HERITAGE PROPANE PARTNERS L P - 10-Q Quarterly Report

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2003

OR

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

FOR THE TRANSITION PERIOD FROM to
---------- ----------

COMMISSION FILE NUMBER 1-11727

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

DELAWARE 73-1493906
(state or other jurisdiction or (I.R.S. Employer
incorporation or organization) Identification No.)

8801 SOUTH YALE AVENUE, SUITE 310
TULSA, OKLAHOMA 74137
(Address of principal
executive offices
and zip code)

(918) 492-7272
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

Yes x No
------

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes x No
------

At April 11, 2003, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 16,367,803 Common Units

FORM 10-Q

HERITAGE PROPANE PARTNERS, L.P.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
(unaudited)

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

1

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES

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

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

2

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)

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

3

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES

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

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

4

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

The accompanying notes are an integral part of these financial statements

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HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES

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

1. OPERATIONS AND ORGANIZATION:

The accompanying financial statements should be read in conjunction with the
consolidated financial statements of Heritage Propane Partners, L.P. and
subsidiaries (the "Partnership") as of August 31, 2002, and the notes thereto
included in the Partnership's consolidated financial statements included in Form
10-K as filed with the Securities and Exchange Commission on November 27, 2002.
The accompanying financial statements include only normal recurring accruals and
all adjustments that the Partnership considers necessary for a fair
presentation. Due to the seasonal nature of the Partnership's business, the
results of operations for interim periods are not necessarily indicative of the
results to be expected for a full year.

In order to simplify the Partnership's obligations under the laws of several
jurisdictions in which it conducts business, the Partnership's activities are
conducted through a subsidiary operating partnership, Heritage Operating, L.P.
(the "Operating Partnership"). The Partnership and the Operating Partnership are
collectively referred to in this report as "Heritage." Heritage sells propane
and propane-related products to more than 650,000 active residential,
commercial, industrial, and agricultural customers in 29 states. Heritage is
also a wholesale propane supplier in the United States and in Canada, the latter
through participation in MP Energy Partnership. MP Energy Partnership is a
Canadian partnership, in which Heritage owns a 60% interest, engaged in
lower-margin wholesale distribution and in supplying Heritage's northern U.S.
locations. Heritage buys and sells financial instruments for its own account
through its wholly owned subsidiary, Heritage Energy Resources, L.L.C.
("Resources").

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

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of the Partnership include the accounts of
its subsidiaries, including the Operating Partnership, MP Energy Partnership,
Heritage Service Corp., Guilford Gas Service, Inc., and Resources. Heritage
accounts for its 50% partnership interest in Bi-State Propane, a propane
retailer in the states of Nevada and California, under the equity method. All
significant intercompany transactions and accounts have been eliminated in
consolidation. For purposes of maintaining partner capital accounts, the
Partnership Agreement of Heritage Propane Partners, L.P. (the "Partnership
Agreement") specifies that items of income and loss shall be allocated among the
partners in accordance with their percentage interests. Normal allocations
according to percentage interests are made, however, only after giving effect to
any priority income allocations in an amount equal to the incentive
distributions that are allocated 100% to the General Partner. For the three
months and six months ended February 28, 2003, the 1.0101% general partner
interest in the Operating Partnership held by the General Partner, U.S. Propane,
L.P. ("U.S. Propane"), was accounted for in the consolidated financial
statements as a minority interest. On February 4, 2002, at a special meeting of
the Partnership's Common Unitholders, the Common Unitholders approved the
substitution of U.S. Propane as the successor General Partner of the Partnership
and the Operating Partnership, replacing Heritage Holdings, Inc. ("Heritage
Holdings"). For the three months and the six months ended February 28, 2002, the
1.0101% general partner interest of the former General Partner, Heritage
Holdings, and U.S. Propane's 1.0101% limited partner interest in the Operating
Partnership were accounted for in the consolidated financial statements as
minority interests.

ACCOUNTS RECEIVABLE

Heritage grants credit to its customers for the purchase of propane and
propane-related products. Included in accounts receivable are trade accounts
receivable arising from the Partnership's retail and wholesale propane
operations and receivables arising from Resources' liquids marketing activities.
Accounts receivable are recorded as amounts billed to customers less an
allowance for doubtful accounts. The allowance for doubtful accounts is based on
management's assessment of the realizability of customer accounts. Management's
assessment is based on the overall creditworthiness of the Partnership's
customers and any specific disputes. Receivables related to liquids marketing
activities are $9,863 and $4,332 as of February 28, 2003 and August 31, 2002,
respectively. Accounts receivable consisted of the following:

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The activity in the allowance for doubtful accounts 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 of fuel delivered to the
customer service locations, while the cost of appliances, parts, and fittings is
determined by the first-in, first-out method. Inventories consisted of the
following:

INCOME TAXES

Heritage is a limited partnership. As a result, Heritage's earnings or losses
for federal and state income tax purposes are included in the tax returns of the
individual partners. Accordingly, no recognition has been given to income taxes
in the accompanying financial statements of Heritage except those anticipated to
be incurred by corporate subsidiaries of Heritage that are subject to income
taxes. Net earnings for financial statement purposes may differ significantly
from taxable income reportable to unitholders as a result of differences between
the tax basis and financial reporting basis of assets and liabilities and the
taxable income allocation requirements under the Partnership Agreement.

INCOME PER LIMITED PARTNER UNIT

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

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QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH

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

Prior to the Special Meeting on February 4, 2002, distributions by the
Partnership in an amount equal to 100% of Available Cash were made 97% to the
Common Unitholders, 1.0101% to U.S. Propane for its limited partner interest in
the Operating Partnership, and 1.9899% to the former General Partner, Heritage
Holdings. After the approval by the Common Unitholders of the substitution of
U.S. Propane as the General Partner, distributions by the Partnership in an
amount equal to 100% of Available Cash will generally be made 98% to the Common
Unitholders and 2% to the General Partner, subject to the payment of incentive
distributions to the holders of Incentive Distribution Rights to the extent that
certain target levels of cash distributions are achieved.

On October 15, 2002, a quarterly distribution of $0.6375 per unit, or $2.55 per
unit annually, was paid to Unitholders of record at the close of business on
October 8, 2002. On January 14, 2003, a quarterly distribution of $0.6375 per
unit, or $2.55 per unit annually, was paid to Unitholders of record at the close
of business on December 30, 2002. On March 24, 2003, the Partnership declared a
cash distribution for the second quarter ended February 28, 2003 of $0.6375 per
unit, or $2.55 per unit annually, payable on April 14, 2003 to Unitholders of
record at the close of business on April 4, 2003. In addition to these quarterly
distributions, the General Partner received quarterly distributions for its
general partner interest in the Partnership, its minority interest, and
incentive distributions to the extent the quarterly distribution exceeded $0.55
per unit.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Heritage applies Financial Accounting Standards Board ("FASB") Statement No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
SFAS 133 requires that all derivatives be recognized in the balance sheet as
either an asset or liability measured at fair value. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statement of operations.

