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

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 February 28, 2003, 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 $278,176,413

At November 21, 2003, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 18,028,029 Common Units

Documents Incorporated by Reference: None

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HERITAGE PROPANE PARTNERS, L.P.

2003 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

i

PART IV

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.............................44

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K...........................................44

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PART I

ITEM 1. BUSINESS

Heritage Propane Partners, L.P., (the "Registrant" or "Partnership"), a
publicly traded Delaware limited partnership, was formed in April 1996 in
connection with its initial public offering. The Partnership's common units,
representing limited partner interests in the Partnership ("Common Units") are
listed on the New York Stock Exchange. In order to simplify the Partnership's
obligations under the laws of several jurisdictions in which it conducts
business, its business activities are primarily conducted through its
subsidiary, Heritage Operating, L.P. (the "Operating Partnership"). The
Partnership holds a 98.9899% limited partner interest in the Operating
Partnership. The Operating Partnership accounts for nearly all of the
consolidated assets, sales and operating earnings of the Partnership. The
Partnership and the Operating Partnership are collectively referred to in this
report as "Heritage."

The sole general partner of the Partnership and the Operating
Partnership is U.S. Propane, L.P. ("U.S. Propane" or "General Partner"), a
Delaware limited partnership. U.S. Propane holds a 1% general partner interest
in the Partnership and a 1.0101% general partner interest in the Operating
Partnership. U.S. Propane is a joint venture among the following four publicly
traded utilities: TECO Energy, Inc.; AGL Resources, Inc.; Piedmont Natural Gas
Company, Inc.; and Atmos Energy Corporation.

o TECO Energy, Inc. ("TECO") is a diversified, energy-related holding
company. TECO's subsidiaries include Florida's largest natural gas
distributor, an electric utility, coal, and transportation businesses.

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 customers in Georgia,
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
customers in North Carolina, South Carolina, and Tennessee.

o Atmos Energy Corporation ("Atmos Energy") is an energy and services
company primarily engaged in natural gas distribution and
non-regulated energy management and gas marketing services. Atmos
Energy is one of the largest pure natural gas distributors in the
United States, serving customers in 12 states, and through its
non-utility businesses, it provides natural gas management and
marketing services to customers in 18 states.

The business of the Partnership starting with the formation of Heritage
Holdings, Inc. ("Heritage Holdings") in 1989, has grown primarily through
acquisitions of retail propane operations and, to a lesser extent, through
internal growth. Since its inception in 1989 through August 31, 2003, the
Partnership has completed 97 acquisitions for a total purchase price of
approximately $675 million, including the August 2000 transfer by U.S. Propane
of its propane operations to the Partnership. The U.S. Propane transaction
combined five of the nation's 50 largest retail propane operations. Volumes of
propane sold to retail customers have increased steadily from 63.2 million
gallons for the Partnership's fiscal year ended August 31, 1992 to 375.9 million
gallons for the fiscal year ended August 31, 2003.

U.S. PROPANE MERGER

In August 2000, in a series of transactions, U.S. Propane was formed
when TECO, AGL Resources, Piedmont Natural Gas, and Atmos Energy combined each
company's propane operations. The merger was accounted for as an acquisition
using the purchase method of accounting with Peoples Gas being the acquirer for
accounting purposes. Following its formation, and also in August 2000, U.S.
Propane acquired all of the outstanding common stock of the Partnership's former
General Partner, Heritage Holdings, and by virtue of Heritage Holdings' general
partner and limited partner interests in the Partnership, U.S. Propane gained
control of the Partnership. Simultaneously with that transaction, U.S. Propane
transferred its propane operations,

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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. The Partnership is the surviving entity for legal purposes;
however, the combined operations that formed U.S. Propane was the acquirer for
accounting purposes, with Peoples Gas described as the accounting acquirer since
Peoples Gas was the acquirer in the transaction that formed U.S. Propane. The
financial information describing the propane operations of the Partnership and
its subsidiaries prior to the series of transactions with U.S. Propane are
identified as Predecessor Heritage and those describing the operations of the
Partnership and its subsidiaries following the combination of the operations of
U.S. Propane and Predecessor Heritage are identified as Heritage. Peoples Gas
had a fiscal year-end of December 31. The eight-month period ended August 31,
2000 was treated as a transition period under the rules of the Securities and
Exchange Commission. However, the Form 10-K for the year ended August 31, 2000
was not a transition report as the Partnership continues to have an August 31
fiscal year-end.

On February 4, 2002, at the Special Meeting of the Common Unitholders
of the Partnership, the Common Unitholders approved the substitution of U.S.
Propane as the general partner of the Partnership and the Operating Partnership,
replacing the former general partner, Heritage Holdings. U.S. Propane, L.L.C.
("USPLLC"), a Delaware limited liability company, is the general partner of U.S.
Propane. The membership interests of USPLLC are owned by AGL Energy Corporation,
United Cities Propane Gas, Inc., TECO Propane Ventures, LLC, and Piedmont. The
substitution of U.S. Propane as the general partner did not alter the management
of the Partnership, as all of the directors of Heritage Holdings became members
of the Board of Managers of USPLLC, and the management and employees of Heritage
Holdings became the management and employees of U.S. Propane.

RECENT DEVELOPMENTS

On November 6, 2003, the Partnership publicly announced the signing of
definitive agreements to combine its operations with those of La Grange Energy,
L.P. ("La Grange Energy"), which is engaged in the midstream natural gas
business through its subsidiary, La Grange Acquisition, L.P., whose midstream
operations are conducted under the name Energy Transfer Company ("Energy
Transfer Company"), and are primarily located in major natural gas producing
regions of Texas and Oklahoma. The combination of Heritage and Energy Transfer
Company will create a diversified master limited partnership by adding natural
gas midstream operations to Heritage's existing retail propane operations. As
part of the transactions, La Grange Energy has agreed to acquire U.S. Propane,
the General Partner of Heritage. La Grange Energy is owned by Natural Gas
Partners VI, L.P., a private equity fund, Ray C. Davis, Kelcy L. Warren, and a
group of institutional investors.

In connection with the transaction, La Grange Energy will contribute
interests in Energy Transfer Company and certain related assets to Heritage in
exchange for:

o $300 million in cash, subject to certain adjustments including
(1) a reduction for any accounts payable of Energy Transfer
Company at closing, (2) a reduction to the extent that the
long-term debt of Energy Transfer Company at closing is greater
than $151.5 million, (3) an increase to the extent that the
long-term debt of Energy Transfer Company at closing is less than
$151.5 million and (4) an increase by up to $80 million to
reimburse La Grange Energy for certain mutually agreed upon
capital expenditures paid by La Grange Energy to third parties
prior to the closing, and

o 15,883,234 units, comprising limited partner interests in the
Partnership. The units will be comprised of the following:

o a number of Common Units totaling 19.99% of the number
of Common Units of Heritage outstanding immediately
prior to the closing;

o a number of Class D Units that will equal the
difference between 12,140,719 and the number of Common
Units issued to La Grange Energy in the transaction;
and

o 3,742,515 Special Units.

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The Units to be issued in connection with the transactions are subject
to the approval of the New York Stock Exchange, and, thus, their terms may be
modified from the description herein. Generally, the Class D Units will receive
the same quarterly distributions as Common Units. The Common Units do not have
priority over the Class D Units with respect to quarterly distributions, but
they do have priority with respect to liquidation distributions. Under the terms
of an amendment to the Partnership Agreement creating the Class D Units, the
Partnership is required, as promptly as practicable following the issuance of
the Class D Units, to submit to a vote of its Unitholders the approval of the
conversion of the Class D Units into Common Units. Upon receipt of the required
vote, each Class D Unit may be converted automatically into one Common Unit upon
request of the holder. If Heritage's Unitholders do not approve the conversion
prior to six months following the closing of the acquisition of Energy Transfer
Company, or if the matter has been submitted for approval of the Unitholders in
documents filed with the Securities and Exchange Commission prior to this six
month period and not approved by such vote, then the distribution rate for all
distributions to Class D Units will increase to 115% of the Common Unit
distribution rate in effect from time to time. The Class D Units generally have
voting rights that are identical to the voting rights of the Common Units and
vote with the Common Units as a single class on each matter with respect to
which the Common Units are entitled to vote.

The Special Units are being issued by the Partnership as consideration
for a natural gas pipeline currently being constructed by Energy Transfer
Company, known as the Bossier Pipeline, and certain related contracts. The
Bossier Pipeline is expected to be an extension and expansion of its existing
pipeline that will create a 78-mile pipeline that connects natural gas supplies
in east Texas to Energy Transfer Company's Katy Pipeline in Grimes County.
Energy Transfer Company has secured contracts with three separate companies to
transport natural gas on this pipeline, including a nine-year fee-based contract
with a major producer. The Special Units will initially be non-voting and will
generally not be entitled to share in partnership distributions. Under the terms
of an amendment to the Partnership Agreement creating the Special Units,
Heritage is required, as promptly as practicable following the issuance of the
Special Units, to submit to a vote of Heritage's Unitholders the approval of the
conversion of the Special Units into Common Units in accordance with the terms
of the Special Units. Following Unitholder approval, and upon the Bossier
Pipeline becoming "commercially operational", such that Energy Transfer Company
is entitled to receive payments under each of the three referenced contracts,
each Special Unit will automatically be converted into one Common Unit upon the
request of the holder. If the Bossier Pipeline does not become operational by
December 1, 2004 and, as a result, a party to one of the three contracts
exercises rights to acquire the Bossier Pipeline, the Special Units will no
longer be considered outstanding. If Heritage's Unitholders do not approve the
conversion of the Special Units in accordance with their terms prior to the time
the Bossier Pipeline becomes commercially operational, such that the Special
Units become qualified to be converted, then each Special Unit will be entitled
to receive 115% of the quarterly amount distributed on each Common Unit on a
pari passu basis with distributions on Common Units.

As a part of the above transaction, La Grange Energy has agreed to
purchase all of the partnership interests of U.S. Propane, L.P., the General
Partner of Heritage, and all of the member interests of U.S. Propane, L.L.C.,
the general partner of U.S. Propane, L.P. (which are collectively referred to as
the "General Partner"), from subsidiaries of AGL Resources, Inc., Atmos Energy
Corporation, TECO Energy, Inc. and Piedmont Natural Gas Company, Inc. (the
"Previous Owners") for $30 million in cash. Prior to the sale of the General
Partner to La Grange Energy, certain assets of the General Partner, including
all of the stock of Heritage Holdings, and 180,028 Common Units of Heritage,
will be distributed by the General Partner to an affiliate of the Previous
Owners. Currently, U.S. Propane, L.P.'s general partner interest in Heritage and
its general partner interest in Heritage's operating partnership, Heritage
Operating, L.P. (the "Operating Partnership") equals a 2% general partner
interest on a combined basis. As part of the acquisition of Heritage's General
Partner, U.S. Propane, L.P. will make a capital contribution of its interest in
the Operating Partnership to Heritage in exchange for an additional 1% general
partner interest in Heritage, such that following the capital contribution, U.S.
Propane, L.P. will own a 2% general partner interest in Heritage.

Also in conjunction with these transactions, Heritage will acquire from
the affiliate of the Previous Owners all of the stock of Heritage Holdings,
which owns approximately 4.4 million Common Units of Heritage (the "HHI Units"),
for $50 million in cash and a $50 million promissory note secured by a pledge of
the HHI Units. In conjunction with the Partnership's purchase of the capital
stock of Heritage Holdings, the HHI Units will be converted into Class E Units.
The Class E Units will generally be entitled to the same cash distributions as
Common Units, except that distributions may not exceed an amount equal to the
percentage that the Class E units are of the total number of outstanding units
upon the closing of the Energy Transfer Company transaction, or 11.1% of cash
distributions, to unitholders and may not include any amounts attributable to
cash distributions received by the Partnership from Heritage Holdings. Cash
distributions on the Class E Units may not exceed $2.82 per unit. Pursuant to
their terms, the Class E Units may be convertible back into Common Units with a
market value of $100 million in the event of a default under the terms of the
$50 million promissory note and the pledge securing payment of the note.

In connection with these transactions, ETC Holdings, L.P., the parent
of La Grange Energy; ET GP, L.L.C., the general partner of ETC Holdings, L.P.;
La Grange Energy; LE GP, L.L.C., the general partner of La Grange Energy; Ray C.
Davis; and Kelcy L. Warren (the "ETC Restricted Parties") have agreed to enter
into a Noncompete Agreement, whereby the ETC Restricted Parties will not engage,
invest or participate, directly or indirectly, in any business activities
involving (a) the purchase, sale, exchange, marketing, trading, storage or
transportation of propane or (b) the purchase, gathering, treating, processing,
marketing, sales, storage, transportation, fractionation or distribution of
natural gas and natural gas liquids, subject to certain limited exceptions. The
ETC Restricted Parties will not engage in these activities until the earlier of
(i) the third anniversary of the closing of the acquisition of Energy Transfer
Company or (ii) the date the ETC Restricted Party ceases to be engaged in the
business of Heritage as conducted at the closing of the acquisition of Energy
Transfer Company as an owner, officer, director or employee, as the case may be.

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Also in connection with the transactions, the Previous Owners have
agreed to enter into a Noncompete Agreement (the "Previous Owners Noncompete
Agreement") with Heritage. Pursuant to the Previous Owners Noncompete Agreement,
the Previous Owners will not engage, invest or participate, directly or
indirectly, in any business activities involving the purchase, sale, exchange,
marketing, trading, storage or transportation of propane, subject to certain
limited exceptions. The Previous Owners have agreed not to engage in these
activities until the third anniversary of the closing of the acquisition of
Energy Transfer Company.

These transactions are subject to customary conditions to closing,
including existing lender and regulatory approvals, and obtaining the requisite
debt and equity financing for the transaction. There can be no assurance that
Heritage will be able to obtain the requisite approval or financing, or that the
other conditions to closing will be satisfied.

ENERGY TRANSFER COMPANY

Energy Transfer Company is a growth-oriented midstream natural gas
company with operations primarily located in major natural gas producing regions
of Texas and Oklahoma. Energy Transfer Company's primary assets consist of two
large gathering and processing systems in the Gulf Coast area of Texas and
western Oklahoma and the Oasis Pipeline, an intrastate natural gas pipeline that
runs from the Permian Basin in west Texas to natural gas supply and market areas
in southeast Texas. Energy Transfer Company's operations consist of the
following:

o the gathering of natural gas from over 1,400 producing wells;

o the compression of natural gas to facilitate its flow from the
wells through Energy Transfer Company's gathering systems;

o the treating of natural gas to remove impurities such as carbon
dioxide and hydrogen sulfide to ensure that the natural gas meets
pipeline quality specifications;

o the processing of natural gas to extract natural gas liquids, or
NGLs; the sale of the pipeline quality natural gas, or "residue
gas," remaining after it is processed; and the sale of the NGLs
to third parties at fractionation facilities where the NGLs are
separated into their individual components, including ethane,
propane, mixed butanes and natural gasoline;

o the transportation of natural gas on its Oasis Pipeline to
industrial end-users, independent power plants, utilities and
other pipelines; and

o the purchase for resale of natural gas from producers connected
to its systems and from other third parties.

Energy Transfer Company owns or has an interest in over 3,850 miles of
natural gas pipeline systems, three natural gas processing plants connected to
its gathering systems with a total processing capacity of approximately 400
MMcf/d, and seven natural gas treating facilities with a total treating capacity
of approximately 425 MMcf/d.

Energy Transfer Company divides its operations into two primary
business segments, the Midstream segment, which consists of its natural gas
gathering, compression, treating, processing and marketing operations, and the
Transportation segment, which consists of the Oasis Pipeline.

The Midstream segment consists of the following:

o the Southeast Texas System, a 2,500-mile integrated system
located in southeast Texas that gathers, compresses, treats,
processes and transports natural gas from the Austin Chalk trend.
The Southeast Texas System, initially constructed in the late
1970's, is a large natural gas gathering system covering thirteen
counties between Austin and Houston. The system includes the La
Grange processing plant

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and five treating facilities. This system is connected to the
Katy Hub through the 55-mile Katy Pipeline and is also connected
to the Oasis Pipeline, as well as two power plants.

o the Elk City System, a 315-mile gathering system located in
western Oklahoma that gathers, compresses, treats and processes
natural gas from the Anadarko Basin. The Elk City System,
initially constructed in the 1980's, also includes the Elk City
processing plant and one treating facility. The Elk City System
is connected, either directly or indirectly, to six major
interstate and intrastate natural gas pipelines providing access
to natural gas markets throughout the United States.

o an interest in various midstream assets located in Texas and
Louisiana, including the Vantex System, the Rusk County Gathering
System, the Whiskey Bay System and the Chalkley Transmission
System. On a combined basis, these assets have a capacity of
approximately 265 MMcf/d.

o marketing operations through Energy Transfer Company's producer
services business, in which it markets the natural gas that flows
through its assets and attracts other customers by marketing
volumes of natural gas that do not move through its assets.

The Transportation segment consists of the Oasis Pipeline, a 583-mile
natural gas pipeline that directly connects the Waha Hub to the Katy Hub. The
Oasis Pipeline, constructed in the early 1970's, is primarily a 36-inch diameter
natural gas pipeline. It has bi-directional capability with approximately 1
Bcf/d of throughput capacity moving west-to-east and greater than 750 MMcf/d of
throughput capacity moving east-to-west and has many interconnections with other
pipelines, power plants, processing facilities, municipalities and producers.

GENERAL

Heritage believes it is presently the fourth largest retail marketer of
propane in the United States (as measured by retail gallons sold). Heritage
currently serves more than 650,000 active residential, commercial, industrial
and agricultural customers from nearly 300 customer service locations in 29
states. Heritage's operations extend from coast to coast with concentrations in
the western, upper midwestern, northeastern, and southeastern regions of the
United States.

Following is a summary of the retail sales volumes per fiscal year
for the last three fiscal years.

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
enabled Heritage to achieve performance levels per retail gallon sold that
management believes are among the highest of any publicly traded propane
partnership. Management believes that as a result of Heritage's geographic
diversity and the impact its local customer service-level incentive compensation
program has on its operational results, Heritage has been able to reduce the
effect of adverse weather conditions on Heritage's operating results, including
those experienced during the warmer-than-normal winters of 1998-1999, 1999-2000,
and 2001-2002, recorded as three of the warmest winters in the last 100 years.
Management believes that Heritage's concentration in higher-than-average
population growth areas provides a strong economic foundation for expansion
through acquisitions and internal growth. Management does not believe that
Heritage is significantly more vulnerable than its competitors to displacement
by natural gas distribution systems because the majority of Heritage's areas of
operations are located in rural areas where natural gas is not readily
available.

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BUSINESS STRATEGY

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

Acquisitions. Acquisitions are the principal means of growth for
Heritage, as the retail propane industry is mature and overall demand for
propane is expected to experience limited growth in the foreseeable future.
Management believes that the fragmented nature of the propane industry provides
significant opportunities for growth through acquisition. Heritage follows a
disciplined acquisition strategy that concentrates on propane 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 propane acquisition
candidates from the seller's viewpoint.

Since inception through August 31, 2003, Heritage completed 97
acquisitions including the merger with U.S. Propane on August 10, 2000. Heritage
will focus on propane acquisition candidates in its existing areas of
operations, but will consider core acquisitions in other higher-than-average
population growth areas, in which it presently has no presence, in order to
further reduce the impact adverse weather patterns in any one region may have on
Heritage's overall operations. While Heritage is currently evaluating numerous
acquisition candidates, there can be no assurance that Heritage will identify
attractive acquisition candidates in the future, that Heritage will be able to
acquire such businesses on economically acceptable terms or successfully
integrate them into existing operations and make cost-saving changes, that any
acquisition will not dilute earnings and distributions to Unitholders, or that
any additional debt incurred to finance an acquisition will not adversely affect
the ability of Heritage to make distributions to Unitholders.

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

Heritage announced on November 6, 2003, that it had entered into
definitive agreements to acquire Energy Transfer Company, a company engaged in
the midstream natural gas business. This proposed acquisition demonstrates
Heritage's intention to create a diversified master limited partnership by
adding natural gas midstream operations to its retail propane operations. The
addition of midstream operations will provide Heritage an opportunity to offset
to some extent the seasonal nature of its current business and reduce the impact
weather volatility can have on Heritage's operating results. Energy Transfer
Company is a growth-oriented business involved in gathering, compressing,
treating, processing and transporting natural gas and natural gas liquids. The
Energy Transfer Company will continue to be managed by its current management
whose focus to expand its midstream operations includes the expansion of its
operations in southeast Texas with the construction of the proposed Bossier
Pipeline.

Low-Cost, Decentralized Operations. Heritage focuses on controlling
costs at both the corporate level and the customer service location level. While
Heritage realizes certain economies of scale as a result of its acquisitions, it
attributes its low operating costs primarily to its decentralized structure. By
delegating all customer billing and collection activities to the customer
service location level, Heritage has been able to operate without a large
corporate staff. Of the 2,418 full-time employees as of August 31, 2003, only
92, or approximately 4%, were general and administrative. In addition,
Heritage's customer service location level incentive compensation program
encourages customer service location employees at all levels to control costs
while increasing revenues.

