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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ to
COMMISSION FILE NUMBER 1-11727
HERITAGE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1493906
(state or other jurisdiction or (I.R.S. Employer
incorporation or organization) Identification No.)
8801 SOUTH YALE AVENUE, SUITE 310
TULSA, OKLAHOMA 74137
(Address of principal
executive offices
and zip code)
(918) 492-7272
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [x] No[ ]
At January 13, 2004, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 18,533,855 Common Units
FORM 10-Q
HERITAGE PROPANE PARTNERS, L.P.
TABLE OF CONTENTS
Pages
-----
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets -
November 30, 2003 and August 31, 2003......................... 1
Consolidated Statements of Operations -
Three months ended November 30, 2003 and 2002 ................ 2
Consolidated Statements of Comprehensive Income (Loss) -
Three months ended November 30, 2003 and 2002................. 3
Consolidated Statement of Partners' Capital -
Three months ended November 30, 2003.......................... 4
Consolidated Statements of Cash Flows -
Three months ended November 30, 2003 and 2002................. 5
Notes to Consolidated Financial Statements....................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................... 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................... 23
ITEM 4. CONTROLS AND PROCEDURES.......................................... 25
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................. 26
SIGNATURE
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
November 30, August 31,
2003 2003
------------ -----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,820 $ 7,117
Marketable securities 3,176 3,044
Accounts receivable, net of allowance for doubtful accounts 52,467 35,879
Inventories 57,439 45,274
Assets from liquids marketing 112 83
Prepaid expenses and other 5,623 2,741
----------- -----------
Total current assets 126,637 94,138
PROPERTY, PLANT AND EQUIPMENT, net 435,710 426,588
INVESTMENT IN AFFILIATES 8,887 8,694
GOODWILL, net of amortization prior to adoption of SFAS No. 142 157,185 156,595
INTANGIBLES AND OTHER ASSETS, net 52,717 52,824
----------- -----------
Total assets $ 781,136 $ 738,839
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Working capital facility $ 60,448 $ 26,700
Accounts payable 55,648 43,690
Accounts payable to related companies 6,829 6,255
Accrued and other current liabilities 37,584 35,993
Liabilities from liquids marketing 100 80
Current maturities of long-term debt 42,544 38,309
----------- -----------
Total current liabilities 203,153 151,027
LONG-TERM DEBT, less current maturities 364,161 360,762
MINORITY INTERESTS 3,998 4,002
----------- -----------
571,312 515,791
----------- -----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Common Unitholders (18,028,029 and 18,013,229 units issued and
outstanding at November 30, 2003 and August 31, 2003, 207,980 221,207
respectively)
Class C Unitholders (1,000,000 units issued and outstanding at
November 30, 2003 and August 31, 2003) - -
General Partner 2,062 2,190
Accumulated other comprehensive loss (218) (349)
----------- -----------
Total partners' capital 209,824 223,048
----------- -----------
Total liabilities and partners' capital $ 781,136 $ 738,839
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
1
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)
(unaudited)
Three Months
Ended November 30,
---------------------------
2003 2002
----------- -----------
REVENUES:
Retail fuel $ 94,388 $ 84,050
Wholesale fuel 10,342 11,348
Liquids marketing, net 49 707
Other 18,947 17,355
---------- ----------
Total revenues 123,726 113,460
---------- ----------
COSTS AND EXPENSES:
Cost of products sold 66,370 57,020
Operating expenses 38,042 33,392
Depreciation and amortization 9,415 9,266
Selling, general and administrative 3,190 2,856
---------- ----------
Total costs and expenses 117,017 102,534
---------- ----------
OPERATING INCOME 6,709 10,926
OTHER INCOME (EXPENSE):
Interest expense (8,166) (9,297)
Equity in earnings of affiliates 219 213
Gain on disposal of assets 173 67
Other (46) (278)
---------- ----------
INCOME (LOSS) BEFORE MINORITY INTERESTS AND INCOME TAXES (1,111) 1,631
Minority interests (135) (127)
---------- ----------
NET INCOME (LOSS) BEFORE INCOME TAXES (1,246) 1,504
Income taxes 50 -
---------- ----------
NET INCOME (LOSS) (1,296) 1,504
GENERAL PARTNER'S INTEREST IN NET INCOME (LOSS) 311 233
---------- ----------
LIMITED PARTNERS' INTEREST IN NET INCOME (LOSS) $ (1,607) $ 1,271
========== ==========
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ (0.09) $ 0.08
========== ==========
BASIC AVERAGE NUMBER OF UNITS OUTSTANDING 18,020,137 15,816,347
========== ==========
DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ (0.09) $ 0.08
========== ==========
DILUTED AVERAGE NUMBER OF UNITS OUTSTANDING 18,020,137 15,848,698
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
2
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
Three Months Ended
November 30,
---------------------
2003 2002
-------- --------
Net income (loss) $(1,296) $ 1,504
Other comprehensive income (loss)
Reclassification adjustment for losses or
gains on derivative instruments
included in net income - -
Change in value of available-for-sale
securities 131 -
------- -------
Comprehensive income (loss) $(1,165) $ 1,504
======= =======
RECONCILIATION OF ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of period $ (349) $(3,652)
Current period reclassification to earnings - -
Current period change 131 -
------- -------
Balance, end of period $ (218) $(3,652)
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
3
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit data)
(unaudited)
Accumulated
Number of Units Other
---------------------- General Comprehensive
Common Class C Common Class C Partner Loss Total
---------- --------- ---------- ------- --------- ------------- ----------
BALANCE, AUGUST 31, 2003 18,013,229 1,000,000 $ 221,207 $ - $ 2,190 $ (349) $ 223,048
Unit distribution - - (11,710) - (439) - (12,149)
Conversion of phantom units 14,800 - - - - - -
Other - - 90 - - - 90
Net change in accumulated other
comprehensive loss per
accompanying statements - - - - - 131 131
Net loss - - (1,607) - 311 - (1,296)
---------- --------- --------- ------- -------- -------- ---------
BALANCE, NOVEMBER 30, 2003 18,028,029 1,000,000 $ 207,980 $ - $ 2,062 $ (218) $ 209,824
========== ========= ========= ======= ======== ======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
4
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
November 30,
---------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,296) $ 1,504
Reconciliation of net income (loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization 9,415 9,266
Provision for loss on accounts receivable 298 234
Gain on disposal of assets (173) (67)
Deferred compensation on restricted units and long-term
incentive plan 90 309
Undistributed earnings of affiliates (193) (213)
Minority interests (5) (36)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (16,571) (26,887)
Inventories (11,889) (4,938)
Assets from liquids marketing (29) 1,488
Prepaid and other expenses (2,875) (1,558)
Intangibles and other assets (457) (64)
Accounts payable 11,958 15,830
Accounts payable to related companies 574 (444)
Accrued and other current liabilites 1,505 4,280
Liabilities from liquids marketing 20 (1,046)
-------- --------
Net cash used in operating activities (9,628) (2,342)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (6,799) (1,603)
Capital expenditures (12,240) (9,652)
Proceeds from the sale of assets 592 1,491
-------- --------
Net cash used in investing activities (18,447) (9,764)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 73,298 48,750
Principal payments on debt (32,371) (25,613)
Unit distributions (12,149) (10,404)
-------- --------
Net cash provided by financing activities 28,778 12,733
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 703 627
CASH AND CASH EQUIVALENTS, beginning of period 7,117 4,596
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 7,820 $ 5,223
======== ========
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 455 $ 519
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 9,571 $ 7,247
======== ========
The accompanying notes are an integral part of these financial statements.
5
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except unit and per unit data)
(unaudited)
1. OPERATIONS AND ORGANIZATION:
The accompanying financial statements should be read in conjunction with the
consolidated financial statements of Heritage Propane Partners, L.P. and
subsidiaries (the "Partnership") as of August 31, 2003, and the notes thereto
included in the Partnership's consolidated financial statements included in Form
10-K as filed with the Securities and Exchange Commission on November 26, 2003.
The accompanying financial statements include only normal recurring accruals and
all adjustments that the Partnership considers necessary for a fair
presentation. Due to the seasonal nature of the Partnership's business, the
results of operations for interim periods are not necessarily indicative of the
results to be expected for a full year.
In order to simplify the Partnership's obligations under the laws of several
jurisdictions in which it conducts business, the Partnership's activities are
conducted through a subsidiary operating partnership, Heritage Operating, L.P.
(the "Operating Partnership"). The Partnership and the Operating Partnership are
collectively referred to in this report as "Heritage". Heritage sells propane
and propane-related products to more than 650,000 active residential,
commercial, industrial, and agricultural customers from over 300 customer
service locations in 31 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., and Resources. Heritage accounts for its 50% partnership
interest in Bi-State Propane, a propane retailer in the states of Nevada and
California, under the equity method. All significant intercompany transactions
and accounts have been eliminated in consolidation. 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. The 1.0101% general partner interest in the
Operating Partnership held by the General Partner, U.S. Propane, L.P. ("U.S.
Propane"), is accounted for in the consolidated financial statements as a
minority interest.
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.
6
COSTS AND EXPENSES
Costs of products sold include actual cost of fuel sold adjusted for the effects
of qualifying cash flow hedges, storage fees and inbound freight, and the cost
of appliances, parts, and fittings. Operating expenses include all costs
incurred to provide products to customers, including compensation for operations
personnel, insurance costs, vehicle maintenance, advertising costs, shipping and
handling costs, purchasing costs, and plant operations. Selling, general and
administrative expenses include all corporate expenses and compensation for
corporate personnel.