Heritage was the holder of certain call options at February 28, 2003 that have
been designated as cash flow hedging instruments in accordance with SFAS 133.
The call options give Heritage the right, but not the obligation, to buy a

8

specified number of gallons of propane at a specified price at any time until a
specified expiration date. Heritage entered into these options to hedge pricing
on the forecasted propane volumes to be purchased during each of the one-month
periods ending February 2003 through March 2003. Heritage utilizes hedging
transactions to provide price protection against significant fluctuations in
propane prices. These call options had a fair value of $572 as of February 28,
2003, which was recorded in accounts receivable on the balance sheet through
other comprehensive income net of minority interest liability. There were no
ineffective hedges or discontinued hedges as of February 28, 2003.

MARKETABLE SECURITIES

Heritage's marketable securities are classified as available-for-sale securities
and are reflected as a current asset on the consolidated balance sheet at their
fair value. During the three months ended February 28, 2003, Heritage determined
there was a non-temporary decline in the market value of its available-for-sale
securities, and reclassified into earnings a loss of $2,376, net of minority
interest, which is recorded in other expense. Unrealized holding losses of $9
for the three and six months ended February 28, 2003, and $991 and $615 for the
three and six months ended February 28, 2002, respectively, were recorded
through accumulated other comprehensive loss based on the market value of the
securities.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement
Obligations (SFAS 143). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. Heritage adopted the provisions of SFAS
143 on September 1, 2002. The adoption of SFAS 143 did not have a material
impact on the Partnership's consolidated financial position or results of
operations.

In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (SFAS 121), and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS 144 retains the fundamental
provisions of SFAS 121 for recognition and measurement of the impairment of
long-lived assets to be held and used, and measurement of long-lived assets to
be disposed of by sale. Heritage adopted the provisions of SFAS 144 on September
1, 2002. The adoption of SFAS 144 did not have a material impact on the
Partnership's consolidated financial position or results of operations.

In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
(SFAS 145). SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that Statement, FASB Statement
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS
145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of
Motor Carriers, amends FASB Statement No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions and also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Heritage adopted the provisions of SFAS 145 on September 1, 2002.
The adoption did not have a material impact on the Partnership's consolidated
financial position or results of operations.

RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED

In October 2002, the Emerging Issues Task Force ("EITF") of the FASB discussed
EITF Issue No. 02-3, Issues Related to Accounting for Contracts Involved in
Energy Trading and Risk Management Activities (EITF 02-3). The EITF reached a
consensus to rescind EITF Issue No. 98-10, Accounting for Contracts Involved in
Energy Trading and Risk Management Activities (EITF 98-10), the impact of which
is to preclude mark-to-market accounting for energy trading contracts not within
the scope of SFAS 133. The EITF also reached a consensus that gains and losses
on derivative instruments within the scope of SFAS 133 should be shown net in
the statement of operations if the derivative instruments are held for trading
purposes. The consensus regarding the rescission of EITF 98-10 is

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applicable for fiscal periods beginning after December 15, 2002. Energy trading
contracts not within the scope of SFAS 133 purchased after October 25, 2002, but
prior to the implementation of the consensus, are not permitted to apply
mark-to-market accounting. Heritage will adopt the provisions of EITF 02-3 as of
September 1, 2003. Management has not yet determined the impact the adoption of
EITF 02-3 will have on the Partnership's financial position or results of
operations.

In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. The provisions of SFAS 146 are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. Management does not believe that the adoption will have
a material impact on the Partnership's consolidated financial position or
results of operations.

In December 2002, the FASB issued Statement No. 148 Accounting for Stock-Based
Compensation -Transition and Disclosure (SFAS 148). The statement amends FASB
Statement No. 123 Accounting for Stock-Based Compensation (SFAS 123) to provide
alternative methods of transitions for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
this statement amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The provisions of SFAS 148 are effective for
fiscal years ending after July 31, 2003, with earlier application permitted, and
the interim disclosure requirements of SFAS 148 are effective for periods
beginning after December 15, 2002. Heritage will adopt the interim disclosure
requirements of SFAS 148 as of May 31, 2003. Heritage will adopt the provisions
of SFAS 148 as of September 1, 2003. Management has not yet determined the
impact the adoption of SFAS 148 will have on the Partnership's financial
positions or results of operations.

PROFORMA RESULTS

On January 2, 2003, Heritage purchased the propane assets of V-1 Oil Co. ("V-1")
of Idaho Falls, Idaho for total consideration of $34.2 million after
post-closing adjustments. The acquisition price was payable $19.2 million in
cash, with $17.3 million financed by the Acquisition Facility, and by the
issuance of 551,456 Common Units of Heritage valued at $15.0 million. V-1's
propane distribution network included 35 customer service locations in Colorado,
Idaho, Montana, Oregon, Utah, Washington, and Wyoming. The results of operations
of V-1 from January 2, 2003 to February 28, 2003 are included in the
consolidated statement of operations of Heritage for the three and six months
ended February 28, 2003.

The following unaudited pro forma consolidated results of operations are
presented as if the acquisition of V-1 had been made at the beginning of the
periods presented:

The pro forma consolidated results of operations include adjustments to give
effect to depreciation on the step-up of property, plant and equipment,
amortization of customer lists, interest expense on acquisition debt, and
certain other adjustments. The unaudited pro forma information is not
necessarily indicative of the results of operations that would have occurred had
the transactions been made at the beginning of the periods presented or the
future results of the combined operations.

3. WORKING CAPITAL FACILITY AND LONG-TERM DEBT:

Effective July 16, 2001, the Operating Partnership entered into the Fifth
Amendment to the First Amended and Restated Credit Agreement. The terms of the
Agreement as amended are as follows:

10

A $65,000 Senior Revolving Working Capital Facility is available
through June 30, 2004. The interest rate and interest payment dates
vary depending on the terms Heritage agrees to when the money is
borrowed. Heritage must be free of all working capital borrowings for
30 consecutive days each fiscal year. The weighted average interest
rate was 3.13% for the amount outstanding at February 28, 2003. The
maximum commitment fee payable on the unused portion of the facility is
0.50%. All receivables, contracts, equipment, inventory, general
intangibles, cash concentration accounts, and the capital stock of
Heritage's subsidiaries secure the Senior Revolving Working Capital
Facility. As of February 28, 2003, the Senior Revolving Working Capital
Facility had a balance outstanding of $19,300.