Internal Growth. In addition to pursuing expansion through
acquisitions, Heritage has aggressively focused on internal growth at its
existing customer service 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

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adding new customers. Heritage also believes that its decentralized operations
foster an entrepreneurial corporate culture by: (i) having operational decisions
made at the customer service location and regional level, (ii) retaining
billing, collection and pricing responsibilities at the local and regional
levels, and (iii) rewarding employees for achieving financial targets at the
local level.

WEATHER AND SEASONALITY

Heritage's propane distribution business is 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. 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, in some cases, 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 generate
higher margins than sales to other customer groups, such as commercial or
agricultural customers. Wholesale margins are substantially lower than retail
margins. In addition, gross profit margins vary by geographic region.
Accordingly, a change in customer or geographic mix can affect gross profit
without necessarily affecting total revenues.

INDUSTRY BACKGROUND AND COMPETITION

Propane, a by-product of natural gas processing and petroleum refining,
is a clean-burning energy source recognized for its transportability and ease of
use relative to alternative forms of stand-alone energy sources. Retail propane
use falls into three broad categories: (i) residential applications, (ii)
industrial, commercial, and agricultural applications, and (iii) other retail
applications, including motor fuel sales. Residential customers use propane
primarily for space and water heating. Industrial customers use propane
primarily as fuel for forklifts, stationary engines, 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 at processing plants or separated
from crude oil during the refining process. Propane is normally transported and
stored in a liquid state under moderate pressure or refrigeration for ease of
handling in shipping and distribution. When the pressure is released or the
temperature is increased, it is usable as a flammable gas. Propane is naturally
colorless and odorless. An odorant is added to allow its detection. Like natural
gas, propane is a clean burning fuel and is considered an environmentally
preferred energy source.

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

In addition to competing with alternative energy sources, Heritage
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and generally
occurs on a local basis with other large multi-state propane marketers,
thousands of smaller local independent marketers, and farm cooperatives. Most of
Heritage's customer service locations compete with five or more

7

marketers or distributors. Each retail distribution outlet operates in its own
competitive environment because retail marketers tend to locate in close
proximity to customers. The typical retail distribution outlet generally has an
effective marketing radius of approximately 50 miles although in certain rural
areas the marketing radius may be extended by satellite locations.

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

The wholesale propane business is highly competitive. For fiscal year
2003, Heritage's domestic wholesale operations (excluding MP Energy Partnership)
accounted for only 3.9% of its total gallons sold in the United States and
approximately 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 nearly 300 customer service locations in 29 states.
Heritage's operations are concentrated in large part in the western, upper
midwestern, northeastern, and southeastern regions of the United States.
Heritage serves more than 650,000 active customers. Historically, approximately
two-thirds of Heritage's retail propane volumes and in excess of 80% of EBITDA,
as adjusted, were attributable to sales during the six-month peak-heating season
from October through March, as many customers use propane for heating purposes.
Consequently, sales and operating profits are normally concentrated in the first
and second fiscal quarters while cash flows from operations 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, customer service 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 customer service locations where it is unloaded into storage tanks.
In order to make a retail delivery of propane to a customer, a bobtail truck is
loaded with propane from the storage tank. Propane is then delivered to the
customer by the bobtail truck, which generally holds 2,500 to 3,000 gallons of
propane, and pumped into a stationary storage tank on the customer's premises.
The capacity of these customer tanks ranges from approximately 100 gallons to
1,200 gallons, with a typical tank capacity of 100 to 300 gallons in milder
climates and from 500 to 1,000 gallons in colder climates. Heritage also
delivers propane to retail customers in portable cylinders, which typically have
a capacity of 5 to 35 gallons. When these cylinders are delivered to customers,
empty cylinders are picked up for refilling at Heritage's distribution locations
or are refilled on site. Heritage also delivers propane to certain other bulk
end-users of propane in tractor-trailer transports, which typically have an
average capacity of approximately 10,500 gallons. End-users receiving transport
deliveries include industrial customers, large-scale heating accounts, mining
operations, and large agricultural accounts.

Heritage encourages its customers whose propane needs are temperature
sensitive to implement a regular delivery schedule. Many of Heritage's
residential customers receive their propane supply pursuant to an automatic
delivery system which eliminates the customer's need to make an affirmative
purchase decision and allows for more efficient route scheduling. Heritage also
sells, installs, and services equipment related to its propane distribution
business, including heating and cooking appliances.

Heritage owns, through its subsidiaries, a 60% interest in MP Energy
Partnership, a Canadian partnership that supplies Heritage with propane as
described below under "Propane Supply and Storage."

8

Approximately 96% of the domestic gallons sold by Heritage in the
fiscal year ended August 31, 2003 were to retail customers and 4% to wholesale
customers. For the year ended August 31, 2003, retail gallons sold by Heritage,
were 60% to residential customers, 25% to industrial, commercial and
agricultural customers, and 15% to other retail users. Sales to residential
customers in the fiscal year ended August 31, 2003 accounted for 58% of total
domestic gallons sold but accounted for approximately 72% 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 18% of Heritage's gross profit
from propane sales for the fiscal year ended August 31, 2003, with all other
retail users accounting for 9%. Additional volumes sold to wholesale customers
contributed 1% of gross profit from propane sales. No single customer accounts
for 10% or more of revenues.

The propane business is very seasonal with weather conditions
significantly affecting demand for propane. Heritage believes that the
geographic diversity of its operations helps to reduce its overall exposure to
less than favorable weather conditions in any particular region of the United
States. 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 due to the
lack of availability or the high cost of alternative fuels,

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 90% of the storage tanks utilized by
its customers, which prevents fuel deliveries from competitors, 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 energy companies and natural
gas processors at numerous supply points located in the United States and
Canada. In the fiscal year ended August 31, 2003, Enterprise Products Operating
L.P. ("Enterprise") and Dynegy Liquids Marketing and Trade ("Dynegy") provided
approximately 29% and 13% of Heritage's total propane supply, respectively. In
addition, M-P Oils, Ltd., Heritage's wholly owned subsidiary that owns a 60%
interest in MP Energy Partnership, a Canadian partnership, procured 19% of
Heritage's total propane supply during the fiscal year ended August 31, 2003
through MP Energy Partnership. MP Energy Partnership buys and sells propane for
its own account and supplies propane to Heritage for its northern United States
operations.

Heritage believes that if supplies from Enterprise and Dynegy were
interrupted it would be able to secure adequate propane supplies from other
sources without a material disruption of its operations. Aside from Enterprise,
Dynegy, and the supply procured by M-P Oils, Ltd., no single supplier provided
more than 10% of Heritage's total domestic propane supply during the fiscal year
ended August 31, 2003. Heritage believes that its diversification of suppliers
will enable it to purchase all of its supply needs at market prices without a
material disruption of its operations if supplies are interrupted from any of
its existing sources. Although no assurances can be given that supplies of
propane will be readily available in the future, Heritage expects a sufficient
supply to continue to be

9

available. However, increased demand for propane in periods of severe cold
weather, or otherwise, could cause future propane supply interruptions or
significant volatility in the price of propane.

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

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

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

PRICING POLICY

Pricing policy is an essential element in the marketing of propane.
Heritage relies on regional management to set prices based on prevailing market
conditions and product cost, as well as local management input. All regional
managers are advised regularly of any changes in the posted price of each
customer service location'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. 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 local customer service locations. 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;

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.

10

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

In connection with all acquisitions of retail propane businesses that
involve the acquisition of any interests in real estate, Heritage conducts an
environmental review in an attempt to determine whether any substance other than
propane has been sold from, or stored on, any such real estate prior to its
purchase. Such review includes 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 on which Heritage presently has, or formerly
had, operations. These sites were evaluated at the time of their acquisition. In
all cases, remediation operations have been or will be undertaken by others, and
in all six cases Heritage obtained indemnification for expenses associated with
any remediation from the former owners or related entities. Heritage has not
been named as a potentially responsible party at any of these sites, nor has the
Partnership's operations contributed to the environmental issues at these sites.
Accordingly, no amounts have been recorded in the Partnership's August 31, 2003
or 2002 consolidated balance sheets for any liability that may be attributable
to any required remediation. Based on information currently available to
Heritage, such projects are not expected to have a material adverse effect on
Heritage's financial condition or results of operations.

In July 2001, Heritage acquired a company that had previously received
a request for information from the U.S. Environmental Protection Agency (the
"EPA") regarding potential contribution to a widespread groundwater
contamination problem in San Bernardino, California, known as the Newmark
Groundwater Contamination. Although the EPA has indicated that the groundwater
contamination may be attributable to releases of solvents from a former military
base located within the subject area that occurred long before the facility
acquired by Heritage was constructed, it is possible that the EPA may seek to
recover all or a portion of groundwater remediation costs from private parties
under CERCLA. Based upon information currently available to Heritage, it is not
believed that Heritage's liability, if such action were to be taken by the EPA,
would have a material adverse effect on Heritage's financial condition or
results of operations.

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

11

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

EMPLOYEES

As of August 31, 2003, Heritage had 2,418 full time employees who were
employed by the General Partner or subsidiaries of the Partnership, of whom 92
were general and administrative and 2,326 were operational employees. Of its
operational employees, 57 are represented by labor unions. The General Partner
believes that its relations with its employees are satisfactory. Historically,
the General Partner has also hired seasonal workers to meet peak winter demands.

SEC REPORTING

Heritage electronically files certain documents with the SEC. Heritage
files annual reports on Form 10-K; quarterly reports on Form 10-Q; current
reports on Form 8-K (as appropriate); along with any related amendments and
supplements thereto. From time-to-time, Heritage may also file registration and
related statements pertaining to equity or debt offerings. You may read and copy
any materials Heritage files with the SEC at the SEC's Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. You may obtain information regarding
the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains an Internet website at www.sec.gov that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC.

Heritage provides electronic access to its periodic and current reports
on the Partnership's internet website, www.heritagepropane.com, free of charge.
These reports are available on the Partnership's website as soon as reasonably
practicable after the Partnership electronically files such materials with the
SEC.

ITEM 2. PROPERTIES

Heritage operates bulk storage facilities at nearly 300 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 34 million gallons of above
ground storage capacity at its various plant sites and has leased an aggregate
of approximately 50 million gallons of underground storage facilities in New
York, Georgia, Michigan, South Carolina, Arizona, New Mexico, Texas and Alberta,
Canada. Heritage does not own or operate any underground storage facilities
(excluding customer and local distribution tanks) or propane pipeline
transportation assets (other than local delivery systems).

Heritage also owns a 50% interest in Bi-State Propane, a California
general partnership that conducts business in California and Nevada. Bi-State
Propane operates twelve customer service locations that are included on a gross
basis in Heritage's site, customer, and other property descriptions contained
herein. However, Heritage's 50% interest is accounted for under the equity
method.

The transportation of propane requires specialized equipment. The
trucks and railroad tank cars used for this purpose carry specialized steel
tanks that maintain the propane in a liquefied state. As of August 31, 2003,
Heritage utilized approximately 52 transport truck tractors, 50 transport
trailers, 12 railroad tank cars, 1,063 bobtails and 1,749 other delivery and
service vehicles, all of which Heritage owns. As of August 31, 2003, Heritage
owned approximately 625,000 customer storage tanks with typical capacities of
120 to 1,000 gallons that are leased or available for lease to customers. These
customer storage tanks are pledged as collateral to secure Heritage's
obligations to its Banks and the holders of its Notes.

12

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

Heritage utilizes a variety of trademarks and tradenames that it owns
or has secured the right to use, including "Heritage Propane." These trademarks
and tradenames have been registered or are pending registration before the
United States Patent and Trademark Office or the various jurisdictions in which
the marks or tradenames are used. Heritage believes that its strategy of
retaining the names of the companies it has acquired has maintained the local
identification of these companies and has been important to the continued
success of these businesses. Some of Heritage's most significant trade names
include AGL Propane, Balgas, Bi-State Propane, Blue Flame Gas of Charleston,
Blue Flame Gas of Mt. Pleasant, Blue Flame Gas, Carolane Propane Gas, Gas
Service Company, EnergyNorth Propane, Gibson Propane, Guilford Gas, Holton's L.
P. Gas, Ikard & Newsom, Northern Energy, Sawyer Gas, Peoples Gas Company,
Piedmont Propane Company, ProFlame, Rural Bottled Gas and Appliance, ServiGas,
V-1 Propane, and TECO Propane. Heritage regards its trademarks, tradenames, and
other proprietary rights as valuable assets and believes that they have
significant value in the marketing of its products.

ITEM 3. LEGAL PROCEEDINGS.

Propane is a flammable, combustible gas. Serious personal injury and
significant property damage can arise in connection with its storage,
transportation or use. In the ordinary course of business, Heritage is sometimes
threatened with or is named as a defendant in various lawsuits seeking actual
and punitive damages for product liability, personal injury, and property
damage. Heritage maintains liability insurance with insurers in amounts and with
coverages and deductibles it believes are reasonable and prudent, and which are
generally accepted in the industry. However, there can be no assurance that the
levels of insurance protection currently in effect will continue to be available
at reasonable prices or that such levels will remain adequate to protect
Heritage from material expenses related to product liability, personal injury or
property damage in the future. Of the pending or threatened matters in which
Heritage is a party, none have arisen outside the ordinary course of business
except for an action filed by Heritage on November 30, 1999, that is currently
pending in the Court of Common Pleas, State of South Carolina, Richland County,
against SCANA Corporation, Cornerstone Ventures, L.P. and Suburban Propane, L.P.
(the "SCANA litigation"). Heritage has asserted under a number of contract and
fraud causes of action that SCANA litigation defendants materially breached its
contract with Heritage to sell its assets to Heritage, and is seeking an
unspecified amount of compensatory and punitive damages. The defendants have
denied the claims and discovery is ongoing. Although any litigation is
inherently uncertain, based on past experience, the information currently
available and the availability of insurance coverage, Heritage does not believe
that pending or threatened litigation matters will have a material adverse
effect on its financial condition or results of operations.

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

No matters were submitted to a vote of the security holders of the
Partnership during the fourth quarter of the fiscal year ended August 31, 2003.

13

PART II

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

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

The Partnership Common Units are listed on the New York Stock Exchange
under the symbol "HPG". The following table sets forth, for the periods
indicated, the high and low sales prices per Common Unit, as reported on the New
York Stock Exchange Composite Tape, and the amount of cash distributions paid
per Common Unit for the period indicated.

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

DESCRIPTION OF UNITS

As of September 30, 2003, there were approximately 16,800 individual
Common Unitholders, which includes Common Units held in street name. Common
Units and Class C Units represent limited partner interests in the Partnership
that entitle the holders to the rights and privileges specified in the Heritage
Propane Partners, L.P. Partnership Agreement (the "Partnership Agreement"). As
of November 7, 2003, there were 18,028,029 Common Units representing, an
aggregate 98% limited partner interest in the Partnership. Except as described
below, the Common Units generally participate pro rata in Heritage's income,
gains, losses, deductions, credits, and distributions. There are also 1,000,000
Class C Units outstanding that are entitled only to participate in distributions
that Heritage may make that are attributable to amounts received by Heritage in
connection with the SCANA litigation.

No person is entitled to preemptive rights in respect of issuances of
securities by the Partnership, except that U.S. Propane, the General Partner,
has the right to purchase sufficient partnership securities to maintain its
equity interest in the Partnership.

Common Units. The Partnership's Common Units are registered under the
Securities Exchange Act of 1934. 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."

14

Class C Units. In conjunction with the transaction with U.S. Propane
and the change of control of the former General Partner, Heritage Holdings, the
Partnership issued 1,000,000 newly created Class C Units to Heritage Holdings in
conversion of that portion of its Incentive Distribution Rights that entitled it
to receive any distribution made by the Partnership attributable to the net
amount received by the Partnership in connection with the settlement, judgment,
award or other final nonappealable resolution of the SCANA litigation filed by
Heritage prior to the transaction with U.S. Propane. The Class C Units have zero
initial capital account balance and were distributed by Heritage Holdings to its
former stockholders in connection with the transaction with U.S. Propane. Thus,
U.S. Propane will not receive any distributions made with respect to the SCANA
litigation that would have gone to Heritage Holdings to the extent of its
General Partner interest and Incentive Distribution Rights had it remained the
General Partner of the Partnership.

All decisions of the General Partner relating to the SCANA litigation
will be determined by a special litigation committee consisting of one or more
independent directors of the General Partner. As soon as practicable after the
time, if any, that the Partnership receives the final cash payment as a result
of the resolution of the SCANA litigation, the special litigation committee will
determine the aggregate net amount of such proceeds distributable by the
Partnership by deducting from the amounts received all costs and expenses
incurred by the Partnership and its affiliates in connection with the SCANA
litigation and such cash reserves as the special committee deems necessary or
appropriate. Until the special litigation committee decides to distribute the
distributable proceeds, none of the distributable proceeds will be deemed to be
"Available Cash" under the Partnership Agreement. Please read "Cash Distribution
Policy" below for a discussion of Available Cash. When the special litigation
committee decides to distribute the distributable proceeds, the amount of the
distribution will be distributed in the same manner as the Partnership's
distribution of Available Cash, as described below under "Cash Distribution
Policy," except that the amount of distributable proceeds that would normally be
distributed to holders of Incentive Distribution Rights will instead be
distributed to the holders of the Class C Units, pro rata. The Partnership
cannot predict whether it will receive any cash payments as a result of the
SCANA litigation and, if so, when such distributions might be received.

Each holder of Class C Units receiving a distribution of cash in any
taxable year of the Partnership will be allocated items of gross income with
respect to such taxable year in an amount equal to the cash distributed to the
holder. The holders of Class C Units will not be allocated any other items of
income, gain, loss deduction or credit. The Class C Units do not have any rights
to share in any of the assets or distributions upon dissolution and liquidation
of the Partnership, except to the extent that any such distributions consist of
proceeds from the SCANA litigation to which the Class C Unitholders would have
otherwise been entitled. The Class C Units may not be converted into any other
unit. The Class C Units have no voting rights except to the extent provided by
Delaware law with respect to a vote as a class, in which case each Class C Unit
will be entitled to one vote.

15

Incentive Distribution Rights. Incentive distribution rights represent
the contractual right to receive an increasing percentage of quarterly
distributions of available cash from operating surplus after the minimum
quarterly distribution has been paid. Please read "--Cash Distribution Policy"
below. The General Partner owns all of the incentive distribution rights, except
that in conjunction with the August 2000 transaction with U.S. Propane, the
Partnership issued 1,000,000 Class C Units to Heritage Holdings, its general
partner at that time, in conversion of that portion of Heritage Holdings'
incentive distribution rights that entitled it to receive any distribution made
by the Partnership of funds attributable to the net amount received in
connection with the settlement, judgment, award or other final nonappealable
resolution of the SCANA litigation. Any amount payable on the Class C Units in
the future will reduce the amount otherwise distributable to holders of
incentive distribution rights at the time the distribution of such litigation
proceeds is made and will not reduce the amount distributable to holders of
Common Units. No payments to date have been made on the Class C Units.

CASH DISTRIBUTION POLICY

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

Heritage currently distributes Available Cash, excluding any Available
Cash to be distributed to the Class C Unitholders, as follows:

o First, 98% to all Unitholders, pro rata, and 2% to the General
Partner, until all Unitholders have received $0.50 per unit for such
quarter and prior quarters (the "minimum quarterly distribution");

o Second, 98% to all Unitholders, pro rata, and 2% to the General
Partner, until all Unitholders have received $0.55 per unit for such
quarter (the "first target distribution");

o Third, 85% to all Unitholders, pro rata, 13% to the holders of
Incentive Distribution Rights, pro rata, and 2% to the General
Partner, until all Common Unitholders have received at least $0.635
per unit for such quarter (the "second target distribution");

o Fourth, 75% to all Unitholders, pro rata, 23% to the holders of
Incentive Distribution Rights, pro rata, and 2% to the General
Partner, until all Common Unitholders have received at least $0.825
per unit for such quarter; (the "third target distribution"); and

o Fifth, thereafter 50% to all Unitholders, pro rata, 48% to the holders
of Incentive Distribution Rights, pro rata, and 2% to the General
Partner

The total amount of distributions for the 2003 fiscal year on Common
Units, the general partner interests and the Incentive Distribution Rights
totaled $43.7 million, $0.9 million and $1.0 million, respectively. All such
distributions were made from Available Cash from Operating Surplus.

CHANGES IN SECURITIES AND RECENT SALES OF UNREGISTERED SECURITIES

A total of 2,500 Common Units were issued by the Partnership to a
director and to a former director of Heritage that had previously been awarded
under the terms of the Partnership's Restricted Unit Plan, and 66,118

16

restricted Common Units under the terms of the Partnership's Long Term Incentive
Plan were issued by the Partnership to seven executive officers upon the
attainment of the performance targets required for such awards. The foregoing
units were not registered with the Securities and Exchange Commission and the
Partnership relied on an exemption under section 4(2) of the Securities Act of
1933 for their issuance.