ACCOUNTS RECEIVABLE
Heritage grants credit to its customers for the purchase of propane and
propane-related products. 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 $298 and $234, for the three months ended
November 30, 2003 and 2002, respectively. Accounts receivable consisted of the
following:
November 30, August 31,
2003 2003
---------------- --------------
Accounts receivable $ 55,971 $ 39,383
Less - allowance for doubtful accounts 3,504 3,504
---------------- --------------
Total, net $ 52,467 $ 35,879
================ ==============
The activity in the allowance for doubtful accounts consisted of the following:
For the three months ended
November 30,
------------------------------
2003 2002
-------------- --------------
Balance, beginning of the period $ 3,504 $ 2,504
Provision for loss on accounts receivable 298 234
Accounts receivable written off, net of
recoveries (298) (228)
------------- -------------
Balance, end of period $ 3,504 $ 2,510
============= =============
INVENTORIES
Inventories are valued at the lower of cost or market. The cost of fuel
inventories is determined using weighted-average cost of fuel delivered to the
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:
November 30, August 31,
2003 2003
-------------- --------------
Fuel $ 46,923 $ 34,544
Appliances, parts and fittings 10,516 10,730
-------------- --------------
Total inventories $ 57,439 $ 45,274
============== ==============
7
INCOME (LOSS) PER LIMITED PARTNER UNIT
Basic net income (loss) per limited partner unit is computed by dividing net
income (loss), after considering the General Partner's interest, by the weighted
average number of Common Units outstanding. Diluted net income (loss) per
limited partner unit is computed by dividing net income (loss), after
considering the General Partner's interest, by the weighted average number of
Common Units outstanding and, if dilutive, the weighted average number of
restricted units ("Phantom Units") outstanding under the Restricted Unit Plan. A
reconciliation of net income (loss) and weighted average units used in computing
basic and diluted net income (loss) per unit is as follows:
Three Months Ended
November 30,
--------------------------
2003 2002
------------ -----------
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Limited Partners' interest in net income (loss) $ (1,607) $ 1,271
=========== ===========
Weighted average limited partner units 18,020,137 15,816,347
=========== ===========
Basic net income (loss) per limited partner unit $ (0.09) $ 0.08
=========== ===========
DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Limited partners' interest in net income (loss) $ (1,607) $ 1,271
=========== ===========
Weighted average limited partner units 18,020,137 15,816,347
Dilutive effect of phantom units (a) - 32,351
----------- -----------
Weighted average limited partner units, assuming dilutive
effect of phantom units 18,020,137 15,848,698
=========== ===========
Diluted net income (loss) per limited partner unit $ (0.09) $ 0.08
=========== ===========
(a) For the three months ended November 30, 2003, 41,900 phantom units were
excluded from the calculation of diluted net loss as such units were
anti-dilutive due to the net loss for the period.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership Agreement requires that the Partnership will distribute all of
its Available Cash to its Unitholders and its General Partner within 45 days
following the end of each fiscal quarter, subject to the payment of incentive
distributions to the holders of Incentive Distribution Rights to the extent that
certain target levels of cash distributions are achieved. The term Available
Cash generally means, with respect to any fiscal quarter of the Partnership, all
cash on hand at the end of such quarter, plus working capital borrowings after
the end of the quarter, less reserves established by the General Partner in its
sole discretion to provide for the proper conduct of the Partnership's business,
to comply with applicable laws or any debt instrument or other agreement, or to
provide funds for future distributions to partners with respect to any one or
more of the next four quarters. Available Cash is more fully defined in the
Partnership Agreement.
Distributions by the Partnership in an amount equal to 100% of Available Cash
will generally be made 98% to the Common Unitholders and 2% to the General
Partner, subject to the payment of incentive distributions to the holders of
Incentive Distribution Rights to the extent that certain target levels of cash
distributions are achieved.
On October 15, 2003, a quarterly distribution of $0.65 per unit, or $2.60
annually, was paid to Unitholders of record at the close of business on October
8, 2003 and to the General Partner for its general partner interest in the
Partnership, its minority interest, and its Incentive Distribution Rights. On
December 19, 2003, the Partnership declared a cash distribution for the first
quarter ended November 30, 2003 of $0.65 per unit, or $2.60 per unit annually,
payable on January 14, 2004 to Unitholders of record at the close of business on
December 30, 2003. These quarterly distributions include incentive distributions
payable to the General Partner to the extent the quarterly distribution exceeds
$0.55 per unit. The total amount of distributions for the first quarter ended
November 30, 2003 on Common Units, the general partner interests and the
Incentive Distribution Rights totaled $12.0 million, $0.2
8
million and $0.3 million, respectively. All such distributions were made from
Available Cash from Operating Surplus as defined in Heritage's Partnership
Agreement.
STOCK BASED COMPENSATION PLANS
During the fourth quarter of 2003, Heritage applied 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
applied 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).
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, L.P.'s acquisition of Heritage's General Partner, resulting in
the early vesting of any awards thereunder.
The issuance of the Common Units pursuant to the Restricted Unit Plan is
intended to serve as a means of incentive compensation for performance and not
primarily as an opportunity to participate in the equity appreciation in respect
of the Common Units. Therefore, no consideration will be payable by the plan
participants upon vesting and issuance of the Common Units. As of November 30,
2003, 26,100 restricted units were outstanding and 14,300 were available for
grants to non-employee directors and key employees. Deferred compensation
expense of $90 and $81 was recognized for the three months ended November 30,
2003 and 2002, respectively.
LONG-TERM INCENTIVE PLAN
Effective September 1, 2000, Heritage adopted a long-term incentive plan whereby
Common Units will be awarded based on achieving certain targeted levels of
Distributed Cash (as defined in the Long Term Incentive Plan) per unit. Awards
under the program will be made starting in 2003 based upon the average of the
prior three years' Distributed Cash per unit. A minimum of 250,000 Common Units
and if certain targeted levels are achieved, a maximum of 500,000 Common Units
will be awarded.
Deferred compensation expense on this plan of $0 and $228 was recognized for the
three months ended November 30, 2003 and 2002, respectively. No expense was
recorded under the Long-Term Incentive plan for the three months ended November
30, 2003 because the required targeted levels were not expected to be achieved.
SFAS 123 requires that significant assumptions be used during the year to
estimate the fair value, which includes the risk-free interest rate used, the
expected life of the grants under each of the plans, the expected volatility,
and the expected distributions on each of the grants. Heritage assumed a
weighted average risk free interest rate of 2.62% and 5.72% for the three months
ended November 30, 2003 and 2002, respectively. Annual average cash
distributions at the grant date were estimated to be $2.55 and $2.39 for the
three months ended November 30, 2003 and 2002, respectively. The expected life
of each grant is assumed to be the minimum vesting period under certain
performance criteria of each grant.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Heritage applies Financial Accounting Standards Board ("FASB") Statement No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
SFAS 133 requires that all derivatives be recognized in the
9
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. There
were no such financial instruments outstanding as of November 30, 2003 or 2002.
RECENTLY ISSUED ACCOUNTING STANDARDS
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.
In January 2003, the FASB issued Financial Interpretation No. 46 Consolidation
of Variable Interest Entities - An Interpretation of ARB No. 51 (FIN 46). In
December 2003, the FASB issued a revision to 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. The implementation of FIN 46 did
not have a significant impact on Heritage's financial position or results of
operations.
PRO FORMA RESULTS
On January 2, 2003, Heritage purchased the propane assets of V-1 Oil Co. ("V-1")
of Idaho Falls, Idaho for total consideration of $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 $0.4 million in liabilities assumed. V-1's propane distribution network
included 35 customer service locations in Colorado, Idaho, Montana, Oregon,
Utah, Washington, and Wyoming. The results of operations of V-1 for the three
months ended November 30, 2003 are included in the consolidated statement of
operations of Heritage for the three months ended November 30, 2003.
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition of V-1 had been made at the beginning of the
periods presented:
Three Months Ended
November 30,
2002
------------------
Total revenues $ 120,444
Net Income $ 2,271
Limited partners' interest in net income $ 2,031
Basic net income per limited partner unit $ 0.12
Diluted net income per limited partner unit $ 0.12
The pro forma consolidated results of operations include adjustments to give
effect to depreciation on the step-up of property, plant and equipment,
amortization of customer lists, interest expense on acquisition debt, and
certain other adjustments. The unaudited pro forma information is not
necessarily indicative of the results of operations that would have occurred had
the transactions been made at the beginning of the periods presented or the
future results of the combined operations.
3. WORKING CAPITAL FACILITY AND LONG-TERM DEBT:
Effective July 16, 2001, the Operating Partnership entered into the Fifth
Amendment to the First Amended and Restated Credit Agreement (Bank Credit
Facility). The terms of the Bank Credit Facility as amended are as follows:
10
A $65,000 Senior Revolving Working Capital Facility, expiring June 30,
2004 with $60,448 outstanding at November 30, 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 2.495% for the amount outstanding at
November 30, 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 $36,350
outstanding as of November 30, 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 2.495% for
the amount outstanding at November 30, 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.
Heritage entered into an amendment and restatement of the above described Bank
Credit Facility effective as of December 31, 2003, which increased the amount
available to be borrowed under each of the Working Capital Facility and the
Acquisition Facility to up to $75 million and extended the maturity of each
Facility to December 31, 2006.
4. REPORTABLE SEGMENTS:
The Partnership's financial statements reflect four reportable segments: the
domestic retail operations of Heritage, the domestic wholesale operations of
Heritage, the foreign wholesale operations of MP Energy Partnership, and the
liquids marketing activities of Resources. Heritage's reportable domestic and
wholesale fuel segments are strategic business units that sell products and
services to retail and wholesale customers. Intersegment sales by the foreign
wholesale segment to the domestic segment are priced in accordance with the
partnership agreement of MP Energy Partnership. Heritage manages these segments
separately as each segment involves different distribution, sale, and marketing
strategies. Heritage evaluates the performance of its operating segments based
on operating income, exclusive of selling, general, and administrative expenses
of $3,190 and $2,856 for the three months ended November 30, 2003 and 2002,
respectively. Selling, general and administrative expenses, interest expense and
other expenses are not allocated by segment. Investment in affiliates and equity
in earnings (losses) of affiliates relates primarily to Heritage's investment in
Bi-State Propane (see Note 6), and is part of the domestic retail fuel segment.