A $50,000 Senior Revolving Acquisition Facility is available through
December 31, 2003, at which time the outstanding amount must be paid in
ten equal quarterly installments beginning March 31, 2004. The interest
rate and interest payment dates vary depending on the terms Heritage
agrees to when the money is borrowed. The weighted average interest
rate was 3.13% for the amount outstanding at February 28, 2003. The
maximum commitment fee payable on the unused portion of the facility is
0.50%. All receivables, contracts, equipment, inventory, general
intangibles, cash concentration accounts, and the capital stock of
Heritage's subsidiaries secure the Senior Revolving Acquisition
Facility. As of February 28, 2003, the Senior Revolving Acquisition
Facility had a balance outstanding of $32,300.

4. REPORTABLE SEGMENTS:

The Partnership's financial statements reflect four reportable segments: the
domestic retail operations of Heritage, the domestic wholesale operations of
Heritage, the foreign wholesale operations of MP Energy Partnership, and the
liquids marketing activities of Resources. Heritage's reportable retail and
wholesale fuel segments are strategic business units that sell products and
services to retail and wholesale customers. Intersegment sales by the foreign
wholesale segment to the domestic segment are priced in accordance with the
partnership agreement of MP Energy Partnership. Heritage manages these segments
separately as each segment involves different distribution, sale, and marketing
strategies. Heritage evaluates the performance of its operating segments based
on operating income. The operating income below does not reflect selling,
general, and administrative expenses of $4,656 and $3,158 for the three months
ended February 28, 2003 and 2002, respectively, or $7,848 and $6,109 for the six
months ended February 28, 2003 and 2002, respectively. The following table
presents the unaudited financial information by segment for the following
periods:

5. SIGNIFICANT INVESTEE:

Heritage holds a 50% interest in Bi-State Propane. Heritage accounts for this
50% interest in Bi-State Propane under the equity method. Heritage's investment
in Bi-State Propane totaled $7,691 and $7,485 at February 28, 2003 and August
31, 2002 respectively. Heritage did not receive any distributions from Bi-State
Propane for the six months ended February 28, 2003 or 2002. On March 1, 2002,
the Operating Partnership sold certain assets acquired in the ProFlame
acquisition to Bi-State Propane for approximately $9,730 plus working capital.
This sale was made pursuant to the provision in the Bi-State Propane partnership
agreement that requires each partner to offer to sell any newly acquired
businesses within Bi-State Propane's area of operations to Bi-State Propane. In
conjunction with this sale, the Operating Partnership guaranteed $5 million of
debt incurred by Bi-State Propane to a financial institution. Based on the
current financial condition of Bi-State Propane, management considers the
likelihood of Heritage incurring a liability resulting from the guarantee to be
remote. Bi-State Propane's financial position is summarized below:

12

Bi-State Propane's results of operations for the three months and six months
ended February 28, 2003 and 2002, respectively are summarized below:

6. FOOTNOTES INCORPORATED BY REFERENCE:

Certain footnotes are applicable to the consolidated financial statements but
would be substantially unchanged from those presented on Form 10-K filed with
the Securities and Exchange Commission on November 27, 2002. Accordingly,
reference should be made to the Company's Annual Report filed with the
Securities and Exchange Commission on Form 10-K for the following:

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Heritage Propane Partners, L.P. (the "Registrant" or "Partnership"), is a
Delaware limited partnership. The Partnership's common units are listed on the
New York Stock Exchange. The Partnership's business activities are primarily
conducted through its subsidiary, Heritage Operating, L.P. (the "Operating
Partnership"), a Delaware limited partnership. The Partnership is the sole
limited partner of the Operating Partnership, with a 98.9899% limited partner
interest. The Partnership and the Operating Partnership are sometimes referred
to collectively in this report as "Heritage."

The following is a discussion of the historical financial condition and results
of operations of the Partnership and its subsidiaries, and should be read in
conjunction with the Partnership's historical consolidated financial statements
and accompanying notes thereto included elsewhere in this Quarterly Report on
Form 10-Q.

FORWARD-LOOKING STATEMENTS

CERTAIN MATTERS DISCUSSED IN THIS REPORT, EXCLUDING HISTORICAL INFORMATION, AS
WELL AS SOME STATEMENTS BY HERITAGE IN PERIODIC PRESS RELEASES AND SOME ORAL
STATEMENTS OF HERITAGE OFFICIALS DURING PRESENTATIONS ABOUT THE PARTNERSHIP,
INCLUDE CERTAIN "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934. STATEMENTS USING WORDS SUCH AS "ANTICIPATE," "BELIEVE," "INTEND,"
"PROJECT," "PLAN," "CONTINUE," "ESTIMATE," "FORECAST," "MAY," "WILL," OR SIMILAR
EXPRESSIONS HELP IDENTIFY FORWARD-LOOKING STATEMENTS. ALTHOUGH HERITAGE BELIEVES
SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS AND CURRENT
EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS, NO ASSURANCE CAN BE GIVEN THAT
EVERY OBJECTIVE WILL BE REACHED.

ACTUAL RESULTS MAY DIFFER MATERIALLY FROM ANY RESULTS PROJECTED, FORECASTED,
ESTIMATED, OR EXPRESSED IN FORWARD-LOOKING STATEMENTS SINCE MANY OF THE FACTORS
THAT DETERMINE THESE RESULTS ARE DIFFICULT TO PREDICT AND ARE BEYOND
MANAGEMENT'S CONTROL. SUCH FACTORS INCLUDE:

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

o WEATHER CONDITIONS THAT VARY SIGNIFICANTLY FROM HISTORICALLY NORMAL
CONDITIONS WHICH MAY ADVERSELY AFFECT THE DEMAND FOR PROPANE AND
HERITAGE'S FINANCIAL CONDITION;

o HERITAGE'S SUCCESS IN HEDGING ITS PRODUCT SUPPLY POSITIONS;

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

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

o SUDDEN AND SHARP PROPANE PRICE INCREASES AND MARKET VOLATILITY MAY
ADVERSELY AFFECT HERITAGE'S OPERATING RESULTS;

o THE POLITICAL AND ECONOMIC STABILITY OF PETROLEUM PRODUCING NATIONS;

o HERITAGE'S ABILITY TO CONDUCT BUSINESS IN FOREIGN COUNTRIES;

o HERITAGE'S ABILITY TO OBTAIN ADEQUATE SUPPLIES OF PROPANE FOR RETAIL
SALE IN THE EVENT OF AN INTERRUPTION IN SUPPLY OR TRANSPORTATION;