EQUITY COMPENSATION PLAN INFORMATION

At the time of its initial public offering, the Board of Directors of
the Partnership's General Partner adopted a Restricted Unit Plan, amended and
restated as of February 4, 2002 as the Partnership's Second Amended and Restated
Restricted Unit Plan (the "Restricted Unit Plan"), which provided for the
awarding of Common Units to key employees. See "Executive
Compensation--Restricted Unit Plan" for a description of the Restricted Unit
Plan.

In conjunction with the U.S. Propane merger, the Partnership adopted a
long term incentive plan (the "Long Term Incentive Plan"), which provides for
awarding Common Units to the executive officers of the General Partner of the
Partnership and certain other persons that may be designated by the Board of
Directors. The Long Term Incentive Plan provides for a maximum award of 500,000
Common Units provided that certain targeted levels of cash distributions are
reached. See "Executive Compensation--Long Term Incentive Plan" for a
description of the Long Term Incentive Plan.

The following table sets forth in tabular format, a summary of the
Partnership's equity plan information:

(1) Valued as of November 7, 2003. Actual exercise price may differ depending
on the Common Unit price on the date such units vest.

(2) As of November 7, 2003.

ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

HERITAGE

The following table sets forth, for the periods and as of the dates
indicated, selected historical financial and operating data for Heritage Propane
Partners, L.P. and its subsidiaries. Information presented represents financial
and operating data prior to and following the transactions with U.S. Propane.
Although the Partnership was the surviving entity for legal purposes, Peoples
Gas following the transactions with U.S. Propane was the accounting acquirer.
The years ended December 31, 1998 and 1999, and the eight-month period ended
August 31, 1999 reflect the results of Peoples Gas on a stand-alone basis. The
eight-month period ended August 31, 2000 was treated as a transition period, and
represents seven months of Peoples Gas stand-alone and one month of Heritage.
The years ended August 31, 2001, 2002 and 2003 reflect the results of the
Partnership following the 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. included elsewhere in
this report and "Management's Discussion and

17

Analysis of Financial Condition and Results of Operations" also included
elsewhere in this report. The amounts in the table below, except per unit data,
are in thousands.

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

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

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

(c) EBITDA, as adjusted is defined as the Partnership's earnings before
interest, taxes, depreciation, amortization and other non-cash items,
such as compensation charges for unit issuances to employees, gain or
loss on disposal of assets, and other expenses. We present EBITDA, as
adjusted, on a Partnership basis which includes both the general and

18

limited partner interests. Non-cash compensation expense represents
charges for the value of the Common Units awarded under the
Partnership's compensation plans that have not yet vested under the
terms of those plans and are charges which do not, or will not, require
cash settlement. Non-cash income such as the gain arising from our
disposal of assets is not included when determining EBITDA, as
adjusted. EBITDA, as adjusted (i) is not a measure of performance
calculated in accordance with generally accepted accounting principles
and (ii) should not be considered in isolation or as a substitute for
net income, income from operations or cash flow as reflected in our
consolidated financial statements.

EBITDA, as adjusted is presented because such information is relevant
and is used by management, industry analysts, investors, lenders and
rating agencies to assess the financial performance and operating
results of the Partnership's fundamental business activities.
Management believes that the presentation of EBITDA, as adjusted is
useful to lenders and investors because of its use in the propane
industry and for master limited partnerships as an indicator of the
strength and performance of the Partnership's ongoing business
operations, including the ability to fund capital expenditures, service
debt and pay distributions. Additionally, management believes that
EBITDA, as adjusted provides additional and useful information to the
Partnership's investors for trending, analyzing and benchmarking the
operating results of the Partnership from period to period as compared
to other companies that may have different financing and capital
structures. The presentation of EBITDA, as adjusted allows investors to
view the Partnership's performance in a manner similar to the methods
used by management and provides additional insight to the Partnership's
operating results.

EBITDA, as adjusted is used by management to determine our operating
performance, and along with other data as internal measures for setting
annual operating budgets, assessing financial performance of the
Partnership's numerous business locations, as a measure for evaluating
targeted businesses for acquisition and as a measurement component of
incentive compensation. The Partnership has a large number of business
locations located in different regions of the United States. EBITDA, as
adjusted can be a meaningful measure of financial performance because
it excludes factors which are outside the control of the employees
responsible for operating and managing the business locations, and
provides information management can use to evaluate the performance of
the business locations, or the region where they are located, and the
employees responsible for operating them. To present EBITDA, as
adjusted on a full Partnership basis, we add back the minority interest
of the general partner because net income is reported net of the
general partner's minority interest. Our EBITDA, as adjusted includes
non-cash compensation expense which is a non-cash expense item
resulting from our unit based compensation plans that does not require
cash settlement and is not considered during management's assessment of
the operating results of the Partnership's business. By adding these
non-cash compensation expenses in EBITDA, as adjusted allows management
to compare the Partnership's operating results to those of other
companies in the same industry who may have compensation plans with
levels and values of annual grants that are different than the
Partnership's. Other expenses include other finance charges and other
asset non-cash impairment charges that are reflected in the
Partnership's operating results but are not classified in interest,
depreciation and amortization. We do not include gain on the sale of
assets when determining EBITDA, as adjusted since including non-cash
income resulting from the sale of assets increases the performance
measure in a manner that is not related to the true operating results
of the Partnership's business. In addition, Heritage's debt agreements
contain financial covenants based on EBITDA, as adjusted. For a
description of these covenants, please read "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Description of Indebtedness."

There are material limitations to using a measure such as EBITDA, as
adjusted, including the difficulty associated with using it as the sole
measure to compare the results of one company to another, and the
inability to analyze certain significant items that directly affect a
company's net income or loss. In addition, Heritage's calculation of
EBITDA, as adjusted may not be consistent with similarly titled
measures of other companies and should be viewed in conjunction with
measurements that are computed in accordance with GAAP. EBITDA, as
adjusted for the periods described herein is calculated in the same
manner as presented by Heritage in the past. Management compensates for
these limitations by considering EBITDA, as adjusted in conjunction
with its analysis of other GAAP financial measures, such as gross
profit, net income (loss), and cash flow from operating activities. A
reconciliation of EBITDA, as adjusted to net income (loss) is presented
below. Please read "-Reconciliation of EBITDA, As Adjusted to Net
Income" below.

(d) Capital expenditures fall generally into three categories: (i)
maintenance capital expenditures of approximately $15.1 and $12.8
million in fiscal years 2003, and 2002, respectively, which include
expenditures for repairs that extend the life of the assets and
replacement of property, plant and equipment, (ii) growth capital
expenditures, which include expenditures for purchase of new propane
tanks and other equipment to facilitate retail customer base expansion,
and (iii) acquisition expenditures which include expenditures related
to the acquisition of retail propane operations and other business, and
the portion of the purchase price allocated to intangibles associated
with such acquired businesses.

19

RECONCILIATION OF EBITDA, AS ADJUSTED, TO NET INCOME

The following tables set forth the reconciliation of EBITDA, as adjusted, to net
income of Heritage Propane Partners, L.P. for the periods indicated:

(a) Please read footnote (c) under "Item 6. Selected Historical Financial
and Operating Data - Heritage Propane Partners L.P. (formerly Peoples
Gas)" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Description of Indebtedness" for a
more detailed discussion of EBITDA, as adjusted.

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

The following is a discussion of the historical financial condition and
results of operations of Heritage Propane Partners, L.P. and its subsidiaries,
and should be read in conjunction with the Partnership's historical consolidated
financial statements and Notes thereto included elsewhere in this annual report
on Form 10-K.

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 SUBJECT TO UNCERTAINTIES AND RISKS,
DIFFICULT TO PREDICT, AND BEYOND MANAGEMENT'S CONTROL. SUCH FACTORS INCLUDE:

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

o THE POLITICAL AND ECONOMIC STABILITY OF PETROLEUM PRODUCING
NATIONS;

o THE EFFECT OF WEATHER CONDITIONS ON DEMAND FOR PROPANE;

20

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

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

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

o HERITAGE'S ABILITY TO OBTAIN ADEQUATE SUPPLIES OF PROPANE FOR
RETAIL SALE IN THE EVENT OF AN INTERRUPTION IN SUPPLY OR
TRANSPORTATION AND THE AVAILABILITY OF CAPACITY TO TRANSPORT
PROPANE TO MARKET AREAS;

o HAZARDS OR OPERATING RISKS INCIDENTAL TO TRANSPORTING, STORING
AND DISTRIBUTING PROPANE THAT MAY NOT BE FULLY COVERED BY
INSURANCE;

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

o ENERGY EFFICIENCIES AND TECHNOLOGICAL TRENDS;

o LOSS OF KEY PERSONNEL;

o THE AVAILABILITY AND COST OF CAPITAL AND HERITAGE'S ABILITY TO
ACCESS CERTAIN CAPITAL SOURCES;

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

o THE COSTS AND EFFECTS OF LEGAL AND ADMINISTRATIVE PROCEEDINGS;
AND

o HERITAGE'S ABILITY TO SUCCESSFULLY IDENTIFY AND CONSUMMATE
STRATEGIC ACQUISITIONS AT PURCHASE PRICES THAT ARE ACCRETIVE TO
HERITAGE'S FINANCIAL RESULTS.

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 typically one-year agreements subject to annual
renewal and 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. In addition, 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. The number of contracts
entered into may vary from year to year. 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 for internal combustion engines that power
vehicles and forklifts and as a heating source in manufacturing and mining
processes.

Heritage's propane distribution business is largely seasonal and
dependent upon weather conditions in its service areas. Propane sales to
residential and commercial customers are affected by winter heating season

21

requirements. Historically, approximately two-thirds of Heritage's retail
propane volume and in excess of 80% of Heritage's EBITDA, as adjusted, is
attributable to sales during the six-month peak-heating season of October
through March. This generally results in higher operating revenues and net
income during the period from October through March of each year and lower
operating revenues, and, in some cases, 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,
while 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 resulting in the
temperatures realized in Heritage's areas of operations, particularly during the
six-month peak-heating season, having a significant effect on its financial
performance. In any given area, sustained warmer-than-normal temperatures will
tend to result in reduced propane use, while sustained colder-than-normal
temperatures will tend to result in greater propane use. Heritage uses
information based on normal temperatures in understanding how temperatures that
are colder or warmer than normal affect historical results of operations and in
preparing forecasts of future operations.

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.

On November 6, 2003, Heritage publicly announced that it had entered
into agreements to acquire Energy Transfer Company, a company engaged in the
midstream natural gas business. Upon consummation of the transactions
contemplated by such agreements, Heritage will operate the midstream business of
Energy Transfer Company in conjunction with its retail propane operations.

The following is a discussion of the historical financial condition and
results of operations of Heritage Propane Partners, L.P. and its subsidiaries,
and should be read in conjunction with the historical Financial and Operating
Data and Notes thereto included elsewhere in this annual report on Form 10-K.

ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS - HERITAGE PROPANE PARTNERS, L.P.

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 not owned by
Heritage is excluded from the EBITDA, as adjusted, calculation. All other
financial information and operating data included in management's discussion and
analysis of financial condition and results of operations includes references to
the foreign wholesale results of MP Energy Partnership.

FISCAL YEAR ENDED AUGUST 31, 2003 COMPARED TO THE FISCAL YEAR ENDED AUGUST 31,
2002

Volume. Total retail gallons sold in fiscal year 2003 were 375.9
million, an increase of 46.3 million from the 329.6 million gallons sold in
fiscal year 2002. Of the increase in volume, approximately 6.0 million gallons
was attributable to the volume added through acquisitions and approximately 40.3
million gallons was attributable to more favorable weather conditions in 2003 in
some of Heritage's areas of operations, offset by warmer than normal weather
conditions in other areas of operations.

Heritage sold approximately 74.3 million wholesale gallons during
fiscal year 2003 of which 15.3 million were domestic wholesale and 59.0 million
were foreign wholesale. In fiscal year 2002, Heritage sold 16.8 million domestic
wholesale gallons and 65.3 million foreign wholesale gallons. The 6.3 million
gallon decrease in foreign wholesale volumes of MP Energy Partnership was
primarily due to an exchange contract that was in effect during fiscal year
2002, which was not economical to renew during fiscal year 2003.

Revenues. Total revenues for fiscal year 2003 were $571.4 million, an
increase of $109.1 million, as compared to $462.3 million in fiscal year 2002.
Retail revenues for fiscal year 2003 were $463.4 million as

22

compared to $365.3 million for fiscal year 2002, an increase of $98.1 million,
of which $40.9 million was primarily due to higher selling prices, and $49.8
million was primarily due to the increase in gallons sold as a result of colder
weather conditions, and $7.4 million was due to the increase in gallons sold by
customer service locations added through acquisitions. Selling prices in all the
reportable segments increased from last year in response to higher supply costs.
Domestic wholesale revenues increased $0.7 million to $10.7 million, due to an
increase of approximately $1.7 million related to higher selling prices, offset
by a decrease of approximately $1.0 million related to a decrease in gallons
sold. Foreign wholesale revenues were $36.6 million for fiscal year 2003 as
compared to $31.2 million for fiscal year 2002, an increase of $5.4 million
primarily due to an approximate $9.3 million increase related to higher selling
prices offset by an approximate $3.9 million related to decreased volumes as
described above. Net liquids marketing revenues increased from $0.5 million in
fiscal year 2002 to $1.3 million in fiscal year 2003, primarily due to more
favorable movement in product prices in the current fiscal year. Other domestic
revenues increased by $4.1 million to $59.4 million for fiscal year 2003,
compared to $55.3 million for fiscal year ended 2002 primarily as a result of
acquisitions.

Cost of Products Sold. Total cost of sales increased $58.9 million to
$297.1 million as compared to $238.2 million for fiscal year 2002. Retail fuel
cost of sales increased $51.7 million to $236.3 million for fiscal year 2003, of
which approximately $29.1 million was due to increased volumes, and
approximately $22.6 million was due to higher supply costs. U.S. wholesale cost
of sales decreased $0.1 million to $9.6 million. Foreign wholesale cost of sales
increased $4.7 million to $34.0 million, of which approximately $8.4 million was
due to increased product costs this fiscal year, offset by an approximate
decrease of $3.7 million attributable to the decreased volumes described above.
Other cost of sales increased $2.6 million to $17.2 million for fiscal year 2003
primarily due to acquisitions.

Gross Profit. Total gross profit increased to $274.3 million in fiscal
year 2003 as compared to $224.1 million in fiscal year 2002, due to the
aforementioned increases in volumes and revenues described above, and the
results of acquisitions, offset in part by the increases in product costs. For
fiscal year 2003, retail fuel gross profit was $227.1 million, domestic
wholesale fuel gross profit was $1.1 million, liquids marketing gross profit was
$1.3 million, other gross profit was $42.2 million, and foreign wholesale gross
profit was $2.6 million. As a comparison, for fiscal year 2002, Heritage
recorded retail fuel gross profit of $180.7 million, domestic wholesale fuel
gross profit of $0.3 million, liquids marketing gross profit of $0.5 million,
other gross profit of $40.6 million, and foreign wholesale gross profit of $2.0
million.

Operating Expenses. Operating expenses were $152.1 million for fiscal
year 2003 as compared to $133.2 million for fiscal year 2002. The increase of
$18.9 million is primarily the result of $6.8 million of additional operating
expenses incurred for employee wages and benefits related to the growth of
Heritage from acquisitions made during fiscal year 2002, an increase of $5.5
million in the performance-based compensation plan expense due to higher
operating performance, an increase of approximately $5.5 million in operating
expenses in certain areas of the Partnership's operations due to acquisitions
and to accommodate increased winter demand, and industry-wide increases in
business insurance costs of $1.1 million.

Selling, General and Administrative. Selling, general and
administrative expenses were $14.0 million for fiscal year 2003 as compared to
$13.0 million for fiscal year 2002. This increase is primarily related to the
performance-based compensation plan expense in 2003 that was not incurred in
2002, offset by a $0.7 million decrease in deferred compensation expense related
to the adoption of FASB Statement No. 123 Accounting for Stock-Based
Compensation (SFAS 123).

Depreciation and Amortization. Depreciation and amortization for fiscal
year 2003 was $37.9 million, an increase of $0.9 million as compared to $37.0
million in fiscal year 2002. The increase is attributable to current year
acquisitions.

Operating Income. Heritage reported operating income of $70.2 million
in fiscal year 2003 as compared to the operating income of $41.0 million for
fiscal year 2002. This increase is a combination of increased gross profit and a
$0.7 million increase due to the adoption of SFAS 123, offset by increased
operating expenses described above.

23

Interest Expense. Interest expense for fiscal year 2003 was $35.7
million, a decrease of $1.6 million as compared to $37.3 million in fiscal year
2002. The decrease was primarily attributable to the retirement of a portion of
outstanding debt during the year.

Other Expense. Other expense for fiscal year 2003 was $3.2 million, an
increase of $2.9 million as compared to $0.3 million in fiscal year 2002. The
increase was primarily attributable to the reclassification into earnings of a
$2.8 million loss on marketable securities in fiscal year 2003 that was
previously recorded as accumulated other comprehensive loss on the balance
sheet.

Taxes. Taxes for the year ended August 31, 2003 were $1.0 million due
to the tax expense incurred by Heritage's corporate subsidiaries and other
franchise taxes owed. Of the $1.0 million increase, $0.3 million was incurred in
connection with the liquidation of Guilford Gas Service, Inc. during the fiscal
year ended August 31, 2003. There was no tax expense for these subsidiaries for
the year ended August 31, 2002.

Net Income. Heritage reported net income of $31.1 million, or $1.79 per
limited partner unit, for fiscal year 2003, an increase of $26.2 million from
net income of $4.9 million for fiscal year 2002. The increase is primarily the
result of the increase in operating income, which includes a $0.7 million
decrease in expenses due to the adoption of SFAS 123, partially offset by the
increase in other expenses and taxes described above.

EBITDA, as adjusted. EBITDA, as adjusted, increased $29.5 million to
$111.0 million for fiscal year 2003, as compared to EBITDA, as adjusted, of
$81.5 million for fiscal year 2002. This increase is due to the operating
conditions described above and is a record level of EBITDA, as adjusted, for the
fiscal year results of Heritage. Please read footnote (c) under "Item 6.
Selected Historical Financial and Operating Data - Heritage Propane Partners,
L.P. (formerly Peoples Gas)" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Description of Indebtedness"
for a more detailed discussion of EBITDA, as adjusted.

FISCAL YEAR ENDED AUGUST 31, 2002 COMPARED TO THE FISCAL YEAR ENDED AUGUST 31,
2001

Volume. Total retail gallons sold in fiscal year 2002 were 329.6
million, a decrease of 0.6 million from the 330.2 million gallons sold in fiscal
year 2001. This decrease resulted from an approximate 36.2 million gallon
reduction in gallons sold primarily due to the significantly warmer than normal
weather in fiscal year 2002, offset by an approximate 35.6 million gallon
increase realized from acquisitions that were not included in the year ended
August 31, 2001. Temperatures in the Partnership's area of operations were an
average of 10% warmer in 2002 than in 2001 and 12% warmer than normal.

Heritage sold approximately 82.1 million wholesale gallons during
fiscal year 2002 of which 16.8 million were domestic wholesale and 65.3 million
were foreign wholesale. In fiscal year 2001, Heritage sold 12.7 million domestic
wholesale gallons and 88.9 million foreign wholesale gallons. The increase of
4.1 million in domestic wholesale gallons in fiscal year 2002 compared to fiscal
year 2001 is due to an approximate 10.1 million gallon increase related to
acquisitions, offset by an approximate 6.0 million gallon decrease in volume
sold primarily due to warmer temperatures in fiscal year 2002. The 23.6 million
gallon decrease in foreign wholesale volumes is primarily due to a decrease in
volume sold as a result of the warmer temperatures in fiscal year 2002.

Revenues. Total revenues for fiscal year 2002 were $462.3 million, a
decrease of $81.6 million, as compared to $543.9 million in fiscal year 2001.
Retail revenues for fiscal year 2002 were $365.3 million as compared to $440.5
million for fiscal year 2001, a decrease of $75.2 million, of which $74.5
million was primarily due to lower selling prices and $40.2 million was
primarily due to the decrease in gallons sold as a result of warmer weather
conditions, offset by an approximate $39.5 million increase due to gallons added
through acquisitions. Selling prices in all the reportable segments decreased
from last year in response to lower supply costs. Domestic wholesale revenues
increased $0.1 million to $10.0 million, due to an increase of approximately
$6.0 million in acquisition related volumes, offset by decreases of
approximately $2.3 million due to lower selling prices and approximately $3.6
million related to a decrease in gallons sold as a result of the warmer weather
conditions in fiscal year 2002 as compared to fiscal year 2001. Foreign
wholesale revenues were $31.2 million for fiscal year 2002 as compared to $50.0
million for fiscal year 2001, a decrease of $18.8 million primarily due to a
combination of an approximate $11.3 million in decreased volumes due to warmer
weather and an approximate $7.5 million decrease related to lower selling
prices. Net liquids marketing revenues decreased from $0.8 million in fiscal
year 2001 to $0.5 million in fiscal year 2002, primarily due to an overall
reduction in the number of contracts entered into during

24

fiscal year 2002 and lower commodity prices as compared to fiscal year 2001.
Other domestic revenues increased by $12.6 million to $55.3 for fiscal year
2002, compared to $42.7 million for fiscal year ended 2001 as a result of
acquisitions and an increase in other service fees that are not weather
sensitive.

