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, 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. This statement retains the fundamental
provisions of Statement No. 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. This statement is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and interim periods within those fiscal years, with early application
encouraged. Management has not determined the method, timing or impact of
adopting Statement No. 144.

3. ACQUISITIONS:

On July 31, 2001, Heritage purchased the propane operations of ProFlame, Inc.
and subsidiaries and affiliates (ProFlame) located in California and Nevada, in
a series of mergers, stock purchases and asset purchases. This acquisition was
accounted for using the purchase method of accounting under FASB Statement No.
141. The acquisition of ProFlame enhanced Heritage's operations in the Western
United States and is expected to reduce costs through blend-ins to existing
operations.

The aggregate purchase price was $56,201 net of cash acquired of $6,518. The
purchase price included $42,695 paid in cash, of which $2,958 related to
preliminary working capital, 129,901 common units valued at $4,450 and
liabilities assumed of $9,056. The 129,901 common units were issued to the
General Partner in connection with the assumption of certain liabilities by the
General Partner. The value of the units was determined based on the market price
at the date of acquisition. Management is in the process of obtaining valuations
of certain intangible assets; thus, the allocation of the purchase price is
preliminary. The working capital adjustment is expected to settle in January
2002.

F-15

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.

Current assets, net of cash acquired $ 4,995
Property, plant and equipment 25,231
Goodwill 15,521
Other intangible assets 10,454
-------
Total assets acquired 56,201
-------
Current liabilities 2,036
Long-term debt 7,020
-------
Total liabilities assumed 9,056
-------
Net assets acquired $47,145
=======

Of the $10,454 of acquired intangible assets, $7,040 was assigned to
non-competes, which are being amortized over a 10 year weighted-average useful
life and $3,414 was assigned to customer lists, which are being amortized over
15 year weighted average useful life. Of the $15,521 assigned to goodwill, none
is expected to be deductible for tax purposes.

The results of operations of ProFlame from August 1, 2001 through August 31,
2001 are included in the consolidated statement of operations of Heritage for
the fiscal year ended August 31, 2001.

The following unaudited pro forma consolidated results of operations are
presented as if the series of transactions with ProFlame and Heritage had been
made at the beginning of the periods presented.

The pro forma consolidated results of operations include adjustments to give
effect to amortization of non-competes and customer lists, interest expense on
acquisition and assumed debt and certain other adjustments, including the
elimination of income taxes. The unaudited pro forma information is not
necessarily indicative of the results of operations that would have occurred had
the transactions been made at the beginning of the periods presented or the
future results of the combined operations.

Heritage also purchased all of the common stock of EnergyNorth Propane, Inc. and
its VGS Propane, LLC subsidiary in northern New England, and all of the stock of
one other small company. Heritage acquired substantially all of the assets of
seven other companies during the fiscal year ended August 31, 2001. These
acquisitions totaled $60,473, which included liabilities assumed and noncompete
agreements of $3,010 for periods ranging up to ten years. These acquisitions
were financed primarily with the acquisition facility and the issuance of $1,600
of common units.

In August 2000, Heritage purchased substantially all of the assets of two
companies for $1,887 in cash and noncompete agreements with the prior owners for
$309. In January 2000, Peoples Gas purchased substantially all of the fixed
assets of a company for approximately $3,300 in cash and noncompete agreements
with the prior owners for $500. In July 1999, Peoples Gas purchased
substantially all of the inventory and fixed assets of a company for
approximately $1,015 in cash and noncompete agreements with the prior owners for
$200. The results of operations of the acquired entities have been included in
Heritage's or Peoples Gas' financial statements from the date of acquisition.

F-16

4. WORKING CAPITAL FACILITY AND LONG-TERM DEBT:

Maturities of the Senior Secured Notes, the Medium Term Note Program and the
Senior Secured Promissory Notes are as follows:

1996 8.55% Senior Notes:
mature at the rate of $12,000 on June 30 in each
of the years 2002 to and including 2011. Interest
is paid semi-annually.

1997 Medium Term Note Program:

Series A Notes: mature at the rate of $2,400 on November 19 in
each of the years 2005 to and including 2009.
Interest is paid semi-annually.

Series B Notes: mature at the rate of $2,000 on November 19 in
each of the years 2003 to and including 2012.
Interest is paid semi-annually.

Series C Notes: mature at the rate of $714 on March 13 in each of
the years 2000 to and including 2003, $357 on
March 13, 2004, $1,073 on March 13, 2005, and $357
in each of the years 2006 and 2007. Interest is
paid semi-annually.

Series D Notes: mature at the rate of $556 on March 13 in each of
the years 2002 to and including 2010. Interest is
paid semi-annually.

Series E Notes: mature at the rate of $714 on March 13 in each of
the years 2007 to and including 2013. Interest is
paid semi-annually.

F-17

2000 and 2001 Senior Secured Promissory Notes:

Series A Notes: mature at the rate of $3,200 on August 15 in each
of the years 2003 to and including 2007. Interest
is paid quarterly.

Series B Notes: mature at the rate of $4,571 on August 15 in each
of the years 2004 to and including 2010. Interest
is paid quarterly.

Series C Notes: mature at the rate of $5,750 on August 15 in each
of the years 2006 to and including 2007, $4,000 on
August 15, 2008 and $5,750 on August 15, 2009 to
and including 2010. Interest is paid quarterly.

Series D Notes: mature at the rate of $12,450 on August 15 in each
of the years 2008 and 2009, $7,700 on August 15,
2010, $12,450 on August 15, 2011 and $12,950 on
August 15, 2012. Interest is paid quarterly.

Series E Notes: mature at the rate of $1,000 on August 15 in each
of the years 2009 to and including 2015. Interest
is paid quarterly.

Series F Notes: mature at the rate of $3,636 on August 15 in each
of the years 2010 to and including 2020. Interest
is paid quarterly.