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

o THE MATURITY OF THE PROPANE INDUSTRY AND COMPETITION FROM OTHER PROPANE
DISTRIBUTORS AND OTHER ENERGY SOURCES;

o ENERGY EFFICIENCIES AND TECHNOLOGICAL TRENDS MAY AFFECT DEMAND FOR
PROPANE;

o THE AVAILABILITY AND COST OF CAPITAL;

o HERITAGE'S ABILITY TO ACCESS CERTAIN CAPITAL SOURCES MAY REQUIRE IT TO
OBTAIN A DEBT RATING;

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

o OPERATING RISKS INCIDENTAL TO TRANSPORTING, STORING, AND DISTRIBUTING
PROPANE, INCLUDING LITIGATION RISKS WHICH MAY NOT BE COVERED BY
INSURANCE;

o HERITAGE'S ABILITY TO GENERATE AVAILABLE CASH FOR DISTRIBUTIONS TO
UNITHOLDERS;

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

o HERITAGE'S ABILITY TO SUSTAIN HISTORICAL LEVELS OF INTERNAL GROWTH;

o HERITAGE'S ABILITY TO CONTINUE TO LOCATE AND ACQUIRE OTHER PROPANE
COMPANIES AT PURCHASE PRICES THAT ARE ACCRETIVE TO ITS FINANCIAL
RESULTS;

o CASH DISTRIBUTIONS TO UNITHOLDERS ARE NOT GUARANTEED AND MAY FLUCTUATE
WITH HERITAGE'S PERFORMANCE AND OTHER EXTERNAL FACTORS, INCLUDING
RESTRICTIONS IN HERITAGE'S DEBT AGREEMENTS; AND

o HERITAGE MAY SELL ADDITIONAL LIMITED PARTNER INTERESTS, THUS DILUTING
THE EXISTING INTEREST OF UNITHOLDERS.

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GENERAL

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

The retail propane business of Heritage consists principally of transporting
propane purchased in the contract and spot markets, primarily from major fuel
suppliers, to its customer service locations and then to tanks located on the
customers' premises, as well as to portable propane cylinders. In the
residential and commercial markets, propane is primarily used for space heating,
water heating, and cooking. In the agricultural market, propane is primarily
used for crop drying, tobacco curing, poultry brooding, and weed control. In
addition, propane is used for certain industrial applications, including use as
an engine fuel to power vehicles and forklifts and as a heating source in
manufacturing and mining processes.

Since its formation in 1989, Heritage has grown primarily through acquisitions
of retail propane operations and, to a lesser extent, through internal growth.
Since its inception through August 31, 2002, Heritage completed 91 acquisitions
for an aggregate purchase price approximating $633 million. During the six
months ended February 28, 2003, Heritage completed three acquisitions for an
aggregate purchase price of $37.4 million, which includes $21.2 million in cash,
$15.0 million in Common Units issued, and $1.2 million in notes payable on
non-compete agreements and liabilities assumed. Heritage serves more than
650,000 customers from nearly 300 customer service locations in 29 states.

Heritage's propane distribution business is largely seasonal and dependent upon
weather conditions in its service areas. Propane sales to residential and
commercial customers are affected by winter heating season requirements.
Historically, approximately two-thirds of Heritage's retail propane volume and
in excess of 80% of Heritage's EBITDA is attributable to sales during the
six-month peak-heating season of October through March. This generally results
in higher operating revenues and net income during the period from October
through March of each year and lower operating revenues and either net losses or
lower net income during the period from April through September of each year.
Consequently, sales and operating profits are concentrated in the first and
second fiscal quarters, however, cash flow from operations is generally greatest
during the second and third fiscal quarters when customers pay for propane
purchased during the six-month peak-heating season. Sales to industrial and
agricultural customers are much less weather sensitive.

A substantial portion of Heritage's propane is used in the heating-sensitive
residential and commercial markets causing the temperatures realized in
Heritage's areas of operations, particularly during the six-month peak-heating
season, to have a significant effect on its financial performance. In any given
area, sustained warmer-than-normal temperatures will tend to result in reduced
propane use, while sustained colder-than-normal temperatures will tend to result
in greater propane use. Heritage uses information on normal temperatures in
understanding how temperatures that are colder or warmer than normal affect
historical results of operations and in preparing forecasts of future
operations.

Gross profit margins are not only affected by weather patterns, but also vary
according to customer mix. For example, sales to residential customers generate
higher margins than sales to certain other customer groups, such as commercial
or agricultural customers. Wholesale margins are substantially lower than retail
margins. In addition, gross profit margins vary by geographical region.
Accordingly, a change in customer or geographic mix can affect gross profit
without necessarily affecting total revenues.

15

Amounts discussed below reflect 100% of the results of MP Energy Partnership. MP
Energy Partnership is a general partnership in which Heritage owns a 60%
interest. Because MP Energy Partnership is primarily engaged in lower-margin
wholesale distribution, its contribution to Heritage's net income is not
significant and the minority interest of this partnership is excluded from the
EBITDA calculation.

THREE MONTHS ENDED FEBRUARY 28, 2003 COMPARED TO THE THREE MONTHS ENDED FEBRUARY
28, 2002

Volume. Total retail gallons sold in the three months ended February
28, 2003 were 166.6 million, an increase of 32.1 million over the 134.5 million
gallons sold in the three months ended February 28, 2002. The increase in volume
reflects the benefits of the volume added through acquisitions and from more
favorable weather conditions in some of Heritage's areas of operations, offset
by warmer than normal weather conditions in other areas of operations. The
Partnership also sold approximately 30.9 million wholesale gallons in this
second quarter of fiscal 2003, an increase of 0.7 million gallons from the 30.2
million wholesale gallons sold in the second quarter of fiscal year 2002. U.S.
wholesale volumes remained the same at 5.5 million gallons while the foreign
volumes of MP Energy Partnership increased 0.7 million gallons to 25.4 million
gallons for the second quarter.