Cost of Products Sold. Total cost of sales decreased $68.4 million to
$238.2 million as compared to $306.6 million for fiscal year 2001. Retail fuel
cost of sales decreased $53.5 million to $184.6 million for fiscal year 2002,
due to decreases in the cost of propane as compared to fiscal year 2001.
Although the market price for propane for the year ended August 31, 2002 was
well below the price for the year ended August 31, 2001, the average cost per
gallon sold for fiscal year 2002 was negatively impacted by the higher cost of
pre-bought inventory that was absorbed into cost of sales throughout the year
ended August 31, 2002. U. S. wholesale cost of sales increased $0.6 million due
to an increase of approximately $2.3 million as a result of acquisition volumes
offset by an approximate $1.7 million decrease due to lower cost of propane.
Foreign wholesale cost of sales decreased $18.7 million of which approximately
$10.6 million was due to decreased product costs in fiscal year 2002 and
approximately $ 8.1 million was due to decreased volumes described above. Other
cost of sales increased $3.2 million to $14.6 million for fiscal year 2002
primarily due to acquisitions.

Gross Profit. Total gross profit decreased to $224.1 million in fiscal
year 2002 as compared to $237.4 million in fiscal year 2001, due to the
aforementioned decreases in volumes and revenues described above, offset in part
by the decreases in product costs and the results of acquisitions. For fiscal
year 2002, retail fuel gross profit was $180.7 million, domestic wholesale fuel
gross profit was $0.3 million, liquids marketing gross profit was $0.5 million,
other gross profit was $40.6 million, and foreign wholesale gross profit was
$2.0.million. As a comparison, for fiscal year 2001, Heritage recorded retail
fuel gross profit of $202.4 million, domestic wholesale fuel gross profit was
$0.8 million, liquids marketing gross profit was $1.5 million, other gross
profit was $30.7 million, and foreign wholesale gross profit was $2.0 million
for a total gross profit of $237.4 million.

Operating Expenses. Operating expenses were $133.2 million for fiscal
year 2002 as compared to $126.8 million for fiscal year 2001. The increase of
$6.4 million is primarily the result of $10.8 million of additional operating
expenses incurred for employee wages and benefits related to the growth of
Heritage from acquisitions since the fiscal year ended August 31, 2001, offset
by a $4.4 million decrease in the short-term incentive compensation plan expense
and cost reduction efforts initiated to address the decreased operating income
encountered during the unusually warm winter of fiscal year 2002.

Selling, General and Administrative. Selling, general and
administrative expenses were $13.0 million for fiscal year 2002 as compared to
$15.7 million for fiscal year 2001. This decrease is primarily attributable to
the additional expenses incurred in fiscal year 2001 related to the executive
short-term incentive compensation plan that did not reoccur during fiscal year
2002.

Depreciation and Amortization. Depreciation and amortization for fiscal
year 2002 was $37.0 million, a decrease of $3.4 million as compared to $40.4
million in fiscal year 2001. The decrease is primarily attributable to the
adoption of FASB Statement No. 142, Goodwill and Other Intangible Assets ("SFAS
142") on September 1, 2001, which resulted in goodwill no longer being
amortized. The adoption of SFAS 142 resulted in $5.7 million less amortization
expense for the year ended August 31, 2002 because of the impact on the
amortization of goodwill. Goodwill amortization totaled $4.9 million for the
year ended August 31, 2001. This decrease was offset by increased depreciation
related to property, plant and equipment, and intangible assets from the
businesses acquired during fiscal year 2002.

Operating Income. Heritage reported operating income of $41.0 million
in fiscal year 2002 as compared to the operating income of $54.4 million for
fiscal year 2001. The decrease of $13.4 million is due to the related decrease
in gross profit and increase in operating expenses described above offset by the
decrease in selling, general and administrative expenses and the decrease in
deprecation and amortization previously discussed.

Interest Expense. Interest expense for fiscal year 2002 was $37.3
million, an increase of $1.7 million as compared to $35.6 million in fiscal year
2001. In May 2001, Heritage issued $70.0 million of fixed rate Senior Secured
Notes. Interest expense related to these notes was recorded for four months in
2001 and twelve months in 2002, causing interest expense to increase
approximately $3.6 million in fiscal year 2002 compared to fiscal year 2001.
This increase was offset by a $0.6 million decrease in interest expense on the
Working Capital Facility and a $1.3 million decrease in interest expense on the
Acquisition Facility.

25

Net Income. Heritage reported net income of $4.9 million, or $0.25 per
limited partner unit, for fiscal year 2002, a decrease of $14.8 million from net
income of $19.7 million for fiscal year 2001. This reduction is primarily due to
the decreased operating income described above, and a $1.7 million increase in
interest expense, offset by a decrease in minority interest expense due to
decreased net income, a decrease in other expenses, and an increase in earnings
from affiliates.

EBITDA, as adjusted. EBITDA, as adjusted, decreased $15.9 million to
$81.5 million for fiscal year 2002, as compared to EBITDA, as adjusted, of $97.4
million for fiscal year 2001. This decrease is related to the decrease in gross
margin realized during the year ended August 31, 2002 as compared to the year
ended August 31, 2001, resulting in reduced operating income. Please read
footnote (c) under "Item 6. Selected Historical Financial and Operating Data -
Heritage Propane Partners, L.P. (formerly Peoples Gas)" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Description of Indebtedness" for a more detailed discussion of
EBITDA, as adjusted.

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 expenditures, mainly for customer tanks, 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 2003 was $95.2 million as compared to cash provided by operating activities
of $65.4 million for fiscal year 2002. The net cash provided from operations of
$95.2 million for fiscal year 2003 consisted of net income of $31.1 million and
non-cash charges of $43.2 million, primarily depreciation and amortization, and
a decrease in working capital items of $20.9 million.

Investing Activities. Heritage completed six acquisitions during fiscal
year 2003 investing $24.9 million, net of cash received. This capital
expenditure amount is reflected in the cash used in investing activities of
$48.4 million along with $15.1 million invested for maintenance needed to
sustain operations at current levels and $12.2 million for customer tanks and
other expenditures to support growth of operations. Investing activities also
includes proceeds from the sale of property of $3.8 million.

Financing Activities. Cash used in financing activities of $44.3
million during fiscal year 2003, was primarily a net decrease in short-term debt
of $3.5 million, a net decrease in long-term debt of $42.1 million, and $43.4
million of cash distributions paid to Unitholders and the General Partner,
offset by $44.5 million of net proceeds from the issuance of Common Units, and
$0.2 million contributed by the General Partner to maintain its general partner
interest in the Partnership.

Financing and Sources of Liquidity

Heritage has a Bank Credit Facility with various financial
institutions, which includes a Working Capital Facility, providing for up to
$65.0 million of borrowings to be used for working capital and other general
partnership purposes, and an Acquisition Facility, providing for up to $50.0
million of borrowings to be used for acquisitions and improvements. The Working
Capital Facility expires June 30, 2004 and the Acquisition Facility expires
December 31, 2003, at which time the outstanding balance on the Acquisition
Facility will convert to a term loan

26

payable in quarterly installments with a final maturity of June 30, 2006. The
weighted average interest rate was 2.49125% for the amounts outstanding at
August 31, 2003 on both the Working Capital Facility and the Acquisition
Facility. At August 31, 2003, there was $38.3 million available for borrowing on
the Working Capital Facility and $25.3 million available on the Acquisition
Facility. See Note 4 - "Working Capital Facility and Long-Term Debt" to the
Consolidated Financial Statements beginning on Page F-1 of this report.

Upon consummation of the transactions announced on November 6, 2003,
Heritage expects to maintain separate sources of financing for potential
acquisitions or other expansion of Energy Transfer Company's midstream
operations, including a separate revolving credit facility. Consummation of the
transaction is conditioned upon Heritage's obtaining sufficient financing to
complete the transactions. Heritage may acquire financing to fund its
acquisition of La Grange through a combination of equity and debt financing. The
debt financings may take the form of bank debt, a private debt placement with
institutional investors, a public debt offering, or a combination of one or more
of the foregoing. Heritage's current Bank Credit Facility described above will
be used only in conjunction with Heritage's retail propane operations.

The Partnership uses its cash provided by operating and financing
activities to provide distributions to Unitholders and to fund acquisition,
maintenance and growth capital expenditures. Acquisition capital expenditures,
which include expenditures related to the acquisition of retail propane
operations and intangibles associated with such acquired businesses, were $24.9
million for the fiscal year ended August 31, 2003 as compared to $19.7 million
for fiscal year 2002. In addition to the $24.9 million of cash expended for
acquisitions during fiscal year 2003, $15.0 million of Common Units and $0.9
million for notes payable on non-compete agreements were issued and $1.0 million
in liabilities were assumed in connection with certain acquisitions. In
comparison, in addition to the $19.7 million of cash expended for acquisitions
during the fiscal year ended August 31, 2002, $2.7 million for notes payable on
non-compete agreements were issued in connection with acquisitions.

Under the Partnership Agreement, the Partnership will distribute to the
General Partner and its Limited Partners, 45 days after the end of each fiscal
quarter, an amount equal to all of its Available Cash for such quarter.
Available Cash generally means, with respect to any quarter of the Partnership,
all cash on hand at the end of such quarter less the amount of cash reserves
established by the General Partner in its reasonable discretion that is
necessary or appropriate to provide for future cash requirements. The
Partnership's commitment to its Unitholders is to distribute the increase in its
cash flow while maintaining prudent reserves for the Partnership's operations.
The distribution was $0.6375 per unit ($2.55 annually) for each of the quarters
ended February 28, 2002 through and including May 31, 2003. Heritage raised the
quarterly distribution $0.0125 per unit for the quarter ended August 31, 2003,
to $0.65 per unit ($2.60 annually). The current distribution level includes
incentive distributions payable to the General Partner to the extent the
quarterly distribution exceeds $0.55 per unit ($2.20 annually).

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

DESCRIPTION OF INDEBTEDNESS

In connection with its initial public offering, on June 25, 1996,
Heritage entered into a Note Purchase Agreement whereby Heritage issued $120
million principal amount of 8.55% Senior Secured Notes (the "Notes") with
institutional investors. Interest is payable semi-annually in arrears on each
December 31 and June 30. The Notes have a final maturity of June 30, 2011, with
ten equal mandatory repayments of principal, which began on June 30, 2002. At
August 31, 2003, $96 million of principal debt was outstanding under the Senior
Secured Notes.

On November 19, 1997, Heritage entered into a Note Purchase Agreement
("Medium Term Note Program") that provided for the issuance of up to $100
million of senior secured promissory notes if certain conditions were met. An
initial placement of $32 million (Series A and B), at an average interest rate
of 7.23% with an average 10-year maturity, was completed at the closing of the
Medium Term Note Program. Interest is payable semi-annually in arrears on each
November 19 and May 19. An additional placement of $15 million (Series C, D and
E), at an average interest rate of 6.59% with an average 12-year maturity, was
completed in March 1998. Interest is payable on Series C and D 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

27

permitted under the unused portion of the Medium Term Note Program. During the
fiscal year ended August 31, 2003, Heritage used $3.9 million and $5.0 million
of the proceeds from the issuance of 1,610,000 of Common Units to retire the
balance of the Series D and Series E Senior Secured Notes, respectively. At
August 31, 2003, $34.1 million of principal debt was outstanding under the
Medium Term Note Program.

On August 10, 2000, Heritage entered into a Note Purchase Agreement
("Senior Secured Promissory Notes") that provided for the issuance of up to $250
million of fixed rate senior secured promissory notes if certain conditions were
met. An initial placement of $180 million (Series A through F) at an average
rate of 8.66% with an average 13-year maturity, was completed in conjunction
with the merger with U.S. Propane. Interest is payable quarterly. The proceeds
were used to finance the transaction with U.S. Propane and retire a portion of
existing debt. On May 24, 2001, Heritage issued an additional $70 million
(Series G through I) of the Senior Secured Promissory Notes to a group of
institutional lenders with 7-, 12- and 15-year maturities and an average coupon
rate of 7.66%. 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. During the fiscal year ended
August 31, 2003, Heritage used $7.5 million and $19.5 million of the proceeds
from the issuance of 1,610,000 of Common Units to retire a portion of the Series
G and Series H Senior Secured Promissory Notes, respectively. At August 31,
2003, $223 million of principal debt was outstanding under the Senior Secured
Promissory Notes.

The Note Agreements for each of the Senior Secured Notes, Medium Term
Note Program and Senior Secured Promissory Notes, and the Bank Credit Facility
contain customary restrictive covenants applicable to the Operating Partnership,
including limitations on the level of additional indebtedness, creation of
liens, and sale of assets. These covenants require the Operating Partnership to
maintain ratios of Consolidated Funded Indebtedness to Consolidated EBITDA (as
these terms are similarly defined in the Bank Credit Facility and the Note
Agreements) of not more than 5.00 to 1 for the Bank Credit Facility and not more
than 5.25 to 1 for the Note Agreements and Consolidated EBITDA to Consolidated
Interest Expense (as these terms are similarly defined in the Bank Credit
Facility and the Note Agreements) of not less than 2.25 to 1. The Consolidated
EBITDA used to determine these ratios is calculated in accordance with these
debt agreements. For purposes of calculating the ratios under the Bank Credit
Facility and the Note Agreements, Consolidated EBITDA is based upon Heritage's
EBITDA, as adjusted, during the most recent four quarterly periods and modified
to give pro forma effect for acquisitions and divestures made during the test
period, and is compared to Consolidated Funded Indebtedness as of the test date
and the Consolidated Interest Expense for the most recent twelve months. The
debt agreements also provide that the Operating Partnership may declare, make,
or incur a liability to make, a restricted payment during each fiscal quarter,
if: (a) the amount of such restricted payment, together with all other
restricted payments during such quarter, do not exceed Available Cash with
respect to the immediately preceding quarter; and (b) no default or event of
default exists before such restricted payment and after giving effect thereto.
The debt agreements further provide that Available Cash is required to reflect a
reserve equal to 50% of the interest to be paid on the notes. In addition, in
the third, second and first quarters preceding a quarter in which a scheduled
principal payment is to be made on the notes, Available Cash is required to
reflect a reserve equal to 25%, 50%, and 75%, respectively, of the principal
amount to be repaid on such payment dates.

Failure to comply with the various restrictive and affirmative
covenants of the Operating Partnership's Bank Credit Facility and the Note
Agreements could negatively impact the Operating Partnership's ability to incur
additional debt and Heritage's ability to pay distributions. The Operating
Partnership is required to measure these financial tests and covenants quarterly
and was in compliance or had no continuing defaults with all financial
requirements, tests, limitations, and covenants related to financial ratios
under the Senior Secured Notes, Medium Term Note Program, Senior Secured
Promissory Notes, and the Bank Credit Facility at August 31, 2003.

The following table summarizes our long-term debt and other contractual
obligations as of August 31, 2003:

28

See Note 4 - "Working Capital Facility and Long-Term Debt" to the Consolidated
Financial Statements beginning on Page F-1 of this report for further discussion
of the long-term debt classifications and the maturity dates and interest rates
related to long-term debt.

NEW ACCOUNTING STANDARDS

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

In November 2002, the FASB issued Financial Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 expands the
existing disclosure requirements for guarantees and requires that companies
recognize a liability for guarantees issued after December 31, 2002. The
implementation of FIN 45 did not have a significant impact on Heritage's
financial position or results of operations.

In January of 2003, the FASB issued Financial Interpretation No. 46
Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51
(FIN 46). FIN 46 clarifies Accounting Research Bulletin No. 51, Consolidated
Financial Statements. If certain conditions are met, this interpretation
requires the primary beneficiary to consolidate certain variable interest
entities in which equity investors lack the characteristics of a controlling
interest or do not have sufficient equity investment at risk to permit the
variable interest entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
immediately for variable interest entities created or obtained after January 31,
2003. For variable interest entities acquired before February 1, 2003, the
interpretation is effective for the first fiscal year or interim period
beginning after June 15, 2003. Management does not believe FIN 46 will have a
significant impact on Heritage's financial position or results of operations.

In April 2003, the FASB issued Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS
149 amends and clarifies financial accounting and reporting for derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS 133. SFAS 149 is effective
for contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. Heritage adopted SFAS 149 as of
July 1, 2003. The adoption of SFAS 149 did not have a material impact on the
Partnership's consolidated financial position or results of operations.

In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS
150). SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within the scope of SFAS 150 as a liability (or an asset in some circumstances).
This statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. Heritage adopted the provisions of
SFAS 150 as of September 1, 2003. The adoption did not have a material impact on
the Partnership's consolidated financial position or results of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to establish accounting policies and make estimates and assumptions
that affect reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of

29

the financial statements and the reported amounts of revenues and expenses
during the reporting period. Heritage evaluates its policies and estimates on a
regular basis. Actual results could differ from these estimates.

The Partnership's significant accounting policies are discussed in Note
2 --"Summary of Significant Accounting Policies and Balance Sheet Detail" to the
Consolidated Financial Statements beginning on page F-1 of this report. Heritage
believes the following are critical accounting policies:

Marketable Securities. Heritage has marketable securities that are
classified as available-for-sale. Unrealized holding losses occur as a result of
declines in the market value of the Partnership's holdings. The fair market
value of the Partnership's holdings is determined based upon the market price of
the securities, which are publicly traded securities. Based on the performance
of the securities over the preceding nine-month period, Heritage reviews the
fair market value to determine if an other-than temporary impairment should be
recorded.

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. Heritage performs this review by considering
if the carrying values of the assets exceed the undiscounted cash flows expected
to result from the use and eventual disposition of the assets. 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.
Heritage has never recorded an impairment as a result of this review.

Stock Based Compensation Plans. Heritage accounts for its stock
compensation plans following the fair value recognition method. Heritage adopted
this accounting method on a prospective basis beginning on September 1, 2002 for
all stock based compensation granted to date by Heritage. This method was
adopted as Heritage believes it is the preferable method of accounting for stock
based compensation. Please see the caption "Stock Based Compensation Plans" in
Note 2 - "Summary of Significant Accounting Policies and Balance Sheet Detail"
to the Consolidated Financial Statements beginning on page F-1 of this report
for additional information about this adoption and a comparison to amounts
recorded in prior periods.

Depreciation of Property, Plant, and Equipment. Heritage calculates
depreciation using the straight-line method based on the estimated useful lives
of the assets ranging from 5 to 30 years. Changes in the estimated useful lives
of the assets could have a material effect on Heritage's results of operation.
Heritage does not anticipate future changes in the estimated useful live of its
property, plant, and equipment.

Amortization of Intangible Assets. Heritage calculates amortization
using the straight-line method over periods ranging from 2 to 15 years. Heritage
uses amortization methods and determines asset values based on management's best
estimate using reasonable and supportable assumptions and projections. Changes
in the amortization methods or asset values could have a material effect on
Heritage's results of operations. Heritage does not anticipate future changes in
the estimated useful lives of its intangible assets.

Fair Value of Derivative Commodity Contracts. Heritage enters into
commodity forward, swaps, and options contracts involving propane and related
products, which, in accordance with SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities", are not accounting hedges, but are used for
risk management trading purposes. To the extent such contracts are entered into
at fixed prices and thereby subject Heritage to market risk, the contracts are
accounted for using the fair value method. Under this valuation method,
derivatives are carried in the consolidated balance sheets at fair value with
changes in value recognized in earnings. Heritage classifies all gains and
losses from these derivative contracts entered into for risk management purposes
as liquids marketing revenue in the consolidated statement of operations.
Heritage utilizes published settlement prices for exchange-traded contracts,
quotes provided by brokers, and estimates of market prices based on daily
contract activity to estimate the fair value of these contracts. Changes in the
methods used to determine the fair value of these contracts could have a
material effect on our results of operations. Heritage does not anticipate
future changes in the methods used to determine the fair value of these
derivative contracts.

30

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

Interest Rate Exposure

Heritage has little cash flow exposure due to interest rate changes for
long-term debt obligations. Heritage had $51.4 million of variable rate debt
outstanding as of August 31, 2003. The variable rate debt consists of the Bank
Credit Facility described elsewhere in this report. The balance in the Bank
Credit Facility generally fluctuates throughout the year. A theoretical change
of 1% in the interest rate on the balance outstanding at August 31, 2003 would
result in an approximate $514 thousand change in net income. Heritage primarily
incurs debt obligations to support general corporate purposes including capital
expenditures and working capital needs. Heritage's long-term debt instruments
are typically issued at fixed interest rates. When these debt obligations
mature, Heritage may refinance all or a portion of such debt at then-existing
market interest rates which may be more or less than the interest rates on the
maturing debt.

Commodity price risk arises from the risk of price changes in the
propane inventory that Heritage buys and sells. The market price of propane is
often subject to volatile changes as a result of supply or other market
conditions over which Heritage has 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 adequate supply
sources are available to Heritage during periods of high demand, Heritage at
times will purchase significant volumes of propane during periods of low demand,
which generally occur during the summer months, at the then current market
price, for storage both at its customer service locations and in major storage
facilities and for future resale.

