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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 FEBRUARY 29, 2004
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
ENERGY TRANSFER 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.)
2838 WOODSIDE STREET
DALLAS, TEXAS 75204
(Address of principal
executive offices
and zip code)
(918) 492-7272
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [x] No [ ]
At April 11, 2004, the registrant had units outstanding as follows:
Energy Transfer Partners, L.P. 27,919,974 Common Units
7,721,542 Class D Units
FORM 10-Q
ENERGY TRANSFER PARTNERS, L.P.
TABLE OF CONTENTS
Pages
-----
PART I FINANCIAL INFORMATION......................................................................... 1
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets -
February 29, 2004
August 31, 2003 (Energy Transfer Company)
and August 31, 2003 (Predecessor Heritage) ............................................... 2
Consolidated Statements of Operations -
Three months and six months ended February 29, 2004
Three months and five months ended February 28, 2003 (Energy Transfer Company)
Three months and six months ended February 28, 2003 (Predecessor Heritage)................ 4
Consolidated Statements of Comprehensive Income -
Three months and six months ended February 29, 2004
Three months and five months ended February 28, 2003 (Energy Transfer Company)
Three months and six months ended February 28, 2003 (Predecessor Heritage)................ 5
Consolidated Statement of Partners' Capital -
Six months ended February 29, 2004........................................................ 6
Consolidated Statements of Cash Flows -
Six months ended February 29, 2004
Five months ended February 28, 2003 (Energy Transfer Company)
Six months ended February 28, 2003 (Predecessor Heritage)................................. 7
Notes to Consolidated Financial Statements.................................................... 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................................... 35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................................................... 55
ITEM 4. CONTROLS AND PROCEDURES....................................................................... 56
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................................................... 57
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................. 57
SIGNATURE
i
PART I - FINANCIAL INFORMATION
The financial statements presented herein for the three months and six months
ended February 29, 2004 include the results of operations for Energy Transfer
Company for the period from December 1, 2003 and September 1, 2003,
respectively, through February 29, 2004, and for Heritage Propane Partners, L.P.
(referenced herein as Predecessor Heritage) only for the period from January 20,
2004 to February 29, 2004. Thus, the results of operations do not represent the
entire results of operations for Predecessor Heritage for the three and six
months ended February 29, 2004, as they do not include the results of operations
of Predecessor Heritage for the period prior to the Energy Transfer Transaction
on January 20, 2004.
1
ITEM 1. FINANCIAL STATEMENTS
ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
(unaudited)
February 29, August 31, August 31,
2004 2003 2003
----------- --------------- -------------
(Energy Transfer (Predecessor
(see Note 2) Company) Heritage)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 110,601 $ 53,122 $ 7,117
Marketable securities 2,126 - 3,044
Accounts receivable, net of allowance for doubtful accounts 247,811 105,987 35,879
Accounts receivable from related companies 3,856 - -
Inventories 37,576 3,947 45,274
Deposits paid to vendors 1,106 19,053 -
Exchanges receivable 1,597 1,373 -
Price risk management asset 3,311 928 -
Prepaid expenses and other 6,887 770 2,824
----------- ----------- -------------
Total current assets 414,871 185,180 94,138
PROPERTY, PLANT AND EQUIPMENT, net 928,052 391,264 426,588
INVESTMENT IN AFFILIATES 7,902 6,844 8,694
GOODWILL 284,240 13,409 156,595
INTANGIBLES AND OTHER ASSETS, net 96,566 5,406 52,824
----------- ----------- -------------
Total assets $ 1,731,631 $ 602,103 $ 738,839
=========== =========== =============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Working capital facility $ 65,488 $ - $ 26,700
Accounts payable 230,219 114,198 43,690
Accounts payable to related companies 15,046 820 6,255
Exchanges payable 1,704 1,410 -
Accrued and other current liabilities 39,076 19,655 35,573
Price risk management liabilities 2,254 823 -
Income taxes payable 867 2,567 500
Current maturities of long-term debt 29,937 30,000 38,309
----------- ----------- -------------
Total current liabilities 384,591 169,473 151,027
LONG-TERM DEBT, less current maturities 685,460 196,000 360,762
DEFERRED TAXES 112,325 55,385 -
OTHER NONCURRENT LIABILITIES 3,601 157 -
MINORITY INTERESTS 761 - 4,002
----------- ----------- -------------
1,186,738 421,015 515,791
----------- ----------- -------------
2
ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
(unaudited)
February 29, August 31, August 31,
2004 2003 2003
----------- --------------- -------------
(Energy Transfer (Predecessor
(see Note 2) Company) Heritage)
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Common Unitholders (27,897,734 and 6,628,817 units authorized,
issued and outstanding at February 29, 2004 and August 31,
2003, respectively) 312,856 180,896 221,207
Class C Unitholders (1,000,000 and 0 units authorized, issued
and outstanding at February 29, 2004 and August 31, 2003,
respectively) - - -
Class D Unitholders (7,721,542 and 0 authorized, issued and
outstanding at February 29, 2004 and August 31, 2003) 211,883 - -
Treasury Units - Class E Unitholders (4,426,916 and 0
authorized, issued and outstanding at February 29,
2004 and August 31, 2003, respectively) - - -
Special Units (3,742,515 and 0 authorized, issued and
outstanding at February 29, 2004 and August 31, 2003) - - -
General Partner 17,703 192 2,190
Accumulated other comprehensive income (loss) 2,451 - (349)
----------- ----------- -------------
Total partners' capital 544,893 181,088 223,048
----------- ----------- -------------
Total liabilities and partners' capital $ 1,731,631 $ 602,103 $ 738,839
=========== =========== =============
The accompanying notes are an integral part of these consolidated financial
statements.
3
ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)
(unaudited)
Three Three Three Months
Months Months Months Six Months Five Months Six Months
Ended Ended Ended Ended Ended Ended
February February February February February February
29, 2004 28, 2003 28, 2003 29, 2004 28, 2003 28, 2003
---------- ----------- ----------- ----------- ---------- ----------
(Energy (Energy
Transfer (Predecessor Transfer (Predecessor
(see Note 2) Company) Heritage) (see Note 2) Company) Heritage)
REVENUES:
Midstream and transportation $ 488,291 $ 201,440 $ - $ 903,277 $ 277,293 $ -
Affiliated - midstream - 2,667 - - 5,066 -
Propane 132,453 - 232,922 132,453 - 328,319
Other 8,543 - 16,887 8,543 - 34,950
---------- ----------- ---------- ---------- ---------- ----------
Total revenues 629,287 204,107 249,809 1,044,273 282,359 363,269
---------- ----------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of products sold 534,513 174,504 128,420 917,062 241,825 185,440
Operating expenses 27,470 5,452 45,237 32,910 7,548 78,630
Depreciation and amortization 9,472 2,811 9,447 13,619 4,461 18,713
Selling, general and
administrative 6,381 4,286 4,320 11,261 5,873 7,177
Realized and unrealized
(gains)
losses on derivatives (7,168) 4,828 - (10,202) 6,693 -
---------- ----------- ---------- ---------- ---------- ----------
Total costs and expenses 570,668 191,881 187,424 964,650 266,400 289,960
---------- ----------- ---------- ---------- ---------- ----------
OPERATING INCOME 58,619 12,226 62,385 79,623 15,959 73,309
OTHER INCOME (EXPENSE):
Interest, net (8,895) (3,542) (9,317) (12,647) (4,951) (18,613)
Equity in earnings of
affiliates 180 71 970 327 1,443 1,183
Gain on disposal of assets 31 - 88 28 - 155
Other 227 36 (2,268) 233 68 (2,546)
---------- ----------- ---------- ---------- ---------- ----------
INCOME BEFORE MINORITY
INTERESTS AND INCOME
TAXES 50,162 8,791 51,858 67,564 12,519 53,488
Minority interests (175) - (821) (175) - (947)
---------- ----------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME
TAXES 49,987 8,791 51,037 67,389 12,519 52,541
Income taxes 748 952 1,285 2,457 952 1,285
---------- ----------- ---------- ---------- ---------- ----------
NET INCOME 49,239 7,839 49,752 64,932 11,567 51,256
GENERAL PARTNER'S INTEREST IN
NET INCOME 2,304 157 723 2,617 231 956
---------- ----------- ---------- ---------- ---------- ----------
LIMITED PARTNERS' INTEREST IN
NET INCOME $ 46,935 $ 7,682 $ 49,029 $ 62,315 $ 11,336 $ 50,300
========== =========== ========== ========== ========== ==========
BASIC NET INCOME PER LIMITED
PARTNER UNIT $ 2.38 $ 1.16 $ 3.03 $ 4.74 $ 1.71 $ 3.15
========== =========== ========== ========== ========== ==========
BASIC AVERAGE NUMBER OF UNITS
OUTSTANDING 19,686,563 6,621,737 16,165,602 13,154,150 6,621,737 15,990,010
========== =========== ========== ========== ========== ==========
DILUTED NET INCOME PER LIMITED
PARTNER UNIT $ 2.38 $ 1.16 $ 3.03 $ 4.73 $ 1.71 $ 3.14
========== =========== ========== ========== ========== ==========
DILUTED AVERAGE NUMBER OF
UNITS OUTSTANDING 19,711,458 6,621,737 16,207,002 13,178,848 6,621,737 16,026,860
========== =========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)
Three Months Three Months Three Months Six Months Five Months Six Months
Ended Ended Ended Ended Ended Ended
February February February February February February
29, 2004 28, 2003 28, 2003 29, 2004 28, 2003 28, 2003
------------- ------------ ------------ ---------- ----------- ----------
(Energy (Energy
Transfer (Predecessor Transfer (Predecessor
(see Note 2) Company) Heritage) (see Note 2) Company) Heritage)
Net income $ 49,239 $ 7,839 $ 49,752 $ 64,932 $ 11,567 $ 51,256
Other comprehensive income
Reclassification adjustment
for gains on derivative
instruments included in net
income (6,381) - (427) (5,900) - (427)
Reclassification adjustment
for losses on
available-for-sale
securities included in net
income - - 2,376 - - 2,376
Change in value of derivative
instruments 9,729 - 957 8,730 - 957
Change in value of
available-for-sale securities (379) - (9) (379) - (9)
--------- ------------ --------- --------- ----------- --------
Comprehensive income $ 52,208 $ 7,839 $ 52,649 $ 67,383 $ 11,567 $ 54,153
========= ============ ========= ========= =========== ========
RECONCILIATION OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of period $ (518) $ - $ (3,652) $ - $ - $ (3,652)
Current period reclassification
to earnings (6,381) - 1,949 (5,900) - 1,949
Current period change 9,350 - 948 8,351 - 948
--------- ------------ ---------- --------- ----------- --------
Balance, end of period $ 2,451 $ - $ (755) $ 2,451 $ - $ (755)
========== ============ ========== ========= =========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit data)
(unaudited)
Number of Units
------------------------------------------------------------
Class E
Common Class C Class D Treasury Special Common Class C
---------- --------- --------- ---------- --------- --------- -------
BALANCE, AUGUST 31, 2003 6,628,817 - - - $ 180,896 $ -
Distribution to parent - - - - (209,264) -
Merger with Predecessor
Heritage 16,495,833 1,000,000 7,721,542 3,742,515 116,236 -
Purchase of Treasury Units - - - (4,426,916) - - -
Issuance of Common Units 9,200,000 - - - 334,835 -
Conversion of Class E (4,426,916) - - 4,426,916 - (157,340) -
units
General Partner capital
contribution - - - - (1,027) -
Net change in accumulated
other comprehensive
income per accompanying
statements - - - - - -
Net income - - - - 48,520 -
---------- --------- --------- ---------- --------- --------- -------
BALANCE, FEBRUARY 29, 2004 27,897,734 1,000,000 7,721,542 - 3,742,515 $ 312,856 $ -
========== ========= ========= ========== ========= ========= =======
Accumulated
Other
Class E General Comprehensive
Class D Treasury Special Partner Income Total
---------- --------- --------- ---------- --------- ---------
BALANCE, AUGUST 31, 2003 $ - $ - $ - $ 192 $ - $ 181,088
Distribution to parent - - - - (209,264)
Merger with Predecessor
Heritage 198,372 - - (1,957) - 312,651