The following table presents the unaudited financial information by segment for
the following periods:
For the Three Months ended
November 30,
-------------------------------
2003 2002
------------ ------------
Gallons:
Domestic retail fuel 78,641 76,721
Domestic wholesale fuel 3,294 4,890
Foreign wholesale fuel
Affiliated 20,947 20,380
Unaffiliated 12,169 17,195
Elimination (20,947) (20,380)
----------- -----------
Total 94,104 98,806
=========== ===========
11
Revenues:
Domestic retail fuel $ 94,388 $ 84,050
Domestic wholesale fuel 2,287 2,411
Foreign wholesale fuel
Affiliated 13,973 10,408
Unaffiliated 8,055 8,937
Elimination (13,973) (10,408)
Liquids marketing, net 49 707
Other 18,947 17,355
----------- -----------
Total $ 123,726 $ 113,460
=========== ===========
Operating Income (Loss):
Domestic retail $ 9,861 $ 13,437
Domestic wholesale fuel (516) (484)
Foreign wholesale fuel
Affiliated 153 110
Unaffiliated 646 506
Elimination (153) (110)
Liquids marketing (92) 323
----------- -----------
Total $ 9,899 $ 13,782
=========== ===========
Gain (Loss) on Disposal of Assets:
Domestic retail fuel $ 162 $ 80
Domestic wholesale fuel 11 (13)
----------- -----------
Total $ 173 $ 67
=========== ===========
Minority Interest Expense:
Corporate $ (13) $ 16
Foreign wholesale 148 111
----------- -----------
Total $ 135 $ 127
=========== ===========
Depreciation and amortization:
Domestic retail $ 9,301 $ 9,132
Domestic wholesale 108 129
Foreign wholesale 6 5
----------- -----------
Total $ 9,415 $ 9,266
=========== ===========
As of As of
November 30, August 31,
2003 2003
--------------- ---------------
Total Assets:
Domestic retail $ 723,065 $ 691,900
Domestic wholesale 15,103 12,197
Foreign wholesale 15,119 13,912
Liquids Marketing 11,246 4,474
Corporate 16,603 16,356
-------------- --------------
Total $ 781,136 $ 738,839
============== ==============
Additions to property, plant and
equipment including acquisitions:
Domestic retail fuel $ 16,970 $ 57,499
Domestic wholesale 106 280
Foreign wholesale - -
Corporate - 2,344
-------------- --------------
Total $ 17,076 $ 60,123
============== ==============
12
Corporate assets include vehicles, office equipment and computer software for
the use of administrative personnel. These assets are not allocated to segments.
Corporate minority interest expense relates to U.S. Propane's general partner
interest in the Operating Partnership.
5. SUBSEQUENT EVENTS:
On December 24, 2003, Heritage purchased the 50% interest in Bi-State Propane
that it did not previously own, in exchange for 422,000 Common Units before
final working capital adjustments, of which, 413,180 Common Units have been
issued. The remaining units will be issued, subject to final working capital
adjustments. Heritage now owns 100% of Bi-State Propane.
On January 5, 2004, Heritage announced the completion of the acquisition of the
assets of Metro Lift Propane for approximately $21.4 million. The purchase price
was payable $15.7 million in cash, 92,646 Partnership Common Units valued at
$3.5 million, and $2.2 million in notes payable on non-compete agreements.
6. SIGNIFICANT INVESTEE:
At November 30, 2003, Heritage held a 50% interest in Bi-State Propane. Heritage
accounts for this 50% interest in Bi-State Propane under the equity method.
Heritage's investment in Bi-State Propane totaled $8,425 and $8,242 at November
30, 2003 and August 31, 2003 respectively. Heritage received distributions of
$27 and $0 from Bi-State Propane for the three months ended November 30, 2003
and 2002, respectively. The Operating Partnership guaranteed $5 million of debt
incurred by Bi-State Propane to a financial institution. Based on the current
financial condition of Bi-State Propane, management considers the likelihood of
Heritage incurring a liability resulting from the guarantee to be remote.
Heritage has not recorded a liability on the balance sheets as of November 30,
2003 or August 31, 2003 for this guarantee because the guarantee was in effect
prior to the issuance of FIN 45, and there have been no amendments to the
original guarantee. Bi-State Propane's financial position is summarized below:
November 30, August 31,
2003 2003
--------------- ---------------
Current assets $ 4,204 $ 3,393
Noncurrent assets 22,443 23,187
--------------- ---------------
$ 26,647 $ 26,580
=============== ===============
Current liabilities $ 3,400 $ 3,701
Long-term debt 7,750 7,750
Partners' capital:
Heritage 8,425 8,242
Other partner 7,072 6,887
--------------- ---------------
$ 26,647 $ 26,580
=============== ===============
Bi-State Propane's results of operations for the three months ended November 30,
2003 and 2002, respectively are summarized below:
For the Three Months Ended
November 30,
---------------------------
2003 2002
----------- -----------
Revenues $ 5,084 $ 4,641
Gross profit 2,257 2,285
Net income:
Heritage 210 206
Other Partner 212 215
13
On December 24, 2003, Heritage purchased the 50% interest in Bi-State Propane
that it did not previously own. Heritage now owns 100% of Bi-State Propane.
Beginning December 24, 2003, Heritage will consolidate the results of Bi-State,
as Bi-State became a wholly owned subsidiary of the Partnership.
7. 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 $777 and $716 for the
three months ended November 30, 2003 and 2002, 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 $1,641. 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. 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 $1.6 million in salary and the issuance of up to
150,018 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 November 30,
2003 and 2002, an accrual of $941 and $641, 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 November 30, or
August 31, 2003 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.
14
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.
8. PARTNER'S CAPITAL:
Common Units. The Partnership's Common Units are registered under the Securities
Exchange Act of 1934, and are listed for trading on the New York Stock Exchange.
Each holder of a Common Unit is entitled to one vote per unit on all matters
presented to the Limited Partners for a vote. However, if at any time any person
or group (other than the General Partner and its affiliates) owns beneficially
20% or more of all Common Units, any Common Units owned by that person or group
may not be voted on any matter and are not considered to be outstanding when
sending notices of a meeting of Unitholders (unless otherwise required by law),
calculating required votes, determining the presence of a quorum or for other
similar purposes under our Partnership Agreement. The Common Units are entitled
to distributions of Available Cash as described above under "Quarterly
Distributions of Available Cash"
Class C Units. In conjunction with the transaction with U.S. Propane and the
change of control of Heritage's General Partner in August 2000, the Partnership
issued 1,000,000 newly created Class C Units to Heritage Holdings in conversion
of the 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 specified litigation filed by Heritage
prior to the transaction with U.S. Propane, which is referred to as the "SCANA
litigation." The Class C Units have zero initial capital account balance and
were distributed by Heritage Holdings to its former stockholders in connection
with the transaction with U.S. Propane. Thus, U.S. Propane will not receive any
distributions made with respect to the SCANA litigation.
All decisions of the General Partner relating to the SCANA litigation are
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 any final cash payment as a result
of the resolution of the SCANA litigation, the special litigation committee will
determine the aggregate net amount of these 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 any cash reserves necessary or appropriate to provide for
operating expenditures. Until the special litigation committee decides to make
this distribution, none of the distributable proceeds will be deemed to be
"Available Cash" under the Partnership Agreement. Please read "Quarterly
Distributions of Available Cash" above 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 above under
"Quarterly Distributions of Available Cash," 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 do not have the privilege of
15
conversion into any other unit and do not have any voting rights except to the
extent provided by law, in which case the Class C Units will be entitled to one
vote.
The amount of cash distributions to which the Incentive Distribution Rights are
entitled was not increased by the creation of the Class C Units, rather, the
Class C Units are a mechanism for dividing the Incentive Distribution Rights
that Heritage Holdings and its former stockholders would have been entitled to.
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 "Quarterly Distributions of Available
Cash" above. 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.
9. ENERGY TRANSFER TRANSACTION:
On November 6, 2003, Heritage signed a definitive agreement with La Grange
Energy, L.P. pursuant to which La Grange Energy will contribute the midstream
natural gas business operations of 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. Simultaneously with this acquisition, La Grange Energy will also
purchase U.S. Propane, L.P., the General Partner of the Partnership, and its
General Partner, U.S. Propane, L.L.C., from subsidiaries of AGL Resources, Atmos
Energy Corporation, TECO Energy, Inc. and Piedmont Natural Gas Company, Inc. 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. The
transactions are expected to close in the second quarter of fiscal year 2004,
and will be accounted for as a reverse acquisition in accordance with EITF 90-13
Accounting for Simultaneous Common Control Mergers and SFAS 141 Business
Combinations. Although Heritage Propane Partners, L.P. will be the surviving
parent entity for legal purposes, Energy Transfer Company will become the
accounting acquirer. As a result, following the closing of the transaction, the
Partnership's historical financial statements for the periods prior to the
closing will be the historical financial statements of Energy Transfer Company.
On January 13, 2004, Heritage priced a public offering of 8,000,000 Common
Units of the Partnership, plus an underwriters' over-allotment option, at a
price of $38.69 per Common Unit. Heritage plans to use the net proceeds from
the offering to pay a portion of the consideration related to the business
combination with Energy Transfer Company and for general partnership purposes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERTIONS
Heritage Propane Partners, L.P. (the "Registrant" or "Partnership"), is a
Delaware limited partnership. The Partnership's Common Units are listed on the
New York Stock Exchange. The Partnership's business activities are primarily
conducted through its subsidiary, Heritage Operating, L.P. (the "Operating
Partnership"), a Delaware limited partnership. The Partnership is the sole
limited partner of the Operating Partnership, with a 98.9899% limited partner
interest. The Partnership and the Operating Partnership are sometimes referred
to collectively in this report as "Heritage."