Propane Hedging

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 had
entered into these swap instruments in the past to hedge the projected propane
volumes to be purchased during each of the one-month periods during the
projected heating season.

At August 31, 2003, Heritage had no outstanding propane hedges.
Heritage continues to monitor propane prices and may enter into additional
propane hedges in the future. Inherent in the portfolio from the liquids
marketing activities of the Partnership are certain business risks, including
market risk and credit risk. Market risk is the risk that the value of the
portfolio will change, either favorably or unfavorably, in response to changing
market conditions. Credit risk is the risk of loss from nonperformance by
suppliers, customers, or financial counter parties to a contract. Heritage takes
an active role in managing and controlling market and credit risk, and has
established control procedures, which are reviewed on an ongoing basis. Heritage
monitors market risk through a variety of techniques, including routine
reporting to senior management. Heritage attempts to minimize credit risk
exposure through credit policies and periodic monitoring procedures.

Liquids Marketing

Heritage buys and sells derivative financial instruments, which are
within the scope of SFAS 133 and that are not designated as accounting hedges.
Heritage also enters into energy trading contracts, which are not derivatives,
and therefore are not within the scope of SFAS 133. EITF Issue No. 98-10,
Accounting for Contracts Involved in Energy Trading and Risk Management
Activities (EITF 98-10), applied to energy trading contracts not within the
scope of SFAS 133 that were entered into prior to October 25, 2002. The types of
contracts Heritage utilizes in its liquids marketing segment include energy
commodity forward contracts, options, and swaps traded on the over-the-counter
financial markets. In accordance with the provisions of SFAS 133, derivative
financial instruments utilized in connection with Heritages' liquids marketing
activity are accounted for using the mark-to-market method. Additionally, all
energy trading contracts entered into prior to October 25, 2002 were accounted
for using the

31

mark-to-market method in accordance with the provisions of EITF 98-10. Under the
mark-to-market method of accounting, forwards, swaps, options, and storage
contracts are reflected at fair value, and are shown in the consolidated balance
sheet as assets and liabilities from liquids marketing activities. As of August
31, 2002, Heritage adopted the applicable provisions of EITF Issue No. 02-3,
Issues Related to Accounting for Contracts Involved in Energy Trading and Risk
Management Activities (EITF 02-3), which requires that gains and losses on
derivative instruments be shown net in the statement of operations if the
derivative instruments are held for trading purposes. Net realized and
unrealized gains and losses from the financial contracts and the impact of price
movements are recognized in the statement of operations as liquids marketing
revenue. Changes in the assets and liabilities from the liquids marketing
activities result primarily from changes in the market prices, newly originated
transactions, and the timing and settlement of contracts. EITF 02-3 also
rescinds EITF 98-10 for all energy trading contracts entered into after October
25, 2002 and specifies certain disclosure requirements. Consequently, Heritage
does not apply mark-to-market accounting for any contracts entered into after
October 25, 2002 that are not within the scope of SFAS 133. Heritage attempts to
balance its contractual portfolio in terms of notional amounts and timing of
performance and delivery obligations. However, net unbalanced positions can
exist or are established based on management's assessment of anticipated market
movements.

The notional amounts and terms of these financial instruments as of
August 31, 2003 and 2002 include fixed price payor for 45,000 and 1,180,000
barrels of propane, respectively, and fixed price receiver of 195,000 and
1,076,900 barrels of propane, respectively. Notional amounts reflect the volume
of the transactions, but do not represent the amounts exchanged by the parties
to the financial instruments. Accordingly, notional amounts do not accurately
measure Heritage's exposure to market or credit risks.

The fair value of the financial instruments related to liquids
marketing activities as of August 31, 2003 and 2002 was assets of $83 thousand
and $2.3 million, respectively, and liabilities of $80 thousand and $1.8
million, respectively.

Sensitivity Analysis

Estimates related to Heritage's liquids marketing activities are
sensitive to uncertainty and volatility inherent in the energy commodities
markets and actual results could differ from these estimates. A theoretical
change of 10% in the underlying commodity value of the liquids marketing
contracts would result in an approximate $345 thousand change in the market
value of the contracts as there were approximately 6.3 million gallons of net
unbalanced positions at August 31, 2003.

Disclosures about Liquids Marketing Activities Accounted for at Fair
Value

The following table summarizes the fair value of Resources' contracts,
aggregated by method of estimating fair value of the contracts as of August 31,
2003 and 2002, where settlement had not yet occurred. Resources' contracts all
have a maturity of less than 1 year. The market prices used to value these
transactions reflect management's best estimate considering various factors
including closing average spot prices for the current and outer months plus a
differential to consider time value and storage costs.

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The following table summarizes the changes in the unrealized fair value
of Resources' contracts where settlement had not yet occurred for the fiscal
years ended August 31, 2003, 2002 and 2001.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Financial statements set forth on pages F-1 to F-32 of this report
are incorporated herein by reference.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

The Partnership maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Partnership files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission. An evaluation was performed
under the supervision and with the participation of the Partnership's
management, including the Chief Executive Officer and the Chief Financial
Officer of the General Partner of the Partnership, of the effectiveness of the
design and operation of the Partnership's disclosure controls and procedures (as
such terms are defined in Rule 13a-15(e) and 15d-15(e) 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 August 31, 2003. There has been no change in the
Partnership's internal controls over financial reporting (as defined in Rule
13(a)-15 or Rule 15(d)-15(f) of the Exchange Act) or in other factors during the
Partnership's last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Partnership's internal controls over financial
reporting, and there have been no corrective actions with respect to significant
deficiencies and material weaknesses in our internal controls.

It should be noted that any system of disclosure controls and procedures,
however well designed and operated, can provide only reasonable and not absolute
assurance that the objectives of the system are met. In addition, the design of
any system of disclosure controls and procedures is based in part upon
assumptions about the likelihood of future events. Because of these and other
inherent limitations of any such system, there can be no assurance that any
design will always succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

PARTNERSHIP MANAGEMENT

The Partnership does not directly employ any persons responsible for
its management or operations. Prior to the February 4, 2002 Special Meeting of
the Common Unitholders of the Partnership, all of the Partnership's activities
were managed and operated by its General Partner, Heritage Holdings. Persons
employed to manage and operate the activities of the Partnership and its
subsidiaries were employees, officers or directors of Heritage Holdings.

Following Common Unitholder approval of the substitution of U.S. Propane as
General Partner of the Partnership, the Partnership's activities have been
managed and operated by U.S. Propane L.P. Former employees of Heritage Holdings
became employees of U.S. Propane L.P. Officers and directors of Heritage
Holdings were appointed officers and directors of U.S. Propane's General
Partner, USP LLC. Each of the thirteen members of the Board of Directors of
Heritage Holdings was appointed, individually, a manager of USP LLC, and
collectively, such persons are referred to as the Board of Directors. The Board
of Directors of USP LLC is comprised of its Chairman, its President and Chief
Executive Officer, two persons designated by each of its four members, and three
independent persons approved by a majority of the members. In the event the
transactions announced on November 6, 2003 are completed, the agreements
referenced in the announcement provide that effective concurrently with the
closing of these transactions, ten members of the thirteen members of the Board
of Directors of the General Partner (the "Board"), including the eight members
of the Board appointed by the Previous Owners, will resign, and the remaining
three independent members have agreed to resign upon the request of La Grange
Energy. La Grange Energy will have the right to appoint individuals to fill 12
of the 13 vacancies on the Board, and the Previous Owners will have the right to
appoint one individual to serve as a member of the Board for as long as the
promissory note for the HHI Units remains outstanding.

The Board of Directors appoints members of the Board to serve on the
Independent Committee with the authority to review specific matters to which the
Board of Directors believes there may be a conflict of interest in order to
determine if the resolution of such conflict proposed by the General Partner is
fair and reasonable to the Partnership. Any matters approved by the Independent
Committee will be conclusively deemed to be fair and reasonable to the
Partnership, approved by all partners of the Partnership and not a breach by the
General Partner or its Board of Directors of any duties they may owe the
Partnership or the Unitholders. Bill W. Byrne, Stephen L. Cropper, and J.
Charles Sawyer were appointed to serve as the members of the Independent
Committee of the Board of Directors of Heritage Holdings in October of 2001,
appointed as members of the Independent Committee of the Board of Directors of
USP LLC on February 4, 2002, and reappointed in October 2002.

AUDIT COMMITTEE

The Board of Directors appoints persons who are neither officers of USP
LLC nor employees of the General Partner or any affiliate of the Partnership to
serve on its Audit Committee. The Board has determined that based on relevant
experience, audit committee member Stephen L. Cropper is an Audit Committee
financial expert. A description of Mr. Cropper's qualifications may be found
elsewhere in this Item 10 under "Directors and Executive Officers of the General
Partner." The Board has also determined that Mr. Cropper is independent of
management. The Audit Committee meets on a scheduled basis with the
Partnership's independent accountants and is available to meet at their request.
The Audit Committee has the authority and responsibility to review external
financial reporting of the Partnership, to review the Partnership's procedures
for internal auditing and the adequacy of the Partnership's internal accounting
controls, to consider the qualifications and independence of the Partnership's
independent accountants, to engage the Partnership's independent accountants,
and to review the letter of engagement and statement of fees relating to the
scope of the annual audit work and special audit work which may be recommended
or required by the independent accountants. The Audit Committee reviews and
discusses the audited financial statements with management, discusses with the
Partnership's independent auditors matters required to be discussed by SAS 61,
Communications with Audit Committees, and makes recommendations to the Board of
Directors relating to the Partnership's audited financial statements. On
February 4, 2002, the Board of Directors of

34

USP LLC adopted the Charter for the Audit Committee previously adopted by
Heritage Holdings. Any matters approved by the Audit Committee will be
conclusively deemed to be fair and reasonable to the Partnership, approved by
all partners of the Partnership and not a breach by the General Partner or its
Board of Directors of any duties they may owe the Partnership or the
Unitholders. Bill W. Byrne, Stephen L. Cropper, and J. Charles Sawyer were
appointed to serve as members of the Audit Committee of the Board of Directors
of Heritage Holdings in October of 2001, appointed as members of the Audit
Committee of the Board of Directors of USP LLC on February 4, 2002, and
reappointed in October 2002.

CODE OF ETHICS

The Board has adopted a code of ethics for our General Partner's principal
executive officer, principal financial officer, principal accounting officer or
controller and/or those persons performing similar functions. This code can be
viewed on Heritage's website at www.heritagepropane.com. Amendments to, or
waivers from, the code will be available on Heritage's website, however, any
technical, administrative or other non-substantive amendments to the code may
not be posted. Please note that the preceding Internet address is for
information purposes only and is not intended to be a hyperlink. Accordingly, no
information found and/or provided at such Internet addresses or at Heritage's
website in general is intended or deemed to be incorporated by reference herein.

EMPLOYEE MATTERS

The Partnership does not directly employ any of the persons responsible
for managing or operating the Partnership. As of August 31, 2003, the General
Partner or subsidiaries of the Partnership employed 2,418 full time individuals.
The employment agreements with Messrs. Bertelsmeyer and Krimbill specify that
they serve as Chairman of the Board and President and Chief Executive Officer,
respectively.

DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER

The following table sets forth certain information with respect to the
executive officers and members of the Board of Directors as of October 31, 2003.
Executive officers and directors are elected for one-year terms.

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

(2) Elected Vice President and Chief Financial Officer July 2002.

(3) Elected an Executive Officer July 2000.

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

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

(6) Elected to the Board of Directors April 2002.

(7) Elected to the Board of Directors October 2002.

H. Michael Krimbill. Mr. Krimbill joined Heritage as Vice President and
Chief Financial Officer in 1990 and was previously Treasurer of a publicly
traded, fully integrated oil company. Mr. Krimbill was promoted to President of
Heritage in April 1999 and to Chief Executive Officer in March 2000.

James E. Bertelsmeyer. Mr. Bertelsmeyer has over 28 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 founded Heritage and served as Chief Executive Officer of Heritage
since its formation until the election of H. Michael Krimbill in March 2000. Mr.
Bertelsmeyer began his career with Conoco Inc. where he spent ten years in
positions of increasing responsibility in the pipeline and gas products
departments. Mr. Bertelsmeyer has been a director of the NPGA for the past 28
years, and is a former president of the NPGA.

R. C. Mills. Mr. Mills has over 40 years of experience in the propane
industry. Mr. Mills joined Heritage in 1991 as Executive Vice President and
Chief Operating Officer. Before coming to Heritage, Mr. Mills spent 25 years
with Texgas Corporation and its successor, Suburban Propane, Inc. At the time he
left Suburban in 1991, Mr. Mills was Vice President of Supply and Wholesale.

Michael L. Greenwood. Mr. Greenwood became Heritage's Vice President
and Chief Financial Officer, on July 1, 2002. Prior to joining Heritage, Mr.
Greenwood was Senior Vice President, Chief Financial Officer and Treasurer for
Alliance Resource Partners, L.P., a publicly traded master limited partnership
involved in the production and marketing of coal. Mr. Greenwood brings to
Heritage over 20 years of diverse financial and management experience in the
energy industry during his career with several major public energy companies
including MAPCO Inc., Penn Central Corporation, and The Williams Companies.

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

Mark A. Darr. Mr. Darr has 18 years in the propane industry. Mr. Darr
joined Heritage in 1991 and has held various positions including District
Manager and Vice President and Regional Manager before his election to Vice
President - Southern Operations, in July 2000. Prior to joining Heritage, Mr.
Darr held various positions with Texgas Corporation, and its successor, Suburban
Propane. He is a past President of the Florida Propane Gas Association, the
Florida Director of the NPGA, and a member of the LP Gas Bureau State Advisory
Council

Thomas H. Rose. Mr. Rose has 27 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

36

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

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

J. Charles Sawyer. Mr. Sawyer is the President and Chief Executive
Officer of Sawyer Cellars. Mr. Sawyer is also the President and Chief Executive
Officer of Computer Energy, Inc., a provider of computer software to the propane
industry since 1981. Mr. Sawyer was Chief Executive Officer of Sawyer Gas Co., a
regional propane distributor, until it was purchased by Heritage in 1991. Mr.
Sawyer has served as a director of Heritage since 1991 and is a member of both
the Independent Committee and the Audit Committee. Mr. Sawyer is a former
president and director of the NPGA.

Stephen L. Cropper. Mr. Cropper spent 25 years with The Williams
Companies before retiring in 1998, as President and Chief Executive Officer of
Williams Energy Services. Mr. Cropper is a director of Rental Car Finance
Corporation, a subsidiary of Dollar Thrifty Automotive Group. He is a director
and serves as the audit committee financial expert of Berry Petroleum Company.
Mr. Cropper also serves as a director, chairman of the audit committee and
member of the compensation committee of Sun Logistics Partners L.P. Mr. Cropper
is a director and serves as the chairman of the compensation committee of
QuikTrip Corporation. Mr. Cropper has served as a director of Heritage since
April 2000 and is a member of the both the Independent Committee and the Audit
Committee.

J. Patrick Reddy. Mr. Reddy is the Senior Vice President and Chief
Financial Officer of Atmos Energy and has held that position since October 2000.
Prior to being named to that position, Mr. Reddy served as Atmos Energy's Senior
Vice President, Chief Financial Officer and Treasurer from March 2000 to
September 2000, and its Vice President of Corporate Development and Treasurer
during the period from December 1998 to April 2000. Prior to joining Atmos
Energy in August 1998 as Vice President, Corporate Development, Mr. Reddy held a
number of management positions with Pacific Enterprises, Inc. during the period
from 1980 to 1998, including Vice President, Planning & Advisory Services from
1995 to August 1998. Mr. Reddy has served as a director of Heritage since August
2000 and is a member of the Compensation Committee.

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

William N. Cantrell. Mr. Cantrell currently serves as President of
Tampa Electric Company, the largest TECO subsidiary, engaged in the regulated
electric and gas industry. Mr. Cantrell has been employed with TECO since 1975.
At the time of the formation of U.S. Propane, Mr. Cantrell was the President of
Peoples Gas Company, a regional propane distributor serving the Florida market.
Mr. Cantrell has served as a director of Heritage since August 2000.

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

37

JD Woodward III. Mr. Woodward has served as Senior Vice President of
Non-Utility Operations of Atmos Energy since April 2001, and is responsible for
Atmos Energy's non-regulated business activities. Prior to being named to that
position, Mr. Woodward held the position of President of Woodward Marketing,
L.L.C., in Houston, Texas from January 1995 to March 2001. Mr. Woodward was
named a director of Heritage in October 2001.

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

Kevin M. O'Hara. Mr. O'Hara is Vice President of Corporate Planning for
Charlotte-based Piedmont Natural Gas. Mr. O'Hara joined Piedmont Natural Gas in
1987 and his current responsibilities include the development and implementation
of corporate strategies related to system expansion and organization
development. In addition, Mr. O'Hara has responsibility for non-regulated
business activities of Piedmont Natural Gas. His prior work experience was with
Andersen Consulting (now Accenture) where he started his career in their Chicago
office. Mr. O'Hara was elected a director of Heritage in April 2002.

Andrew W. Evans. Mr. Evans is the Vice President of Finance and
Treasurer of AGL Resources. He has held that position since May 2002. Prior
thereto Mr. Evans was with Mirant Corporation where he served as Vice President
of Corporate Development for Mirant Americas business unit, and prior to that
Vice President and Treasurer for Mirant Americas. During his tenure with Mirant,
he oversaw market analysis and structured product development for the energy
marketing business. He also served as Director of Finance for Mirant's trading
business, Mirant Americas Energy Marketing. Prior to Mirant, Evans was employed
by the Cambridge, MA office of National Economic Research Associates and the
Federal Reserve Bank of Boston. Mr. Evans was named a director of Heritage in
October 2002.

COMPENSATION OF THE GENERAL PARTNER

The General Partner does not receive any management fee or other
compensation in connection with its management of the Partnership and the
Operating Partnership. The General Partner and its affiliates performing
services for the Partnership and the Operating Partnership are reimbursed at
cost for all expenses incurred on behalf of Heritage, including the costs of
employee compensation allocable to Heritage, and all other expenses necessary or
appropriate to the conduct of the business of, and allocable to, Heritage. These
costs totaled approximately $108.9 million for the year ended August 31, 2003,
$95.7 million for the year ended August 31, 2002, and $93.4 million for the year
ended August 31, 2001.

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

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

Based solely on the Partnership's review of the copies of such forms
received by it, or written representations from certain reporting persons that
no Form 5s were required for those persons, the Partnership believes that during
fiscal year ending August 31, 2003, 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 each of James E. Bertelsmeyer,
Stephen L. Cropper, Mark A. Darr, U.S. Propane, L.L.C., and U.S. Propane, L.P.

38

ITEM 11. EXECUTIVE COMPENSATION.

The following table sets forth the annual salary, bonus and all other
compensation awards and payouts for each of the past three fiscal years earned
by: (i) all persons serving as the Chief Executive Officer of the General
Partner of the Partnership during fiscal year 2003; (ii) the four next highly
compensated executive officers other than the Chief Executive Officer, who
served as executive officers of the General Partner of the Partnership during
fiscal year 2003 and (iii) any persons who would have been reported had they
been an executive officer of the General Partner of the Partnership at the end
of fiscal year 2003.

(1) Bonuses are earned based on the results of operations for each fiscal year.
The payment in any one fiscal year is limited and the excess bonus earned
is deferred until the next fiscal year.

(2) Consists of life insurance premiums.

(3) Consists of the value of Common Units issued pursuant to awards under the
Long-Term Incentive Plan.

(4) Mr. Greenwood was named Chief Financial Officer in July of 2002. Mr.
Greenwood's 2002 salary was annualized.

EMPLOYMENT AGREEMENTS

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

The Employment Agreement for Mr. Bertelsmeyer had an initial term of
two years starting August 2000, with an annual base salary of $193,500. At the
expiration of the term on August 10, 2002, Mr. Bertelsmeyer's employment
agreement became "at will." On April 1, 2003, Mr. Bertelsmeyer's employment
agreement was amended to provide that from and after April 1, 2003, Mr.
Bertelsmeyer shall receive no cash salary for his services to the Partnership,
but shall be entitled to receive, when issued Partnership Common Units from time
to time. The number of Common Units issuable shall be determined on each March 1
and September 1. The number of Common Units issuable will be determined at the
rate of the full number of Common Units resulting from dividing $6,250 by the
numerical average of the ten closing prices of the Common Units on the stock
exchange where they are listed for the ten trading days immediately preceding
the calculation date times the number of full months served under the

39

agreement since the next preceding calculation date. Each semiannual grant shall
vest and be issued five years following the calculation date, provided Mr.
Bertelsmeyer shall have faithfully performed his obligations under the
employment agreement up to and including the applicable issue date. The
Employment Agreements for Messrs. Krimbill, Mills, and Atkinson, (each an
"Executive") had 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 Agreement
for Mr. Greenwood (an "Executive") has an initial term of one year and one month
starting on July 1, 2002. However, beginning on August 10, 2002 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 their
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 party to the
Board and the President and Chief Executive Officer of the Company, or in the
event of the Executive's death. The Employment Agreements for each of Messrs,
Krimbill, Mills, Greenwood, and Atkinson, provide for an annual base salary of
$350,000, $335,000, $240,000, and $200,000, 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 for the Executives to participate in bonus and incentive
plans. The Employment Agreements also provide for the Executive and, where
applicable, the Executive's dependents, to have the right to participate in
benefit plans made available to other executives of Heritage including the
Restricted Unit Plan and the Long-Term Incentive Plan described below.