Purchase of Treasury Units - (157,340) - - - (157,340)
Issuance of Common Units - - - - - 334,835
Conversion of Class E - 157,340 - - - -
units
General Partner capital
contribution (284) - - 16,851 - 15,540
Net change in accumulated
other comprehensive
income per accompanying
statements - - - - 2,451 2,451
Net income 13,795 - - 2,617 - 64,932
---------- --------- --------- ---------- --------- ---------
BALANCE, FEBRUARY 29, 2004 $ 211,883 $ - $ - $ 17,703 $ 2,451 $ 544,893
========== ========= ========= ========== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Five Months Six Months
Ended Ended Ended
February February February
29, 2004 28, 2003 28, 2003
------------ ------------ ------------
(Energy
Transfer (Predecessor
(see Note 2) Company) Heritage)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 64,932 $ 11,567 $ 51,256
Reconciliation of net income to net cash provided by
operating activities-
Depreciation and amortization 13,619 4,461 18,713
Provision for loss on accounts receivable 84 - 1,511
Loss on write down of marketable securities - - 2,400
Gain on disposal of assets (28) - (155)
Deferred compensation on restricted units and long-term
incentive plan - - 620
Undistributed earnings of affiliates (474) (1,443) (1,183)
Deferred income taxes (400) (1,351) -
Other, net - (82) -
Minority interests (213) - 582
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable (74,390) (60,981) (60,298)
Accounts receivable from related companies (3,345) (4,132) -
Inventories 50,813 (44) 21,045
Deposits paid to vendors 17,947 (1,800) -
Exchanges receivable (224) (1,938) -
Prepaid and other expenses 799 - 3,568
Intangibles and other assets (50) 12,360 (41)
Accounts payable 13,873 47,114 21,704
Accounts payable to related companies 1,524 - 1,160
Exchanges payable 294 987 -
Accrued and other current liabilites (15,299) 112 (6,388)
Income taxes payable (1,700) 827 500
Price risk management liabilities, net 1,878 4,193 -
------------ ------------ ------------
Net cash provided by operating activities 69,640 9,850 54,994
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (165,577) (332,148) (21,170)
Capital expenditures (45,086) (3,567) (16,510)
Proceeds from the sale of assets 353 10,056 2,078
------------ ------------ ------------
Net cash used in investing activities (210,310) (325,659) (35,602)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 332,672 246,000 107,650
Principal payments on debt (283,955) (12,500) (102,247)
Net proceeds from issuance of Common Units 334,835 - -
Capital contribution from General Partner 15,540 108,723 -
Distributions to parent (196,708) - -
Debt issuance costs (4,235) (6,462) -
Unit distributions - - (20,810)
Other - - 153
------------ ------------ ------------
Net cash provided by/ (used) in financing activities 198,149 335,761 (15,254)
------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 57,479 19,952 4,138
CASH AND CASH EQUIVALENTS, beginning of period 53,122 - 4,596
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 110,601 $ 19,952 $ 8,734
============ ============ ============
7
ENERGY TRANSFER PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Five Months Six Months
Ended Ended Ended
February 29, February 28, February 28,
2004 2003 2003
------------ ------------ ------------
(Energy
Transfer (Predecessor
(see Note 2) Company) Heritage)
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ - $ - $ 772
============ ============ ============
Issuance of Common Units in connection with certain
acquistions $ - $ - $ 15,000
============ ============ ============
General Partner capital contribution $ 1,311 $ - $ -
============ ============ ============
Distributions payable to parent $ 12,556 - $ -
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 9,050 $ 2,943 $ 18,302
============ ============ ============
Cash paid during the period for income taxes $ 4,157 $ 2,500 $ -
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
8
ENERGY TRANSFER 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:
ENERGY TRANSFER TRANSACTION
On January 20, 2004, Heritage Propane Partners, L.P., ("Heritage") and La Grange
Energy, L.P. ("La Grange Energy") completed the series of transactions whereby
La Grange Energy contributed its subsidiary, La Grange Acquisition, L.P. and its
subsidiaries who conduct business under the assumed name of Energy Transfer
Company, ("ETC") (the "ETC Transaction") to Heritage in exchange for cash of
$300,000 less the amount of Energy Transfer Company debt in excess of $151,500,
less ETC's accounts payable and other specified liabilities, plus agreed upon
capital expenditures paid by La Grange Energy relating to the ETC business prior
to closing, $433,909 of Heritage Common and Class D Units, and the repayment of
the ETC debt of $151,500. In conjunction with the ETC Transaction and prior to
the contribution of ETC to Heritage, ETC distributed its cash and accounts
receivables to La Grange Energy and an affiliate of La Grange Energy contributed
an office building to ETC. La Grange Energy also received 3,742,515 Special
Units as consideration for certain assets described as the Bossier Pipeline. In
the event the Bossier Pipeline does not become commercially operational by
December 1, 2004, the Special Units will no longer be considered outstanding and
will not be entitled to any rights afforded any other of Heritage's units. In
accordance with Statement of Financial Accounting Standards No. 141, Business
Combinations ("SFAS 141") no value has been recorded with respect to the Special
Units.
Simultaneously with the ETC Transaction, La Grange Energy obtained control of
Heritage by acquiring all of the interest in U.S. Propane, L.P., ("U.S.
Propane") the General Partner of Heritage, and U.S. Propane, L.P.'s 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. for
$30,000 (the "General Partner Transaction"). In conjunction with the General
Partner Transaction, U.S. Propane L.P. contributed its 1.0101% General Partner
interest in Heritage Operating, L.P. ("Heritage Operating") to Heritage in
exchange for an additional 1% General Partner interest in Heritage.
Simultaneously with these transactions, Heritage purchased the outstanding stock
of Heritage Holdings, Inc. ("HHI") for $100,000.
Concurrent with the ETC Transaction, ETC borrowed $325,000 from financial
institutions and Heritage raised $355,948 of gross proceeds through the sale of
9,200,000 Common Units at an offering price of $38.69 per unit. The net proceeds
were used to finance the transaction and for general partnership purposes.
ACCOUNTING TREATMENT OF THE ENERGY TRANSFER TRANSACTION
The ETC Transaction was accounted for as a reverse acquisition in accordance
with SFAS 141. Although Heritage is the surviving parent entity for legal
purposes, ETC is the acquirer for accounting purposes. As a result, ETC's
historical financial statements are now the historical financial statements of
the registrant. The operations of Heritage prior to the ETC Transaction are
referred to as Predecessor Heritage. The assets and liabilities of Predecessor
Heritage have been recorded at fair value to the extent acquired by ETC through
its acquisition of the General Partner and limited partner interests of Heritage
of approximately 35.4%, determined in accordance with Emerging Issues Task Force
(EITF) 90-13 Accounting for Simultaneous Common Control Mergers and SFAS 141.
The assets and liabilities of Energy Transfer have been recorded at historical
cost. Although the partners' capital accounts of ETC became the capital accounts
of the Partnership, Predecessor Heritage's partnership structure and partnership
units survive. Accordingly, the partners' capital accounts of ETC have been
restated based on the general partner interests and units received by La Grange
Energy in the ETC Transaction. The acquisition of Heritage Holdings by Heritage
was accounted for as a capital transaction as the primary asset held by Heritage
Holdings is 4,426,916 Common Units of Heritage. Following the acquisition of
Heritage Holdings by Heritage, these Common Units were converted to Class E
Units. The Class E Units are recorded as treasury units in the unaudited
consolidated financial statements.
If the Bossier Pipeline becomes commercially operational prior to December 1,
2004, which entitles the Partnership or its subsidiaries to receive payment
under the transportation contract, the Special Units will convert to Common
9
Units if the conversion is approved by the Common Unitholders. Costs incurred
to construct the Bossier Pipeline are recorded at its historical cost. The
issuance of the additional Common Units upon the conversion of the Special Units
will adjust the percent of Heritage acquired by La Grange Energy in the ETC
Transaction and will result in an additional fair value step-up being recorded
in accordance with EITF 90-13. If the Special Units are converted to Common
Units, ETC will have acquired approximately 41.5% of Heritage, and approximately
$38,000 additional step-up in the fair value of the assets and liabilities of
Heritage will be recorded.
The excess purchase price over Predecessor Heritage's cost was determined as
follows:
Net book value of Predecessor Heritage at January 20, 2004 $ 238,944
Historical goodwill at January 20, 2004 (170,500)
Equity investment from public offering 355,948
Treasury Class E Unit purchase (157,340)
-------------
267,052
Percent of Heritage acquired by La Grange Energy 35.4%
-------------
Equity interest acquired $ 94,536
=============
Fair market value of Limited Partner Units 651,170
Purchase price of General Partner Interest 30,000
Equity investment from public offering 355,948
Treasury Class E Unit purchase (157,340)
-------------
879,778
Percent of Heritage acquired by La Grange Energy 35.4%
-------------
Fair value of equity acquired 311,441
Net book value of equity acquired 94,536
-------------
Excess purchase price over Predecessor Heritage cost $ 216,905
=============
The excess purchase price over Predecessor Heritage cost was allocated as
follows:
Property, plant and equipment (25 year life) $ 34,513
Customer lists (15 year life) 13,641
Trademarks 10,366
Goodwill 158,385
-------------
$ 216,905
=============
The purchase accounting allocations recorded as of February 29, 2004 are
preliminary. However, management does not believe there will be material
modifications to the purchase price allocations except when the Special Units
are converted to Common Units upon completion of the Bossier pipeline project
and approval of the Common Unitholders.
SUBSEQUENT DEVELOPMENTS
On February 12, 2004, the Board of Directors of Heritage's General Partner voted
to change the name of Heritage to Energy Transfer Partners, L.P., and began
trading on the New York Stock Exchange under the ticker symbol "ETP". The name
change and new ticker symbol were effective March 1, 2004.
BUSINESS OPERATIONS
In order to simplify the obligations of Energy Transfer Partners, L.P. (the
"Partnership") under the laws of several jurisdictions in which it conducts
business, the Partnership's activities are conducted through two subsidiary
operating partnerships, La Grange Acquisition, L.P. ("La Grange Acquisition"), a
Texas limited partnership which is engaged in midstream natural gas operations,
and Heritage Operating, L.P. ("Heritage Operating"), a Delaware limited
partnership which is engaged in retail and wholesale propane operations
(collectively the "Operating Partnerships"). The Partnership and the Operating
Partnerships are collectively referred to in this report as "Energy Transfer."
La Grange Acquisition owns and operates approximately 4,500 miles of natural gas
gathering and transportation pipelines with an aggregate throughput capacity of
2.5 billion cubic feet of natural gas per day, with natural gas treating and
processing plants located in Texas, Oklahoma, and Louisiana. Its major asset
groups consist of the Southeast Texas System, Elk City System and Oasis
pipeline. The Southeast Texas System has a throughput capacity of 260 MMcf/d.
10
The system has 2,500 miles of pipeline with 1,050 wells connected, the La Grange
processing plant, and 5 natural gas treating facilities. The Elk City System has
a throughput capacity of 170 MMcf/d. The system has 315 miles of pipeline with
300 wells connected, the Elk City processing plant, and a treating facility. The
583 mile long Oasis pipeline, which connects the West Texas Waha Hub to the Katy
Texas Tailgate, has a throughput capacity of 830 MMcf/d.