Series G Notes: mature at the rate of $5,300 on May 15 in each of
the years 2004 to and including 2008. Interest is
paid quarterly.

Series H Notes: mature at the rate of $2,500 on May 15 in each of
the years 2006 to and including 2016. Interest is
paid quarterly.

Series I Notes: mature in one payment of $16,000 on May 15, 2013.
Interest is paid quarterly.

The Senior Secured Notes, the Medium Term Note Program and the Senior Secured
Promissory Notes contain restrictive covenants including limitations on
substantial disposition of assets, changes in ownership of Heritage and
additional indebtedness and require the maintenance of certain financial ratios.
At August 31, 2001, Heritage was in compliance with all covenants. All
receivables, contracts, equipment, inventory, general intangibles, cash
concentration accounts, and the common stock of Heritage's subsidiaries secure
the notes.

Effective December 28, 2000, Heritage entered into the Fourth Amendment to the
First Amended and Restated Credit Agreement, and effective July 16, 2001,
Heritage entered into the Fifth Amendment to First Amended and Restated Credit
Agreement, with various financial institutions that amended existing credit
agreements. The terms of the Agreement as amended are as follows:

A $65,000 Senior Revolving Working Capital Facility, expiring June 30,
2004, with $19,900 outstanding at August 31, 2001. 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
5.295 percent for the amount outstanding at August 31, 2001. Heritage
must be free of all working capital borrowings for 30 consecutive days
each fiscal year. The maximum commitment fee payable on the unused
portion of the facility is .50 percent.

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. There
were no amounts outstanding as of August 31, 2001. The interest rate
and interest payment dates vary depending on the terms Heritage agrees
to when the money is borrowed. The maximum commitment fee payable on
the unused portion of the facility is .50 percent.

Future maturities of long-term debt for each of the next five fiscal years and
thereafter are $16,120 in 2002; $19,605 in 2003; $31,697 in 2004; $31,998 in
2005; $41,877 in 2006 and $298,571 thereafter.

5. COMMITMENTS AND CONTINGENCIES:

Certain property and equipment is leased under noncancelable leases, which
require fixed monthly rental payments and expire at various dates through 2020.
Rental expense under these leases totaled approximately $2,708 for the year
ended August 31, 2001, $245 for the eight months ended August 31, 2000, and $184
for fiscal 1999 and $119 for fiscal 1998, and has been included in operating
expenses in the accompanying statements of operations. Fiscal

F-18

year future minimum lease commitments for such leases are $2,680 in 2002; $1,830
in 2003; $1,365 in 2004; $1,126 in 2005; $488 in 2006 and $1,052 thereafter.

Heritage is a party to various legal proceedings incidental to its business.
Certain claims, suits and complaints arising in the ordinary course of business
have been filed or are pending against Heritage. In the opinion of management,
all such matters are covered by insurance, are without merit or involve amounts,
which, if resolved unfavorably, would not have a significant effect on the
financial position or results of operations of Heritage.

Petroleum-based contamination or environmental wastes are known to be located on
or adjacent to six sites, which Heritage presently or formerly had operations.
These sites were evaluated at the time of their acquisition. In all cases,
remediation operations have been or will be undertaken by others, and in all six
cases, Heritage obtained indemnification for expenses associated with any
remediation from the former owners or related entities. Additionally, Heritage
has been named as a large deminimis generator at one superfund site, but it
believes that its exposure will not be material. In the opinion of management
and based on information currently available to Heritage, such projects are not
expected to have a material adverse effect on Heritage's financial condition or
results of operation.

Heritage has entered into several purchase and supply commitments with varying
terms as to quantities and prices, which expire at various dates through March
2002.

6. PARTNERS' CAPITAL:

The Agreement of Limited Partnership of Heritage Propane Partners, L.P.
("Partnership Agreement") contains specific provisions for the allocation of net
earnings and losses to each of the partners for purposes of maintaining the
partner capital accounts.

All of the subordinated units were held by Heritage Holdings, a wholly owned
subsidiary of U.S. Propane and the general partner of the Operating Partnership.
The subordinated units were a separate class of limited partner interests and
the rights of holders of subordinated units to participate in distributions to
partners differed from, and were subordinated to, the rights of the holders of
common units.

Under the partnership agreement, 925,736 subordinated units converted into
common units as of July 7, 1999, 925,736 subordinated units converted into
common units as of July 5, 2000 and the remaining 1,851,471 subordinated units
converted into common units as of July 6, 2001. The conversions of the
subordinated units occurred and the subordination period ended because Heritage
met specified cash performance and distribution requirements during successive
four-quarter periods commencing with the initial public offering in June of
1996. As common units issued upon conversion of the subordinated units, the new
common units share equally with other common units in distributions of available
cash.

The class B subordinated units represent a portion of the limited partner
interests issued to certain former stockholders of Heritage Holdings, who are
also members of management, in connection with the transaction with U.S.
Propane. The class B subordinated units have the same voting rights as the
subordinated units outstanding before the end of the subordination period. Each
class B subordinated unit is entitled to one vote on each matter with respect to
which the class B subordinated units are entitled to vote.

In connection with the transaction with U.S. Propane and because the class B
subordinated units are not convertible into common units except by approval of
the common unitholders or a change in the rules of the New York Stock Exchange,
Heritage agreed to submit to a vote or consent of the common unitholders a
proposal to change the terms of the class B subordinated units to provide that
each class B subordinated unit is convertible into one common unit. Heritage
intends to submit this proposal to its common unitholders by December 31, 2001.