The Employment Agreements provide that in the event of a change of
control of the ownership of the General Partner or in the event an Executive (i)
is involuntarily terminated (other than for "misconduct" or "disability") or
(ii) voluntarily terminates employment for "good reason" (as defined in the
agreements), such Executive will be entitled to continue receiving his base
salary and to participate in all group health insurance plans and programs that
may be offered to executives of the General Partner for the remainder of the
term of the Employment Agreement or, if earlier, the Executive's death, and the
Executive will vest immediately in the Minimum Award of the number of Common
Units to which the Executive is entitled under the Long Term Incentive Plan to
the extent not previously awarded, and if the executive is terminated as a
result of the foregoing, all restrictions on the transferability of the units
purchased by such executive under the Subscription Agreement dated as of June
15, 2000, previously filed as an exhibit, shall automatically lapse in full on
such date. Pursuant to the transactions announced November 6, 2003, the "change
of control" provisions of the Employment Agreements will be triggered upon
consummation of the acquisition by La Grange Energy of Heritage's general
partner, and will result in the payment of approximately $1.5 million and the
issuance of up to 194,993 Common Units pursuant to their terms. Each Employment
Agreement also provides that if any payment received by an Executive is subject
to the 20% federal excise tax under Section 4999(a) of the Code of the Internal
Revenue Service, the Payment will be grossed up to permit the Executive to
retain a net amount on an after-tax basis equal to what he would have received
had the excise tax and all other federal and state taxes on such additional
amount not been payable. In addition, each Employment Agreement contains
non-competition and confidentiality provisions.

RESTRICTED UNIT PLAN

The Partnership adopted the Amended and Restated Restricted Unit Plan
dated August 10, 2000, amended February 4, 2002 as the Second Amended and
Restated Restricted Unit Plan. (the "Restricted Unit Plan"), previously filed as
exhibits, for certain directors and key employees of the General Partner and its
affiliates. The Restricted Unit Plan covers rights to acquire 146,000 Common
Units. The right to acquire the Common Units under the Restricted Unit Plan,
including any forfeiture or lapse of rights are available for grant to key
employees on such terms and conditions (including vesting conditions) as the
Compensation Committee of the General Partner shall determine. Each director
shall automatically receive a Director's grant with respect to 500 Common Units
on each September 1 that such person continues as a director. Newly elected
directors are also entitled to receive a grant with respect to 2,000 Common
Units upon election or appointment to the Board. Directors who are employees of
U.S. Propane, TECO, Atmos Energy, Piedmont Natural Gas or AGL Resources or their
affiliates are not entitled to receive a Director's grant of Common Units.
Messrs. Bertelsmeyer and Krimbill are not entitled to receive a Director's Grant
of Common Units but may receive Common Units as employees. Generally, the rights
to acquire

40

the Common Units granted will vest upon the occurrence of specified performance
objectives established by the Compensation Committee at the time designations of
grants are made, or if later, the three-year anniversary of the grant date. In
the event of a "change of control" (as defined in the Restricted Unit Plan), all
rights to acquire Common Units pursuant to the Restricted Unit Plan will
immediately vest. Pursuant to the transactions announced November 6, 2003, the
vesting provisions of the Restricted Unit Plan will be triggered, except for
waivers granted there under, upon consummation of La Grange Energy's acquisition
of Heritage's general partner, resulting in the early vesting of any awards
thereunder.

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

The Board of Directors, in its discretion may terminate the Restricted
Unit Plan at any time with respect to any Common Units for which a grant has not
heretofore 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.

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, 2003, 39,400 restricted units granted to non-employee directors and key
employees were outstanding. Compensation expense of $0.2 million, $0.4 million
and $0.3 million was recognized for fiscal years 2003, 2002, and 2001,
respectively. See Note 6 --"Partners' Capital" to the Consolidated Financial
Statements, beginning on page F-1 of this report.

No grants of Common Units under the Restricted Unit Plan to persons
serving as executive officers of the Partnership were made in the last fiscal
year.

LONG-TERM INCENTIVE PLAN

Effective September 1, 2000, the Partnership adopted a long-term
incentive plan whereby units will be awarded to the Executive Officers and other
employees at its discretion based on achieving certain targeted levels of
Distributed Cash (as defined in the Long Term Incentive Plan) per unit. Awards
under the program will be made starting in 2003 based upon the average of the
prior three years Distributed Cash per unit. A minimum of 250,000 units and if
targeted levels are achieved, a maximum of 500,000 units will be awarded under
the Long Term Incentive Plan. During the fiscal year ended August 31, 2003,
66,118 units vested pursuant to the vesting rights of the Long-Term Incentive
Plan and Common Units were issued, and 8,889 units were not awarded and are not
available for future award. Compensation expense of $0.9 million, $1.5 million,
and $0.8 million was recognized for fiscal years 2003, 2002, and 2001,
respectively.

COMPENSATION OF DIRECTORs

The Partnership currently pays no additional remuneration to its
employees for serving as directors of the General Partner. Under the Restricted
Unit Plan, directors other than directors who are employees of U.S. Propane,
Atmos Energy, AGL Resources, TECO and Piedmont Natural Gas, or their affiliates,
will be awarded 500 of these restricted units annually, and newly elected
directors receive an initial award of 2,000 restricted units. The General
Partner will pay each of its non-employee and nonaffiliated directors $10,000
annually, plus $1,000 per board meeting attended and $500 per committee meeting
attended. Each of the members of the Independent Committee received a payment of
$10,000 during fiscal year 2003, as payment for services and expenses rendered
in conjunction with the Partnership's evaluation of potential acquisition
candidates. All expenses associated with compensation of directors will be
reimbursed to the General Partner by the Partnership.

41

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors determines
compensation of the executive officers. Royston K. Eustace, Bill W. Byrne, and
J. Patrick Reddy served as members of the Compensation Committee of the Board of
Directors of Heritage Holdings and as members of the Compensation Committee of
the Board of Directors of USP LLC beginning February 4, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of October 31,
2003, regarding the beneficial ownership of the Partnership's securities by
certain beneficial owners and all directors and named executive officers, both
individually and as a group. The General Partner knows of no other person not
disclosed herein beneficially owning more than 5% of the Partnership's Common
Units.

HERITAGE PROPANE PARTNERS, L.P. UNITS

* Less than one percent (1%)

(1) The address for Mr. Krimbill, Mr. Greenwood, and Mr. Atkinson is 8801 S.
Yale, Suite 310, Tulsa, Oklahoma 74137. The address for U.S. Propane, L.P.
is 702 N. Franklin Street, Tampa, Florida 33602. The address for each of
Messrs. Bertelsmeyer, and Mills is 5000 Sawgrass Village Circle, Suite 4,
Ponte Vedra Beach, Florida 32082. The address for Heritage Holdings is c/o
Brett Stovern, AGL Resources, Inc., 817 W. Peachtree St., Atlanta, Georgia
30308.

42

(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) U.S. Propane, L.P. owns 180,028 Common Units and, by virtue of its
ownership of 100% of Heritage Holdings, may be deemed to beneficially own
the 4,426,916 Common Units owned by Heritage Holdings. U.S. Propane L.L.C.,
as the general partner of U.S. Propane, L.P., may be deemed to beneficially
own the 180,028 Common Units owned by U.S. Propane, L.P and the 4,426,916
Common Units owned by Heritage Holdings. U.S. Propane, L.P. disclaims any
beneficial ownership with respect to the Common Units owned by Heritage
Holdings and U.S. Propane L.L.C. disclaims any beneficial ownership with
respect to the Common Units owned by U.S. Propane, L.P and Heritage
Holdings.

(5) U.S. Propane, L.P. owns 100% of the common stock of Heritage Holdings. AGL
Propane Services, Inc., United Cities Propane Gas, Inc., TECO Propane
Ventures, LLC and Piedmont Propane Company own a 22.358%, 18.968%, 37.976%
and 20.688%, respectively, limited partner interest in U.S. Propane, L.P.
U.S. Propane, L.L.C. is the General Partner of U.S. Propane, L.P. with a
0.01% general partner interest. The members of U.S. Propane L.L.C. and
their respective membership interest is as follows:

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Computer Energy, Inc., ("Computer Energy") is a provider of computer
software to the propane industry. During fiscal year 2003, purchases of computer
software and/or additional licenses from Computer Energy were made by and
utilized in Heritage's propane operations. The total amount of purchases made by
Heritage in fiscal year 2003 did not exceed $70,000, and were made under terms
no less favorable than those available from other computer software providers.
J. Charles Sawyer is the President and owner of 50% of the stock of Computer
Energy. The Board of Directors has determined that Mr. Sawyer's stock ownership
of Computer Energy and its relationship as a supplier of computer software to
Heritage is not significant and does not affect his independence as a director
of the General Partner of the Partnership.

Heritage has entered into an agreement with TECO Partners, Inc. ("TECO
Partners") whereby TECO Partners will provide services relating to the securing
of new propane customers in Heritage's Florida regional operations area. Under
the agreement, TECO Partners receives commissions upon the procuring of new
propane customers for Heritage. The terms of the agreement are no less favorable
to Heritage than those available from other parties providing similar services.
During fiscal year 2003, TECO Partners received commissions of less than
$200,000.

43

PART IV

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Principal Accounting Fees and Services disclosure is effective for
filings related to fiscal years ending after December 15, 2003, and therefore is
not applicable to this filing.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) 1. FINANCIAL STATEMENTS.

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

2. FINANCIAL STATEMENT SCHEDULES.

None.

3. EXHIBITS.

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

(b) REPORTS ON FORM 8-K.

The Registrant filed one report on Form 8-K during the three
months ended August 31, 2003.

Form 8-K dated July 25, 2003 was filed to provide the tables
reconciling EBITDA to net income for Heritage's annual report on
Form 10-K for the fiscal year ended August 31, 2002 and quarterly
report on Form 10-Q for the quarter ended November 30, 2002.

44

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 U.S. Propane L.P., its General Partner.
By U.S. Propane, L.L.C., its General Partner

By: /s/ H. Michael Krimbill
---------------------------------------------
H. Michael Krimbill
President and Chief Executive Officer and
officer duly authorized to sign on behalf of
the registrant

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:

46

INDEX TO FINANCIAL STATEMENTS

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES

F-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Partners
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, as of August
31, 2003 and 2002 and the related consolidated statements of operations,
comprehensive income (loss), partners' capital, and cash flows for each of the
three years in the period ended August 31, 2003. 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 of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Heritage Propane
Partners, L.P. and subsidiaries as of August 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the three years in the
period ended August 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.

As explained in Note 2 to the consolidated financial statements, effective
September 1, 2002, the Partnership changed its method of accounting for
stock-based compensation plans and adopted the fair value recognition provisions
of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation following the modified prospective method of adoption
described in Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure.

/s/ Grant Thornton LLP

Tulsa, Oklahoma
October 24, 2003 (except for Note 12, as to which the date is November 6, 2003)

F-2

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES

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

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

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

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

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

F-7

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

The accompanying notes are an integral part of these financial statements

F-8

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES

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

1. OPERATIONS AND ORGANIZATION:

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 from nearly 300 customer
service locations 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. On May 31,
2003 Guilford Gas Service, Inc., was merged with the Operating Partnership. The
surviving limited partnership of the merger was the Operating Partnership. A
minority interest liability and minority interest expense is recorded for all
partially owned subsidiaries. Heritage accounts for its 50% partnership interest
in Bi-State Propane, a propane retailer in the states of Nevada and California,
under the equity method. All significant intercompany transactions and accounts
have been eliminated in consolidation. The accounts of the Operating Partnership
are included based on the determination that Heritage possesses a controlling
financial interest through a direct ownership of a 98.9899% voting interest and
its ability to exert control over the Operating Partnership.

For purposes of maintaining partner capital accounts, 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 years ended August 31, 2003 and 2002, 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 year ended August 31, 2001, the
1.0101% general partner interest of the former General Partner, Heritage
Holdings, and U.S. Propane's 1.0101% limited partner interest in the Operating
Partnership were accounted for in the consolidated financial statements as
minority interests.

REVENUE RECOGNITION

Sales of propane, propane appliances, parts, and fittings are recognized at the
later of the time of delivery of the product to the customer or the time of sale
or installation. Revenue from service labor is recognized upon completion of the
service and tank rent is recognized ratably over the period it is earned.
Shipping and handling revenues are included in the price of propane charged to
customers, and thus are classified as revenues.

COSTS AND EXPENSES

Costs of products sold include actual cost of fuel sold adjusted for the effects
of qualifying cash flow hedges, storage fees and inbound freight, and the cost
of appliances, parts, and fittings. Operating expenses include all costs

F-9

incurred to provide products to customers, including compensation for operations
personnel, insurance costs, vehicle maintenance, advertising costs, shipping and
handling costs, purchasing costs, and plant operations. Selling, general and
administrative expenses include all corporate expenses and compensation for
corporate personnel.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include all cash on hand, demand deposits, and
investments with original maturities of three months or less. The Partnership
considers cash equivalents to include short-term, highly liquid investments that
are readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.

ACCOUNTS RECEIVABLE

Heritage grants credit to its customers for the purchase of propane and
propane-related products. Accounts receivable are recorded at 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. The Partnership recorded
bad debt expense net of recoveries of $2,578, $887, and $4,055 for the years
ended August 31, 2003, 2002, and 2001, respectively. Accounts receivable
consisted of the following:

The activity in the allowance for doubtful accounts consisted of the following
during the years ending:

INVENTORIES

Inventories are valued at the lower of cost or market. The cost of fuel
inventories is determined using weighted-average cost of fuel delivered to the
retail districts and includes storage fees and inbound freight costs, while the
cost of appliances, parts, and fittings is determined by the first-in, first-out
method. Inventories consisted of the following:

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Expenditures for maintenance and repairs are
expensed as incurred. Expenditures to refurbish tanks that either extend the
useful lives of the tanks or prevent environmental contamination are capitalized
and depreciated over the remaining useful life of the tanks.

F-10

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:

Aggregate amortization expense of intangible assets was $7,811, $8,152, and
$6,879 for the years ended August 31, 2003, 2002 and 2001 respectively. The
estimated aggregate amortization expense for the next five fiscal years is
$7,284 for 2004; $6,980 for 2005; $6,476 for 2006; $6,163 for 2007, and $5,348
for 2008.

GOODWILL

Goodwill is associated with acquisitions made for Heritage's domestic retail
segment; therefore, all goodwill is recorded in this segment. Of the $156,595
balance in goodwill, $23,923 is expected to be tax deductible. Goodwill is
tested for impairment at the end of each fiscal year end in accordance with SFAS
142. The changes in the carrying amount of goodwill for the years ended August
31, 2002 and 2003 were as follows:

F-11

Balance as of August 31, 2001 $ 153,404
Goodwill acquired during the year 6,464
Impairment losses --
Goodwill written off to sale of business (4,133)
------------
Balance as of August 31, 2002 155,735

Goodwill acquired during the year 860
Impairment losses --
------------
Balance as of August 31, 2003 $ 156,595
============

LONG-LIVED ASSETS

Heritage reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If such a review should indicate that the carrying amount of
long-lived assets is not recoverable, Heritage reduces the carrying amount of
such assets to fair value. No impairment of long-lived assets was recorded
during the years ended August 31, 2003, 2002, and 2001.

ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and other current liabilities consisted of the following:

INCOME TAXES

Heritage is a master limited partnership. As a result, Heritage's earnings or
losses for federal and state income tax purposes are included in the tax returns
of the individual partners. Accordingly, no recognition has been given to income
taxes in the accompanying financial statements of Heritage except those incurred
by corporate subsidiaries of Heritage that are subject to income taxes. On May
31, 2003 Guilford Gas Service, Inc., one of the Partnership's taxable
subsidiaries was merged with the Operating Partnership. Taxes recorded in
connection with this liquidation were approximately $250. 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. As of August 31, 2003
and 2002, there was a liability of $500 and $0 recorded for income taxes
incurred by Heritage's corporate subsidiaries, respectively.

STOCK BASED COMPENSATION PLANS

During the fourth quarter of 2003, Heritage adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123 Accounting for
Stock-based Compensation (SFAS 123) effective as of September 1, 2002. Heritage
adopted the fair value recognition provisions following the modified prospective
method of adoption described in Statement of Financial Accounting Standards No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS
148). Following adoption, deferred compensation expense that is recognized in

F-12

the financial statements will be the same as that which would have been
recognized had the fair value recognition provisions of SFAS 123 been applied to
all awards under the Restricted Unit Plan and the Long Term Incentive Plan
granted after October 1, 1995.

SFAS 123 requires that significant assumptions be used during the year to
estimate the fair value, which includes the risk-free interest rate used, the
expected life of the grants under each of the plans and the expected
distributions on each of the grants. Heritage assumed a weighted average risk
free interest rate of 5.72% for the year ended August 31, 2003, 6.18% for the
year ended August 31, 2002 and 5.96% for the year ended August 31, 2001 in
estimating the present value of the future cash flows of the distributions
during the vesting period on the measurement date of each grant. Annual average
cash distributions at the grant date were estimated to be $2.39 for the year
ended August 31, 2003, $2.37 for the year ended August 31, 2002, and $2.35 for
the year ended August 31, 2001. The expected life of each grant is assumed to be
the minimum vesting period under certain performance criteria of each grant. The
following table illustrates the effect on limited partners' interest in net
income (loss) and the basic and diluted net income (loss) per limited partner
unit if Heritage had applied the fair value recognition provisions of SFAS 123
to the Restricted Unit Plan and the Long-Term Incentive Plan for all periods
presented.

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 and Subordinated 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 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
and weighted average units used in computing basic and diluted earnings per unit
is as follows:

F-13

DILUTED NET INCOME PER LIMITED PARTNER UNIT:
Limited partners' interest in net income $ 29,823 $ 3,984 $ 18,879
============= ============= =============

Weighted average limited partner units 16,635,966 15,738,621 13,223,184
Dilutive effect of Phantom Units 58,377 38,686 31,724
------------- ------------- -------------
Weighted average limited partner units,
assuming dilutive effect of Phantom Units 16,694,343 15,777,307 13,254,908
============= ============= =============

Diluted net income per limited partner unit $ 1.79 $ 0.25 $ 1.42
============= ============= =============

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Some of the more significant estimates made by
management include, but are not limited to, allowances for doubtful accounts,
derivative hedging instruments, liquids marketing assets and liabilities,
purchase accounting allocations and subsequent realizability of intangible
assets, and general business and medical self-insurance reserves. Actual results
could differ from those estimates.

RECLASSIFICATIONS

Certain prior period amounts have been reclassified to conform with the 2003
presentation. These reclassifications have no impact on net income or partners'
capital.

FAIR VALUE

The carrying amounts of accounts receivable and accounts payable approximate
their fair value. Based on the estimated borrowing rates currently available to
Heritage for long-term loans with similar terms and average maturities, the
aggregate fair value and carrying amount of long-term debt at August 31, 2003
was $421,579 and $399,071, respectively. The fair value and carrying amount of
long-term debt at August 31, 2002 was approximately $470,264 and $440,179,
respectively.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS
133). SFAS 133 requires that all derivatives be recognized in the balance sheet
as either an asset or liability measured at fair value. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statement of operations. Heritage adopted the
provisions of SFAS 133 on September 1, 2000. The cumulative effect of adopting
SFAS 133 was an adjustment to accumulated other comprehensive income of $5,429.

Heritage had certain call options that settled during the year ended August 31,
2003 that were designated as cash flow hedging instruments in accordance with
SFAS 133. The call options gave Heritage the right, but not the obligation, to
buy a specified number of gallons of propane at a specified price at any time
until a specified expiration date. Heritage entered into these options to hedge
pricing on the forecasted propane volumes to be purchased during each of the
one-month periods ending February 2003 and March 2003. Heritage utilized hedging
transactions to provide price protection against significant fluctuations in
propane prices. During the years ended August 31, 2003, 2002, and 2001, Heritage
reclassified into earnings through cost of products sold, a gain of $553, a loss
of $7,016, and a gain of $3,844 respectively, that were previously reported in
accumulated other comprehensive income (loss). There were no such financial
instruments outstanding as of August 31, 2003.

F-14

GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible
Assets (SFAS 142). Under SFAS 142, goodwill is no longer subject to amortization
over its estimated useful life. Rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value-based test.
Additionally, any acquired intangible assets should be separately recognized if
the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented or exchanged, regardless of the acquirer's intent to do so. Those assets
will be amortized over their useful lives, other than assets that have an
indefinite life.