Heritage Operating sells propane and propane-related products to more than
650,000 active residential, commercial, industrial, and agricultural customers
in 31 states. Heritage Operating is also a wholesale propane supplier in the
United States and in Canada, the latter through its participation in MP Energy
Partnership. MP Energy Partnership is a Canadian partnership in which the
Partnership owns a 60% interest, engaged in lower-margin wholesale distribution
and in supplying Heritage Operating's northern U.S. locations. Heritage
Operating buys and sells financial instruments for its own account through its
wholly owned subsidiary, Heritage Energy Resources, L.L.C. ("Resources").
The accompanying financial statements should be read in conjunction with the
consolidated financial statements of Heritage Propane Partners, L.P. and
subsidiaries ("Predecessor Heritage") as of August 31, 2003, and the notes
thereto included in the registrant's Form 10-K filed with the Securities and
Exchange Commission on November 26, 2003, the combined financial statements of
ETC as of August 31, 2003, and the notes thereto included in the registrant's
Prospectus Supplement on Form 424(b)(2) filed with the Securities and Exchange
Commission on January 14, 2004. 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 propane business, the results of propane operations for interim
periods are not necessarily indicative of the results to be expected from these
operations for a full year.
2. PRESENTATION OF FINANCIAL INFORMATION:
The accompanying financial statements for the three and six month periods ended
February 29, 2004 include the results of operations for ETC beginning September
1, 2003 and December 1, 2003, respectively, consolidated with the results of
operations of Heritage Operating and HHI beginning January 20, 2004. The
financial statements for the fiscal period including January 20, 2004 do not
include the complete results of operations for both ETC and Predecessor Heritage
for such periods, as they include the results of operations of Predecessor
Heritage only for the period from January 20, 2004 to February 29, 2004. The
financial statements of ETC are the financial statements of the registrant, as
ETC was deemed the accounting acquirer. ETC was formed on October 1, 2002, and
has an August 31, year-end. ETC's predecessor entities had a December 31
year-end. Accordingly, ETC's 11-month period ended August 31, 2003 was treated
as a transition period under the rules of the Securities and Exchange Commission
and therefore, only a five-month period is presented for the period ended
February 28, 2003. The accompanying combined financial statements of ETC as of
August 31, 2003 and the three and five months ended February 28, 2003 present
the combined financial statements of La Grange Acquisition and subsidiaries
after the elimination of significant intercompany balances and transactions.
During the eleven months ended August 31, 2003, ETC owned the Southeast Texas
System and the Elk City System. From October 1, 2002 through December 27, 2002,
ETC also owned a 50% equity interest in Oasis Pipe Line Company, which owns the
Oasis pipeline. After December 27, 2002, ETC owned a 100% interest in Oasis Pipe
Line Company. In addition, on December 27, 2002, an affiliate of La Grange
Energy's general partner contributed to ETC its marketing business (ET Company
I) and its investment in the Vantex System, the Rusk County Gathering System,
the Whiskey Bay System and the Chalkley Transmission System.
11
The following unaudited pro forma consolidated results of operations are
presented as if Oasis Pipe Line Company and ET Company I were wholly owned at
the beginning of the periods presented and the transaction with Heritage and ETC
had been made at the beginning of the periods presented.
Six Months Five Months
Three Months Ended Ended Ended
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
-------------- -------------- -------------- -------------
REVENUES:
Midstream and transportation $ 488,291 $ 225,672 $ 903,277 $ 337,964
Propane Operations 269,777 232,922 374,508 328,319
Other 19,120 16,887 38,115 34,949
-------------- -------------- -------------- -------------
Total revenues 777,188 475,481 1,315,900 701,232
COSTS AND EXPENSES:
Cost of products sold -
Midstream and Transportation 457,928 192,712 840,478 287,631
Propane Operations 153,581 123,552 214,680 175,731
Other 5,199 4,868 10,470 9,709
Operating expenses 51,903 51,361 95,384 87,796
Depreciation and amortization 15,759 13,641 30,174 25,840
Selling, general and
administrative 13,268 9,070 21,315 14,361
Realized and unrealized
(gains) losses on derivatives (7,168) 4,828 (10,202) 6,693
-------------- -------------- -------------- -------------
Total costs and expenses 690,470 400,032 1,202,299 607,761
OPERATING INCOME 86,718 75,449 113,601 93,471
OTHER INCOME (EXPENSE)
Interest, net (14,424) (13,873) (27,284) (25,504)
Equity in earnings of
affiliates 457 (533) 823 1,054
Gain on disposal of assets 31 - 28 -
Other 206 (81) 168 (489)
-------------- -------------- -------------- -------------
INCOME BEFORE MINORITY INTERESTS
AND INCOME TAXES
72,988 60,962 87,336 68,532
Minority interests 367 317 516 432
-------------- -------------- -------------- -------------
INCOME BEFORE INCOME TAXES 72,621 60,645 86,820 68,100
Income Taxes 1,841 3,777 4,722 6,173
-------------- -------------- -------------- -------------
NET INCOME 70,780 56,868 82,098 61,927
GENERAL PARTNER'S INTEREST
IN NET INCOME 2,113 1,796 3,659 2,565
-------------- -------------- -------------- -------------
LIMITED PARTNERS' INTEREST
IN NET INCOME $ 68,667 $ 55,072 $ 78,439 $ 59,362
============== ============== ============== =============
BASIC EARNINGS PER LIMITED
PARTNER UNIT $ 1.94 $ 1.65 $ 2.22 $ 1.79
============== ============== ============== =============
BASIC AVERAGE NUMBER OF UNITS
OUTSTANDING 35,478,745 33,340,069 35,296,097 35,161,396
============== ============== ============== =============
DILUTED EARNINGS PER
LIMITED PARTNER UNIT $ 1.93 $ 1.65 $ 2.22 $ 1.79
============== ============== ============== =============
DILUTED AVERAGE NUMBER OF UNITS
OUTSTANDING 35,503,640 33,364,569 35,320,795 33,185,896
============== ============== ============== =============
12
VOLUMES
Midstream
Natural gas MMBtu/d 968,000 432,000 946,000 412,000
NGLs bbls/d 12,600 10,200 13,800 12,400
Transportation
Natural gas MMBtu/d 873,000 816,000 831,000 846,000
Propane operations (in gallons) 177,447 166,622 256,088 243,343
Retail propane 3,379 5,467 6,673 10,357
Domestic wholesale 23,006 25,358 35,175 42,553
Foreign wholesale
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:
PRINCIPLES OF CONSOLIDATION
Prior to the merger with Heritage, Energy Transfer Company was the assumed name
of a group of entities under common control consisting of La Grange Acquisition,
L.P. and a series of its limited partner investees. La Grange Acquisition is a
Texas limited partnership formed on October 1, 2002 and was 99.9% owned by its
limited partner, La Grange Energy, L.P., and 0.1% owned by its general partner,
LA GP, LLC. La Grange Acquisition is the 99.9% limited partner of ETC Gas
Company, Ltd., ETC Texas Pipeline, Ltd., ETC Processing, Ltd., and ETC
Marketing, Ltd. and a 99% limited partner of ETC Oasis Pipe Line, L.P. and ET
Company I, Ltd. (collectively, the "Operating Companies"). The general partners
of La Grange Acquisition, La Grange Energy, and the Operating Companies were
ultimately owned and controlled by members of management, a private equity
investor fund, and a group of institutional investors. La Grange Acquisition and
the Operating Companies conducted business under the name Energy Transfer
Company. The historical financial statements of Energy Transfer Company present
the accounts of La Grange Acquisition and the Operating Companies (collectively
"Energy Transfer Company" or "ETC") on a combined basis as entities under common
control. The accompanying combined financial statements of ETC as of August 31,
2003 and the three and five months ended February 28, 2003, include the accounts
of La Grange Acquisition and the Operating Companies after the elimination of
significant intercompany balances and transactions. Further, La Grange
Acquisition's limited partner investments in each of the Operating Companies
were eliminated against the Operating Companies' limited partner's capital. From
October 2002 through December 2002, ETC owned a 20% interest in the Nustar Joint
Venture. Effective December 27, 2002, ETC owned a 50% interest in Vantex Gas
Pipeline Company, LLC, and a 49.5% interest in Vantex Energy Services, Ltd.
These investments are accounted for under the equity method. All significant
intercompany transactions have been eliminated. Prior to December 27, 2002, when
the remaining 50% of Oasis Pipe Line Company ("Oasis") capital stock was
redeemed, ETC accounted for its 50% ownership in Oasis under the equity method.
After December 27, 2002, Oasis became a wholly owned subsidiary of ETC. La
Grange Acquisition and the Operating Companies were contributed by La Grange
Energy to Heritage and, thus, after the January 2004 ETC Transaction, La Grange
Acquisition, L.P. and the Operating Companies under La Grange Acquisition,
became wholly owned subsidiaries of the Partnership.
Predecessor Heritage's financial statements include the accounts of its
subsidiaries, including Heritage Operating and its subsidiaries. At August 31,
2003, Predecessor Heritage accounted for its 50% partnership interest in
Bi-State Propane, ("Bi-State") a propane retailer in the states of Nevada and
California, under the equity method. On December 24, 2003, Predecessor Heritage
acquired the remaining 50% of Bi-State that it did not previously own, thereby
making Bi-State a wholly owned subsidiary of Predecessor Heritage.
After the ETC Transaction, the consolidated financial statements of the
registrant include the accounts of its subsidiaries, including the Operating
Partnerships and HHI. A minority interest liability and minority interest
expense is recorded for all partially owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated in consolidation.
13
For purposes of maintaining partner capital accounts, the Partnership Agreement
of Energy Transfer Partners, L.P. (the "Partnership Agreement") specifies that
items of income and loss shall generally be allocated among the partners in
accordance with their percentage interests (see footnote 8). 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.
REVENUE RECOGNITION
Revenues for sales of natural gas, natural gas liquids ("NGLs") including
propane, and 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, including transportation, treating,
compression, and gas processing, is recognized upon completion of the service.
Transportation capacity payments are recognized when earned in the period the
capacity was made available. Tank rent is recognized ratably over the period it
is earned.
SHIPPING AND HANDLING COSTS
In accordance with the Emerging Issues Task Force Issue 00-10, Accounting for
Shipping and Handling Fees and Costs, the Partnership has classified all
deductions from producer payments for natural gas, compression and treating,
which can be considered handling costs, as revenue. The Partnership does not
separately charge shipping and handling costs of propane to customers.
COSTS AND EXPENSES
Costs of products sold include actual cost of fuel sold adjusted for the effects
of qualifying cash flow hedges, propane storage fees and inbound freight on
propane, 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 related to propane, purchasing
costs, and plant operations. Selling, general and administrative expenses
include all corporate expenses and compensation for corporate personnel.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash on hand, demand deposits, and
investments with original maturities of three months or less. The Partnership
considers cash equivalents to include short-term, highly liquid investments that
are readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.
MARKETABLE SECURITIES
Marketable securities owned by the Partnership are classified as
available-for-sale securities and are reflected as a current asset on the
consolidated balance sheet at their fair value. Unrealized holding losses of
$379 for the three and six months ended February 29, 2004, and $0 for the three
and six months ended February 28, 2003, respectively, and $9 for the three and
six months ended February 28, 2003 for Predecessor Heritage were recorded
through accumulated other comprehensive income based on the market value of the
securities.