In conjunction with the transaction with U.S. Propane and the change of control
of the General Partner, Heritage issued 1,000,000 newly created class C units to
Heritage Holdings in conversion of that portion of its incentive distribution
rights that entitled it to receive any distribution made by Heritage
attributable to the net amount received by Heritage in connection with the
settlement, judgment, award or other final nonappealable resolution of specified
litigation filed by Heritage prior to the transaction with U.S. Propane, which
is referred to as the "litigation". The class C units have zero initial capital
account balance and were distributed by Heritage Holdings to its former
stockholders in connection with the transaction with U.S. Propane. Thus, U.S.
Propane will not receive any distributions made with respect to the litigation.

F-19

On July 31, 2001, Heritage sold 2,500,000 common units in an underwritten public
offering at a public offering price of $28.00 per unit. Heritage used $41
million of the approximate net proceeds of $66 million to reduce indebtedness
under the Senior Revolving Acquisition Facility, which was incurred in the
acquisition of ProFlame. The remainder of the proceeds was used for general
partnership purposes, including additional acquisitions and repayment of debt.
To effect the transfer of the contribution required by the general partner to
maintain its 1% general partner interest in, the General Partner contributed
common units to Heritage and those units were cancelled.

On August 1, 2001, Heritage issued 129,901 common units to the General Partner
in connection with the assumption of certain liabilities by the general partner
from Heritage's acquisition of certain assets of ProFlame. The general partner
was entitled to 158,917 common units as a result of this transaction but forwent
1,638 units and 1,605 units, which represented its capital contributions to
maintain its 1% interest in Heritage and its 1.0101% interest in the Operating
Partnership, respectively, in relation to this transaction. Heritage Holdings
also forwent an additional 25,773 common units to which it was entitled in the
ProFlame acquisition to maintain its 1.0101% interest in the Operating
Partnership. These units were not registered with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, by virtue of an
exemption under Section 4(2) thereof. These units carry a restrictive legend
with regard to transfer of the units.

During fiscal 2001, Heritage issued 58,000 common units in exchange for certain
assets in connection with the acquisitions of certain propane businesses, for a
total value of $1.6 million. These units were issued utilizing Heritage's
Registration Statement No. 333-40407 on Form S-4.

QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH

The partnership agreement requires that Heritage will distribute all of its
"available cash" to its unitholders and its general partner within 45 days
following the end of each fiscal quarter, subject to the payment of incentive
distributions to the holders of Incentive Distribution Rights to the extent that
certain target levels of cash distributions are achieved. The term "available
cash" generally means, with respect to any fiscal quarter of the partnership,
all cash on hand at the end of such quarter, plus working capital borrowings
after the end of the quarter, less reserves established by the general partner
in its sole discretion to provide for the proper conduct of Heritage's business,
comply with applicable laws or any Heritage debt instrument or other agreement,
or to provide funds for future distributions to partners with respect to any one
or more of the next four quarters. Available cash is more fully defined in the
Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P.

The Minimum Quarterly Distribution was made to the Common and Subordinated
Unitholders for the quarters ended November 30, 1996 through August 31, 1998.
For the quarter ended November 30, 1998, a quarterly distribution of $.5125 was
paid to the Common and Subordinated Unitholders. For each of the quarters ended
February 28, 1999 through and including May 31, 2000, quarterly distributions of
$.5625, respectively, were paid to the Common and Subordinated Unitholders.
Heritage raised the quarterly distribution $0.0125 per unit each quarter
beginning with the quarter ended August 31, 2000, to the current level of $0.625
per unit (or $2.50 annually) for the quarter ended August 31, 2001. The
quarterly distributions for the quarters ended February 28, 1999 through August
31, 2001 included incentive distributions payable to the General Partner to the
extent the quarterly distribution exceeded $.55 per unit.

The subordination period ended as a result of the conversion into common units
of all remaining outstanding subordinated units (but not class B subordinated
units) as described above. Beginning with the fiscal quarter ended August 31,
2001, and as long as class B subordinated units are outstanding, Heritage will
distribute available cash, excluding any available cash to be distributed to the
class C unitholders, as follows:

o First, 97% to the holders of common units, pro rata, 1% to U.S.
Propane in respect of its limited partner interest in the
Operating Partnership and 2% to the general partner, until the
holders of common units have received $0.50 per common unit for
such quarter and any prior quarter in which they failed to
receive $0.50 per common unit;

o Second, 97% to the holders of class B subordinated units, pro
rata, 1% to U.S. Propane in respect of its limited partner
interest in the Operating Partnership and 2% to the general
partner, until the holders of class B subordinated units have
received $0.50 per unit for such quarter;

o Third, 97% to all common unitholders and class B subordinated
units, pro rata, 1% to U.S. Propane in respect of its limited
partner interest in the Operating Partnership and 2% to the
general partner, until all common unitholders have received at
least $0.55 per unit for such quarter;

F-20

o Fourth, 84% to all common unitholders and class B subordinated
unitholders, 1% to U.S. Propane in respect of its limited partner
interest in the Operating Partnership and 13% to the holders of
incentive distribution rights, pro rata and 2% to the general
partner, until all common unitholders have received at least
$0.635 per unit for such quarter;

o Fifth, 74% to all common unitholders and class B subordinated
unitholders, pro rata, 1% to U.S. Propane in respect of its
limited partner interest in the Operating Partnership, 23% to the
holders of incentive distribution rights, pro rata, and 2% to the
general partner, until all common unitholders have received at
least $0.825 per unit for such quarter; and

o Sixth, thereafter 49% to all common unitholders and class B
subordinated unitholders, pro rata, 1% to U.S. Propane in respect
of its limited partner interest in the Operating Partnership, 48%
to the holders of incentive distribution rights, pro rata, and 2%
to the general partner.

If the common unitholders have not approved the conversion of class B
subordinated units into common units by December 31, 2001, then the amount
distributed to each class B subordinated unit pursuant to the second through
sixth clauses above will be equal to 115% of the amount distributed to each
common unit pursuant to each such clause.