The following is a discussion of the historical financial condition and results
of operations of the Partnership and its subsidiaries, and should be read in
conjunction with the Partnership's historical consolidated financial statements
and accompanying notes thereto included elsewhere in this Quarterly Report on
Form 10-Q.
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
16
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:
- THE GENERAL ECONOMIC CONDITIONS IN THE UNITED STATES OF
AMERICA AS WELL AS THE GENERAL ECONOMIC CONDITIONS AND
CURRENCIES IN FOREIGN COUNTRIES;
- THE POLITICAL AND ECONOMIC STABILITY OF PETROLEUM PRODUCING
NATIONS;
- THE EFFECT OF WEATHER CONDITIONS ON DEMAND FOR PROPANE;
- THE EFFECTIVENESS OF RISK-MANAGEMENT POLICIES AND PROCEDURES
AND THE ABILITY OF HERITAGE'S LIQUIDS MARKETING COUNTERPARTIES
TO SATISFY THEIR FINANCIAL COMMITMENTS;
- ENERGY PRICES GENERALLY AND SPECIFICALLY, AND THE PRICE OF
PROPANE TO THE CONSUMER COMPARED TO THE PRICE OF ALTERNATIVE
AND COMPETING FUELS;
- THE GENERAL LEVEL OF PETROLEUM PRODUCT DEMAND AND THE
AVAILABILITY AND PRICE OF PROPANE SUPPLIES;
- 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;
- HAZARDS OR OPERATING RISKS INCIDENTAL TO TRANSPORTING, STORING
AND DISTRIBUTING PROPANE THAT MAY NOT BE FULLY COVERED BY
INSURANCE;
- THE MATURITY OF THE PROPANE INDUSTRY AND COMPETITION FROM
OTHER PROPANE DISTRIBUTORS;
- ENERGY EFFICIENCIES AND TECHNOLOGICAL TRENDS;
- LOSS OF KEY PERSONNEL;
- THE AVAILABILITY AND COST OF CAPITAL AND HERITAGE'S ABILITY TO
ACCESS CERTAIN CAPITAL SOURCES;
- CHANGES IN LAWS AND REGULATIONS TO WHICH WE ARE SUBJECT,
INCLUDING TAX, ENVIRONMENTAL, TRANSPORTATION AND EMPLOYMENT
REGULATIONS;
- THE COSTS AND EFFECTS OF LEGAL AND ADMINISTRATIVE PROCEEDINGS;
AND
- 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
17
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.
Since its formation in 1989, Heritage has grown primarily through acquisitions
of retail propane operations and, to a lesser extent, through internal growth.
Since its inception through August 31, 2003, Heritage completed 97 acquisitions
for an aggregate purchase price approximating $675 million. During the three
months ended November 30, 2003, Heritage completed six acquisitions for an
aggregate purchase price of $7.3 million, which includes $6.8 million in cash
and $0.5 million in notes payable on non-compete agreements and liabilities
assumed. Subsequent to November 30, 2003, Heritage completed two acquisitions
for an aggregate purchase price of approximately $39.7 million, before working
capital adjustments, which includes $15.7 million in cash, 505,826 Partnership
Common Units valued at $17.8 million, and $6.2 million in notes payable on
non-compete agreements and long-term debt. Management believes that Heritage is
the fourth largest retail marketer of propane in the United States, based on
retail gallons sold. Heritage serves more than 650,000 customers from over 300
customer service locations in 31 states.
Heritage's propane distribution business is largely seasonal and dependent upon
weather conditions in its service areas. Propane sales to residential and
commercial customers are affected by winter heating season requirements.
Historically, approximately two-thirds of Heritage's retail propane volume and
in excess of 80% of Heritage's EBITDA, as adjusted, is attributable to sales
during the six-month peak-heating season of October through March. This
generally results in higher operating revenues and net income during the period
from October through March of each year and lower operating revenues, and, 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.
18
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 quarterly report on Form 10-Q.
Amounts discussed below reflect 100% of the results of MP Energy Partnership. MP
Energy Partnership is a general partnership in which Heritage owns a 60%
interest. Because MP Energy Partnership is primarily engaged in lower-margin
wholesale distribution, its contribution to Heritage's net income is not
significant and the minority interest of this partnership is excluded from the
EBITDA, as adjusted calculation.
THREE MONTHS ENDED NOVEMBER 30, 2003 COMPARED TO THE THREE MONTHS ENDED NOVEMBER
30, 2002
Volume. Total retail gallons sold in the three months ended November
30, 2003 were 78.6 million, an increase of 1.9 MILLION over the 76.7 million
gallons sold in the three months ended November 30, 2002. Of the 1.9 million
gallon increase in volume, 6.7 million gallons reflects the benefits of the
volume added through acquisitions offset by a decrease of 4.8 million gallons
due to warmer than normal weather conditions in the areas of operations.
Temperatures were approximately 11 percent warmer than normal and 11 percent
warmer than the first quarter of fiscal year 2003. Heritage also sold
approximately 15.5 million wholesale gallons in this first quarter of fiscal
2004, a decrease of 6.6 million gallons from the 22.1 million wholesale gallons
sold in the first quarter of fiscal 2003. U.S. wholesale gallons decreased 1.6
million gallons to 3.3 million gallons, due to a change in customer mix and the
effects of the warmer than normal weather, and the foreign volumes of MP Energy
Partnership decreased 5.0 million gallons to 12.2 million for the first quarter,
due to an exchange contract that was in effect during the three months ended
November 30, 2002 which was not economical to renew during the three months
ended November 30, 2003.
Revenues. Total revenues for the three months ended November 30, 2003
were $123.7 million, an increase of $10.2 million, as compared to $113.5 million
in the three months ended November 30, 2002. The current period's domestic
retail propane revenues increased $10.4 million to $94.4 million versus the
prior year's revenues of $84.0 million due to an $8.1 million increase from
acquisition related volumes, an $8.0 million increase due to higher selling
prices offset by $5.8 million decrease as a result of decreased volumes due to
warmer temperatures in the current period. The U.S. wholesale revenues decreased
to $2.3 million, as compared to $2.5 million for the period ended November 30,
2002 as a result of a $1.1 million decrease due to decreased volumes offset by a
$0.9 million increase due to higher selling prices. Foreign revenues decreased
$0.9 million for the three months ended November 30, 2003 to $8.0 million as
compared to $8.9 million for the three months ended November 30, 2002, as a
result of a $3.3 million decrease due to decreased volumes described above,
partially offset by a $2.4 million increase from higher selling prices. The net
liquids marketing activity conducted through Resources was $0.1 million versus
the prior year's activity of $0.7 million due to less favorable movement in
product prices in the current fiscal period. Other domestic revenues increased
by $1.5 million, to $18.9 million as compared to $17.4 million in the prior year
as a result of acquisitions.
Cost of Products Sold. Total cost of products sold increased to $66.4
million for the three months ended November 30, 2003 as compared to $57.0
million for the three months ended November 30, 2002. The current period's
domestic retail cost of sales increased $10.0 million to $51.6 million as
compared to $41.6 million in the prior year, of which $8.7 million was due to a
higher cost of fuel per gallon this period and a $1.3 million increase due to
slightly increased volumes compared to the same period last fiscal year. The
U.S. wholesale cost of sales remained the same at $2.1 million. Foreign cost of
sales decreased $1.0 million to $7.4 million as compared to $8.4 million in the
prior year, which was due to a $3.0 million decrease due to lower volumes,
offset by a $2.0 million increase in wholesale fuel costs. Other cost of sales
increased $0.4 million to $5.3 million as compared to $4.9 million for the three
months ended November 30, 2002.
Gross Profit. Total gross profit for the three months ended November
30, 2003 increased by $1.0 million to $57.4 million as compared to $56.4 million
for the three months ended November 30, 2002. For the three months ended
November 30, 2003, retail fuel gross profit was $42.8 million, U.S. wholesale
was $0.2 million, and other gross profit was $13.6 million. Foreign wholesale
gross profit was $0.7 million and liquids marketing gross profit was $0.1
million. As a comparison, for the three months ended November 30, 2002, Heritage
recorded retail fuel gross profit of $42.4 million, U.S. wholesale was $0.3
million, and other gross profit was $12.5 million. Foreign wholesale gross
profit was $0.5 million and liquids marketing was $0.7 million for the three
months ended November 30, 2002.
Operating Expenses. Operating expenses were $38.0 million for the three
months ended November 30, 2003 as compared to $33.4 million for the three months
ended November 30, 2002. The increase of $4.6 million is
19
primarily the result of a $2.1 million increase in personnel costs and benefits
as a result of acquisitions, and a $2.5 million increase in general operating
expenses due to acquisitions.
Selling, General and Administrative. Selling, general and
administrative expenses were $3.2 million for the three months ended November
30, 2003, a $0.3 million increase from the $2.9 million for the same three-month
period last year.
Depreciation and Amortization. Depreciation and amortization was $9.4
million in the three months ended November 30, 2003 as compared to $9.3 million
in the three months ended November 30, 2002. This increase is due to additional
depreciation and amortization of property, plant and equipment, and other
intangible assets from acquisitions.
Operating Income. For the three months ended November 30, 2003,
Heritage had operating income of $6.7 million as compared to operating income of
$10.9 million for the three months ended November 30, 2002. This decrease is
primarily due to the increased operating expenses described above.