ACCOUNTS RECEIVABLE
The Partnership's midstream and transportation operations deal with
counterparties that are typically either investment grade or are otherwise
secured with a letter of credit or other form of security (corporate guaranty or
prepayment). Management reviews midstream and transportation accounts receivable
balances each week. Credit limits are assigned and monitored for all
counterparties of the midstream and transportation operations. Bad debt expense
related to these receivables is recognized at the time an account is deemed
uncollectible. There were no bad debts recognized in the midstream and
transportation accounts receivable during the three or six months ended February
29, 2004 or the three and five months ended February 28, 2003.
The Partnership grants credit to its customers for the purchase of propane and
propane-related products. Also included in accounts receivable are trade
accounts receivable arising from the Partnership's retail and wholesale propane
operations and receivables arising from Resources' liquids marketing activities.
Accounts receivable for
14
retail and wholesale propane and liquids marketing activities are recorded as
amounts billed to customers less an allowance for doubtful accounts. The
allowance for doubtful accounts is based on management's assessment of the
realizability of customer accounts. Management's assessment is based on the
overall creditworthiness of the Partnership's customers and any specific
disputes. Accounts receivable consisted of the following:
February 29, August 31, August 31,
2004 2003 2003
------------- --------------- -------------
(Energy Transfer (Predecessor
Company) Heritage)
Accounts receivable midstream and
transportation $ 144,902 $ 105,987 $ -
Accounts receivable retail and wholesale
propane 89,161 - 35,383
Accounts receivable liquids marketing 13,832 - 4,000
Less - allowance for doubtful accounts 84 - 3,504
------------- ------------- -------------
Total, net $ 247,811 $ 105,987 $ 35,879
============= ============= =============
The activity in the allowance for doubtful accounts consisted of the following:
Six Five Six
Months Ended Months Ended Months Ended
February 29, February 28, February 28,
2004 2003 2003
------------- --------------- -------------
(Energy Transfer (Predecessor
Company) Heritage)
Balance, beginning of the period $ - $ - $ 2,504
Provision for loss on accounts
receivable 84 - 1,511
Accounts receivable written off, net
of recoveries - - (511)
------------- ------------- --------------
Balance, end of period $ 84 $ - $ 3,504
============= ============= ==============
INVENTORIES
Inventories are valued at the lower of cost or market. The cost of propane
inventories is determined using weighted-average cost of propane delivered to
the customer service locations, and includes storage fees and inbound freight
costs, while the cost of appliances, parts, and fittings is determined by the
first-in, first-out method. Inventories consisted of the following:
February 29, August 31, August 31,
2004 2003 2003
-------------- ---------------- ------------
(Energy Transfer (Predecessor
Company) Heritage)
Propane and other NGLs $ 25,519 $ 1,876 $ 34,544
Appliances, parts and fittings and other 12,057 2,071 10,730
-------------- ---------------- -----------
Total inventories $ 37,576 $ 3,947 $ 45,274
============== ================ ===========
DEPOSITS
Deposits are paid to vendors in the midstream and transportation business as
pre-payments for natural gas deliveries in the following month. The Partnership
makes pre-payments when the volume of business with a vendor exceeds the
Partnership's credit limit, and/or when it is economically beneficial to do so.
Deposits with vendors for gas purchases were $0 and $16,962 as of February 29,
2004 and August 31, 2003, respectively. The Partnership also has deposits with
derivative counterparties of $1,106 and $2,091 as of February 29, 2004 and
August 31, 2003, respectively.
15
Deposits are received from midstream and transportation customers as
pre-payments for natural gas deliveries in the following month and deposits from
propane customers as security for future propane use. Pre-payments and security
deposits may also be required when customers exceed their credit limits or do
not qualify for open credit. Deposits received from customers were $6,213 and
$11,600 as of February 29, 2004 and August 31, 2003, respectively and are
recorded as accrued and other current liabilities on the Partnership's
consolidated balance sheets. Predecessor Heritage's deposits received from
customers were $2,137 as of August 31, 2003.
EXCHANGES
Exchanges consist of natural gas and NGL delivery imbalances with others. These
amounts turn over monthly and Management believes the cost approximates market
value. Accordingly, these volumes are valued at market prices and are recorded
as exchanges receivable or exchanges payable on the Partnership's consolidated
balance sheets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Expenditures for maintenance and repairs that do not
add capacity or extend the useful life are expensed as incurred. Expenditures to
refurbish assets that either extend the useful lives of the asset or prevent
environmental contamination are capitalized and depreciated over the remaining
useful life of the asset. Additionally, the Partnership capitalizes certain
costs directly related to the installation of company-owned propane tanks, and
construction of assets including internal labor costs, interest and engineering
costs. Upon disposition or retirement of pipeline components or natural gas
plant components, any gain or loss is recorded to accumulated depreciation. When
entire pipeline systems, gas plants or other property and equipment are retired
or sold, any gain or loss is included in operations.
The Partnership reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. If such a review should indicate that the carrying amount of
long-lived assets is not recoverable, the Partnership reduces the carrying
amount of such assets to fair value. No impairment of long-lived assets was
recorded during the periods presented.
Components and useful lives of property, plant and equipment were as follows:
February 29, August 31, August 31,
2004 2003 2003
----------- ----------- --------
(Energy
Transfer (Predecessor
Company) Heritage)
Land and improvements $ 26,055 $ 992 $ 21,937
Buildings and improvements (10 to 30 years) 30,563 987 30,843
Pipelines and equipment (10 to 65 years) 401,613 382,517 -
Bulk storage, equipment and facilities (3 to 30 years) 47,072 - 43,340
Tanks and other equipment (5 to 30 years) 316,472 - 327,193
Vehicles (5 to 10 years) 48,637 - 76,239
Right of way (20 to 65 years) 4,923 4,057 -
Furniture and fixtures (3 to 10 years) 6,649 - 11,164
Linepack 5,176 5,176 -
Other (5 to 10 years) 5,942 3,675 3,578
---------- ---------- ----------
893,102 397,404 514,294
Less - Accumulated depreciation (25,485) (13,261) (99,563)
---------- ---------- ----------
867,617 384,143 414,731
Plus - Construction work-in-process 60,435 7,121 11,857
---------- ---------- ----------
Property, plant and equipment, net $ 928,052 $ 391,264 $ 426,588
========== ========== ==========
The Partnership accounts for expected future costs associated with its
obligation to perform site reclamation and dismantle facilities of abandoned
pipelines under Statement of Accounting Standards No. 143, Accounting for Asset
Retirement Obligations, ("SFAS 143"). If a reasonable estimate of the fair value
of an abandonment obligation can be made, SFAS 143 requires the Partnership to
record a liability (an asset retirement obligation or ARO) on the consolidated
balance sheets in other non-current liabilities and to capitalize the asset
retirement cost in the period in
16
which the retirement obligation is incurred. In general, the amount of an ARO
and the associated costs capitalized will be equal to the estimated future cost
to satisfy the abandonment obligation using current prices after discounting the
future cost back to the date that the abandonment obligation was incurred using
the credit-adjusted risk-free rate for the Partnership. After recording these
amounts, the ARO will be accreted to its future estimated value using the
credit-adjusted risk-free rate and the additional capitalized costs will be
depreciated on a straight line basis over the productive life of the related
assets. The Partnership had an ARO of approximately $3,544 recorded in the
consolidated balance sheet as of February 29, 2004. The Partnership acquired all
of its operating assets subsequent to the effective date of SFAS 143; therefore
there is no cumulative effect of adopting SFAS 143.
No assets are legally restricted for purposes of settling the Partnership's
AROs. A reconciliation of the beginning and ending aggregate carrying amount of
the Partnership's ARO for the six months ended February 29, 2004 is as follows:
Balance as of August 31, 2003 $ -
Liabilities incurred 3,500
Liabilities settled -
Accretion expense 44
Revision in estimated abandonment costs -
-----------
Balance as of February 29, 2004 $ 3,544
===========
INTANGIBLES AND OTHER ASSETS
Intangibles and other assets are stated at cost net of amortization computed on
the straight-line method. The Partnership eliminates from its balance sheet any
fully amortized intangibles and the related accumulated amortization. Components
and useful lives of intangibles and other assets were as follows:
February 29, 2004 August 31, 2003 August 31, 2003
--------------------------- ---------------------------- ------------------------
Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
---------- ------------- ----------- ------------ ------------- ------------
(Energy Transfer Company) (Predecessor Heritage)
Amortized intangible assets -
Noncompete agreements
(5 to 15 years) $ 27,667 $ (466) $ - $ - $ 42,742 $ (15,893)
Customer lists (15 40,454 (418) - - 28,378 (6,356)
years) Financing costs
(3 to 15 years) 14,124 (4,175) 5,724 (2,464) 4,225 (1,995)
Consulting agreements
(2 to 7 years) 132 (5) - - 517 (367)
Other (10 years) 478 (119) 477 (92) - -
---------- ------------- ----------- ------------- ------------- ------------
Total 82,855 (5,183) 6,201 (2,556) 75,862 (24,611)
Unamortized intangible assets -
Trademarks 17,827 - - - 1,309 -
Other assets 1,067 - 1,761 - 264 -
---------- ------------- ----------- ----------- ------------- ------------
Total intangibles and
other assets $ 101,749 $ (5,183) $ 7,962 $ (2,556) $ 77,435 $ (24,611)
========== ============= =========== =========== ============= ============
Aggregate amortization expense of intangible assets was $663 and $2,627 for the
three and six months ended February 29, 2004, respectively and, $833 and $1,027
for the three and five months ended February 28, 2003, respectively. Predecessor
Heritage's aggregate amortization expense was $1,909 and $3,946 for the three
and six months ended February 28, 2003, respectively.
GOODWILL
Goodwill is associated with acquisitions made for the Partnership's midstream
and domestic retail propane segments. There is no goodwill associated with the
transportation segment. Of the $284,240 balance in goodwill, $16,500 is expected
to be tax deductible. Goodwill is tested for impairment annually in accordance
with Statement of Accounting Standards No. 142, Goodwill and Other Intangible
Assets, ("SFAS 142"). The changes in the carrying amount of goodwill for the six
months ended February 29, 2004 were as follows:
17
Midstream Retail Propane Total
----------------- ----------------- -----------------
Balance as of August 31, 2003 $ 13,409 $ - $ 13,409
Goodwill acquired during the year - 270,831 270,831
Impairment losses - - -
----------------- ----------------- -----------------
Balance as of February 29, 2004 $ 13,409 $ 270,831 $ 284,240
================= ================= =================
ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consisted of the following:
February 29, August 31, August 31,
2004 2003 2003
----------- ----------- -----------
(Energy
Transfer (Predecessor
Company) Heritage)
Interest payable $ 5,954 $ 1,014 $ 4,485
Wages, payroll taxes and employee
benefits 11,788 2,702 4,932
Deferred tank rent 4,861 - 4,080
Customer deposits 6,213 11,600 2,137
Taxes other than income 4,019 2,460 2,405
Environmental 500 633 -
Advanced budget payments and unearned
revenue 4,589 - 15,417
Other 1,152 1,246 2,117
---------- ---------- ----------
Accrued and other current liabilities $ 39,076 $ 19,655 $ 35,573
========== ========== ==========
INCOME TAXES
Energy Transfer Partners is a limited partnership. As a result, The
Partnership's earnings or losses for federal and state income tax purposes are
included in the tax returns of the individual partners. Net earnings for
financial statement purposes may differ significantly from taxable income
reportable to unitholders as a result of differences between the tax basis and
financial reporting basis of assets and liabilities and the taxable income
allocation requirements under the Partnership Agreement.
Oasis, HHI and certain other of the Partnership's subsidiaries are taxable
corporations and follow the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes (SFAS 109). Under SFAS 109, deferred income taxes are recorded
based upon differences between the financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the underlying assets are received and liabilities settled.