If the conversion of the class B subordinated units is approved, each class B
subordinated unit will be converted into one common unit and will then
participate pro rata with the other common units in distributions of available
cash. After the conversion of the class B subordinated units into common units,
Heritage will distribute available cash, excluding any available cash to be
distributed to the class C unitholders as follows:

o First, 97% to all unitholders, pro rata, 1% to U.S. Propane in
respect of its limited partner interest in the Operating
Partnership and 2% to the general partner, until all unitholders
have received $0.50 per unit for such quarter and any prior
quarter;

o Second, 97% to all unitholders, pro rata, 1% to U.S. Propane in
respect of its limited partner interest in the Operating
Partnership and 2% to the general partner, until all unitholders
have received $0.55 per unit for such quarter;

o Third, 84% to all unitholders, pro rata, 1% to U.S. Propane in
respect of its limited partner interest in the Operating
Partnership, 13% to the holders of incentive distribution rights,
pro rata, and 2% to the general partner, until all common
unitholders have received at least $0.635 per unit for such
quarter;

o Fourth, 74% to unitholders, pro rata, 1% to U.S. Propane in
respect of its limited partner interest in the Operating
Partnership, 23% to the holders of incentive distribution rights,
pro rata and 2% to the general partner, until all common
unitholders have received at least $0.825 per unit for such
quarter;

o Fifth, thereafter 49% to all unitholders, pro rata, 1% to U.S.
Propane in respect of its limited partner interest in the
Operating Partnership, 48% to the holders of incentive
distribution rights, pro rata, and 2% to the general partner.

RESTRICTED UNIT PLAN

The General Partner has adopted the Amended and Restated Restricted Unit Plan
dated August 10, 2000 (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 TECO, Atmos, Piedmont or AGL 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 (ii) the
conversion of the Subordinated units to common units. Grants made after the
conversion of all of the Subordinated units to common units shall vest on such
terms as the Committee may establish, which may

F-21

include the achievement of performance objectives. In the event of a "change of
control" (as defined in the Restricted Unit Plan), all rights to acquire common
units pursuant to the Restricted Unit Plan will immediately vest.

The issuance of the common units pursuant to the Restricted Unit Plan is
intended to serve as a means of incentive compensation for performance and not
primarily as an opportunity to participate in the equity appreciation in respect
of the common units. Therefore, no consideration will be payable by the plan
participants upon vesting and issuance of the common units. As of August 31,
2001, 34,050 restricted units are outstanding and 31,150 are available for
grants to non-employee directors and key employees.

Subsequent to August 31, 2001, 1,750 additional Phantom Units vested pursuant to
the vesting rights of the Restricted Unit Plan and common units were issued.
During fiscal 2000, 21,300 of these Phantom Units were granted by Predecessor
Heritage to non-employee directors and key employees of Predecessor Heritage. As
of August 31, 2000, 80,800 Phantom Units were awarded of which 4,500 grants
vested pursuant to the vesting rights of the Restricted Unit Plan and 71,300
vested in accordance with the change of control that occurred with the General
Partner. Compensation expense of $323 and $549 was recognized for fiscal year
2001 and the eight months ended August 31, 2000, respectively on the units,
which vested due to the change in control of the General Partner. Individuals
holding the remaining 5,000 grants waived their rights to vesting under the
change of control and compensation cost related to such units will be recognized
over the vesting period of the related awards. During fiscal 2001, 750
additional Phantom Units vested pursuant to the vesting rights of the Restricted
Unit Plan and Common Units were issued. Heritage applies APB Opinion No. 25
"Accounting for Stock Issued to Employees". Heritage follows the disclosure only
provision of Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-based Compensation". Pro forma net income and net income
per limited partner unit under the fair value method of accounting for equity
instruments under SFAS No. 123 would be the same as reported net income and net
income per limited partner unit.

LONG-TERM INCENTIVE PLAN

Effective September 1, 2000, Heritage adopted a long-term incentive plan whereby
units will be awarded based on achieving certain targeted levels of Distributed
Cash per unit. Awards under the program will be made starting in 2003 based upon
the average of the prior three years' Distributed Cash per unit. A minimum of
250,000 units and a maximum of 500,000 units will be awarded. Compensation
expense of $756 was recognized for the year ended August 31, 2001.

7. PROFIT SHARING AND 401(K) SAVINGS PLAN:

Heritage sponsors a defined contribution profit sharing and 401(k) savings plan
(the "Plan"), which covers all employees subject to service period requirements.
Contributions are made to the Plan at the discretion of the Board of Directors
and are allocated to eligible employees as of the last day of the plan year
based on their pro rata share of total contributions. Employer matching
contributions are calculated using a discretionary formula based on employee
contributions. Prior to 2001, employer matching contributions were entirely
discretionary. Heritage did not recognize any expense under the profit sharing
provision of the Plan during the year ended August 31, 2001 or the period ended
August 31, 2000. The company made matching contributions of $2,260 and $0 to the
401(k) savings plan for the year ended August 31, 2001 and the period ended
August 31, 2000, respectively.

8. RELATED PARTY TRANSACTIONS:

Heritage has no employees and is managed by the General Partner. Pursuant to the
Partnership Agreement, the General Partner is entitled to reimbursement for all
direct and indirect expenses incurred or payments it makes on behalf of
Heritage, and all other necessary or appropriate expenses allocable to Heritage
or otherwise reasonably incurred by the General Partner in connection with
operating Heritage's business. These costs, which totaled approximately $93,442
for the year ended August 31, 2001 and $5,977 for the period ended August 31,
2000, include compensation and benefits paid to officers and employees of the
General Partner.

TECO performed certain services for Peoples Gas, which were billed at actual
cost. In addition, common general and administrative salary and other operating
costs and expenses were allocated to Peoples Gas based upon methods considered
reasonable by management. Such charges for employee services amounted to $1,836
and $1,697 for the eight months ended August 31, 2000 and 1999, respectively,
and $2,906 and $2,160 for the years ended 1999 and 1998 respectively.