Heritage adopted SFAS 142 on September 1, 2001 and accordingly has discontinued
the amortization of goodwill. Under the provisions of SFAS 142, Heritage was
required to perform a transitional goodwill impairment appraisal within six
months from the time of adoption. Management completed an assessment of the fair
value of each of Heritage's operating segments, which were compared with the
carrying value of each segment to determine whether any impairment existed on
the date of adoption. Heritage completed the transitional goodwill impairment
appraisal and has determined that based on the fair value of Heritage's
operating segments, Heritage's goodwill was not impaired as of September 1,
2001. Management has determined that a detailed evaluation of the Partnership's
operating segments as of August 31, 2003 is not necessary based on the fact that
there has not been a significant change in the components of the Partnership's
operating segments since the last evaluation, the previous fair value of the
Partnership's operating segments substantially exceeded the carrying value, and
the likelihood that the Partnership's operating segments current carrying value
exceeds its current fair value is remote based on an analysis of events and
circumstances since the Partnership's most recent evaluation. Accordingly, no
impairment of the Partnership's goodwill was recorded for the year ended August
31, 2003. The Partnership will continue to test goodwill for impairment as of
the end of each fiscal year. The adoption of SFAS 142 eliminated goodwill
amortization that would have totaled approximately $5,704 for the each of the
years ended August 31, 2003 and 2002, based on the balances as of August 31,
2001, and totaled approximately $4,910 for the year ended August 31, 2001.

The following table reflects the effect of the adoption of SFAS 142 on net
income as if SFAS 142 had been in effect for all of the periods presented:

F-15

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 year ended August 31, 2003, Heritage determined there was
a non-temporary decline in the market value of its available-for-sale
securities, and reclassified into earnings a loss of $2,823, which is net of
minority interest and is recorded in other expense. Unrealized holding gains
(losses) of $480, $(1,575), and $(2,077) for the years ended August 31, 2003,
2002, and 2001, respectively, were recorded through accumulated other
comprehensive income (loss) based on the market value of the securities.

LIQUIDS MARKETING ACTIVITIES

Heritage buys and sells derivative financial instruments, which are within the
scope of SFAS 133 and that are not designated as accounting hedges. Heritage
also enters into energy trading contracts, which are not derivatives, and
therefore are not within the scope of SFAS 133. EITF Issue No. 98-10, Accounting
for Contracts Involved in Energy Trading and Risk Management Activities (EITF
98-10), applied to energy trading contracts not within the scope of SFAS 133
that were entered into prior to October 25, 2002. The types of contracts
Heritage utilizes in its liquids marketing segment include energy commodity
forward contracts, options, and swaps traded on the over-the-counter financial
markets. In accordance with the provisions of SFAS 133, derivative financial
instruments utilized in connection with Heritages' liquids marketing activity
are accounted for using the mark-to-market method. Additionally, all energy
trading contracts entered into prior to October 25, 2002 were accounted for
using the mark-to-market method in accordance with the provisions of EITF 98-10.
Under the mark-to-market method of accounting, forwards, swaps, options, and
storage contracts are reflected at fair value, and are shown in the consolidated
balance sheet as assets and liabilities from liquids marketing activities. As of
August 31, 2002, Heritage adopted the applicable provisions of EITF Issue No.
02-3, Issues Related to Accounting for Contracts Involved in Energy Trading and
Risk Management Activities (EITF 02-3), which requires that gains and losses on
derivative instruments be shown net in the statement of operations if the
derivative instruments are held for trading purposes. Net realized and
unrealized gains and losses from the financial contracts and the impact of price
movements are recognized in the statement of operations as liquids marketing
revenue. Changes in the assets and liabilities from the liquids marketing
activities result primarily from changes in the market prices, newly originated
transactions, and the timing and settlement of contracts. EITF 02-3 also
rescinds EITF 98-10 for all energy trading contracts entered into after October
25, 2002 and specifies certain disclosure requirements. Consequently, Heritage
does not apply mark-to-market accounting for any contracts entered into after
October 25, 2002, that are not within the scope of SFAS 133. Heritage attempts
to balance its contractual portfolio in terms of notional amounts and timing of
performance and delivery obligations. However, net unbalanced positions can
exist or are established based on management's assessment of anticipated market
movements.

The notional amounts and terms of these financial instruments as of August 31,
2003 and 2002 include fixed price payor for 45 and 1,180 barrels of propane,
respectively, and fixed price receiver of 195 and 1,076 barrels of propane,
respectively. Notional amounts reflect the volume of the transactions, but do
not represent the amounts exchanged by the parties to the financial instruments.
Accordingly, notional amounts do not accurately measure Heritage's exposure to
market or credit risks.

Estimates related to Resource's liquids marketing activities are sensitive to
uncertainty and volatility inherent in the energy commodities markets and actual
results could differ from these estimates. A theoretical change of 10% in the
underlying commodity value of the liquids marketing contracts would result in an
approximate $345 change in the market value of the contracts as there were
approximately 6.3 million gallons of net unbalanced positions at August 31,
2003.

Inherent in the resulting contractual portfolio are certain business risks,
including market risk and credit risk. Market risk is the risk that the value of
the portfolio will change, either favorably or unfavorably, in response to
changing market conditions. Credit risk is the risk of loss from nonperformance
by suppliers, customers, or financial counterparties to a contract. Heritage 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.

F-16

The following table summarizes the fair value of Resources' contracts,
aggregated by method of estimating fair value of the contracts as of August 31,
2003 and 2002 where settlement had not yet occurred. Resources' contracts all
have a maturity of less than 1 year. The market prices used to value these
transactions reflect management's best estimate considering various factors
including closing average spot prices for the current and outer months plus a
differential to consider time value and storage costs.

The following table summarizes the changes in the unrealized fair value of
Resources' contracts where settlement had not yet occurred for the fiscal years
ended August 31, 2003, 2002 and 2001.

The following table summarizes the gross transaction volumes in barrels for
liquids marketing contracts that were physically settled for the years ended
August 31, 2003, 2002 and 2001:

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. Heritage adopted the provisions of SFAS 146

F-17

effective for exit or disposal activities that are initiated after December 31,
2002. The adoption did not have a material impact on the Partnership's
consolidated financial position or results of operations.

In November 2002, the FASB issued Financial Interpretation No. 45 Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 expands the existing
disclosure requirements for guarantees and requires that companies recognize a
liability for guarantees issued after December 31, 2002. The implementation of
FIN 45 did not have a significant impact on Heritage's financial position or
results of operations.

In January 2003, the FASB issued Financial Interpretation No. 46 Consolidation
of Variable Interest Entities - An Interpretation of ARB No. 51 (FIN 46). FIN 46
clarifies Accounting Research Bulletin No. 51, Consolidated Financial
Statements. If certain conditions are met, this interpretation requires the
primary beneficiary to consolidate certain variable interest entities in which
equity investors lack the characteristics of a controlling interest or do not
have sufficient equity investment at risk to permit the variable interest entity
to finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective immediately for variable interest entities
created or obtained after January 31, 2003. For variable interest entities
acquired before February 1, 2003, the interpretation is effective for the first
fiscal year or interim period beginning after June 15, 2003. Management does not
believe FIN 46 will have a significant impact on Heritage's financial position
or results of operations.

In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments embedded
in other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS 133. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. Heritage adopted SFAS 149 as of July 1, 2003. The adoption of
SFAS 149 did not have a material impact on the Partnership's consolidated
financial position or results of operations.

In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within the scope
of SFAS 150 as a liability (or an asset in some circumstances). This statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. Heritage adopted the provisions of SFAS 150 as of
September 1, 2003. The adoption did not have a material impact on the
Partnership's consolidated financial position or results of operations.

3. ACQUISITIONS

On January 2, 2003, Heritage purchased the propane assets of V-1 Oil Co. ("V-1")
of Idaho Falls, Idaho for total consideration of $35.4 million after
post-closing adjustments. The acquisition price was payable $20.0 million in
cash, with $17.3 million of that amount financed by the Acquisition Facility,
and by the issuance of 551,456 Common Units of Heritage valued at $15.0 million,
and assumed $0.4 million in liabilities. V-1's propane distribution network
included 35 customer service locations in Colorado, Idaho, Montana, Oregon,
Utah, Washington, and Wyoming. Heritage was able to expand its market presence
in the Northwest and achieve a greater geographical balance through the
transaction with V-1. This acquisition enhanced Heritage's current operations
and reduced costs through synergies with existing operations in locations in
which Heritage was already conducting business. The results of operations of V-1
from January 2, 2003 to August 31, 2003 are included in the consolidated
statement of operations of Heritage for the year ended August 31, 2003.

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

F-18

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. The following table summarizes the
estimated fair values of the assets acquired and liabilities assumed of V-1 as
of the date of acquisition:

Of the total amount assigned to goodwill, $20 is expected to be deductible for
tax purposes.

During the year ended August 31, 2003, Heritage also acquired substantially all
of the assets of four other companies, which included V-1 Oil Company of
Spokane, Washington, Stegall Petroleum located in North Carolina, 1st Propane of
Boise Idaho, and Love Propane Gas located in South Carolina. Heritage also
purchased the stock of Tri-Cities Gas Company, Inc. located in Alabama. The
aggregate purchase price for these acquisitions totaled $6.4 million, which
included liabilities assumed and non-compete agreements of $1.4 million for
periods ranging from five to ten years. In the aggregate, these acquisitions are
not material for proforma disclosure purposes. These acquisitions were financed
primarily with the acquisition facility and were accounted for by the purchase
method under SFAS 141. Heritage has historically accounted for business
combinations using the purchase method; therefore, the guidelines of SFAS 141
did not have a significant impact on how the Partnership accounted for these
acquisitions.

During the year ended August 31, 2002, Heritage purchased the stock of Virginia
Gas Propane Company, Inc., in Virginia, Mt. Pleasant Propane, Inc. in Tennessee
and two other smaller companies. Heritage also acquired substantially all of the
assets of six companies, which included Tri-County Propane, Inc., located in
North Carolina, Franconia Gas Corporation located in New Hampshire and Quality
Gas, Inc. also located in North Carolina. The aggregate purchase price for these
acquisitions totaled $24,915, which included liabilities assumed and non-compete
agreements of $5.2 million for periods ranging from five to ten years. In the
aggregate, these acquisitions are not material for proforma disclosure purposes.
These acquisitions were financed primarily with the acquisition facility and
were accounted for by the purchase method under SFAS 141.

Heritage recorded the following intangible assets in conjunction with these
acquisitions as of August 31, 2003 and 2002:

F-19

Goodwill was warranted because these acquisitions enhance Heritage's current
operations and certain acquisitions are expected to reduce costs through
synergies with existing operations. Heritage assigned all of the goodwill
acquired to the retail operating segment of the Partnership. The results of
operations from these acquisitions are included on the Partnership's statement
of operations from the dates acquired.

On July 31, 2001, Heritage purchased the propane operations of ProFlame, Inc.
and subsidiaries and affiliates (ProFlame) located in California and Nevada, in
a series of mergers, stock purchases, and asset purchases. The aggregate
purchase price was $56,201 net of cash acquired of $6,518. The purchase price
included $42,695 paid in cash, of which $2,958 related to preliminary working
capital, and liabilities assumed of $9,056. In addition, a total of 158,917
Common Units valued at $4,450 were payable in connection with the assumption of
certain liabilities by Heritage Holdings. Although Heritage Holdings was
entitled to 158,917 Common Units as a result of this transaction, it agreed to
forego the issuance of 1,605 units and 1,638 units, which represented its
capital contributions to maintain its 1% interest in the Partnership and its
1.0101% interest in the Operating Partnership, respectively, in relation to this
transaction. Heritage Holdings also agreed to forego the issuance of an
additional 25,773 Common Units to which it was entitled in the ProFlame
acquisition to maintain its 1.0101% interest in the Operating Partnership as a
result of the July 31, 2001 public offering. The Partnership issued 129,901
Common Units to Heritage Holdings with a fair value of $28.00 per unit.

The results of operations of ProFlame are included in the consolidated statement
of operations of Heritage for the years ended August 31, 2003 and 2002.

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

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

During 2001, Heritage purchased all of the common stock of EnergyNorth Propane,
Inc. and its VGS Propane, LLC subsidiary in northern New England, and all of the
stock of one other small company. Heritage acquired substantially all of the
assets of seven other companies during the fiscal year ended August 31, 2001.
These acquisitions totaled $60,473, which included liabilities assumed and
non-compete agreements of $3,010 for periods ranging up to ten years. These
acquisitions were financed primarily with the acquisition facility and the
issuance of 1,610,000 Common Units.

F-20

4. WORKING CAPITAL FACILITY AND LONG-TERM DEBT:

During the year ended August 31, 2003, Heritage used approximately $35.9 million
of the $44.5 million net proceeds from the sale of the Partnership's Common
Units to repay a portion of the indebtedness outstanding under various tranches
of its Senior Secured Notes. Long-term debt consists of the following:

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

1996 8.55% Senior Secured Notes:

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

F-21

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.

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 $3,800 on May 15
in each of the years 2004 to and
including 2008. Interest is paid
quarterly. $7.5 million of these notes
were retired during the fiscal year
ended August 31, 2003.

Series H Notes: mature at the rate of $727 on May 15 in
each of the years 2006 to and including
2016. Interest is paid quarterly. $19.5
million of these notes were retired
during the fiscal year ended August 31,
2003.

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, additional
indebtedness, and require the maintenance of certain financial ratios. At August
31, 2003, Heritage was in compliance with these covenants or had no continuing
defaults. All receivables, contracts, equipment, inventory, general intangibles,
cash concentration accounts, and the capital stock of Heritage's subsidiaries
secure the notes.

The Note Agreements for each of the Senior Secured Notes, Medium Term Note
Program and Senior Secured Promissory Notes, and the Bank Credit Facility
contain customary restrictive covenants applicable to the Operating Partnership,
including limitations on the level of additional indebtedness, creation of
liens, and sale of assets. These covenants require the Operating Partnership to
maintain ratios of Consolidated Funded Indebtedness to Consolidated EBITDA (as
these terms are similarly defined in the Bank Credit Facility and the Note
Agreements) of not more than 5.00 to 1 for the Bank Credit Facility and not more
than 5.25 to 1 for the Note Agreements and Consolidated EBITDA to Consolidated
Interest Expense (as these terms are similarly defined in the Bank Credit
Facility and the Note Agreements) of not less than 2.25 to 1. The Consolidated
EBITDA used to determine these ratios is calculated in accordance with these
debt agreements. For purposes of calculating the ratios under the Bank Credit
Facility and the Note Agreements, Consolidated EBITDA is based upon Heritage's
EBITDA, as adjusted for the most recent four quarterly periods, and modified to
give pro forma effect for acquisitions and divestures made during the test
period and is compared to Consolidated Funded Indebtedness as of the test date
and the Consolidated Interest Expense for the most recent twelve months. These
debt agreements also provide that the Operating Partnership may declare, make,
or incur a liability to make, a restricted payment during each fiscal quarter,
if: (a) the amount of such restricted payment, together with all other
restricted payments during such quarter, do not exceed Available Cash with
respect to the immediately preceding quarter; and (b) no default or event of
default exists before such restricted payment and after giving effect thereto.
The debt agreements further provide that Available Cash is required to reflect a
reserve equal to 50% of the interest to be paid on the notes. In addition, in
the third, second and first quarters preceding a quarter in which a scheduled
principal payment is to be made on the notes, Available Cash is

F-22

required to reflect a reserve equal to 25%, 50%, and 75%, respectively, of the
principal amount to be repaid on such payment dates.

Failure to comply with the various restrictive and affirmative covenants of the
Operating Partnership's Bank Credit Facility and the Note Agreements could
negatively impact the Operating Partnership's ability to incur additional debt
and/or Heritage's ability to pay distributions. The Operating Partnership is
required to measure these financial tests and covenants quarterly and was in
compliance or had no continuing defaults with all requirements, tests,
limitations, and covenants related to the Senior Secured Notes, Medium Term Note
Program and Senior Secured Promissory Notes, and the Bank Credit Facility at
August 31, 2003.

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

A $65,000 Senior Revolving Working Capital Facility, expiring June 30,
2004 with $26,700 outstanding at August 31, 2003. 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 2.49125% for the amount outstanding
at August 31, 2003. The maximum commitment fee payable on the unused
portion of the facility is 0.50%. All receivables, contracts,
equipment, inventory, general intangibles, cash concentration accounts,
and the capital stock of Heritage's subsidiaries secure the Senior
Revolving Working Capital Facility.

A $50,000 Senior Revolving Acquisition Facility is available through
December 31, 2003, at which time the outstanding amount must be paid in
ten equal quarterly installments beginning March 31, 2004, with $24,700
outstanding as of August 31, 2003. 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 2.49125% for
the amount outstanding at August 31, 2003. The maximum commitment fee
payable on the unused portion of the facility is 0.50%. All
receivables, contracts, equipment, inventory, general intangibles, cash
concentration accounts, and the capital stock of Heritage's
subsidiaries secure the Senior Revolving Acquisition Facility.

Future maturities of long-term debt for each of the next five fiscal years and
thereafter are $38,309 in 2004; $40,288 in 2005; $48,474 in 2006; $38,514 in
2007; $45,223 in 2008, and $188,263 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 $2,997, $2,977 and
$2,708 for the years ended August 31, 2003, 2002 and August 31, 2001,
respectively, and has been included in operating expenses in the accompanying
statements of operations. Certain of these leases contain renewal options and
also contain escalation clauses, which are accounted for on a straight-line
basis over the minimum lease term. Fiscal year future minimum lease commitments
for such leases are $2,916 in 2004; $1,906 in 2005; $1,325 in 2006; $929 in
2007; $934 in 2008 and $846 thereafter.

The General Partner has employment agreements with seven employees. The
employment agreements provide for total annual base salary of $1,545. The
employment agreements provide for the Executives to participate in bonus and
incentive plans.

The Employment Agreements provide that in the event of a change of control of
the ownership of the General Partner or in the event an Executive (i) is
involuntarily terminated (other than for "misconduct" or "disability") or (ii)
voluntarily terminates employment for "good reason" (as defined in the
agreements), such Executive will be entitled to continue receiving his base
salary and to participate in all group health insurance plans and programs that
may be offered to executives of the General Partner for the remainder of the
term of the Employment Agreement or, if earlier, the Executive's death, and the
Executive will vest immediately in the Minimum Award of the number of Common
Units to which the Executive is entitled under the Long Term Incentive Plan to
the extent not previously awarded, and if the Executive is terminated as a
result of the foregoing, all restrictions on the transferability of the units
purchased by such executive under the Subscription Agreement dated as of June
15, 2000, shall automatically lapse in full on such date. If such change were to
have occurred on August 31, 2003, the General Partner would be

F-23

required to pay the remaining portion of $1,545 in base salary for the
Executives and a maximum of 174,993 Common Units or approximately $5,477 based
on a per unit price of $31.30 would be awarded under the Long Term Incentive
Plan, of which $915, $1,500 and $750 has been included in operating expenses in
the accompanying statements of operations for the years ending August 31, 2003,
2002 and 2001, respectively. Pursuant to the transactions announced November 6,
2003, the "change of control" provisions of the Employment Agreements will be
triggered upon consummation of the acquisition by La Grange Energy of Heritage's
General Partner, and will result in the payment of approximately $1.5 million
and the issuance of up to 174,993 Common Units pursuant to their terms. In
addition, pursuant to the terms of one of the Employment Agreements, an
additional 20,000 Common Units will be issued. Each Employment Agreement also
provides that if any payment received by an Executive is subject to the 20%
federal excise tax under Section 4999(a) of the Code of the Internal Revenue
Service, the payment will be grossed up to permit the Executive to retain a net
amount on an after-tax basis equal to what he would have received had the excise
tax and all other federal and state taxes on such additional amount not been
payable. In addition, each Employment Agreement contains non-competition and
confidentiality provisions.

Heritage is a party to various legal proceedings incidental to its business.
Certain claims, suits and complaints arising in the ordinary course of business
have been filed or are pending against Heritage. In the opinion of management,
all such matters are either covered by insurance, are without merit or involve
amounts, which, if resolved unfavorably, would not have a significant effect on
the financial position or results of operations of Heritage. Once management
determines that information pertaining to a legal proceeding indicates that it
is probable that a liability has been incurred, an accrual is established equal
to management's estimate of the likely exposure. For matters that are covered by
insurance, the Partnership accrues the related deductible. As of August 31, 2003
and 2002, an accrual of $941 and $671, respectively, was recorded as accrued and
other current liabilities on the Partnership's consolidated balance sheets.

Petroleum-based contamination or environmental wastes are known to be located on
or adjacent to six sites, on which Heritage presently has, or formerly had,
operations. These sites were evaluated at the time of their acquisition. In all
cases, remediation operations have been or will be undertaken by others, and in
all six cases, Heritage obtained indemnification for expenses associated with
any remediation from the former owners or related entities. Heritage has not
been named as a potentially responsible party at any of these sites, nor has the
Partnership's operations contributed to the environmental issues at these sites.
Accordingly, no amounts have been recorded in the Partnership's August 31, 2003
or 2002 consolidated balance sheets. Based on information currently available to
Heritage, such projects are not expected to have a material adverse effect on
Heritage's financial condition or results of operations.