Revenues. Total revenues for the three months ended February 28, 2003
were $329.0 million, an increase of $99.4 million, as compared to $229.6 million
in the three months ended February 28, 2002. The current period's domestic
retail propane revenues increased $60.3 million to $212.7 million as compared to
the prior year's revenues of $152.4 million primarily due to acquisitions,
higher selling prices in the current period, and the increased retail volumes
described above. Selling prices in each of Heritage's reportable segments
increased as compared to the same period last year as a result of higher supply
costs. The U.S. wholesale revenues increased $1.0 million to $4.3 million for
the three months ended February 28, 2003 as compared to $3.3 million for the
period ended February 28, 2002, due to higher selling prices. Other domestic
revenues increased $1.2 million to $16.5 million, as compared to $15.3 million
in the prior year as a result of acquisitions. Foreign revenues increased $4.6
million for the three months ended February 28, 2003 to $15.9 million as
compared to $11.3 million for the three months ended February 28, 2002, as a
result of higher selling prices and the increased volumes described above.
Revenues from the liquids marketing activity conducted through Resources
increased $32.3 million to $79.6 million as compared to the prior year's
activity of $47.3 million due to an increase in the number and volume of
contracts sold, more favorable market conditions due to the colder winter
temperatures, and higher propane selling prices during the second quarter of
fiscal year 2003.

Cost of Products Sold. Total cost of products sold and liquids
marketing activities increased to $207.7 million for the three months ended
February 28, 2003 as compared to $142.8 million for the three months ended
February 28, 2002. The current period's domestic retail cost of sales increased
$25.2 million to $104.9 million as compared to $79.7 million in the prior year
due to increased volumes and higher supply costs of product as compared to the
same period last year. The U.S. wholesale cost of sales increased $0.7 million
to $3.9 million for the three months ended February 28, 2003 as compared to $3.2
million for the period ended February 28, 2002, due to higher wholesale fuel
costs. Foreign cost of sales increased $4.2 million to $14.8 million as compared
to $10.6 million in the prior year due to an increase in wholesale fuel costs
and higher volumes. Other cost of sales increased $1.2 million to $4.9 million
as compared to $3.7 million for the three months ended February 28, 2002
primarily due to acquisitions. Liquids marketing cost of sales increased $33.6
million during the three months ended February 28, 2003 to $79.2 million as
compared to the prior year's cost of sales of $45.6 million. This increase is
primarily due to the increase in the number and volumes of contracts sold which
were necessary to supply the increased customer demand.

Gross Profit. Total gross profit for the three months ended February
28, 2003 was $121.3 million as compared to $86.9 million for the three months
ended February 28, 2002. For the three months ended February 28, 2003, retail
fuel gross profit was $107.8 million, U.S. wholesale was $0.4 million, and other
gross profit was $11.6 million. Foreign wholesale gross profit was $1.1 million
and liquids marketing gross profit was $0.4 million. As a comparison, for the
three months ended February 28, 2002, Heritage recorded retail fuel gross profit
of $72.7 million, U.S. wholesale of $0.1 million and other gross profit of $11.7
million. Foreign wholesale gross profit was $0.7 million, and liquids marketing
gross profit was $1.7 million for the three months ended February 28, 2002. The
increase in gross fuel profit is primarily attributable to increased volumes as
described above and higher selling prices, partially offset by higher product
costs.

Operating Expenses. Operating expenses were $45.3 million an increase
of $10.3 million, for the three months ended February 28, 2003 as compared to
$35.0 million for the three months ended February 28, 2002. The increase is the
result of various factors, which include an increase in employee-related costs
due to acquisitions, an

16

increase in incentive plan expense due to operating performance, a general
increase in operating expenses in certain areas of the Partnership's operations
to accommodate increased winter demand and industry-wide increases in business
insurance costs.

Selling, General and Administrative. Selling, general and
administrative expenses were $4.7 million for the three months ended February
28, 2003, a $1.5 million increase from the $3.2 million for the same three month
period last year. This increase is primarily related to the performance-based
compensation plan expense in 2003 that was not incurred in 2002.

Depreciation and Amortization. Depreciation and amortization was $9.4
million in the three months ended February 28, 2003 a slight decrease as
compared to $9.6 million in the three months ended February 28, 2002.

Operating Income. For the three months ended February 28, 2003,
Heritage had operating income of $62.0 million as compared to operating income
of $39.1 million for the three months ended February 28, 2002. This increase is
a combination of increased gross profit offset by increased operating expenses
described above.

Other Expense. For the three months ended February 28, 2003, Heritage
recorded other expense of $2.3 million as compared to $0.1 million for the three
months ended February 28, 2002. This increase is primarily due to the
reclassification into earnings of a loss on marketable securities in the six
months ended February 28, 2003 that was previously recorded as accumulated other
comprehensive loss on the balance sheet.

Taxes. Taxes for the three months ended February 28, 2003 were $1.3
million due to the tax expense anticipated to be incurred by Heritage's
corporate subsidiaries. There was no tax expense in these subsidiaries for the
three months ended February 28, 2002.

Net Income. For the three-month period ended February 28, 2003, Heritage
recorded net income of $49.4 million, an increase of $19.3 million as compared
to net income for the three months ended February 28, 2002 of $30.1 million. The
increase is primarily the result of the increase in operating income, partially
offset by the increase in other expenses and taxes described above.

EBITDA. Earnings before interest, taxes, depreciation and amortization
(EBITDA) increased $22.8 million to $73.0 million for the three months ended
February 28, 2003, as compared to EBITDA of $50.2 million for the period ended
February 28, 2002. This increase is due to the operating performance described
above and is a record level EBITDA for the second quarter results of Heritage.
Heritage's EBITDA includes the EBITDA of investees, but does not include the
EBITDA of the minority interest of M-P Energy Partnership or any non-cash
compensation expense. EBITDA should not be considered as an alternative to net
income, cash flow, or any other financial performance measure presented in
accordance with generally accepted accounting principles but provides additional
information for evaluating the Partnership's operating results or its ability to
make quarterly distributions. Management believes that EBITDA is a meaningful
non-GAAP financial measure used by investors and lenders to evaluate the
Partnership's operating performance, cash generation, and ability to service
debt, as certain of the Partnership's debt covenants include EBITDA as a
performance measure. The presentation of EBITDA for the periods described herein
is calculated in the same manner as presented by the Partnership in the past,
and is intended to allow investors to compare performance with prior periods.
The Partnership also believes that EBITDA is sometimes useful to compare the
operating results of other companies within the propane industry due to the fact
that such information is commonly utilized and eliminates the effects of certain
financing and accounting decisions. The Partnership's calculation of EBITDA,
however, may differ from similarly titled items reported by other companies.
EBITDA is computed as follows:

17

SIX MONTHS ENDED FEBRUARY 28, 2003 COMPARED TO THE SIX MONTHS ENDED FEBRUARY 28,
2002

Volume. Total retail gallons sold in the six months ended February 28,
2003 were 243.3 million, an increase of 34.1 million over the 209.2 million
gallons sold in the six months ended February 28, 2002. The increase in volume
reflects the benefits of the volume added through acquisitions and from more
favorable weather conditions in some of Heritage's areas of operations, offset
by warmer than normal weather conditions in other areas of operations. Heritage
also sold approximately 53.0 million wholesale gallons in the six months ended
February 28, 2003, a decrease of 0.5 million gallons from the 53.5 million
wholesale gallons sold in the six months ended February 28, 2002. U.S. wholesale
gallons decreased 0.1 million gallons to 10.4 million gallons and the foreign
volumes of MP Energy Partnership decreased 0.4 million gallons to 42.6 million
for the six months ended February 28, 2003.