F-22

Accounts payable to related companies are non-interest bearing. Accounts payable
to related companies include amounts payable from Heritage to the General
Partner of $6,360 and $2,675 as of August 31, 2001 and 2000 respectively and
$1,577 and $1,139 payable to Bi-State Partnership as of August 31, 2001 and
2000, respectively.

9. REPORTABLE SEGMENTS:

Heritage's financial statements reflect four reportable segments: the domestic
retail operations of Heritage, the domestic wholesale operations of Heritage,
the foreign wholesale operations of M-P Energy Partnership, and the trading
activities of Resources. Heritage's reportable domestic and wholesale fuel
segments are strategic business units that sell products and services to
different types of users: retail and wholesale customers. Intersegment sales by
the foreign wholesale segment to the domestic segment are priced in accordance
with the partnership agreement. Resources is a trading company that buys and
sells financial instruments for its own account. Heritage manages these segments
separately as each segment involves different distribution, sale and marketing
strategies. Heritage evaluates the performance of its operating segments based
on operating income. The operating income below does not reflect domestic and
foreign selling, general, and administrative expenses of $15,716 and $1,019 for
the year ended August 31, 2001 and the period ended August 31, 2000,
respectively. The following table presents financial information by segment for
the following periods:

F-23

10. SIGNIFICANT INVESTEE:

At August 31, 2001, Heritage held a 50 percent interest in Bi-State Partnership.
Heritage accounts for its 50 percent interest in Bi-State Partnership under the
equity method. Heritage's investment in Bi-State Partnership totaled $6,610 and
$5,550 at August 31, 2001 and 2000, respectively. Heritage received
distributions from Bi-State Partnership in the amount of $125 and $0 for the
year ended August 31, 2001, and for the one month period ended August 31, 2000,
respectively.

Bi-State Partnership's financial position is summarized below:

Bi-State Partnership's results of operations for the year ended August 31, 2001
are summarized below. The results of operations for the eight month period ended
August 31, 2000 includes only one month of operations of Bi-State Partnership
due to the U.S. Propane merger and it is not presented due to insignificance.

11. QUARTERLY FINANCIAL DATA (UNAUDITED):

Summarized unaudited quarterly financial data is presented below. The sum of net
income (loss) per limited partner unit by quarter may not equal the net income
(loss) per limited partner unit for the year due to variations in the weighted
average units outstanding used in computing such amounts. Heritage's business is
seasonal due to weather conditions in its service areas. Propane sales to
residential and commercial customers are affected by winter heating season
requirements, which generally results in higher operating revenues and net
income during the period from October through March of each year and lower
operating revenues and either net losses or lower net income during the period
from April through September of each year. Sales to industrial and agricultural
customers are much less weather sensitive.

F-24

F-25

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
Heritage Propane Partners, L.P.:

We have audited the accompanying consolidated statements of operations,
partners' capital and cash flows of Heritage Propane Partners, L.P.
("Predecessor Heritage", a Delaware limited partnership) and subsidiaries for
the period ended August 9, 2000, and the year ended August 31, 1999. These
financial statements are the responsibility of Predecessor Heritage's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Heritage
Propane Partners, L.P. ("Predecessor Heritage") and subsidiaries for the period
ended August 9, 2000, and the year ended August 31, 1999, in conformity with
accounting principles generally accepted in the United States.

/s/ Arthur Andersen LLP
-----------------------

Tulsa, Oklahoma
October 26, 2000
(except with respect to
the matter discussed in Note
12, as to which the date is
October 19, 2001)

F-26

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)

F-27

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit data)

The accompanying notes are an integral part of
these consolidated financial statements.

F-28

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

The accompanying notes are an integral part of
these consolidated financial statements.

F-29

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except unit and per unit data)

1. OPERATIONS AND ORGANIZATION:

Heritage Propane Partners, L.P. ("Predecessor Heritage") was formed April 24,
1996, as a Delaware limited partnership, to acquire, own and operate the propane
business of Heritage Holdings, Inc. ("General Partner") In order to simplify
Predecessor Heritage's obligation under the laws of several jurisdictions in
which Heritage conducts business, Predecessor Heritage's activities are
conducted through a subsidiary operating partnership, Heritage Operating, L.P.
(the "Operating Partnership"). Predecessor Heritage holds a 98.9899 percent
limited partner interest and the General Partner holds a 1.0101 percent general
partner interest in the Operating Partnership.

The Operating Partnership sells propane and propane-related products to
approximately 286,000 retail customers in 27 states throughout the United
States. Predecessor Heritage is also a wholesale propane supplier in the
southwestern United States and in Canada, the latter through participation in
M-P Energy Partnership. M-P Energy Partnership is a Canadian partnership
primarily engaged in lower-margin wholesale distribution in which Predecessor
Heritage owns a 60 percent interest. Predecessor Heritage grants credit to its
customers for the purchase of propane and propane-related products.

In August 2000, U.S. Propane acquired all of the outstanding common stock of
Heritage Holdings, Inc., ("General Partner"), the General Partner of Heritage
Propane Partners, L.P. By virtue of Heritage Holdings, Inc.'s general partner
and limited partner interests in Heritage Propane Partners, L.P., U.S. Propane
gained control of Heritage Propane Partners, L.P. Simultaneously, U.S. Propane
transferred its propane operations, consisting of its interest in four separate
limited liability companies, AGL Propane, L.L.C., Peoples Gas Company, L.L.C.,
United Cities Propane Gas, L.L.C. and Retail Propane Company, L.L.C. (former
Piedmont operations) to Heritage Propane Partners, L.P. for $181,395 plus
working capital. The $181,395 was payable $139,552 in cash, $31,843 of assumed
debt, and the issuance of 372,392 Common Units of Heritage Propane Partners,
L.P. valued at $7,348 and a 1.0101 percent limited partner interest in the
Operating Partnership valued at $2,652. The purchase price and the exchange
price for the common units were approved by an independent committee of the
Board of Directors of Heritage Holdings, Inc. The exchange price for the common
units was $19.73125 per unit under a formula based on the average closing price
of the Heritage Propane Partners, L.P.'s Common Units on the New York Stock
Exchange for the twenty (20) day period beginning ten (10) days prior to the
public announcement of the transaction on June 15, 2000 (the "Formula Price").
The working capital adjustment is estimated at $5,000 and is anticipated to be
settled in December 2000.