In July 2001, Heritage acquired a company that had previously received a request
for information from the U.S. Environmental Protection Agency (the "EPA")
regarding potential contribution to a widespread groundwater contamination
problem in San Bernardino, California, known as the Newmark Groundwater
Contamination. Although the EPA has indicated that the groundwater contamination
may be attributable to releases of solvents from a former military base located
within the subject area that occurred long before the facility acquired by
Heritage was constructed, it is possible that the EPA may seek to recover all or
a portion of groundwater remediation costs from private parties under the
Comprehensive Environmental Response, Compensation, and Liability Act (commonly
called "Superfund"). Based upon information currently available to Heritage, it
is not believed that Heritage's liability if such action were to be taken by the
EPA would have a material adverse effect on Heritage's financial condition or
results of operations.

Heritage has entered into several purchase and supply commitments with varying
terms as to quantities and prices, which expire at various dates through March
2004.

6. PARTNERS' CAPITAL:

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

At the time of the Partnership's Initial Public Offering, Heritage Holdings held
all of the Partnership's Subordinated Units. The Subordinated Units were a
separate class of limited partner interests and the rights of holders of
Subordinated Units to participate in distributions to partners differed from,
and were subordinated to, the rights of the holders of Common Units.

F-24

Pursuant to the provisions of the Partnership Agreement relating to requirements
that the Partnership meet specified cash performance and distribution
requirements during successive four-quarter periods commencing with the Initial
Public Offering in June of 1996, all of the Subordinated Units converted into
Common Units and the Subordination Period ended. Under the Partnership
Agreement, 925,736 Subordinated Units converted into Common Units as of July 7,
1999, 925,736 Subordinated Units converted into Common Units as of July 5, 2000
and the remaining 1,851,471 Subordinated Units converted into Common Units as of
July 6, 2001. Common Units issued upon conversion of the Subordinated Units
share equally with other Common Units in distributions of Available Cash.

On September 1, 2002 and April 14, 2003, an additional 500 and 2,000 Common
Units, respectively, were issued by the Partnership to holders of grants that
had previously been awarded under the terms of the Partnership's Restricted Unit
Plan. On August 10, 2003, the Partnership issued 66,118 Common Units under the
terms of the Partnership's Long-Term Incentive Plan upon the attainment of the
performance targets required for such awards.

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.

On May 20, 2003, the Partnership sold 1,610,000 Common Units in an underwritten
public offering at a public offering price of $29.26 per unit. This sale
included the exercise of the underwriters' over-allotment option to purchase an
additional 210,000 Common Units. Heritage used approximately $35.9 million of
the $44.5 million net proceeds from the sale of the Common Units to repay a
portion of the indebtedness outstanding under various tranches of its Senior
Secured Notes. The remainder of the proceeds was used for general partnership
purposes, including repayment of additional debt. To effect the transfer of the
contribution required by the General Partner to maintain its 1% general partner
interest in the Partnership and its 1.0101% general partner interest in the
Operating Partnership as a result of the offering, the General Partner
contributed 32,692 previously issued Common Units back to the Partnership and
those units were cancelled.

Prior to February 4, 2002, the Partnership had Class B Subordinated Units
representing limited partner interests that were issued to certain former
stockholders of Heritage Holdings, who are or were also members of management,
in connection with the transaction with U.S. Propane. The Class B Subordinated
Units had the same voting rights as the Subordinated Units outstanding before
the end of the Subordination Period, and generally participated pro rata with
the Common Units in Heritage's income, gains, losses, deductions, credits, and
distributions. Each Class B Subordinated Unit was entitled to one vote on each
matter with respect to which the Class B Subordinated Units were entitled to
vote.

On February 4, 2002, at the Special Meeting of the Common Unitholders of the
Registrant, the Common Unitholders approved the amendment of the Partnership
Agreement that converted all of the 1,382,514 outstanding Class B Subordinated
Units into 1,382,514 Common Units. The Common Units issued upon conversion of
the Class B Subordinated Units share equally with other Common Units in
distributions of Available Cash.

In conjunction with the transaction with U.S. Propane and the change of control
of the former General Partner, Heritage Holdings, the Partnership issued
1,000,000 newly created Class C Units to Heritage Holdings in conversion of that
portion of its Incentive Distribution Rights that entitled it to receive any
distribution made by Heritage attributable to the net amount received in
connection with the settlement, judgment, award or other final nonappealable
resolution of the SCANA litigation filed by Heritage prior to the transaction
with U.S. Propane. The Class C Units have zero initial capital account balance
and were distributed by Heritage Holdings to its former stockholders in
connection with the transaction with U.S. Propane. Thus, U.S. Propane will not
receive any distributions made with respect to the SCANA litigation that would
have gone to Heritage Holdings with respect to its General Partner interest and
Incentive Distribution Rights had it remained the General Partner of the
Partnership. Upon receiving final cash payment as a result of the resolution of
the SCANA litigation, the special litigation committee will determine the amount
of litigation proceeds to be distributed, after deducting all costs and expenses
of the litigation incurred by the Partnership and its affiliates and such
reserves as the special committee deems necessary or advisable. The resulting
amount of distributable proceeds will be distributed in the same manner as the
Partnership's distribution of "Available Cash" pursuant to the Partnership
Agreement, except that the amount that would normally be distributed to the
holders of Incentive Distribution Rights will be distributed to the holders of
Class C Units, pro rata. Each holder of Class C Units receiving a distribution
of cash in any taxable year will be allocated items of gross income with respect
to such taxable year in an amount equal to the cash distributed to the holder.
Holders of Class C Units will not be allocated any other items of income, gain,
loss deduction or credit and have no other rights except the right to share in
any distributions upon dissolution and liquidation of the Partnership

F-25

if such distributions consist of proceeds from the SCANA litigation and to which
the Class C Units would have otherwise been entitled. The Class C Units may not
be converted into any other unit. The Class C Units have no voting rights,
except to the extent provided by Delaware law with respect to a vote as a class,
in which case each Class C Unit will be entitled to one vote.

In conjunction with the Common Unitholder approval of the substitution of U.S.
Propane as the General Partner of the Partnership, the Partnership issued
162,913 Common Units to the former General Partner Heritage Holdings in exchange
for its 1.0101% general partner interest in the Operating Partnership. The
Partnership also issued 158,026 Common Units to Heritage Holdings in conversion
of its 1% general partner interest in the Partnership and cancelled 158,026
Common Units held by U.S. Propane upon their conversion into Incentive
Distribution Rights and a 1% general partner interest in the Partnership and
1,646 Common Units held by U.S. Propane to maintain its general partner interest
in the Partnership.

On September 1, 2001 and June 30, 2002, an additional 1,750 and 10,000 Common
Units, respectively, were issued by the Partnership to holders of grants that
had previously been awarded under the terms of the Partnership's Restricted Unit
Plan.

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

On August 1, 2001, the Partnership issued 129,901 Common Units with a fair value
of $28.00 per unit to Heritage Holdings in connection with the assumption of
certain liabilities by Heritage Holdings from Heritage's acquisition of certain
assets of ProFlame. Heritage Holdings was entitled to 158,917 Common Units as a
result of this transaction but agreed to forego the issuance of 1,605 units and
1,638 units, which represented its capital contributions to maintain its 1%
interest in the Partnership and its 1.0101% interest in the Operating
Partnership, respectively, in relation to this transaction. Heritage Holdings
also agreed to forego the issuance of an additional 25,773 Common Units to which
it was entitled in the ProFlame acquisition to maintain its 1.0101% interest in
the Operating Partnership as a result of the July 31, 2001 public offering.

During fiscal 2001, the Partnership issued 58,000 Common Units in exchange for
certain assets in connection with the acquisitions of certain propane
businesses, for a total value of $1.6 million.

QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH

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

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

F-26

The Minimum Quarterly Distribution was made to the Common and Subordinated
Unitholders for the quarters ended November 30, 1996 through August 31, 1998.
For the quarter ended November 30, 1998, a quarterly distribution of $0.5125 was
paid to the Common and Subordinated Unitholders. For each of the quarters ended
February 28, 1999 through and including May 31, 2000, quarterly distributions of
$0.5625, respectively, were paid to the Common and Subordinated Unitholders.
Heritage raised the quarterly distribution $0.0125 per unit each quarter
beginning with the quarter ended August 31, 2000, to $0.6375 per unit (or $2.55
annually) for the quarter ended November 30, 2001. The distribution remained at
$0.6375 per unit for each of the quarters ended February 28, 2002 through and
including May 31, 2003. Heritage raised the quarterly distribution $0.0125 per
unit for the quarter ended August 31, 2003, to $0.65 per unit (or $2.60
annually). The quarterly distributions for the quarters ended February 28, 1999
through August 31, 2003 included incentive distributions payable to the General
Partner to the extent the quarterly distribution exceeded $0.55 per unit.

After the conversion of the Class B Subordinated Units was approved on February
4, 2002, each Class B Subordinated unit converted into one Common Unit and then
participates pro rata with the other Common Units in distributions of Available
Cash. Heritage currently distributes Available Cash, excluding any Available
Cash to be distributed to the Class C Unitholders as follows:

o First, 98% to all Unitholders, pro rata, and 2% to the General
Partner, until all Unitholders have received $0.50 per unit
for such quarter and any prior quarter;

o Second, 98% to all Unitholders, pro rata, and 2% to the
General Partner, until all Unitholders have received $0.55 per
unit for such quarter;

o Third, 85% to all Unitholders, pro rata, 13% to the holders of
Incentive Distribution Right, pro rata, and 2% to the General
Partner, until all Common Unitholders have received at least
$0.635 per unit for such quarter;

o Fourth, 75% to all Unitholders, pro rata, 23% to the holders
of Incentive Distribution Right, pro rata and 2% to the
General Partner, until all Common Unitholders have received at
least $0.825 per unit for such quarter;

o Fifth, thereafter 50% to all Unitholders, pro rata, 48% to the
holders of Incentive Distribution Right, pro rata, and 2% to
the General Partner.

The total amount of distributions for the 2003 fiscal year on Common Units, the
general partner interests and the Incentive Distribution Rights totaled $43.7
million, $0.9 million and $1.0 million, respectively. All such distributions
were made from Available Cash from Operating Surplus.

RESTRICTED UNIT PLAN

The General Partner has adopted the Amended and Restated Restricted Unit Plan
dated August 10, 2000, amended February 4, 2002 as the Second Amended and
Restated Restricted Unit Plan (the "Restricted Unit Plan"), for certain
directors and key employees of the General Partner and its affiliates. The
Restricted Unit Plan covers rights to acquire 146,000 Common Units. The right to
acquire the Common Units under the Restricted Unit Plan, including any
forfeiture or lapse of rights is available for grant to key employees on such
terms and conditions (including vesting conditions) as the Compensation
Committee of the General Partner shall determine. Each director shall
automatically receive a Director's grant with respect to 500 Common Units on
each September 1 that such person continues as a director. Newly elected
directors are also entitled to receive a grant with respect to 2,000 Common
Units upon election or appointment to the Board. Directors who are employees of
U.S. Propane, TECO, Atmos Energy, Piedmont Natural Gas or AGL Resources or their
affiliates are not entitled to receive a Director's grant of Common Units.
Generally, the rights to acquire the Common Units will vest upon the later to
occur of (i) the three-year anniversary of the grant date, or on such terms as
the Compensation Committee may establish, which may include the achievement of
performance objectives. In the event of a "change of control" (as defined in the
Restricted Unit Plan), all rights to acquire Common Units pursuant to the
Restricted Unit Plan will immediately vest. Pursuant to the transactions
announced November 6, 2003, the vesting provisions of the Restricted Unit Plan
will be triggered, except for waivers granted thereunder, upon consummation of
La Grange Energy's acquisition of Heritage's General Partner, resulting in the
early vesting of any awards thereunder.

F-27

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,
2003, 39,400 restricted units are outstanding and 15,800 are available for
grants to non-employee directors and key employees. Subsequent to August 31,
2003, 14,800 additional Phantom Units vested pursuant to the vesting rights of
the Restricted Unit Plan and Common Units were issued.

During the fiscal years ended August 31, 2003, 2002, and 2001, 15,000, 9,600,
and 29,800 units were granted under the Restricted Unit Plan, respectively. The
units had a weighted-average fair value of $20.24, $20.48, and $15.06 per unit
at the grant date, respectively. During fiscal year 2003, 2,500 Phantom Units
vested pursuant to the vesting rights of the Restricted Unit Plan and Common
Units were issued. During fiscal year 2002, 11,750 Phantom Units vested pursuant
to the vesting rights of the Restricted Unit Plan and Common Units were issued,
and 5,000 Phantom Units previously granted were forfeited. During fiscal year
2001, 72,050 Phantom Units vested pursuant to the vesting rights of the
Restricted Unit Plan and Common units were issued.

Deferred compensation expense of $244 was recognized for the year ended August
31, 2003. For the years ended August 31, 2002 and 2001, Heritage followed the
disclosure only provisions of SFAS 123, as amended by SFAS 148 and APB Opinion
No. 25 Accounting for Stock Issued to Employees (APB 25). Under APB 25 the
Restricted Unit Plan was classified as a variable plan so that an estimate of
compensation was required based on a combination of the fair market value of the
Common Units as of the end of the reporting period and an assessment of meeting
certain performance criteria. Deferred compensation expense on this plan of $378
and $323 was recognized for the years ended August 31, 2002 and 2001,
respectively based on the fair value of such units at the end of each period.

LONG-TERM INCENTIVE PLAN

Effective September 1, 2000, Heritage adopted a long-term incentive plan whereby
Common Units will be awarded based on achieving certain targeted levels of
Distributed Cash (as defined in the Long Term Incentive Plan) per unit. Awards
under the program will be made starting in 2003 based upon the average of the
prior three years' Distributed Cash per unit. A minimum of 250,000 Common Units
and if certain targeted levels are achieved, a maximum of 500,000 Common Units
will be awarded. During the fiscal year ended August 31, 2003, 66,118 units
vested pursuant to the vesting rights of the Long-Term Incentive Plan and Common
Units were issued, and 8,889 units were forfeited.

Deferred compensation expense on this plan of $915 was recognized for the year
ended August 31, 2003. For the years ended August 31, 2002 and 2001, Heritage
followed the disclosure only provisions of SFAS 123, and APB 25. Under APB 25,
the Long Term Incentive Plan was classified as a variable plan so that an
estimate of compensation was required based on a combination of the fair market
value of the Common Units as of the end of the reporting period and an
assessment of meeting certain performance criteria. Deferred compensation
expense on this plan of $1,500 and $756 was recognized for the years ended
August 31, 2002 and 2001, respectively based on the fair value of such units at
the end of each period. The expense was determined based on the Partnership
achieving the minimum award available under the plan.

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

Heritage sponsors a defined contribution profit sharing and 401(k) savings plan
(the "Plan"), which covers all employees subject to service period requirements.
Contributions are made to the Plan at the discretion of the Board of Directors
and are allocated to eligible employees as of the last day of the plan year
based on their pro rata share of total contributions. Employer matching
contributions are calculated using a discretionary formula based on employee
contributions. Heritage did not recognize any expense under the profit sharing
provision of the Plan during the years ended August 31, 2003, 2002 or 2001.
Heritage made matching contributions of $2,144, $2,339, and $2,260 to the 401(k)
savings plan for the years ended August 31, 2003, 2002 and 2001, 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

F-28

incurred by the General Partner in connection with operating Heritage's
business. These costs, which totaled approximately $108,861 for the year ended
August 31, 2003, $95,749 for the year ended August 31, 2002 and $93,442 for the
year ended August 31, 2001, include compensation and benefits paid to officers
and employees of the General Partner.

Accounts payable to related companies include non-interest bearing amounts
payable from Heritage to the General Partner of $4,784 and $3,356 as of August
31, 2003 and 2002 respectively and interest bearing amounts payable of $1,471
and $1,646 to Bi-State Propane as of August 31, 2003 and 2002, respectively.
Bi-State Propane purchases all of Bi-State's propane that is delivered to and
sold out of its plants from an affiliate of Bi-State under a supply agreement.
The supply agreement requires the affiliate to sell propane to Bi-State at the
affiliates established cost plus freight charges to the destination. Total
purchases under the agreement by Bi-State were 17.0 million gallons, 12.8
million gallons, and 12.4 million gallons for a total cost of $11,975, $7,480,
and $11,249 for the years ended August 31, 2003, 2002, and 2001, respectively.

9. REPORTABLE SEGMENTS:

Heritage's financial statements reflect four reportable segments: the domestic
retail operations of Heritage, the domestic wholesale operations of Heritage,
the foreign wholesale operations of MP Energy Partnership, and the liquids
marketing activities of Resources. Heritage's reportable domestic and wholesale
fuel segments are strategic business units that sell products and services to
different types of users: retail and wholesale customers. Intersegment sales by
the foreign wholesale segment to the domestic segment are priced in accordance
with the partnership agreement. Resources is a liquids marketing company that
buys and sells financial instruments for its own account. Heritage manages these
segments separately as each segment involves different distribution, sale and
marketing strategies. Heritage evaluates the performance of its operating
segments based on operating income, exclusive of domestic and foreign selling,
general, and administrative expenses of $14,037, $12,978 and $15,716 for the
years ended August 31, 2003, 2002 and 2001, respectively. Selling, general and
administrative expenses, interest expense and other expenses are not allocated
by segment. Investment in affiliates and equity in earnings of affiliates
relates primarily to Heritage's investment in Bi-State Propane (see Note 10),
and is part of the domestic retail fuel segment. The following table presents
the unaudited financial information by segment for the following periods:

F-29

Gain on Disposal of Assets:
Domestic retail fuel $ 386 $ 544 $ 791
Domestic wholesale fuel 44 268 21
------------ ------------ ------------
Total $ 430 $ 812 $ 812
============ ============ ============

Minority Interest Expense:
Corporate $ 318 $ 213 $ 408
Foreign wholesale 558 361 406
------------ ------------ ------------
Total $ 876 $ 574 $ 814
============ ============ ============

Depreciation and
amortization:
Domestic retail fuel $ 37,442 $ 36,550 $ 40,135
Domestic wholesale 494 426 277
Foreign wholesale 23 22 19
------------ ------------ ------------
Total $ 37,959 $ 36,998 $ 40,431
============ ============ ============

Corporate assets include vehicles, office equipment and computer software for
the use of administrative personnel. These assets are not allocated to segments.
Corporate minority interest expense relates to U.S. Propane's general partner
interest in the Operating Partnership.

10. SIGNIFICANT INVESTEE:

Heritage holds a 50% interest in Bi-State Propane. Heritage accounts for its 50%
interest in Bi-State Propane under the equity method. Heritage's investment in
Bi-State Propane totaled $8,242 and $7,485 at August 31, 2003 and 2002,
respectively. Heritage received distributions from Bi-State Propane of $535 and
$400 for the years ended August 31, 2003 and 2002, respectively. On March 1,
2002, the Operating Partnership sold certain assets acquired in the ProFlame
acquisition to Bi-State Propane for approximately $9,730 plus working capital.
There was no gain or loss recorded on the transaction. This sale was made
pursuant to the provision in the Bi-State Propane partnership agreement that
requires each partner to offer to sell any newly acquired businesses within
Bi-State Propane's area of operations to Bi-State Propane. In conjunction with
this sale, the Operating Partnership guaranteed $5 million of debt incurred by
Bi-State Propane to a financial institution. Based on the current financial
condition of Bi-State Propane, Heritage considers the likelihood of the
Partnership incurring a liability resulting from the guarantee to be remote.
Heritage has not recorded a liability on the balance sheets as of August 31,
2003 or 2002 for this guarantee because the guarantee was in effect prior to the
issuance of FIN 45, and there have been no amendments to the original guarantee.

F-30

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

Bi-State Propane's results of operations for the years ended August 31, 2003,
2002 and 2001, respectively are summarized below:

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-31

12. SUBSEQUENT EVENT:

On November 6, 2003, Heritage signed a definitive agreement with La Grange
Energy, L.P. to purchase substantially all of its midstream natural gas assets
by acquiring La Grange Energy, L.P.'s interests in its subsidiary, La Grange
Acquisition, L.P. whose midstream operations are conducted under the name Energy
Transfer Company, in exchange for approximately $300 million in cash, repayment
of outstanding indebtedness, and a combination of Partnership Common Units,
Class D Units and Special Units. The transaction is valued at approximately $980
million. The Partnership will also acquire the stock of Heritage Holdings, Inc.,
which owns approximately 4.4 million common units of the Partnership for $100
million. La Grange Energy, L.P. will also purchase U.S. Propane, L.P., the
General Partner of the Partnership, and U.S. Propane, L.L.C. from subsidiaries
of AGL Resources, Atmos Energy Corporation, TECO Energy, Inc. and Piedmont
Natural Gas Company, Inc.

F-32

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

- ----------

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

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

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

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

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

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

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

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

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

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

(11) File as Exhibit 10.16.3.

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

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

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

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

E-5

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

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

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

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

(20) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated February 4, 2002.

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

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

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

(24) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2003.

(*) Filed herewith.

E-6