Revenues. Total revenues for the six months ended February 28, 2003
were $502.5 million, an increase of $110.8 million, as compared to $391.7
million in the six months ended February 28, 2002. The current period's domestic
retail propane revenues increased $61.2 million to $296.8 million as compared to
the prior year's revenues of $235.6 million primarily due to increased retail
volumes and higher selling prices in the current period. The U.S. wholesale
revenues increased to $6.7 million, as compared to $6.3 million for the
six-month period ended February 28, 2002, due to higher selling prices. Foreign
revenues increased $4.0 million for the six months ended February 28, 2003 to
$24.8 million as compared to $20.8 million for the six months ended February 28,
2002, also as a result of higher selling prices. The liquids marketing activity
conducted through Resources increased $42.2 million to $140.3 million as
compared to the prior year's revenues of $98.1 million due to an increase in the
number and volumes of contracts sold, more favorable market conditions related
to colder winter temperatures and higher propane selling prices in the current
period. Other domestic revenues increased $3.1 million to $33.9 million as
compared to $30.8 million in the prior year as a result of acquisitions.

Cost of Products Sold. Total cost of products sold and liquids
marketing activities increased to $324.7 million for the six months ended
February 28, 2003 as compared to $257.2 million for the six months ended
February 28, 2002. The current period's domestic retail cost of sales increased
$22.5 million to $146.5 million as compared to $124.0 million in the prior year
primarily due to increased volumes compared to the same period last fiscal year.
The U.S. wholesale cost of sales remained the same as last year at $6.1 million.
Foreign cost of sales increased $3.5 million to $23.2 million as compared to
$19.7 million in the prior year primarily due to an increase in foreign
wholesale fuel costs. Other cost of sales increased $2.2 million to $9.7 million
as compared to $7.5 million for the six months ended February 28, 2002. Liquids
marketing cost of sales increased $39.4 million during the six months ended
February 28, 2003 to $139.2 million as compared to the prior year's cost of
sales of $99.8 million. This increase is primarily due to an increase in the
number and volumes of contracts sold which were necessary to supply the
increased customer demand.

Gross Profit. Total gross profit for the six months ended February 28,
2003 increased by $43.2 million to $177.8 million as compared to $134.6 million
for the six months ended February 28, 2002. For the six months ended February
28, 2003, retail fuel gross profit was $150.3 million, U.S. wholesale was $0.6
million, and other gross profit was $24.2 million. Foreign wholesale gross
profit was $1.6 million and liquids marketing gross profit was $1.1 million. As
a comparison, for the six months ended February 28, 2002, Heritage recorded
retail fuel gross profit of $111.6 million, U.S. wholesale of $0.3 million, and
other gross profit of $23.3 million. Foreign wholesale gross profit was $1.1
million and liquids marketing was a loss of $1.7 million for the six months
ended February 28, 2002. The increase in gross profit is primarily attributable
to increased volumes and higher selling prices, offset by higher fuel costs.

18

Operating Expenses. Operating expenses were $78.7 million for the six
months ended February 28, 2003 as compared to $66.8 million for the six months
ended February 28, 2002. The increase of $11.9 million is the result of various
factors, which include an increase in employee-related costs due to
acquisitions, an increase in incentive plan expense due to operating
performance, a general increase in operating expenses in certain areas of the
Partnership's operations to accommodate increased winter demand and
industry-wide increases in business insurance costs.

Selling, General and Administrative. Selling, general and
administrative expenses were $7.8 million for the six months ended February 28,
2003, a $1.7 million increase from the $6.1 million for the same six month
period last year. This increase is primarily related to the performance-based
compensation plan expense in 2003 that was not incurred in 2002.

Depreciation and Amortization. Depreciation and amortization was $18.7
million in each of the six months ended February 28, 2003 and February 28, 2002.

Operating Income. For the six months ended February 28, 2003, Heritage
had operating income of $72.6 million as compared to operating income of $43.0
million for the six months ended February 28, 2002. This increase is a
combination of increased gross profit offset by increased operating expenses
described above.

Other Expense. For the six months ended February 28, 2003, Heritage
recorded other expense of $2.5 million as compared to $0.2 million for the six
months ended February 28, 2002. This increase is primarily due to the
reclassification into earnings of a loss on marketable securities in the six
months ended February 28, 2003 that was previously recorded as accumulated other
comprehensive income loss on the balance sheet.

Taxes. Taxes for the six months ended February 28, 2003 were $1.3
million due to the tax expense anticipated to be incurred by Heritage's
corporate subsidiaries. There was no tax expense in these subsidiaries for the
six months ended February 28, 2002.

Net Income. For the six month period ended February 28, 2003, Heritage
had net income of $50.5 million, an increase of $25.1 million, as compared to a
net income for the six months ended February 28, 2002 of $25.4 million. The
increase is primarily the result of the increase in operating income, partially
offset by the increase in other expenses and taxes described above.