18
INCOME PER LIMITED PARTNER UNIT
Basic net income per limited partner unit is computed by dividing net income,
after considering the General Partner's interest, by the weighted average number
of Common and Class D Units outstanding. Diluted net income per limited partner
unit is computed by dividing net income, after considering the General Partner's
interest, by the weighted average number of Common and Class D Units outstanding
and the weighted average number of restricted units ("Phantom Units") granted
under the Restricted Unit Plan. A reconciliation of net income and weighted
average units used in computing basic and diluted net income per unit is as
follows:
Three Months Three Months Three Months Six Months Five Months Six Months
Ended Ended Ended Ended Ended Ended
February 29 February 28 February 28 February 29 February 28 February 28
2004 2003 2003 2004 2003 2003
------------ ------------ ------------ ------------ ------------ ------------
(Energy (Energy
Transfer (Predecessor Transfer (Predecessor
Company) Heritage) Company) Heritage)
BASIC NET INCOME PER LIMITED
PARTNER UNIT:
Limited Partners' interest in
net income $ 46,935 $ 7,682 $ 49,029 $ 62,315 $ 11,336 $ 50,300
========== ========== ========== ========== ========== ===========
Weighted average limited
partner units 19,686,563 6,621,737 16,165,602 13,154,150 6,621,737 15,990,010
========== ========== ========== ========== ========== ==========
Basic net income per limited
partner unit $ 2.38 $ 1.16 $ 3.03 $ 4.74 $ 1.71 $ 3.15
========== ========== ========== ========== ========== ===========
DILUTED NET INCOME PER
LIMITED PARTNER UNIT:
Limited partners' interest in
net income $ 46,935 $ 7,682 $ 49,029 $ 62,315 $ 11,336 $ 50,300
========== ========== ========== ========== ========== ===========
Weighted average limited
partner units 19,686,563 6,621,737 16,165,602 13,154,150 6,621,737 15,990,010
Dilutive effect of phantom units 24,895 - 41,400 24,698 - 36,850
---------- ---------- ---------- ---------- ---------- -----------
Weighted average limited
partner units, assuming
dilutive effect of phantom
units 19,711,458 6,621,737 16,207,002 13,178,848 6,621,737 16,026,860
========== ========== ========== ========== ========== ===========
Diluted net income per
limited partner unit $ 2.38 $ 1.16 $ 3.03 $ 4.73 $ 1.71 $ 3.14
========== ========== ========== ========== =========== ===========
STOCK BASED COMPENSATION PLANS
The Partnership follows the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123 Accounting for Stock-based Compensation
(SFAS 123).
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 who is not a
member of management or an owner of the General Partner automatically receives a
Director's grant with respect to 500 Common Units on each September 1 that such
person continues as a director. Newly elected directors who are not members of
management or an owner of the General Partner are also entitled to receive a
grant with respect to 2,000 Common Units upon election or appointment to the
Board. Generally, the rights to acquire the Common Units will vest upon the
later to occur of 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.
19
Pursuant to the ETC Transaction, the change of control provisions of the
Restricted Unit Plan were triggered, resulting in the early vesting of 21,600
units by Predecessor Heritage. Individuals holding 4,500 grants waived their
rights to early vesting under the change of control provisions. Compensation
expense on the units that vested was recognized by Predecessor Heritage.
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 February 29,
2004, 6,500 restricted units were outstanding and 12,300 were available for
grants to non-employee directors and key employees. There was no deferred
compensation expense recognized for the three and six months ended February 29,
2004, or for the three and five months ended February 28, 2003.
LONG-TERM INCENTIVE PLAN
Effective September 1, 2000, Predecessor Heritage adopted a long-term incentive
plan whereby Common Units were awarded based on achieving certain targeted
levels of Distributed Cash (as defined in the Long Term Incentive Plan) per
unit. Awards under the program were 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.
Pursuant to the Energy Transfer Transaction, the change of control provisions in
each of the employment agreements of the participants in the plan triggered the
minimum award, less any amounts previously earned and any amounts that had not
been designated for award, resulting in the issuance of 150,018 units by
Predecessor Heritage. Compensation expense on the units that vested was
recognized by Predecessor Heritage and no deferred compensation expense was
recognized for the three and six months ended February 29, 2004, or the three
and five months ended February 28, 2003.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Some of the more significant estimates made by
management include, but are not limited to, allowances for doubtful accounts,
the fair value of derivative hedging instruments, price risk management assets
and liabilities, useful lives for depreciation and amortization, purchase
accounting allocations and subsequent realizability of intangible assets, the
amount of the Partnership's ARO and general business and medical self-insurance
reserves. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the 2004
presentation. These reclassifications have no impact on net income or total
partners' capital.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Partnership applies Financial Accounting Standards Board Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133) as
amended. This statement requires that all derivatives be recognized in the
balance sheet as either an asset or liability measured at fair value. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the statement of operations and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting treatment.
The Partnership utilizes various exchange-traded and over-the-counter commodity
financial instrument contracts to limit its exposure to margin fluctuations in
natural gas and NGL prices. These contracts consist primarily of futures
20
and swaps. Generally, management has previously elected not to apply hedge
accounting to these contracts, therefore, the net gain or loss arising from
marking to market these derivative instruments was previously recognized in
earnings as unrealized gains and losses on the statement of operations. However,
in the quarter ended February 29, 2004, the Partnership designated various
futures and certain associated basis contracts outstanding as cash flow hedging
instruments in accordance with SFAS 133. The effective portion of the hedge gain
or loss is initially reported as a component of other comprehensive income and
is subsequently reclassified into earnings when the instrument settles. The
ineffective portion of the gain or loss is reported in earnings immediately. As
of February 29, 2004, these instruments had a net fair value of $2,737, which
was recorded as price risk management assets and liabilities on the balance
sheet through other comprehensive income. The Partnership reclassified into
earnings gains of $7,004 and $6,961 for the three and six months ended February
29, 2004, respectively, that were previously reported in accumulated other
comprehensive income (loss). The amount of hedge ineffectiveness recognized in
income was a gain of $25 and a loss of $42 for the three and six months ended
February 29, 2004, respectively. There were no such financial instruments for
the three and five months ended February 28, 2003.
The Partnership also entered into an interest rate swap agreement for the
purpose of mitigating the interest rate risk associated with the La Grange
Acquisition Term Note. The interest rate swap agreement is used to manage a
portion of the exposure to changing interest rates by converting floating rate
debt to fixed rate debt. The swap had a fair value of $93 and $807 as of
February 29, 2004 and August 31, 2003, respectively which is recorded as price
risk management assets on the balance sheet. The Partnership reclassified into
earnings through interest expense, losses of $623 and $1,061 for the three and
six months ended February 29, 2004 that were previously reported in accumulated
other comprehensive income (loss).
In the course of normal operations, the Partnership routinely enters into
contracts such as forward physical contracts for the purchase and sale of
natural gas, propane, and other NGLs that qualify for and are designated as a
normal purchase and sales contracts. Such contracts are exempted from the fair
value accounting requirements of SFAS 133 and are accounted for using
traditional accrual accounting.
The market prices used to value the financial derivative transactions reflect
management's estimates considering various factors including closing exchange
and over-the-counter quotations, and the time value of the underlying
commitments. The values are adjusted to reflect the potential impact of
liquidating a position in an orderly manner over a reasonable period of time
under present market conditions.
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. The Partnership 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 Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). The interpretation was revised in December 2003. As
revised, FIN 46 addresses consolidation of business enterprise of variable
interest entities. FIN 46 was effective immediately for all variable interest
entities created after January 31, 2003 and for the first fiscal year or interim
period ending after March 15, 2004 for variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The implementation of FIN 46 did not have a significant impact on the
Partnership's financial position or results of operations.
21
4. ACQUISITIONS:
In October 2002, La Grange Acquisition purchased certain operating assets from
Aquila Gas Pipeline, primarily natural gas gathering, treating and processing
assets in Texas and Oklahoma. The assets acquired and purchase price allocation
were as follows:
Materials and supplies $ 1,626
Other assets 194
Property, plant and equipment 213,374
Investment in Oasis 41,670
Investment in Nustar Joint Venture 9,600
Accrued expenses (2,788)
--------------
Total $ 263,676
==============
At the closing of the acquisition of Aquila Gas Pipeline's assets, $5,000 was
put into escrow until such time that proper consents and conveyance could be
achieved related to a sales contract. It was later determined that it was
unlikely that a proper conveyance could be achieved which resulted in the
escrowed amount of $5,000 being returned to La Grange Acquisition during the
period ended August 31, 2003. The return of the $5,000 purchase price reduced La
Grange Acquisition's basis in property, plant and equipment.
On December 27, 2002, Oasis Pipe Line Company redeemed the remaining 50% of its
capital stock owned by Dow Hydrocarbons Resources, Inc. for $87,000, and
cancelled the stock. La Grange Acquisition, L.P. now owns 100% of the capital
stock of Oasis Pipe Line Company.
Also, on December 27, 2002, ETC Holdings, LP, a limited partner of La Grange
Energy, contributed ET Company I to the Partnership. The investment in the
Vantex system was included in the assets contributed.
5. WORKING CAPITAL FACILITY AND LONG-TERM DEBT:
Long-term debt consists of the following:
February 29, August 31, August 31,
2004 2003 2003
------------ -------------- ------------
(Energy Transfer (Predecessor
Company) Heritage)
1996 8.55% Senior Secured Notes $ 96,000 $ - $ 96,000
1997 Medium Term Note Program:
7.17% Series A Senior Secured Notes 12,000 - 12,000
7.26% Series B Senior Secured Notes 18,000 - 20,000
6.50% Series C Senior Secured Notes 2,143 - 2,143
2000 and 2001 Senior Secured Promissory Notes:
8.47% Series A Senior Secured Notes 12,800 - 16,000
8.55% Series B Senior Secured Notes 32,000 - 32,000
8.59% Series C Senior Secured Notes 27,000 - 27,000
8.67% Series D Senior Secured Notes 58,000 - 58,000
8.75% Series E Senior Secured Notes 7,000 - 7,000
8.87% Series F Senior Secured Notes 40,000 - 40,000
7.21% Series G Senior Secured Notes 19,000 - 19,000
7.89% Series H Senior Secured Notes 8,000 - 8,000
7.99% Series I Senior Secured Notes 16,000 - 16,000
Term Loan Facility 325,000 226,000 -
-
22
Senior Revolving Acquisition Facility 21,228 - 24,700
Notes Payable on noncompete agreements with interest
imputed at rates averaging 7.38%, due in installments
through 2010, collateralized by a first security lien on
certain assets of Heritage Operating 19,690 - 20,110
Other 1,536 - 1,118
Current maturities of long-term debt (29,937) (30,000) (38,309)
---------- ------------ ----------
$ 685,460 $ 196,000 $ 360,762
========== ============ ==========
Maturities of the Senior Secured Notes, the Medium Term Note Program and the
Senior Secured Promissory Notes (the "Notes") are as follows:
1996 8.55% Senior Secured Notes:
mature at the rate of $12,000 on June 30 in
each of the years 2002 to and including 2011.
Interest is paid semi-annually.
1997 Medium Term Note Program:
Series A Notes: mature at the rate of $2,400 on November 19 in
each of the years 2005 to and including 2009.
Interest is paid semi-annually.
Series B Notes: mature at the rate of $2,000 on November 19 in
each of the years 2003 to and including 2012.
Interest is paid semi-annually.
Series C Notes: mature at the rate of $714 on March 13 in each
of the years 2000 to and including 2003, $357
on March 13, 2004, $1,073 on March 13, 2005,
and $357 in each of the years 2006 and 2007.
Interest is paid semi-annually.
2000 and 2001 Senior Secured Promissory Notes:
Series A Notes: mature at the rate of $3,200 on August 15 in
each of the years 2003 to and including 2007.