Interest Expense. Interest expense decreased $1.1 million for the three
months ended November 30, 2003 to $8.2 million from $9.3 million for the same
three-month period last year, primarily as a result of a net decrease of $26.9
million in long-term debt in the period ended November 30, 2003 compared to the
same three-month period last year.
Net Income(Loss). For the three month period ended November 30, 2003,
Heritage had a net loss of $1.3 million, a decrease of $2.8 million as compared
to net income for the three months ended November 30, 2002 of $1.5 million. The
decrease is the result of the decrease in operating income related to operating
performance described above.
EBITDA, as adjusted. EBITDA, as adjusted decreased $4.3 million to
$16.5 million for the three months ended November 30, 2003, as compared to
EBITDA, as adjusted of $20.8 million for the period ended November 30, 2002.
This decrease is due to the operating conditions described above. EBITDA, as
adjusted for the three months ended November 30, 2003 and November 30, 2002 is
computed as follows:
NET INCOME (LOSS) RECONCILIATION Three Months Ended
(in millions) November 30,
-------------------------
2003 2002
----------- -----------
Net income (loss) $ (1.3) $ 1.5
Depreciation and amortization 9.4 9.3
Interest 8.2 9.3
Non-cash compensation expense 0.1 0.3
Other expense 0.1 0.3
Depreciation, amortization, and interest of investee 0.2 0.2
Minority interest in the Operating Partnership - -
Less: Gain on disposal of assets (0.2) (0.1)
----------- -----------
EBITDA, as adjusted (a) $ 16.5 $ 20.8
----------- -----------
(a) EBITDA, as adjusted is defined as the Partnership's earnings before
interest, taxes, depreciation, amortization and other non-cash items,
such as compensation charges for unit issuances to employees, gain or
loss on disposal of assets, and other expenses. We present EBITDA, as
adjusted, on a Partnership basis which includes both the general and
limited partner interests. Non-cash compensation expense represents
charges for the value of the Common Units awarded under the
Partnership's compensation plans that have not yet vested under the
terms of those plans and are charges which do not, or will not, require
cash settlement. Non-cash income such as the gain arising from our
disposal of assets is not included when determining EBITDA, as
adjusted. EBITDA, as adjusted (i) is not a measure of performance
calculated in accordance with generally accepted accounting principles
and (ii) should not be considered in isolation or as a substitute for
net income, income from operations or cash flow as reflected in our
consolidated financial statements.
EBITDA, as adjusted is presented because such information is relevant
and is used by management, industry analysts, investors, lenders and
rating agencies to assess the financial performance and operating
results of the Partnership's fundamental business activities.
Management believes that the presentation of EBITDA, as adjusted is
useful to lenders and investors because of its use in the propane
industry and for master limited partnerships as an indicator of
20
\
the strength and performance of the Partnership's ongoing business
operations, including the ability to fund capital expenditures, service
debt and pay distributions. Additionally, management believes that
EBITDA, as adjusted provides additional and useful information to the
Partnership's investors for trending, analyzing and benchmarking the
operating results of the Partnership from period to period as compared
to other companies that may have different financing and capital
structures. The presentation of EBITDA, as adjusted allows investors to
view the Partnership's performance in a manner similar to the methods
used by management and provides additional insight to the Partnership's
operating results.
EBITDA, as adjusted is used by management to determine our operating
performance, and along with other data as internal measures for setting
annual operating budgets, assessing financial performance of the
Partnership's numerous business locations, as a measure for evaluating
targeted businesses for acquisition and as a measurement component of
incentive compensation. The Partnership has a large number of business
locations located in different regions of the United States. EBITDA, as
adjusted can be a meaningful measure of financial performance because
it excludes factors which are outside the control of the employees
responsible for operating and managing the business locations, and
provides information management can use to evaluate the performance of
the business locations, or the region where they are located, and the
employees responsible for operating them. To present EBITDA, as
adjusted on a full Partnership basis, we add back the minority interest
of the general partner because net income is reported net of the
general partner's minority interest. Our EBITDA, as adjusted includes
non-cash compensation expense which is a non-cash expense item
resulting from our unit based compensation plans that does not require
cash settlement and is not considered during management's assessment of
the operating results of the Partnership's business. By adding these
non-cash compensation expenses in EBITDA, as adjusted allows management
to compare the Partnership's operating results to those of other
companies in the same industry who may have compensation plans with
levels and values of annual grants that are different than the
Partnership's. Other expenses include other finance charges and other
asset non-cash impairment charges that are reflected in the
Partnership's operating results but are not classified in interest,
depreciation and amortization. We do not include gain on the sale of
assets when determining EBITDA, as adjusted since including non-cash
income resulting from the sale of assets increases the performance
measure in a manner that is not related to the true operating results
of the Partnership's business. In addition, Heritage's debt agreements
contain financial covenants based on EBITDA, as adjusted. For a
description of these covenants, please read "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Description of Indebtedness" included in the Partnership's
Form 10-K for the fiscal year ended August 31, 2003, as filed with the
Securities and Exchange Commission on November 26, 2003.
There are material limitations to using a measure such as EBITDA, as
adjusted, including the difficulty associated with using it as the sole
measure to compare the results of one company to another, and the
inability to analyze certain significant items that directly affect a
company's net income or loss. In addition, Heritage's calculation of
EBITDA, as adjusted may not be consistent with similarly titled
measures of other companies and should be viewed in conjunction with
measurements that are computed in accordance with GAAP. EBITDA, as
adjusted for the periods described herein is calculated in the same
manner as presented by Heritage in the past. Management compensates for
these limitations by considering EBITDA, as adjusted in conjunction
with its analysis of other GAAP financial measures, such as gross
profit, net income (loss), and cash flow from operating activities.
LIQUIDITY AND CAPITAL RESOURCES
The ability of Heritage to satisfy its obligations will depend on its future
performance, which will be subject to prevailing economic, financial, business
and weather conditions, and other factors, many of which are beyond management's
control. Future capital requirements of Heritage are expected to be provided by
cash flows from operating activities. To the extent future capital requirements
exceed cash flows from operating activities:
a) working capital will be financed by the working capital line of
credit and repaid from subsequent seasonal reductions in inventory
and accounts receivable;
b) growth capital expenditures, mainly for customer tanks, will be
financed by the revolving acquisition bank line of credit; and
c) acquisition capital expenditures will be financed by the revolving
acquisition bank line of credit; other lines of credit, long term
debt, issuance of additional Common Units or a combination thereof.
Operating Activities. Net cash used in operating activities during the
three months ended November 30, 2003, was $9.6 million as compared to cash used
in operating activities of $2.3 million for the same three-month period ended
November 30, 2002. The net cash used in operating activities for the three
months ended November 30, 2003 consisted of net loss of $1.3 million and
non-cash charges of $9.4 million, principally depreciation and amortization,
offset by the impact of an increase in working capital of $17.8 million. The
increase in working
21
capital for the quarter ended November 30, 2003 as compared to the quarter ended
November 30, 2002 is primarily due to the increased inventory at November 30,
2003 because of lower volumes sold as a result of the warmer weather and more
inventory due to acquisitions, offset by lower receivables in November 30, 2003
compared to November 30, 2002 which is related to lower volumes sold, and a
decrease in the change in accounts payable and accrued liabilities in November
of 2003 compared to 2002, due to warmer weather in the November of 2003.
Investing Activities. Heritage completed six acquisitions during the
three months ended November 30, 2003 spending a net of $6.8 million, after
deducting cash received in such acquisitions. This capital expenditure amount is
reflected in the net cash used in investing activities of $18.4 million along
with $12.2 million invested for maintenance needed to sustain operations at
current levels and for customer tanks to support growth of operations. Net cash
used in investing activities also includes proceeds from the sale of idle
property of $0.6 million.
Financing Activities. Net cash provided by financing activities during
the three months ended November 30, 2003 of $28.8 million resulted mainly from a
net increase in the Working Capital Facility of $33.7 million and a net increase
in the Acquisition Facility of $11.7 million used to acquire other propane
businesses. These increases were offset by cash distributions to Unitholders of
$12.1 million and a decrease in other long-term debt of $4.5 million.
FINANCING AND SOURCES OF LIQUIDITY
Heritage has a Bank Credit Facility with various financial institutions, which
includes a Working Capital Facility, providing for up to $65.0 million of
borrowings for working capital and other general partnership purposes, and an
Acquisition Facility providing for up to $50.0 million of borrowings for
acquisitions and improvements. The Bank Credit Facility is secured by all
receivables, contracts, equipment, inventory and general intangibles of Heritage
Operating. Under the terms of the Bank Credit Facility agreement, the Working
Capital Facility is set to expire June 30, 2004 and the Acquisition Facility was
set to expire December 31, 2003, at which time the outstanding balance on the
Acquisition Facility was to convert to a term loan payable in quarterly
installments with a final maturity of June 30, 2006. Heritage entered into an
amendment and restatement of the above described Bank Credit Facility effective
as of December 31, 2003 which increased the amount available to be borrowed
under each of the Working Capital Facility and the Acquisition Facility to up to
$75 million and extended the maturity of each facility to December 31, 2006. The
weighted average interest rate was 2.495% for the amounts outstanding at
November 30, 2003 on both the Working Capital Facility and the Acquisition
Facility. As of November 30, 2003, the Working Capital Facility had $4.6 million
available for borrowings and the Acquisition Facility had $13.7 million
available to fund future acquisitions. Management believes that its Bank Credit
Facility is adequate to fund the future operating and capital needs of the
Partnership.
Heritage uses its cash provided by operating and financing activities to provide
distributions to the Partnership's Unitholders and to fund acquisition,
maintenance, and growth capital expenditures. Acquisition capital expenditures,
which include expenditures related to the acquisition of retail propane
operations and intangibles associated with such acquired businesses, were $6.8
million for the three months ended November 30, 2003. In addition to the $6.8
million of cash expended for acquisitions, $0.5 million for notes payable on
non-compete agreements were issued in connection with certain acquisitions.