Concurrent with the acquisition, Heritage Propane Partners, L.P. borrowed
$180,000 from several institutional investors and sold 1,161,814 common units
and 1,382,514 Class B Subordinated Units in a private placement to the former
shareholders of Heritage Holdings, Inc., based on the Formula Price, resulting
in net proceeds of $50,203. The total of these proceeds were utilized to finance
the transaction and retire a portion of existing debt.

The merger was accounted for as a reverse acquisition in accordance with
Accounting Principles Board Opinion No. 16. Although Heritage Propane Partners,
L.P. is the surviving entity for legal purposes, U.S. Propane's propane
operations will be the acquirer for accounting purposes. U.S. Propane retained
the name Heritage Propane Partners, L.P. subsequent to the transactions
("Successor Heritage"). The assets and liabilities and results of operations of
Predecessor Heritage are included in the financial statements of Successor
Heritage as of August 10, 2000.

2. SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Predecessor
Heritage, its subsidiaries, including the Operating Partnership, M-P Energy
Partnership, and Heritage Energy Resources, L.L.C. ("Resources"). Predecessor
Heritage accounts for its 50 percent partnership interest in Bi-State
Partnership, another propane retailer, using the equity method. All significant
intercompany transactions and accounts have been eliminated in consolidation.
The General Partner's 1.0101 percent interest in the Operating Partnership is
accounted for in the consolidated financial statements as a minority interest.

F-30

REVENUE RECOGNITION

Sales of propane, propane appliances, parts and fittings are recognized at the
time of delivery of the product to the customer or at the time of sale or
installation. Revenue from service labor is recognized upon completion of the
service and tank rent is recognized ratably over the period it is earned.

INCOME TAXES

Predecessor Heritage is a limited partnership. As a result, Predecessor
Heritage's earnings or losses for federal income tax purposes are included in
the tax returns of the individual partners. Accordingly, no recognition has been
given to income taxes in the accompanying financial statements. Net earnings for
financial statement purposes may differ significantly from taxable income
reportable to unitholders as a result of differences between the tax basis and
financial reporting basis of assets and liabilities and the taxable income
allocation requirements under the partnership agreement.

INCOME PER LIMITED PARTNER UNIT

Basic net income per limited partner unit is computed by dividing net income,
after considering the General Partner's one percent interest, by the weighted
average number of Common and Subordinated Units outstanding. Diluted net income
per limited partner unit is computed by dividing net income, after considering
the General Partner's one percent interest, by the weighted average number of
Common and Subordinated Units outstanding and the weighted average number of
Restricted Units ("Phantom Units") granted under the Restricted Unit Plan (see
Note 5). A reconciliation of net income and weighted average units used in
computing basic and diluted earnings per unit is as follows:

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain 1999 amounts have been reclassified to conform with the 2000
presentation. These reclassifications have no impact on net income.

F-31

3. ACQUISITIONS:

During the period ended August 9, 2000, Predecessor Heritage acquired certain
assets of W. T. Johnson, Inc. in Yulee, FL, J & J Propane Gas, Inc. in various
locations in Alabama and Tennessee, ServiGas with operations located in Texas,
New Mexico, and Arizona, Petro San Juan Leasing, Inc. and two other small
companies. Heritage Holdings, Inc. purchased all of the outstanding stock of
Eaves Oil Company, Inc. of New Ellenton, SC, Blue Flame Gas Co. Inc. of
Charleston, SC, Lake County Gas of Lower Lake, CA, Cumberland LP Gas, Inc. of
Cookeville, TN and one small company and conveyed the net assets to Predecessor
Heritage. The acquisitions totaled $54,904, which includes notes payable on
noncompete agreements of $3,575 for periods ranging from three to ten years and
liabilities assumed. These acquisitions were financed primarily with the
acquisition facility and the issuance of $4,064 of Common Units.

During fiscal 1999, Predecessor Heritage acquired certain assets of Claredon Gas
Company in Manning, SC, Blue Flame Gas Corporation of Richmond, VT and one other
small company. Heritage Holdings, Inc. also purchased all of the outstanding
stock of S.R. Young, Inc. of Springfield, VT, Pioneer LPG Corporation of Madera,
CA and Foster's Gas, Inc. of Leitchfield, KY, and conveyed the net assets to
Predecessor Heritage. The acquisitions totaled $22,743, which includes notes
payable on noncompete agreements of $3,332 for periods ranging from three to ten
years. These acquisitions were financed primarily with the acquisition facility
and the issuance of $502 of Common Units.

The acquisitions have been accounted for by the purchase method and,
accordingly, the purchase prices have been allocated to assets acquired and
liabilities assumed based on the fair market values at the date of acquisitions.
Predecessor Heritage capitalized as part of the purchase price allocation
certain legal and other costs directly related to the acquisitions. The excess
of the purchase price over the fair market values of the net assets acquired has
been recorded as goodwill.

The results of operations of the acquired entities have been included in the
consolidated financial statements from the date of acquisition.

4. COMMITMENTS AND CONTINGENCIES:

Certain property and equipment is leased under noncancelable leases, which
require fixed monthly rental payments and expire at various dates through 2008.
Rental expense under these leases totaled approximately $1,366 for the period
ended August 9, 2000 and $1,554 for fiscal 1999.