Interest is paid quarterly.
Series B Notes: mature at the rate of $4,571 on August 15 in
each of the years 2004 to and including 2010.
Interest is paid quarterly.
Series C Notes: mature at the rate of $5,750 on August 15 in
each of the years 2006 to and including 2007,
$4,000 on August 15, 2008 and $5,750 on August
15, 2009 to and including 2010. Interest is
paid quarterly.
Series D Notes: mature at the rate of $12,450 on August 15 in
each of the years 2008 and 2009, $7,700 on
August 15, 2010, $12,450 on August 15, 2011
and $12,950 on August 15, 2012. Interest is
paid quarterly.
Series E Notes: mature at the rate of $1,000 on August 15 in
each of the years 2009 to and including 2015.
Interest is paid quarterly.
Series F Notes: mature at the rate of $3,636 on August 15 in
each of the years 2010 to and including 2020.
Interest is paid quarterly.
Series G Notes: mature at the rate of $3,800 on May 15 in each
of the years 2004 to and including 2008.
Interest is paid quarterly. $7.5 million of
these notes were retired during the fiscal
year ended August 31, 2003.
Series H Notes: mature at the rate of $727 on May 15 in each
of the years 2006 to and including 2016.
Interest is paid quarterly. $19.5 million of
these notes were retired during the fiscal
year ended August 31, 2003.
Series I Notes: mature in one payment of $16,000 on May 15,
2013. Interest is paid quarterly.
All receivables, contracts, equipment, inventory, general intangibles, cash
concentration accounts, and the capital stock of Heritage Operating and its
subsidiaries secure the Senior Secured, Medium Term, and Senior Secured
Promissory Notes. In addition to the stated interest rate for the Notes, the
Partnership is required to pay an
23
additional 1% per annum on the outstanding balance of the Notes until such time
the Notes achieve investment grade status.
Effective January 20, 2004, La Grange Acquisition entered into the Second
Amended and Restated Credit Agreement. The terms of the Agreement are as
follows:
A $325,000 Term Loan Facility that matures on January 18, 2008.
Interest is paid quarterly and is based on the LIBOR rate plus 3% which
was 4.10% at February 29, 2004. The Term Loan Facility is secured by
substantially all of the La Grange Acquisition's assets.
A $175,000 Revolving Credit Facility is available through January 18,
2008. Amounts borrowed under the La Grange Acquisition Credit Facility
bear interest at a rate based on either a Eurodollar rate, or a prime
rate. The maximum commitment fee payable on the unused portion of the
facility is 0.50%. The facility is fully secured by substantially all
of La Grange Acquisition's assets. As of February 29, 2004, there were
no amounts outstanding under the Revolving Credit Facility, and $10,875
in letters of credit outstanding which reduce the amount available for
borrowing under the Revolving Credit Facility. Letters of Credit under
the Revolving Credit Facility may not exceed $40,000.
Effective December 31, 2003, Heritage Operating entered into the Second Amended
and Restated Credit Agreement. The terms of the Agreement are as follows:
A $75,000 Senior Revolving Working Capital Facility is available
through December 31, 2006. Amounts borrowed under the Working Capital
Facility bear interest at a rate based on either a Eurodollar rate or a
prime rate. The amounts outstanding at February 29, 2004 were
Eurodollar rate loans. The weighted average interest rate was 2.9738%
for the amount outstanding at February 29, 2004. The maximum commitment
fee payable on the unused portion of the facility is 0.50%. Heritage
Operating must reduce the principal amount of working capital
borrowings to $10,000 for a period of not less than 30 consecutive days
at least one time during each fiscal year. All receivables, contracts,
equipment, inventory, general intangibles, cash concentration accounts,
and the capital stock of Heritage Operating's subsidiaries secure the
Senior Revolving Working Capital Facility. As of February 29, 2004, the
Senior Revolving Working Capital Facility had a balance outstanding of
$65,488. A $5,000 Letter of Credit issuance is available to Heritage
Operating for up to 30 days prior to the maturity date of the Working
Capital Facility. Letter of Credit Exposure plus the Working Capital
Loan cannot exceed the $75,000 maximum Working Capital Facility.
Heritage Operating had no outstanding Letters of Credit at February 29,
2004.
A $75,000 Senior Revolving Acquisition Facility is available through
December 31, 2006, at which time the outstanding amount must be paid in
full. Amounts borrowed under the Acquisition Credit Facility bear
interest at a rate based on either a Eurodollar rate or a prime rate.
The amounts outstanding at February 29, 2004 were Eurodollar rate
loans. The weighted average interest rate was 2.9738% for the amount
outstanding at February 29, 2004. 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 Operating's
subsidiaries secure the Senior Revolving Acquisition Facility. As of
February 29, 2004, the Senior Revolving Acquisition Facility had a
balance outstanding of $21,228.
The agreements for each of the Senior Secured Notes, Medium Term Note Program,
Senior Secured Promissory Notes, and the Operating Partnerships' bank credit
facilities contain customary restrictive covenants applicable to the Operating
Partnerships, including limitations on substantial disposition of assets,
changes in ownership of the Operating Partnerships, the level of additional
indebtedness and creation of liens. These covenants require the Operating
Partnerships to maintain ratios of Consolidated Funded Indebtedness to
Consolidated EBITDA (as these terms are similarly defined in the bank credit
facilities and the Note Agreements) of not more than, 4.75 to 1 for Heritage
Operating and 4.00 to 1 for La Grange Acquisition and Consolidated EBITDA to
Consolidated Interest Expense (as these terms are similarly defined in the bank
credit facilities and the Note Agreements) of not less than 2.25 to 1 for
Heritage Operating and 2.75 to 1 for La Grange Acquisition. The Consolidated
EBITDA used to determine these ratios is calculated in accordance with these
debt agreements. For purposes of calculating the ratios
24
under the bank credit facilities and the Note Agreements, Consolidated EBITDA is
based upon the Operating Partnerships' EBITDA, as adjusted for the most recent
four quarterly periods, and modified to give pro forma effect for acquisitions
and divestures made during the test period and is compared to Consolidated
Funded Indebtedness as of the test date and the Consolidated Interest Expense
for the most recent twelve months. These debt agreements also provide that the
Operating Partnerships may declare, make, or incur a liability to make,
restricted payments during each fiscal quarter, if: (a) the amount of such
restricted payment, together with all other restricted payments during such
quarter, do not exceed Available Cash with respect to the immediately preceding
quarter; (b) no default or event of default exists before such restricted
payments; and (c) each Operating Partnership's restricted payment is not greater
than the product of each Operating Partnership's Percentage of Aggregate
Available Cash multiplied by the Aggregate Partner Obligations (as these terms
are similarly defined in the bank credit facilities and the Note Agreements).
The debt agreements further provide that Heritage Operating's Available Cash is
required to reflect a reserve equal to 50% of the interest to be paid on the
notes and in addition, in the third, second and first quarters preceding a
quarter in which a scheduled principal payment is to be made on the notes,
Available Cash is required to reflect a reserve equal to 25%, 50%, and 75%,
respectively, of the principal amount to be repaid on such payment dates.
Failure to comply with the various restrictive and affirmative covenants of the
Operating Partnerships' bank credit facilities and the Note Agreements could
negatively impact the Operating Partnerships' ability to incur additional debt
and/or the Partnership's ability to pay distributions. The Operating
Partnerships are required to measure these financial tests and covenants
quarterly and were in compliance with all requirements, tests, limitations, and
covenants related to the Senior Secured Notes, Medium Term Note Program and
Senior Secured Promissory Notes, and the bank credit facilities at February 29,
2004.
6. INCOME TAXES:
The components of the deferred tax liability were as follows:
February 29, 2004 August 31, 2003
----------------- ----------------
(Energy Transfer
Company)
Deferred Tax Liabilities-
Property, plant and equipment $ 112,627 $ 55,736
Other (302) (351)
------------- -------------
$ 112,325 $ 55,385
============= =============
7. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
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 $616 and $844 for the
three and six months ended February 29, 2004, respectively, and $245 and $393
for the three and five months ended February 28, 2003, respectively, and has
been included in operating expenses in the accompanying statements of
operations. Predecessor Heritage's rental expense under these leases was
approximately $754 and $1,470 for the three and six months ended February 28,
2003. 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 $3,912 in 2004; $3,751 in 2005; $1,731 in 2006; $940 in 2007; $532 in 2008
and $842 thereafter.
The Partnership has forward commodity contracts, which will be settled by
physical delivery. Short-term contracts, which expire in less than one year,
require delivery up to 39 million MMBtu per day. Long-term contracts total
require delivery of up to 157 MMBtu per day. The long-term contracts run through
July 2013.
The Partnership has entered into several propane purchase and supply commitments
with varying terms as to quantities and prices, which expire at various dates
through March 2004.
25
La Grange Acquisition in the normal course of business, purchases, processes and
sells natural gas pursuant to long-term contracts. Such contracts contain terms
that are customary in the industry. The Partnership believes that such terms are
commercially reasonable and will not have a material adverse effect on the
Partnership's financial position or results of operations.
BOSSIER PIPELINE EXTENSION
The Partnership has signed long-term agreements with several parties committing
firm transportation volumes into the new Bossier Pipeline system, which is
currently under construction by the Partnership and will connect East Texas
production into the Katy hub near Houston. Those commitments include an
agreement with XTO Energy, Inc. to deliver approximately 200 MMcf/d of natural
gas into the pipeline. The term of the XTO agreement runs nine years, beginning
when the Bossier Pipeline extension becomes operational, currently scheduled to
occur in mid-2004.
LITIGATION
On June 16, 2003, Guadalupe Power Partners, L.P. ("GPP") sought and obtained a
Temporary Restraining Order against Oasis Pipe Line Company. In their pleadings,
GPP alleged unspecified monetary damages for the period from February 25, 2003
to June 16, 2003 and sought to prevent Oasis Pipe Line Company from implementing
flow control measures to reduce the flow of gas to their power plant at varying
hourly rates. Oasis Pipe Line Company filed a counterclaim against GPP asking
for damages and a declaration that the contract was terminated as a result of
the breach by GPP. Oasis Pipe Line Company Texas, L.P. and GPP agreed to a
"stand still" order and referred this dispute to binding arbitration. The
arbitration panel was selected and discovery was conducted in advance of a
hearing before the arbitration panel. The hearing before the panel commenced on
December 9, 2003. The arbitration was completed with a ruling favorable to the
Oasis Pipe Line Company Texas, L.P. on the contract issues involved, but with no
damages awarded to either party.
The Partnership is a party to various legal proceedings and/or regulatory
proceedings incidental to its business. Certain claims, suits and complaints
arising in the ordinary course of business have been filed or are pending
against the Partnership. 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 the Partnership. 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 February 29,
2004 and August 31, 2003, an accrual of $1,996 and $112, respectively, was
recorded as accrued and other current liabilities on the Partnership's
consolidated balance sheets. As of August 31, 2003, Predecessor Heritage had an
accrual of $941 that was recorded as accrued and other current liabilities.
ENVIRONMENTAL
The Partnership's operations are subject to extensive federal, state and local
environmental laws and regulations that require expenditures for remediation at
operating facilities and waste disposal sites. Although the Partnership believes
its operations are in substantial compliance with applicable environmental laws
and regulations, risks of additional costs and liabilities are inherent in the
natural gas pipeline and processing business, and there can be no assurance that
significant costs and liabilities will not be incurred. Moreover, it is possible
that other developments, such as increasingly stringent environmental laws,
regulations and enforcement policies thereunder, and claims for damages to
property or persons resulting from the operations, could result in substantial
costs and liabilities. Accordingly, the Partnership has adopted policies,
practices, and procedures in the areas of pollution control, product safety,
occupational health, and the handling, storage, use, and disposal of hazardous
materials to prevent material environmental or other damage, and to limit the
financial liability, which could result from such events. However, some risk of
environmental or other damage is inherent in the natural gas pipeline and
processing business, as it is with other entities engaged in similar businesses.