Under the Partnership Agreement, the Partnership will distribute to its partners
within 45 days after the end of each fiscal quarter, an amount equal to all of
its Available Cash for such quarter. Available Cash generally means, with
respect to any quarter of the Partnership, all cash on hand at the end of such
quarter less the amount of cash reserves established by the General Partner in
its reasonable discretion that is necessary or appropriate to provide for future
cash requirements. The Partnership's commitment to its Unitholders is to
distribute the increase in its cash flow while maintaining prudent reserves for
the Partnership's operations. The Partnership paid a quarterly distribution of
$0.65 (or $2.60 annually) on October 15, 2003 for the fourth quarter ended
August 31, 2003, and declared a distribution of $0.65 (or $2.60 annually) on
December 19, 2003 payable on January 14, 2004. 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.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Heritage has little cash flow exposure due to rate changes for long-term debt
obligations. The Operating Partnership had $96.8 million of variable rate debt
outstanding as of November 30, 2003 through its Bank Credit Facility described
elsewhere in this report. The balance outstanding in the Bank Credit Facility
generally fluctuates throughout the year. A theoretical change of 1% in the
interest rate on the balance outstanding at November 30, 2003 would result in an
approximate $968 thousand change in annual net income. Heritage primarily enters
debt obligations to support general corporate purposes including capital
expenditures and working capital needs. The Operating Partnership's long-term
debt instruments were typically issued at fixed interest rates. When these debt
obligations mature, Heritage may refinance all or a portion of such debt at
then-existing market interest rates which may be more or less than the interest
rates on the maturing debt.
Commodity price risk arises from the risk of price changes in the propane
inventory that Heritage buys and sells. The market price of propane is often
subject to volatile changes as a result of market conditions over which
management will have no control. In the past, price changes have generally been
passed along to Heritage's customers to maintain gross margins, mitigating the
commodity price risk. In order to help ensure that adequate supply sources are
available to Heritage during periods of high demand, Heritage will, from time to
time, purchase significant volumes of propane during periods of low demand,
which generally occur during the summer months, at the then current market
price, for storage both at its customer service centers and in major storage
facilities and for future delivery.
Heritage also attempts to minimize the effects of market price fluctuations for
its propane supply by entering into certain financial contracts. In order to
manage a portion of its propane price market risk, Heritage uses contracts for
the forward purchase of propane, propane fixed-price supply agreements, and
derivative commodity instruments such as price swap and option contracts. Swap
instruments are a contractual agreement to exchange obligations of money between
the buyer and seller of the instruments as propane volumes during the pricing
period are purchased. Swaps are tied to a fixed price bid by the buyer and a
floating price determination for the seller based on certain indices at the end
of the relevant trading period. Heritage has 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 November 30, 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
are certain business risks, including market risk and credit risk. Market risk
is the risk that the value of the portfolio will change, either favorably or
unfavorably, in response to changing market conditions. Credit risk is the risk
of loss from nonperformance by suppliers, customers, or financial counter
parties to a contract. Heritage takes an active role in managing and controlling
market and credit risk and has established control procedures which are reviewed
on an ongoing basis. Heritage monitors market risk through a variety of
techniques, including routine reporting to senior management. Heritage attempts
to minimize credit risk exposure through credit policies and periodic monitoring
procedures.
LIQUIDS MARKETING
Heritage buys and sells derivative financial instruments, which are within the
scope of SFAS 133 and that are not designated as accounting hedges. Heritage
also enters into energy trading contracts, which are not derivatives, and
therefore are not within the scope of SFAS 133. EITF Issue No. 98-10, Accounting
for Contracts Involved in Energy Trading and Risk Management Activities (EITF
98-10), applied to energy trading contracts not within the scope of SFAS 133
that were entered into prior to October 25, 2002. The types of contracts
Heritage utilizes in its liquids marketing segment include energy commodity
forward contracts, options, and swaps traded on the over-the-counter financial
markets. In accordance with the provisions of SFAS 133, derivative financial
instruments utilized in connection with Heritages' liquids marketing activity
are accounted for using the mark-to-market method. Additionally, all energy
trading contracts entered into prior to October 25, 2002 were accounted for
using the mark-to-market method in accordance with the provisions of EITF 98-10.
Under the mark-to-market method of accounting, forwards, swaps, options, and
storage contracts are reflected at fair value, and are shown in the consolidated
balance sheet as assets and liabilities from liquids marketing activities.
Heritage applies 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
23
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 November 30,
2003 and 2002 include fixed price payor for 310,000 and 586,000 barrels of
propane, and fixed price receiver of 315,000 and 440,000 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 November 30, 2003 and August 31, 2003, was assets of $0.1 and
$0.08 million respectively, and liabilities of $0.1 and $0.08 million,
respectively, related to propane.
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 $10 thousand change in the market value of the contracts as there
were approximately 210 thousand gallons of net unbalanced positions at November
30, 2003.
The following table summarizes the fair value of Heritage's contracts,
aggregated by method of estimating fair value of the contracts as of November
30, 2003 and August 31, 2003 where settlement had not yet occurred. Heritage's
contracts all have a maturity of less than 1 year. The market prices used to
value these transactions reflect management's best estimate considering various
factors including closing average spot prices for the current and outer months
plus a differential to consider time value and storage costs.
November 30, August 31,
Source of Fair Value 2003 2003
---------------------------------------------- ------------ ----------
Prices actively quoted $ 50 $ 80
Prices based on other valuation methods 62 3
---------- ----------
Assets from liquids marketing $ 112 $ 83
========== ==========
Prices actively quoted $ 78 $ 80
Prices based on other valuation methods 22 -
---------- ----------
Liabilities from liquids marketing $ 100 $ 80
========== ==========
Unrealized gains in fair value of contracts outstanding $ 12 $ 3
========== ==========
The following table summarizes the changes in the unrealized fair value of
Heritage's contracts where settlement had not yet occurred for the three months
ending November 30, 2003 and 2002.
November 30, November 30,
2003 2002
------------ ------------
Unrealized gains (losses) in fair value of contracts
outstanding at the beginning of the period $ 3 $ 483
Other unrealized gains (losses) recognized during the
period 46 224
Less: Realized gains (losses) recognized during the
period 37 666
---------- ----------
Unrealized gains (losses) in fair value of contracts
outstanding at the end of the period $ 12 $ 41
========== ==========
24
The following table summarizes the gross transaction volumes in barrels for
liquids marketing contracts that were physically settled for the three months
ended November 30, 2003, and 2002.
(in thousands)
Three months ended November 30, 2003 29
Three months ended November 30, 2002 44
ITEM 4. CONTROLS AND PROCEDURES
The Partnership maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Partnership files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC. 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 November 30, 2003. There have been no change in the Partnership's internal
controls over financial reporting (as defined in Rule 13(e)-15 or Rule 15d-15(f)
of the Exchange Act) or in other factors during the Partnership's fiscal quarter
covered by this report 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.
25
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the following Exhibit Index are filed as part of this
Report. Exhibits required by Item 601 of Regulation S-K, but which are not
listed below, are not applicable.
Exhibit
Number Description
------- -----------
(1) 3.1 Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(10) 3.1.1 Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P.
(16) 3.1.2 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P.
(19) 3.1.3 Amendment No. 3 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P.
(19) 3.1.4 Amendment No. 4 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P.
(1) 3.2 Agreement of Limited Partnership of Heritage Operating, L.P.
(12) 3.2.1 Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Heritage Operating, L.P.
(19) 3.2.2 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage Operating, L.P.
(18) 3.3 Amended Certificate of Limited Partnership of Heritage Propane Partners, L.P.
(18) 3.4 Amended Certificate of Limited Partnership of Heritage Operating, L.P.
(20) 4.1 Registration Rights Agreement for Limited Partner Interests of Heritage Propane Partners, L.P.
(7) 10.1 First Amended and Restated Credit Agreement with Banks Dated May 31, 1999
(8) 10.1.1 First Amendment to the First Amended and Restated Credit Agreement dated as of October 15, 1999
(9) 10.1.2 Second Amendment to First Amended and Restated Credit Agreement dated as of May 31, 2000
(10) 10.1.3 Third Amendment dated as of August 10, 2000 to First Amended and Restated Credit Agreement
(13) 10.1.4 Fourth Amendment to First Amended and Restated Credit Agreement dated as of December 28, 2000
26
Exhibit
Number Description
------- -----------
(16) 10.1.5 Fifth Amendment to First Amended and Restated Credit Agreement dated as of July 16, 2001
(1) 10.2 Form of Note Purchase Agreement (June 25, 1996)
(3) 10.2.1 Amendment of Note Purchase Agreement (June 25, 1996) dated as of July 25, 1996
(4) 10.2.2 Amendment of Note Purchase Agreement (June 25, 1996) dated as of March 11, 1997
(6) 10.2.3 Amendment of Note Purchase Agreement (June 25, 1996) dated as of October 15, 1998
(8) 10.2.4 Second Amendment Agreement dated September 1, 1999 to June 25, 1996 Note Purchase Agreement
(11) 10.2.5 Third Amendment Agreement dated May 31, 2000 to June 25, 1996 Note Purchase Agreement and November
19, 1997 Note Purchase Agreement
(10) 10.2.6 Fourth Amendment Agreement dated August 10, 2000 to June 25, 1996 Note Purchase Agreement and
November 19, 1997 Note Purchase Agreement
(13) 10.2.7 Fifth Amendment Agreement dated as of December 28, 2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August 10, 2000 Note Purchase Agreement
(1) 10.3 Form of Contribution, Conveyance and Assumption Agreement among Heritage Holdings, Inc., Heritage Propane
Partners, L.P. and Heritage Operating, L.P.