5. PARTNERS' CAPITAL:

Subsequent to August 31, 1999, Predecessor Heritage issued 76,152 Common Units
under Form S-4 registration statement in connection with the purchase of other
propane businesses, 4,500 Common Units in regards to the vesting rights under
the Restricted Unit Plan, 107,878 to the General Partner in connection with the
assumption of certain liabilities by the General Partner from Predecessor
Heritage's prior acquisition of certain assets of various propane companies and
1,200,000 Common Units under Form S-3 registration statement. On July 5, 2000,
925,736 Subordinated Units held by the General Partner converted to Common Units
pursuant to the terms of the Partnership Agreement.

The Agreement of Limited Partnership of Heritage Propane Partners, L.P.
("Partnership Agreement") contains specific provisions for the allocation of net
earnings and loss to each of the partners for purposes of maintaining the
partner capital accounts.

During the Subordination Period (as defined below), Predecessor Heritage may
issue up to 2,012,500 additional Common Units (excluding Common Units issued in
connection with conversion of Subordinated Units into Common Units) or an
equivalent number of securities ranking on a parity with the Common Units and an
unlimited number of partnership interests junior to the Common Units without a
Unitholder vote. Predecessor Heritage may also issue additional Common Units
during the Subordination Period in connection with certain acquisitions or the
repayment of certain indebtedness. During fiscal 1999, Predecessor Heritage
issued 23,213 Common Units to Heritage Holdings, Inc. These Units were issued in
connection with the assumption of certain liabilities by the General Partner
from Predecessor Heritage's prior acquisition of certain assets of a propane
company. After the Subordination Period, the Partnership Agreement authorizes
the General Partner to cause Predecessor Heritage to issue an unlimited number
of limited partner interests of any type without the approval of any
Unitholders. Pursuant

F-32

to the terms of the Partnership Agreement, 925,736 Subordinated Units held by
the General Partner converted to Common Units on July 7, 1999 and an additional
925,736 converted on July 5, 2000.

QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH

Predecessor Heritage is expected to make quarterly cash distributions of all of
its Available Cash, generally defined as consolidated cash receipts less
consolidated operating expenses, debt service payments, maintenance capital
expenditures and net changes in reserves established by the General Partner for
future requirements. These reserves are retained to provide for the proper
conduct of Predecessor Heritage's business, or to provide funds for
distributions with respect to any one or more of the next four fiscal quarters.

Distributions by Predecessor Heritage in an amount equal to 100 percent of its
Available Cash will generally be made 98 percent to the Common and Subordinated
Unitholders and two percent to the General Partner, subject to the payment of
incentive distributions to the holders of Incentive Distribution Rights to the
extent that certain target levels of cash distributions are achieved. To the
extent there is sufficient Available Cash, the holders of Common Units have the
right to receive the Minimum Quarterly Distribution ($.50 per Unit), plus any
arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. Common Units will not accrue arrearages for any quarter
after the Subordination Period and Subordinated Units will not accrue any
arrearages with respect to distributions for any quarter.

In general, the Subordination Period will continue indefinitely until the first
day of any quarter beginning after May 31, 2001, in which distributions of
Available Cash equal or exceed the Minimum Quarterly Distribution ("MQD") on the
Common Units and the Subordinated Units for each of the three consecutive
four-quarter periods immediately preceding such date. Pursuant to the terms of
the Partnership Agreement, 925,736 Subordinated Units held by the General
Partner converted to Common Units on July 7, 1999, and an additional 925,736
converted on July 5, 2000. The conversion of these units was dependent on
meeting certain cash performance and distribution requirements during the period
that commenced with Predecessor Heritage's public offering in June of 1996. The
subordination period applicable to the remaining Subordinated Units will end the
first day of any quarter ending after May 31, 2001, in which certain cash
performance and distribution requirements have been met. Upon expiration of the
Subordination Period, all remaining Subordinated Units will convert to Common
Units.

Predecessor Heritage is expected to make distributions of its Available Cash
within 45 days after the end of each fiscal quarter ending November, February,
May and August to holders of record on the applicable record date. A pro rata
MQD of $.353 per Common and Subordinated Unit was made on October 15, 1996 for
the two month period between Predecessor Heritage's initial public offering and
the quarter ended August 31, 1996. The M Q D was made to the Common and
Subordinated Unitholders for the quarters ended November 30, 1996 through August
31, 1998. For the quarter ended November 30, 1998, a quarterly distribution of
$.5125 was paid to the Common and Subordinated Unitholders. For each of the
quarters ended February 28, 1999 through and including May 31, 2000, quarterly
distributions of $.5625, respectively, were paid to the Common and Subordinated
Unitholders. The quarterly distributions for the quarters ended February 28,
1999 through May 31, 2000 included incentive distributions payable to the
General Partner to the extent the quarterly distribution exceeded $.55 per unit.

RESTRICTED UNIT PLAN

The General Partner adopted a Restricted Unit Plan (the "Restricted Unit Plan")
for its non-employee directors and key employees of the General Partner and its
affiliates effective June 1996. Rights to acquire 146,000 Common Units ("Phantom
Units") are available under the Restricted Unit Plan and may be granted to
employees from time to time at the discretion of the Restricted Unit Plan
Committee. Commencing on September 1, 1996 and on each September 1 thereafter
that the Restricted Unit Plan is in effect, each director who is in office
automatically receives 500 units. The Phantom Units vest upon, and in the same
proportions as (1) the conversion of Predecessor Heritage's Subordinated Units
into Common Units or if later, (2) the third anniversary of their grant date,
and (3) terms and conditions specified by each grant. During fiscal 1999, 21,300
of these Phantom Units were granted to non-employee directors and key employees.
During fiscal 1998, 20,200 of these Phantom Units were granted to non-employee
directors and key employees. As of August 31, 1999, Phantom Units with a value
of $1,346 have been awarded and the compensation cost related to such units will
be recognized over the vesting period of the related awards. Predecessor
Heritage applies APB Opinion No. 25, "Accounting for Stock Issued to Employees".
Compensation cost and directors' fee expense of $362 and $358 was recorded for
the period ended August 9, 2000 and fiscal 1999, respectively, related to the
issuance of the units. Subsequent to August 31, 1999, 4,500 of Phantom Unit
grants vested pursuant to the vesting rights of the Restricted Unit Plan.
Predecessor Heritage follows the

F-33

disclosure only provision of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-based Compensation". Proforma net income
and net income per limited partner unit under the fair value method of
accounting for equity instruments under SFAS No. 123 would be the same as
reported net income and net income per limited partner unit.