In conjunction with the acquisition of the Texas and Oklahoma natural gas
gathering and gas processing assets from Aquila Gas Pipeline, Aquila, Inc.
agreed to indemnify La Grange Acquisition, for any environmental liabilities
that arose from operations of the assets purchased prior to October 1, 2002.
Aquila also agreed to indemnify the Partnership for 50% of any environmental
liabilities that arose from operations of the Oasis Pipe Line Company assets
purchased prior to October 1, 2002.
26
Petroleum-based contamination or environmental wastes are known to be located on
or adjacent to six sites, on which the Partnership 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, Predecessor Heritage obtained indemnification for expenses
associated with any remediation from the former owners or related entities. The
Partnership 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 February 29, 2004 balance sheet. Additionally, no amount
was recorded in Predecessor Heritage's August 31, 2003 balance sheet. Based on
information currently available to the Partnership, such projects are not
expected to have a material adverse effect on the Partnership's financial
condition or results of operations.
In July 2001, Predecessor 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 Predecessor 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 the Partnership, it is not believed that the
Partnership's liability if such action were to be taken by the EPA would have a
material adverse effect on the Partnership's financial condition or results of
operations.
Environmental exposures and liabilities are difficult to assess and estimate due
to unknown factors such as the magnitude of possible contamination, the timing
and extent of remediation, the determination of the Partnership's liability in
proportion to other parties, improvements in cleanup technologies and the extent
to which environmental laws and regulations may change in the future. Although
environmental costs may have a significant impact on the results of operations
for any single period, the Partnership believes that such costs will not have a
material adverse effect on its financial position. As of February 29, 2004 and
August 31, 2003, an accrual of $500 and $633 was recorded in the Partnership's
balance sheet to cover any material environmental liabilities that were not
covered by the environmental indemnifications.
8. PRICE RISK MANAGEMENT ASSETS AND LIABILITIES:
COMMODITY PRICE RISK
The Partnership is exposed to market risks related to the volatility of natural
gas and NGL prices. To reduce the impact of this price volatility, the
Partnership primarily uses derivative commodity instruments (futures and swaps)
to manage its exposures to fluctuations in margins. The fair value of all
derivatives that are designated and documented as cash flow hedges and
determined to be effective are recorded through other comprehensive income until
the settlement month. At the end of the settlement month, any gain or loss
previously recorded in other comprehensive income (loss) is recognized in the
income statement. Unrealized gains or losses on derivatives that do not meet the
requirements for hedge accounting are recognized in the statement of operations.
The Partnership's derivative instruments were as follows at February 29, 2004:
Notional
Volume Fair
Commodity MMBTU Maturity Value
--------- ----------- -------- -----------
Basis Swaps IFERC/Nymex Gas 45,685,000 2004 $ (2,538)
Basis Swaps IFERC/Nymex Gas 57,637,500 2004 3,563
----------
$ 1,025
Swing Swaps IFERC Gas
Swing Swaps IFERC Gas 102,035,000 2004-2005 $ (2,334)
64,340,000 2004-2005 2,057
----------
$ (277)
Futures Nymex Gas 3,525,000 2004-2005 $ (232)
Futures Nymex Gas 145,222,507 2004-2005 1,691
----------
$ 1,459
27
Estimates related to the Partnership's gas marketing activities are sensitive to
uncertainty and volatility inherent in the energy commodities markets and actual
results could differ from these estimates. The Partnership believes it is
protected from the volatility in the energy commodities markets because it does
not have unbalanced positions. Long-term physical contracts are tied to index
prices. System gas, which is also tied to index prices, will provide the gas
required by the Partnership's long-term physical contracts. When third-party gas
is required to supply long-term contracts, a hedge is put in place to protect
the margin on the contract. Financial contracts, which are not tied to physical
delivery, will be offset with financial contracts to balance the Partnership's
positions.
INTEREST RATE RISK
The Partnership is exposed to market risk for changes in interest rates related
to its bank credit facilities. An interest rate swap agreement is used to manage
a portion of the exposure related to LaGrange Acquisition's Term Loan Facility
to changing interest rates by converting floating rate debt to fixed-rate debt.
On October 9, 2002, La Grange Acquisition, L.P. entered into an interest rate
swap agreement to manage its exposure to changes in interest rates. The interest
rate swap has a notional value of $75 million and matures on October 9, 2005.
Under the terms of the interest rate swap agreement, the Partnership will pay a
fixed rate of 2.76% and will receive three-month LIBOR with quarterly settlement
commencing on January 9, 2003. Management has elected to designate the swap as a
hedge for accounting purposes. The value of the interest rate swap at February
29, 2004 and August 31, 2003 is an asset of $93 and $807, respectively.
The following represents gain (loss) on derivative activity:
Three Three
Months Months Six Months Five Months
Ended Ended Ended Ended
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
------------ ------------ ------------ ------------
(Energy (Energy
Transfer Transfer
Company) Company)
Realized and unrealized gain (loss) on
derivative activities recognized in
earnings $ (7,168) $ 4,828 $(10,202) $ 6,693
Realized loss on interest rate swap
included in interest expense $ (623) $ (242) $ (1,061) $ (350)
9. PARTNER'S CAPITAL:
UNITS
Common Units, Class D Units, Special Units, Class E Units and Class C Units
represent limited partner interests in the Partnership that entitle the holders
thereof to the rights and privileges specified in the Partnership Agreement, as
amended. As of February 29, 2004, there were issued and outstanding 27,897,734
Common Units and 7,721,542 Class D Units representing, an aggregate 98% limited
partner interest in the Partnership. Except as described below, the Common Units
and Class D Units generally participate pro rata in the Partnership's income,
gains, losses, deductions, credits, and distributions. There are also 4,426,916
Class E Units outstanding that are entitled to receive distributions in
accordance with their terms, 3,742,515 Special Units outstanding that receive no
distributions until the Bossier Pipeline becomes commercially operational, and
1,000,000 Class C Units outstanding that are entitled only to participate in
distributions that are attributable to the net amount received by the
Partnership in connection with the SCANA litigation (defined below).
No person is entitled to preemptive rights in respect of issuances of securities
by the Partnership, except that U.S. Propane, has the right to purchase
sufficient partnership securities to maintain its general partner equity
interest in the Partnership.
Common Units. The Partnership's Common Units are registered under the Securities
Act of 1933 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
28
matters presented to the Limited Partners for a vote except that holders of
Common Units acquired by La Grange Energy in connection with the ETC Transaction
will be entitled to vote upon the proposal to change the terms of the Class D
Units and Special Units in the same proportion as the votes cast by the holders
of the Common Units other than La Grange Energy with respect to the proposals.
In addition, if at any time any person or group (other than the Partnership's
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
the Partnership Agreement. The Common Units are entitled to distributions of
Available Cash as described below under "Quarterly Distributions of Available
Cash."
Class C Units. The 1,000,000 Class C Units were issued to Heritage Holdings in
August 2000 in conjunction with the transaction with U.S. Propane and the change
of control of the Partnership's General Partner in conversion of that portion of
Heritage Holding's Incentive Distribution Rights that entitled it to receive any
distribution attributable to the net amount received by the Partnership in
connection with the settlement, judgment, award or other final nonappealable
resolution of specified litigation filed by the Partnership 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. All decisions of the Partnership's General
Partner relating to the SCANA litigation are determined by a special litigation
committee consisting of one or more independent directors of the Partnership's
General Partner. As soon as practicable after the time that the Partnership or
its affiliates receive any final cash or other 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 after 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. Following this determination, the distributable proceeds
will be deemed to be "Available Cash" under the Partnership Agreement and will
be distributed as described below under "Quarterly Distributions of Available
Cash." 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 Class C Units do not have any rights
to share in any of the Partnership's 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 conversion into any other unit and do not have any voting
rights except to the extent provided by law, in which case each Class C Unit
will be entitled to one vote.
Class D Units. The Class D Units generally have voting rights that are identical
to the voting rights of the Common Units and vote with the Common Units as a
single class on each matter, except that the Class D Units are entitled to vote
upon a proposal to approve (a) a change in the terms of the Partnership's Class
D Units to provide that each Class D Unit is convertible into one Common Unit
and (b) the issuance of additional Common Units upon such conversion (the
"Listing Proposal") and the Special Unit Proposal in the same proportion as the
votes cast by the holders of the Common Units. Each Class D Unit was initially
entitled to receive 100% of the quarterly amount distributed on each Common
Unit, for each quarter, provided that the Class D Units will be subordinated to
the Common Units with respect to the payment of the minimum quarterly
distribution for such quarter (and any arrearage in the payment of the minimum
quarterly distribution for all prior quarters). If the Listing Proposal is not
approved by the Partnership's Unitholders within six months following the
closing of the ETC Transaction, then the terms of the Class D Units will be
changed such that each Class D Unit will be entitled to receive 115% of the
quarterly amount distributed on each Common Unit on a pari passu basis with
distributions on the Common Units.
In the event of the Partnership's dissolution and liquidation, each Class D Unit
was initially entitled to receive 100% of the amount distributed on each Common
Unit, but only after each Common Unit has received an amount equal to its
capital account, plus the minimum quarterly distribution for the quarter, plus
any arrearages in the minimum quarterly distribution with respect to prior
quarters. If however, the Partnership's Unitholders do not approve the Listing
Proposal within six months following the closing of the ETC Transaction, then
each Class D Unit is entitled upon liquidation to receive 115% of the amount
distributed to each Common Unit on a pari passu basis with liquidating
distributions on the Common Units.
Class E Units. In conjunction with the Partnership's purchase of the capital
stock of Heritage Holdings, the 4,426,916 Common Units held by Heritage Holdings
were converted into 4,426,916 Class E Units. The Class E
29
Units generally do not have any voting rights and are not entitled to vote on
the proposals to make the Class D Units and Special Units convertible into
Common Units. These Class E Units are entitled to aggregate cash distributions
equal to 11.1% of the total amount of cash distributed to all Unitholders,
including the Class E Unitholders, up to $2.82 per unit per year. Distributions
on the Class E Units are taxable income to HHI. In the event of the
Partnership's termination and liquidation, the Class E Units will be allocated
1% of any gain upon liquidation and will be allocated any loss upon liquidation
to the same extent as Common Units. After the allocation of such amounts, the
Class E Units will be entitled to the balance in their capital accounts, as
adjusted for such termination and liquidation. The Class E Units are treated as
treasury stock for accounting purposes because they are owned by the
Partnership's wholly owned subsidiary, HHI. Because the Class E Units are not
entitled to receive any allocation of partnership income, gain, loss, deduction
or credit that is attributable to the Partnership's ownership of HHI, such
amounts will instead be allocated to the General Partner in accordance with its
respective interest and the remainder to the Partnership's Unitholders other
than the holders of Class E Units, pro rata. In the event the Partnership's
distributions exceed $2.82 per unit annually, all such amount in excess thereof
will be available for distribution to Unitholders other than the holders of
Class E Units in proportion to their respective interests.