(1)(**) 10.6 Restricted Unit Plan
(4)(**) 10.6.1 Amendment of Restricted Unit Plan dated as of October 17, 1996
(12)(**) 10.6.2 Amended and Restated Restricted Unit Plan dated as of August 10, 2000
(18)(**) 10.6.3 Second Amended and Restated Restricted Unit Plan dated as of February 4, 2002
(12)(**) 10.7 Employment Agreement for James E. Bertelsmeyer dated as of August 10, 2000
(18) 10.7.1 Consent to Assignment of Employment Agreement for James E. Bertelsmeyer dated February 3, 2002
(21)(**) 10.7.2 Amendment 1 of Employment Agreement for James E. Bertelsmeyer dated August 10, 2002
(24)(**) 10.7.3 Amendment 2 of Employment Agreement for James E. Bertelsmeyer dated April 1, 2003
(12)(**) 10.8 Employment Agreement for R. C. Mills dated as of August 10, 2000
(18) 10.8.1 Consent to Assignment of Employment Agreement for R.C. Mills dated February 3, 2002
(12)(**) 10.10 Employment Agreement for H. Michael Krimbill dated as of August 10, 2000
27
Exhibit
Number Description
------- -----------
(18) 10.10.1 Consent to Assignment of Employment Agreement for H. Michael Krimbill dated February 3, 2002
(12)(**) 10.11 Employment Agreement for Bradley K. Atkinson dated as of August 10, 2000
(18) 10.11.1 Consent to Assignment of Employment Agreement for Bradley K. Atkinson dated February 3, 2002
(12)(**) 10.13 Employment Agreement for Mark A. Darr dated as of August 10, 2000
(18) 10.13.1 Consent to Assignment of Employment Agreement for Mark A. Darr dated February 3, 2002
(12)(**) 10.14 Employment Agreement for Thomas H. Rose dated as of August 10, 2000
(18) 10.14.1 Consent to Assignment of Employment Agreement for Thomas H. Rose dated February 3, 2002
(12) 10.15 Employment Agreement for Curtis L. Weishahn dated as of August 10, 2000
(18) 10.15.1 Consent to Assignment of Employment Agreement for Curtis L. Weishahn dated February 3, 2002
(5) 10.16 Note Purchase Agreement dated as of November 19, 1997
(6) 10.16.1 Amendment dated October 15, 1998 to November 19, 1997 Note Purchase Agreement
(8) 10.16.2 Second Amendment Agreement dated September 1, 1999 to November 19, 1997 Note Purchase Agreement and June
25, 1996 Note Purchase Agreement
(9) 10.16.3 Third Amendment Agreement dated May 31, 2000 to November 19, 1997 Note Purchase Agreement and June 25,
1996 Note Purchase Agreement
(10) 10.16.4 Fourth Amendment Agreement dated August 10, 2000 to November 19, 1997 Note Purchase Agreement and
June 25, 1996 Note Purchase Agreement
(13) 10.16.5 Fifth Amendment Agreement dated as of December 28, 2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August 10, 2000 Note Purchase Agreement
(10) 10.17 Contribution Agreement dated June 15, 2000 among U.S. Propane, L.P., Heritage Operating, L.P. and
Heritage Propane Partners, L.P.
(10) 10.17.1 Amendment dated August 10, 2000 to June 15, 2000 Contribution Agreement
(10) 10.18 Subscription Agreement dated June 15, 2000 between Heritage Propane Partners, L.P. and individual
investors
(10) 10.18.1 Amendment dated August 10, 2000 to June 15, 2000 Subscription Agreement
(16) 10.18.2 Amendment Agreement dated January 3, 2001 to the June 15, 2000 Subscription Agreement
(17) 10.18.3 Amendment Agreement dated October 5, 2001 to the June 15, 2000 Subscription Agreement
28
Exhibit
Number Description
------- -----------
(10) 10.19 Note Purchase Agreement dated as of August 10, 2000
(13) 10.19.1 Fifth Amendment Agreement dated as of December 28, 2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August 10, 2000 Note Purchase Agreement
(14) 10.19.2 First Supplemental Note Purchase Agreement dated as of May 24, 2001 to the August 10, 2000 Note Purchase
Agreement
(15) 10.20 Stock Purchase Agreement dated as of July 5, 2001 among the shareholders of ProFlame, Inc. and Heritage
Holdings, Inc.
(15) 10.21 Stock Purchase Agreement dated as of July 5, 2001 among the shareholders of Coast Liquid Gas, Inc. and
Heritage Holdings, Inc.
(15) 10.22 Agreement and Plan of Merger dated as of July 5, 2001 among California Western Gas Company,
the Majority Stockholders of California Western Gas Company signatories thereto, Heritage Holdings, Inc.
and California Western Merger Corp.
(15) 10.23 Agreement and Plan of Merger dated as of July 5, 2001 among Growth Properties, the Majority Shareholders
signatories thereto, Heritage Holdings, Inc. and Growth Properties Merger Corp.
(15) 10.24 Asset Purchase Agreement dated as of July 5, 2001 among L.P.G. Associates, the Shareholders of L.P.G.
Associates and Heritage Operating, L.P.
(15) 10.25 Asset Purchase Agreement dated as of July 5, 2001 among WMJB, Inc., the Shareholders of WMJB, Inc. and
Heritage Operating, L.P.
(15) 10.25.1 Amendment to Asset Purchase Agreement dated as of July 5, 2001 among WMJB, Inc., the Shareholders of
WMJB, Inc. and Heritage Operating, L.P.
(18) 10.26 Assignment, Conveyance and Assumption Agreement between U.S. Propane, L.P. and Heritage Holdings, Inc.,
as the former General Partner of Heritage Propane Partners, L.P. dated as of February 4, 2002
(18) 10.27 Assignment, Conveyance and Assumption Agreement between U.S. Propane, L.P. and Heritage Holdings, Inc.,
as the former General Partner of Heritage Operating, L.P., dated as of February 4, 2002
(22) 10.28 Assignment for Contribution of Assets in Exchange for Partnership Interest dated December 9, 2002
amount V-1 Oil Co., the shareholders of V-1 Oil Co., Heritage Propane Partners, L.P. and Heritage
Operating, L.P.
(23)(**) 10.29 Employment Agreement for Michael L. Greenwood dated as of July 1, 2002
(25) 10.30 Acquisition Agreement dated November 6, 2003 among the owners of U.S. Propane, L.P. and U.S. Propane,
L.L.C., and La Grange Energy, L.P.
(25) 10.31 Contribution Agreement dated November 6, 2003 among La Grange Energy, L.P., and Heritage Propane
Partners, L.P. and U.S. Propane, L.P.
(*) 10.31.1 Amendment No. 1 to Contribution Agreement dated December 7, 2003 among La Grange Energy, L.P., Heritage
Propane Partners, L.P. and U.S. Propane, L.P.
29
Exhibit
Number Description
------- -----------
(25) 10.32 Stock Purchase Agreement dated November 6, 2003 among the owners of Heritage Holdings, Inc. and
Heritage Propane Partners, L.P.
(25) 21.1 List of Subsidiaries
(*) 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(*) 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(*) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(*) 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- ------------------
(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement of Form S-1, File No. 333-04018, filed with the
Commission on June 21, 1996.
(2) Incorporated by reference to Exhibit 10.11 to Registrant's Registration
Statement on Form S-1, File No. 333-04018, filed with the Commission on
June 21, 1996.
(3) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 1996.
(4) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended February 28, 1997.
(5) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended May 31, 1998.
(6) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1998.
(7) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 1999.
(8) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1999.
(9) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2000.
(10) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 23, 2000.
(11) Filed 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.
30
(13) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2001.
(14) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2001.
(15) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 15, 2001.
(16) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2001.
(17) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended November 30, 2001.
(18) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2002.
(19) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2002.
(20) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated February 4, 2002.
(21) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2002.
(22) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated January 6, 2003.
(23) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended November 30, 2002.
(24) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 21, 2003.
(25) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2003.
(*) Filed herewith.
(**) Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Partnership filed one report on Form 8-K during the quarter ending
November 30, 2003.
Form 8-K item 5 was filed on November 13, 2003 announcing the signing of a
definitive agreement with La Grange Energy, L.P. to acquire the natural gas
gathering, treating, processing and transportation business operations of
La Grange and its subsidiaries.
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERITAGE PROPANE PARTNERS, L.P.
By: U.S. Propane, L.P.., General Partner
By: U.S. Propane, L.L.C., General Partner
Date: January 14, 2004 By: /s/ Michael L. Greenwood
-------------------------------------------
Michael L. Greenwood
(Vice President, Chief Financial
Officer and officer duly authorized to
sign on behalf of the registrant)
32
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
(1) 3.1 Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(10) 3.1.1 Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P.
(16) 3.1.2 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P.
(19) 3.1.3 Amendment No. 3 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P.
(19) 3.1.4 Amendment No. 4 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P.
(1) 3.2 Agreement of Limited Partnership of Heritage Operating, L.P.
(12) 3.2.1 Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Heritage Operating, L.P.
(19) 3.2.2 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage Operating, L.P.
(18) 3.3 Amended Certificate of Limited Partnership of Heritage Propane Partners, L.P.
(18) 3.4 Amended Certificate of Limited Partnership of Heritage Operating, L.P.
(20) 4.1 Registration Rights Agreement for Limited Partner Interests of Heritage Propane Partners, L.P.