6. REGISTRATION STATEMENTS:

Effective November 19, 1997, Predecessor Heritage registered 2,000,000
additional Common Units on Form S-4 that may be issued from time to time by
Predecessor Heritage by means of a prospectus delivered in connection with its
negotiations for acquisition of other businesses, properties or securities in
business combination transactions. During the period ended August 9, 2000,
76,152 Common Units were issued from this registration statement in connection
with acquisitions.

Effective September 13, 1999, Predecessor Heritage registered $150.0 million of
Common Units and Debt Securities on Form S-3 that may be offered for sale in one
or more offerings. On October 25, 1999, Predecessor Heritage issued a prospectus
supplement offering 1,200,000 Common Units, representing limited partner
interests in Predecessor Heritage. The underwriters delivered the Common Units
to purchasers on October 28, 1999 at a public offering price of $22.00 per
Common Unit. Predecessor Heritage used the net proceeds of approximately $24.0
million from this offering to repay a portion of the outstanding indebtedness
under its acquisition facility that was incurred to acquire propane businesses.

7. PROFIT SHARING AND 401(K) SAVINGS PLAN:

Predecessor Heritage sponsors a defined contribution profit sharing and 401(k)
savings plan (the "Plan"), which covers all employees subject to service period
requirements. Contributions are made to the Plan at the discretion of the Board
of Directors. Total expense under the profit sharing provision of the Plan
during the period ended August 9, 2000 and the year ended August 31, 1999 was $0
and $425, respectively.

8. RELATED PARTY TRANSACTIONS:

Predecessor Heritage has no employees and is managed by the General Partner.
Pursuant to the Partnership Agreement, the General Partner is entitled to
reimbursement for all direct and indirect expenses incurred or payments it makes
on behalf of Predecessor Heritage, and all other necessary or appropriate
expenses allocable to Predecessor Heritage or otherwise reasonably incurred by
the General Partner in connection with operating Predecessor Heritage's
business. These costs, which totaled approximately $40,742 and $38,314 for the
period ended August 9, 2000 and the year ended August 31, 1999, respectively,
include compensation and benefits paid to officers and employees of the General
Partner. At August 31, 1999 accounts payable included amounts payable from
Predecessor Heritage to the General Partner of $1,964.

9. REPORTABLE SEGMENTS:

Predecessor Heritage's financial statements reflect four reportable segments:
the domestic retail operations of Predecessor Heritage, the domestic wholesale
operations of Predecessor Heritage, the foreign wholesale operations of M-P
Energy Partnership, and the trading activities of Resources. Predecessor
Heritage's reportable domestic and wholesale fuel segments are strategic
business units that sell products and services to different types of users:
retail and wholesale customers. Intersegment sales by the foreign wholesale
segment to the domestic segment are priced in accordance with the partnership
agreement. Resources is a trading company that buys and sells financial
instruments for its own account. Predecessor Heritage manages these segments
separately as each segment involves different distribution, sale and marketing
strategies. Predecessor Heritage evaluates the performance of its operating
segments based on operating income. The operating income below does not reflect
domestic and foreign selling, general, and administrative expenses of $5,974 and
$6,236 for the period ended August 9, 2000 and for the year ended August 31,
1999, respectively.

F-34

The following table presents financial information by segment for the period
ended August 9, 2000 and the year ended August 31, 1999:

F-35

10. SIGNIFICANT INVESTEE:

At August 31, 1999, Predecessor Heritage held a 50 percent interest in Bi-State
Partnership. Predecessor Heritage accounts for its 50 percent interest in
Bi-State Partnership under the equity method. Predecessor Heritage received
distributions from Bi-State Partnership in the amount of $200 and $470 for the
period ended August 9, 2000, and for the year ended August 31, 1999,
respectively.

Bi-State Partnership's results of operations for the period ended August 9, 2000
and the fiscal year ended August 31, 1999 are summarized below:

11. QUARTERLY FINANCIAL DATA (UNAUDITED):

The retail propane distribution business is largely seasonal due to propane's
use as a heating source in residential and commercial buildings. Historically,
approximately two-thirds of Predecessor Heritage's retail propane volume and
more than 80 percent of the EBITDA is attributable to sales during the six-month
peak heating season of October through March. Consequently, sales and operating
profits are concentrated in Predecessor Heritage's first and second fiscal
quarters. Cash flow from operations, however, is greatest during the second and
third fiscal quarters when customers pay for propane purchased during the
six-month peak-heating season.

12. SUBSEQUENT EVENT:

On August 22, 2001, the final payment to settle the working capital adjustment
was made to the partners of U.S. Propane. Total payments made to settle the
working capital adjustment were approximately $12,900. Accordingly, an
additional amount of approximately $7,900 was recorded as goodwill (See Note 1).

F-36

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

HERITAGE PROPANE PARTNERS, L.P.

By Heritage Holdings, Inc.
(General Partner)

By: /s/ H. Michael Krimbill
-------------------------------------
H. Michael Krimbill
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:

44

INDEX TO 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.

E-1

E-2

E-3

E-4