EBITDA. Earnings before interest, taxes, depreciation and amortization
increased $29.9 million to $93.8 million for the six months ended February 28,
2003, as compared to EBITDA of $63.9 million for the six months ended February
28, 2002. This increase is due to the operating conditions described above and
is a record level EBITDA for the six-month results of Heritage. Heritage's
EBITDA includes the EBITDA of investees, but does not include the EBITDA of the
minority interest of MP Energy Partnership or any non-cash compensation expense.
EBITDA should not be considered as an alternative to net income, cash flow, or
any other financial performance measure presented in accordance with generally
accepted accounting principles but provides additional information for
evaluating the Partnership's operating results or its ability to make quarterly
distributions. Management believes that EBITDA is a meaningful non-GAAP
financial measure used by investors and lenders to evaluate the Partnership's
operating performance, cash generation, and ability to service debt as certain
of the Partnership's debt covenants include EBITDA as a performance measure. The
presentation of EBITDA for the periods described herein is calculated in the
same manner as presented by the Partnership in the past, and is intended to
allow investors to compare performance with prior periods. The Partnership also
believes that EBITDA is sometimes useful to compare the operating results of
other companies within the propane industry due to the fact that such
information is commonly utilized and eliminates the effects of certain financing
and accounting decisions. The Partnership's calculation of EBITDA, however, may
differ from similarly titled items reported by other companies. EBITDA is
computed as follows:

19

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

Operating Activities. Cash provided by operating activities during the
six months ended February 28, 2003, was $55.0 million as compared to cash
provided by operating activities of $23.8 million for the same six-month period
ended February 28, 2002. The net cash provided by operations for the six months
ended February 28, 2003 consisted of net income of $50.5 million and non-cash
charges of $23.2 million, principally depreciation and amortization, offset by
the impact of an increase in working capital of $18.7 million. Although the
increase in working capital for the six months ended February 28, 2003 is
comparable to the increase for the six months ended February 28, 2002, the
changes in components of working capital varied significantly due to an increase
in the demand for fuel resulting from the colder winter temperatures this fiscal
year in various areas of Heritage's operations. The increase in fuel demand
affects working capital as accounts receivable increases, inventory decreases,
accounts payable to purchase product increases, and customer prebought gallons
and prepayments decrease.

Investing Activities. Heritage completed three acquisitions during the
six months ended February 28, 2003 spending a net of $21.2 million, after
deducting cash received in such acquisitions. This capital expenditure amount is
reflected in the cash used in investing activities of $35.6 million along with
$16.5 million invested for maintenance needed to sustain operations at current
levels and for customer tanks to support growth of operations. Cash used in
investing activities also includes proceeds from the sale of idle property of
$2.1 million.

Financing Activities. Cash used in financing activities during the six
months ended February 28, 2003 of $15.2 million resulted mainly from a net
decrease in the outstanding balance under the Working Capital Facility of $10.9
million, cash distributions to Unitholders of $20.8 million, and payments on
other long-term debt of $1.9 million. These decreases were offset by a net
increase in the outstanding balance under the Acquisition Facility of $18.3
million used to acquire other propane businesses and other financing activities
of $0.1 million.

Financing and Sources of Liquidity

During the quarter ended February 28, 2003, the Operating Partnership utilized
its Bank Credit Facility, which includes a Working Capital Facility, providing
for up to $65.0 million of borrowings for working capital and other general
partnership purposes, and an Acquisition Facility providing for up to $50.0
million of borrowings for

20

acquisitions and improvements. As of February 28, 2003, the Working Capital
Facility had $45.7 million available for borrowings and the Acquisition Facility
had $17.7 million available to fund future acquisitions.

Heritage uses its cash provided by operating and financing activities to provide
distributions to the Partnership's Unitholders and to fund acquisition,
maintenance, and growth capital expenditures. Acquisition capital expenditures,
which include expenditures related to the acquisition of retail propane
operations and intangibles associated with such acquired businesses, were $21.2
million for the six months ended February 28, 2003. In addition to the $21.2
million of cash expended for acquisitions, $15 million in Partnership units were
issued, $0.8 million for notes payable on non-compete agreements were issued,
and liabilities of $0.4 million were assumed in connection with certain
acquisitions.

Under the Partnership Agreement, the Partnership will distribute to its partners
within 45 days after the end of each fiscal quarter, an amount equal to all of
its Available Cash for such quarter. Available cash generally means, with
respect to any quarter of the Partnership, all cash on hand at the end of such
quarter less the amount of cash reserves established by the General Partner in
its reasonable discretion that is necessary or appropriate to provide for future
cash requirements. The Partnership's commitment to its Unitholders is to
distribute the increase in its cash flow while maintaining prudent reserves for
the Partnership's operations. The Partnership paid quarterly distributions of
$0.6375 per unit (or $2.55 annually) on October 15, 2002 for the fourth quarter
ended August 31, 2002, and on January 14, 2003 for the quarter ended November
30, 2002. On March 24, 2003, the Partnership declared a distribution for the
second quarter ended February 28, 2003 of $0.6375 per unit (or $2.55 annually)
payable on April 14, 2003 to the unitholders of record at the close of business
on April 4, 2003. In addition to these quarterly distributions, the General
Partner received quarterly distributions for its general partner interest in the
Partnership, its minority interest, and incentive distributions to the extent
the quarterly distribution exceeded $0.55 per unit ($2.20 annually).

The assets utilized in the propane business do not typically require lengthy
manufacturing process time or complicated, high technology components.
Accordingly, the Partnership does not have any significant financial commitments
for capital expenditures. In addition, the Partnership has not experienced any
significant increases attributable to inflation in the cost of these assets or
in its operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Heritage has little cash flow exposure due to rate changes for long-term debt
obligations. The Operating Partnership had $51.6 million of variable rate debt
outstanding as of February 28, 2003 through its Bank Credit Facility described
elsewhere in this report. The balance outstanding in the Bank Credit Facility
generally fluctuates throughout the year. A theoretical change of 1% in the
interest rate on the balance outstanding at February 28, 2003 would result in an
approximate $516 thousand change in annual net income. Heritage primarily enters
debt obligations to support general corporate purposes including capital
expenditures and working capital needs. The Operating Partnership's long-term
debt instruments were typically issued at fixed interest rates. When these debt
obligations mature, Heritage may refinance all or a portion of such debt at
then-existing market interest rates which may be more or less than the interest
rates on the maturing debt.

Commodity price risk arises from the risk of price changes in the propane
inventory that Heritage buys and sells. The market price of propane is often
subject to volatile changes as a result of market conditions over which
management will have no control. In the past, price changes have generally been
passed along to Heritage's customers to maintain gross margins, mitigating the
commodity price risk. In order to help ensure that adequate supply sources are
available to Heritage during periods of high demand, Heritage will, from time to
time, purchase significant volumes of propane during periods of low demand,
which generally occur during the summer months, at the then current market
price, for storage both at its customer service centers and in major storage
facilities, and for future delivery.

Heritage also attempts to minimize the effects of market price fluctuations for
its propane supply by entering into certain financial contracts. In order to
manage a portion of its propane price market risk, Heritage uses contracts for
the forward purchase of propane, propane fixed-price supply agreements, and
derivative commodity instruments such as price swap and option contracts. Swap
instruments are a contractual agreement to exchange obligations of money between
the buyer and seller of the instruments as propane volumes during the pricing
period are purchased. Swaps are tied to a fixed price bid by the buyer and a
floating price determination for the seller based on certain indices at the end
of the relevant trading period. Call options give the Heritage the right, but
not the obligation, to

21

buy a specified number of gallons of propane at a specified price at any time
until a specified expiration date. Heritage enters into these financial
instruments to hedge pricing on the projected propane volumes to be purchased
during each of the one-month periods during the projected heating season.