(7) 10.1 First Amended and Restated Credit Agreement with Banks Dated May 31, 1999
(8) 10.1.1 First Amendment to the First Amended and Restated Credit Agreement dated as of October 15, 1999
(9) 10.1.2 Second Amendment to First Amended and Restated Credit Agreement dated as of May 31, 2000
(10) 10.1.3 Third Amendment dated as of August 10, 2000 to First Amended and Restated Credit Agreement
(13) 10.1.4 Fourth Amendment to First Amended and Restated Credit Agreement dated as of December 28, 2000
33
Exhibit
Number Description
------- -----------
(16) 10.1.5 Fifth Amendment to First Amended and Restated Credit Agreement dated as of July 16, 2001
(1) 10.2 Form of Note Purchase Agreement (June 25, 1996)
(3) 10.2.1 Amendment of Note Purchase Agreement (June 25, 1996) dated as of July 25, 1996
(4) 10.2.2 Amendment of Note Purchase Agreement (June 25, 1996) dated as of March 11, 1997
(6) 10.2.3 Amendment of Note Purchase Agreement (June 25, 1996) dated as of October 15, 1998
(8) 10.2.4 Second Amendment Agreement dated September 1, 1999 to June 25, 1996 Note Purchase Agreement
(11) 10.2.5 Third Amendment Agreement dated May 31, 2000 to June 25, 1996 Note Purchase Agreement and November
19, 1997 Note Purchase Agreement
(10) 10.2.6 Fourth Amendment Agreement dated August 10, 2000 to June 25, 1996 Note Purchase Agreement and
November 19, 1997 Note Purchase Agreement
(13) 10.2.7 Fifth Amendment Agreement dated as of December 28, 2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August 10, 2000 Note Purchase Agreement
(1) 10.3 Form of Contribution, Conveyance and Assumption Agreement among Heritage Holdings, Inc., Heritage Propane
Partners, L.P. and Heritage Operating, L.P.
(1)(**) 10.6 Restricted Unit Plan
(4)(**) 10.6.1 Amendment of Restricted Unit Plan dated as of October 17, 1996
(12)(**) 10.6.2 Amended and Restated Restricted Unit Plan dated as of August 10, 2000
(18)(**) 10.6.3 Second Amended and Restated Restricted Unit Plan dated as of February 4, 2002
(12)(**) 10.7 Employment Agreement for James E. Bertelsmeyer dated as of August 10, 2000
(18) 10.7.1 Consent to Assignment of Employment Agreement for James E. Bertelsmeyer dated February 3, 2002
(21)(**) 10.7.2 Amendment 1 of Employment Agreement for James E. Bertelsmeyer dated August 10, 2002
(24)(**) 10.7.3 Amendment 2 of Employment Agreement for James E. Bertelsmeyer dated April 1, 2003
(12)(**) 10.8 Employment Agreement for R. C. Mills dated as of August 10, 2000
(18) 10.8.1 Consent to Assignment of Employment Agreement for R.C. Mills dated February 3, 2002
(12)(**) 10.10 Employment Agreement for H. Michael Krimbill dated as of August 10, 2000
34
Exhibit
Number Description
------- -----------
(18) 10.10.1 Consent to Assignment of Employment Agreement for H. Michael Krimbill dated February 3, 2002
(12)(**) 10.11 Employment Agreement for Bradley K. Atkinson dated as of August 10, 2000
(18) 10.11.1 Consent to Assignment of Employment Agreement for Bradley K. Atkinson dated February 3, 2002
(12)(**) 10.13 Employment Agreement for Mark A. Darr dated as of August 10, 2000
(18) 10.13.1 Consent to Assignment of Employment Agreement for Mark A. Darr dated February 3, 2002
(12)(**) 10.14 Employment Agreement for Thomas H. Rose dated as of August 10, 2000
(18) 10.14.1 Consent to Assignment of Employment Agreement for Thomas H. Rose dated February 3, 2002
(12) 10.15 Employment Agreement for Curtis L. Weishahn dated as of August 10, 2000
(18) 10.15.1 Consent to Assignment of Employment Agreement for Curtis L. Weishahn dated February 3, 2002
(5) 10.16 Note Purchase Agreement dated as of November 19, 1997
(6) 10.16.1 Amendment dated October 15, 1998 to November 19, 1997 Note Purchase Agreement
(8) 10.16.2 Second Amendment Agreement dated September 1, 1999 to November 19, 1997 Note Purchase Agreement and June
25, 1996 Note Purchase Agreement
(9) 10.16.3 Third Amendment Agreement dated May 31, 2000 to November 19, 1997 Note Purchase Agreement and June 25,
1996 Note Purchase Agreement
(10) 10.16.4 Fourth Amendment Agreement dated August 10, 2000 to November 19, 1997 Note Purchase Agreement and
June 25, 1996 Note Purchase Agreement
(13) 10.16.5 Fifth Amendment Agreement dated as of December 28, 2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August 10, 2000 Note Purchase Agreement
(10) 10.17 Contribution Agreement dated June 15, 2000 among U.S. Propane, L.P., Heritage Operating, L.P. and
Heritage Propane Partners, L.P.
(10) 10.17.1 Amendment dated August 10, 2000 to June 15, 2000 Contribution Agreement
(10) 10.18 Subscription Agreement dated June 15, 2000 between Heritage Propane Partners, L.P. and individual
investors
(10) 10.18.1 Amendment dated August 10, 2000 to June 15, 2000 Subscription Agreement
(16) 10.18.2 Amendment Agreement dated January 3, 2001 to the June 15, 2000 Subscription Agreement
(17) 10.18.3 Amendment Agreement dated October 5, 2001 to the June 15, 2000 Subscription Agreement
35
Exhibit
Number Description
------- -----------
(10) 10.19 Note Purchase Agreement dated as of August 10, 2000
(13) 10.19.1 Fifth Amendment Agreement dated as of December 28, 2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August 10, 2000 Note Purchase Agreement
(14) 10.19.2 First Supplemental Note Purchase Agreement dated as of May 24, 2001 to the August 10, 2000 Note Purchase
Agreement
(15) 10.20 Stock Purchase Agreement dated as of July 5, 2001 among the shareholders of ProFlame, Inc. and Heritage
Holdings, Inc.
(15) 10.21 Stock Purchase Agreement dated as of July 5, 2001 among the shareholders of Coast Liquid Gas, Inc. and
Heritage Holdings, Inc.
(15) 10.22 Agreement and Plan of Merger dated as of July 5, 2001 among California Western Gas Company,
the Majority Stockholders of California Western Gas Company signatories thereto, Heritage Holdings, Inc.
and California Western Merger Corp.
(15) 10.23 Agreement and Plan of Merger dated as of July 5, 2001 among Growth Properties, the Majority Shareholders
signatories thereto, Heritage Holdings, Inc. and Growth Properties Merger Corp.
(15) 10.24 Asset Purchase Agreement dated as of July 5, 2001 among L.P.G. Associates, the Shareholders of L.P.G.
Associates and Heritage Operating, L.P.
(15) 10.25 Asset Purchase Agreement dated as of July 5, 2001 among WMJB, Inc., the Shareholders of WMJB, Inc. and
Heritage Operating, L.P.
(15) 10.25.1 Amendment to Asset Purchase Agreement dated as of July 5, 2001 among WMJB, Inc., the Shareholders of
WMJB, Inc. and Heritage Operating, L.P.
(18) 10.26 Assignment, Conveyance and Assumption Agreement between U.S. Propane, L.P. and Heritage Holdings, Inc.,
as the former General Partner of Heritage Propane Partners, L.P. dated as of February 4, 2002
(18) 10.27 Assignment, Conveyance and Assumption Agreement between U.S. Propane, L.P. and Heritage Holdings, Inc.,
as the former General Partner of Heritage Operating, L.P., dated as of February 4, 2002
(22) 10.28 Assignment for Contribution of Assets in Exchange for Partnership Interest dated December 9, 2002
amount V-1 Oil Co., the shareholders of V-1 Oil Co., Heritage Propane Partners, L.P. and Heritage
Operating, L.P.
(23)(**) 10.29 Employment Agreement for Michael L. Greenwood dated as of July 1, 2002
(25) 10.30 Acquisition Agreement dated November 6, 2003 among the owners of U.S. Propane, L.P. and U.S. Propane,
L.L.C., and La Grange Energy, L.P.
(25) 10.31 Contribution Agreement dated November 6, 2003 among La Grange Energy, L.P., and Heritage Propane
Partners, L.P. and U.S. Propane, L.P.
(*) 10.31.1 Amendment No. 1 to Contribution Agreement dated December 7, 2003 among La Grange Energy, L.P., Heritage
Propane Partners, L.P. and U.S. Propane, L.P.
36
Exhibit
Number Description
------- -----------
(25) 10.32 Stock Purchase Agreement dated November 6, 2003 among the owners of Heritage Holdings, Inc. and
Heritage Propane Partners, L.P.
(25) 21.1 List of Subsidiaries
(*) 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(*) 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(*) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(*) 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- ------------------
(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement of Form S-1, File No. 333-04018, filed with the
Commission on June 21, 1996.
(2) Incorporated by reference to Exhibit 10.11 to Registrant's Registration
Statement on Form S-1, File No. 333-04018, filed with the Commission on
June 21, 1996.
(3) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 1996.
(4) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended February 28, 1997.
(5) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended May 31, 1998.
(6) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1998.
(7) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 1999.
(8) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1999.
(9) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2000.
(10) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 23, 2000.
(11) Filed 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.
37
(13) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2001.
(14) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2001.
(15) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 15, 2001.
(16) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2001.
(17) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended November 30, 2001.
(18) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2002.
(19) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2002.
(20) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated February 4, 2002.
(21) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2002.
(22) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated January 6, 2003.
(23) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended November 30, 2002.
(24) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 21, 2003.
(25) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2003.
(*) Filed herewith.
(**) Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Partnership filed one report on Form 8-K during the quarter ending
November 30, 2003.
Form 8-K item 5 was filed on November 13, 2003 announcing the signing of a
definitive agreement with La Grange Energy, L.P. to acquire the natural gas
gathering, treating, processing and transportation business operations of
La Grange and its subsidiaries.
38