At February 28, 2003, Heritage had outstanding propane hedges (call options) for
a total of 2.1 million gallons of propane. The fair value of the call options is
based on the market price of propane. At February 28, 2003, the fair value of
the options was $572,000 and is recorded in accounts receivable. Inherent in the
portfolio from the liquids marketing activities are certain business risks,
including market risk and credit risk. Market risk is the risk that the value of
the portfolio will change, either favorably or unfavorably, in response to
changing market conditions. Credit risk is the risk of loss from nonperformance
by suppliers, customers, or financial counter parties to a contract. Heritage
takes an active role in managing and controlling market and credit risk and has
established control procedures, which are reviewed on an ongoing basis. Heritage
monitors market risk through a variety of techniques, including routine
reporting to senior management. Heritage attempts to minimize credit risk
exposure through credit policies and periodic monitoring procedures.

LIQUIDS MARKETING

Heritage buys and sells financial instruments for its own account through its
wholly owned subsidiary, Heritage Energy Resources, L.L.C. ("Resources"). In
accordance with the provisions of SFAS 133, financial instruments utilized in
connection with Resources' 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 February 28, 2003 and 2002 include fixed price payor for
65,000 barrels of propane and 355,000 barrels of propane and butane,
respectively, and fixed price receiver of 65,000 barrels of propane and 225,000
barrels of propane and butane, respectively. Notional amounts reflect the volume
of the transactions, but do not represent the amounts exchanged by the parties
to the financial instruments. Accordingly, notional amounts do not accurately
measure Heritage's exposure to market or credit risks.

Fair Value. The fair value of the financial instruments related to liquids
marketing activities as of February 28, 2003 and August 31, 2002, was assets of
$0.6 and $2.3 million, respectively, and liabilities of $0.6 and $1.8 million
respectively. The unrealized gain (loss) related to liquids marketing activities
for the period ended February 28, 2003 and 2002, was $12,600 and ($125,000),
respectively, and is recorded through the income statement as other income
(loss).

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% in the underlying commodity value of the liquids
marketing contracts would result in no change in the market value of the
contracts as there are no net unbalanced positions at February 28, 2003.

ITEM 4. CONTROLS AND PROCEDURES

The Partnership maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Partnership files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC. Within 90 days prior to the filing date of this report, an
evaluation was performed under the supervision and with the participation of the
Partnership's management, including the Chief Executive Officer and the Chief
Financial Officer of the General

22

Partner of the Partnership, of the effectiveness of the design and operation of
the Partnership's disclosure controls and procedures (as such terms are defined
in Rule 13a-14(c) and 15d-14(c) of the Exchange Act). Based upon that
evaluation, management, including the Chief Executive Officer and the Chief
Financial Officer of the General Partner of the Partnership, concluded that the
Partnership's disclosure controls and procedures were adequate and effective as
of February 28, 2003. There have been no significant changes in the
Partnership's internal controls or in other factors subsequent to such
evaluation, and there have been no corrective actions with respect to
significant deficiencies and material weaknesses in our internal controls.

23

PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On January 2, 2003, the Partnership issued 551,456 Common Units, with a total
value of $15 million, in exchange for certain assets acquired in connection with
the acquisition of the propane distribution assets of V-1 Oil Co. The Units were
issued utilizing the Partnership's Registration Statement No. 333-40407 on Form
S-4.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The exhibits listed on the following Exhibit Index are filed as part of this
Report. Exhibits required by Item 601 of Regulation S-K, but which are not
listed below, are not applicable.

------------------

(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement of Form S-1, File No. 333-04018, filed with the
Commission on June 21, 1996.

(2) Incorporated by reference to Exhibit 10.11 to Registrant's Registration
Statement on Form S-1, File No. 333-04018, filed with the Commission on
June 21, 1996.

(3) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 1996.

(4) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended February 28, 1997.

(5) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended May 31, 1998.

(6) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1998.

(7) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 1999.

(8) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1999.

(9) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2000.

(10) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 23, 2000.

(11) File as Exhibit 10.16.3.

(12) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2000.

(13) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2001.

(14) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2001.

28

(15) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 15, 2001.

(16) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2001.

(17) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended November 30, 2001.

(18) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2002.

(19) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2002.

(20) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2002.

(21) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated January 6, 2003.

(22) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended November 30, 2002.

(*) Filed herewith.

(b) Reports on Form 8-K

The Partnership filed two reports on Form 8-K during the three months
ended February 28, 2003:

Form 8-K dated December 11, 2002, was filed reporting the Partnership
had entered into a definitive agreement to acquire the retail propane
assets of V-1 Oil Co. of Idaho Falls, Idaho. Attached as an exhibit to
the Form 8-K was the press release dated December 10, 2002 announcing
the transaction.

Form 8-K dated January 6, 2003, was filed reporting the acquisition of
the propane distribution assets of V-1 Oil Co. The report described the
transaction and advised that the financial statements required to be
filed in connection with the business acquisition would be filed within
the prescribed time periods. Attached as exhibits to the Form 8-K were
the Agreement for Contribution of Assets in Exchange for Partnership
Interests dated December 9, 2002 among V-1 Oil Co., the shareholders of
V-1 Oil Co., Heritage Propane Partners, L.P., and Heritage Operating
L.P., and the Press Release dated January 6, 2003 announcing the
completion of the acquisition.

29

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

HERITAGE PROPANE PARTNERS, L.P.

By: U.S. Propane, L.P.., General Partner

By: U.S. Propane, L.L.C., General Partner

Date: April 14, 2003 By: /s/ Michael L. Greenwood
---------------------------------------------
Michael L. Greenwood
(Vice President, Chief Financial Officer
and officer duly authorized to sign on
behalf of the registrant)

30

CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER

I, H. Michael Krimbill, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Heritage
Propane Partners, L.P.;

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the Audit Committee of registrant's
board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize, and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated
in this quarterly report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.

Date: April 14, 2003

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

31

CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER

I, Michael L. Greenwood, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Heritage
Propane Partners, L.P.;

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the Audit Committee of registrant's
board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize, and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated
in this quarterly report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.

Date: April 14, 2003

/s/ Michael L. Greenwood
------------------------
Michael L. Greenwood
Vice President and Chief Financial Officer

32

EXHIBIT INDEX