Special Units. The Special Units were issued as consideration for the Bossier
Pipeline and its related contracts acquired in the ETC Transaction. The Special
Units generally do not have any voting rights but are entitled to vote on the
Special Unit Proposal to change their terms in the same proportion as the votes
cast by the holders of the Common Units. The Special Units are not entitled to
share in partnership distributions, however, following Unitholder approval of
the Special Unit Proposal and upon the Bossier Pipeline becoming commercially
operational, which is expected to occur in mid-2004, each Special Unit will
immediately be convertible into one Common Unit. If the Special Unit Proposal is
not approved by the Partnership's Unitholders prior to the time the Bossier
Pipeline becomes commercially operational, then each Special Unit will be
entitled to receive 115% of the quarterly amount distributed on each Common Unit
on a pari passu basis with distributions on Common Units, unless subsequently
converted into Common Units. Until the Special Unit Proposal is approved, the
Special Units are entitled to receive an assignment of the Bossier Contracts
that had been committed at the time of the closing of the ETC Transaction, in
the event of the Partnership's dissolution and liquidation. If the Special Unit
Proposal is not approved prior to the time the Bossier Pipeline becomes
commercially operational, then in the event of the Partnership's dissolution and
liquidation, each Special Unit will be entitled to receive 100% of the amount
distributed on each Common Unit on a pari passu basis with liquidating
distributions on the Common Units. If the Bossier Pipeline does not become
operational by December 1, 2004 and, as a result, a party to one of the Bossier
Contracts exercises rights to acquire the Bossier Pipeline under its
transportation contract, the Special Units will no longer be considered
outstanding and will not be entitled to any rights afforded any other of the
Partnership's units.
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" below. The General Partner owns all of the Incentive Distribution Rights,
except that in conjunction with the August 2000 transaction with U.S. Propane,
the Partnership issued 1,000,000 Class C Units to HHI, its general partner at
that time, in conversion of that portion of HHI's 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.
The Class C Units were distributed by HHI to its former shareholders. 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.
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.
30
Distributions by the Partnership in an amount equal to 100% of Available Cash
will generally be made 98% to the Common, Class D, and Class E Unitholders and
2% to the General Partner, subject to the payment of incentive distributions to
the General Partner to the extent that certain target levels of cash
distributions are achieved.
On October 15, 2003, Predecessor Heritage paid a quarterly distribution of $0.65
per unit, or $2.60 per unit annually to Unitholders of record at the close of
business on October 8, 2003. On January 14, 2004, Predecessor Heritage paid a
quarterly distribution of $0.65 per unit, or $2.60 per unit annually to
Unitholders of record at the close of business on December 30, 2003. On March
23, 2004, the Partnership declared a cash distribution for the second quarter
ended February 29, 2004 of $0.70 per unit, or $2.80 per unit annually, payable
on April 14, 2004 to Unitholders of record at the close of business on April 2,
2004. In addition to these quarterly distributions, the General Partner received
quarterly distributions for its general partner interest in the Partnership, and
incentive distributions to the extent the quarterly distribution exceeded $0.55
per unit. The total amount of distributions declared for the second quarter
ended February 29, 2004 on Common Units, the Class D Units, the general partner
interests and the Incentive Distribution Rights totaled $19.6 million, $5.4
million and $1.9 million, respectively. All such distributions were made from
Available Cash from Operating Surplus.
Following the transaction with Energy Transfer, the Partnership currently
distributes Available Cash, excluding any available cash to be distributed to
the Class C Unitholders, as follows:
- First, 98% to the Common, Class D and Class E Unitholders in
accordance with their percentage interests, and 2% to our General
Partner, until each Common Unit has received $0.50 for that
quarter;
- Second, 98% to all Common, Class D and Class E Unitholders in
accordance with their percentage interests, and 2% to our General
Partner, until each Common Unit has received $0.55 for that
quarter;
- Third, 85% to all Common, Class D and Class E Unitholders in
accordance with their percentage interests, and 15% to our General
Partner, until each Common Unit has received $0.635 for that
quarter;
- Fourth, 75% to all Common, Class D and Class E Unitholders in
accordance with their percentage interests, and 25% to our General
Partner, until each Common Unit has received $0.825 for that
quarter;
- Thereafter, 50% to all Common, Class D and Class E Unitholders in
accordance with their percentage interests, and 50% to our General
Partner.
Notwithstanding the foregoing, the Class D Units will be subordinated to the
Common Units with respect to the payment of the minimum quarterly distribution
and any arrearage in the payment of the minimum quarterly distribution for all
prior quarters and the distributions on each Class E Unit may not exceed $2.82
per year. Please read "Partner's Capital" above for a discussion of the Class C
Units and the percentage interests in distributions of the different classes of
units.
If the Unitholders do not approve changing the terms of the Class D Units and
Special Units within six months of the closing of the ETC Transaction to provide
that these units are convertible into Common Units and the Bossier Pipeline is
commercially operational, then the Partnership will distribute available cash,
excluding any available cash to be distributed to the Class C Unitholders, as
follows:
- First, 98% to the Common, Class D, Class E and Special Unitholders
in accordance with their percentage interests, and 2% to our
General Partner, with each Class D and Special Unit receiving 115%
of the amount distributed on each Common Unit, until each Common
Unit has received $0.50 for that quarter;
- Second, 98% to all Common, Class D, Class E and Special
Unitholders in accordance with their percentage interests, and 2%
to our General Partner, with each Class D and Special Unit
receiving 115% of the amount distributed on each Common Unit,
until each Common Unit has received $0.55 for that quarter;
31
- Third, 85% to all Common, Class D, Class E and Special Unitholders
in accordance with their percentage interests, and 15% to our
General Partner, with each Class D and Special Unit receiving 115%
of the amount distributed on each Common Unit, until each Common
Unit has received $0.635 for that quarter;
- Fourth, 75% to all Common, Class D, Class E and Special
Unitholders in accordance with their percentage interests, and 25%
to our General Partner, with each Class D and Special Unit
receiving 115% of the amount distributed on each Common Unit,
until each Common Unit has received $0.825 for that quarter;
- Thereafter, 50% to all Common, Class D, Class E and Special
Unitholders in accordance with their percentage interests, with
each Class D and Special Unit receiving 115% of the amount
distributed on each Common Unit, and 50% to our General Partner.
Notwithstanding the foregoing, the distributions to the Class E Unitholders may
not exceed $2.82 per year. Please read "Partners' Capital" above for a
discussion of the Class C Units and the percentage interests in distributions of
the different classes of units
10. RETIREMENT BENEFITS:
The Partnership has a defined contribution plan for virtually all employees of
La Grange Acquisition with discretionary matching. Pursuant to the plan,
employees of La Grange Acquisition can defer a portion of their compensation and
contribute it to a deferred account. No matching contributions were made to this
plan by Energy Transfer Company through February 29, 2004.
The Partnership also sponsors a defined contribution profit sharing and 401(k)
savings plan, which covers all employees of Heritage Operating subject to
service period requirements. Contributions are made to the plan at the
discretion of the Board of Directors and are allocated to eligible employees as
of the last day of the plan year based on their pro rata share of total
contributions. Employer matching contributions are calculated using a
discretionary formula based on employee contributions. The Partnership made
matching contributions of $303 to the 401(k) savings plan for the three and six
months ended February 29, 2004.
11. RELATED PARTY TRANSACTIONS:
Accounts payable to related companies as of February 29, 2004 includes $12,500
due from La Grange Acquisition to La Grange Energy. This amount represents the
balance of funds due to La Grange Energy related to the ETC Transaction that
have not yet been distributed.
12. REPORTABLE SEGMENTS:
The Partnership's financial statements reflect six reportable segments: La
Grange Acquisition's midstream and transportation operations, Heritage
Operating's domestic retail and domestic wholesale operations, the foreign
wholesale operations of MP Energy Partnership, and the liquids marketing
activities of Resources. The operations which focus on the gathering,
compression, treating, processing, transportation and marketing of natural gas,
primarily at the Southeast Texas System and Elk City Systems, generate revenue
primarily by the volumes of natural gas gathered, compressed, treated,
processed, transported, purchased and sold through the Partnership's pipeline
(excluding Oasis Pipe Line) and gathering systems and the level of natural gas
and NGL prices. The transportation operations focus on transporting natural gas
through the Partnership's Oasis Pipe Line. Revenue is generated from fees
charged to customers to reserve firm capacity on or move gas on the pipeline on
an interruptible basis. The fee structure is derived from the gas price
differential between the Waha and Katy hubs. A monetary fee, and/or fuel
retention are components of the fee structure. Excess fuel retained after
consumption is valued at the first of the month Katy tailgate price and
strategically sold when market prices are high.
The Partnership's retail and wholesale fuel segments 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. The Partnership manages these segments
separately as each segment involves different distribution, sale, and marketing
strategies. Selling, general and administrative expenses are allocated to the
midstream and transportation operating segments, however, the Partnership
evaluates the
12
performance of its other operating segments based on operating income exclusive
of selling, general, and administrative expenses of $1,500 for the three and six
months ended February 29, 2004, and $0 for the three and five months ended
February 28, 2003. Predecessor Heritage's selling, general and administrative
expenses were $4,320 and $7,177 for the three and six months ended February 28,
2003. Investment in affiliates and equity in earnings (losses) of affiliates
relates primarily to The Partnership's investment in Vantex Gas Pipeline Company
and Vantex Energy Services, Ltd, and is part of the midstream segment. In
addition, the Partnership's two largest customers' revenues are included in the
midstream segment's revenues. The following table presents the unaudited
financial information by segment for the following periods:
Three Months Three Months Three Months Six Months Five Months Six Months
Ended Ended Ended Ended Ended Ended
February 29, February 28, February 28, February 29, February 28, February 28,
2004 2003 2003 2004 2003 2003
----------- ------------ ------------ ------------ ----------- -----------
(Energy Transfer (Predecessor (Energy Transfer (Predecessor
Company) Heritage) Company) Heritage)
Midstream
Natural gas MMBtu/d 968,000 390,000 - 946,000 336,000 -
NGLs bbls/d 12,600 9,990 - 13,800 12,000 -
Transportation
Natural gas MMBtu/d 873,000 763,000 - 831,000 787,000 -
Propane gallons
(in thousands)
Domestic retail fuel 84,435 - 166,622 84,435 - 243,343
Domestic wholesale
fuel 1,291 - 5,467 1,291 - 10,357
Foreign wholesale fuel
Affiliated 18,587 - 17,452 18,587 - 37,832
Unaffiliated 11,876 - 25,358 11,876 - 42,553
Elimination (18,587) - (17,452) (18,587) - (37,832)
-------- --------- ----------- ----------- ----------- -----------
Total gallons 97,602 - 197,447 97,602 - 296,253
======== ========= =========== =========== =========== ===========
Three Months Three Months Three Months Six Months Five Months Six Months
Ended Ended Ended Ended Ended Ended
February 29, February 28, February 28, February 29, February 28, February 28,
2004 2003 2003 2004 2003 2003
----------- ------------ ------------ ------------ ----------- -----------
(Energy Transfer (Predecessor (Energy Transfer (Predecessor
Company) Heritage) Company) Heritage)
Revenues:
Midstream $ 477,712 $ 197,518 $ - $ 883,010 $ 275,770 $ -
Eliminations (7,378) (1,189) (11,866) (1,189)
Transportation 17,957 7,778 - 32,133 7,778 -
Domestic retail fuel 121,981 - 212,704 121,981 - 296,754
Domestic wholesale fuel 1,284 - 4,345 1,284 - 6,755
Foreign wholesale fuel
Affiliated 471 - 27,424 471 - 37,832
Unaffiliated 9,188 - 15,873 9,188 - 24,810
Eliminations (471) - (27,424) (471) - (37,832)
Liquids marketing, net 309 - 352 309 - 1,059
Other 8,234 - 16,535 8,234 - 33,891
--------- ---------- ----------- ---------- ----------- ------------
Total $ 629,287 $ 204,107 $ 249,809 $1,044,273 $ 282,359 $ 363,269
========= ========== =========== ========== =========== ============
Cost of sales:
Midstream $ 457,947 $ 172,626 $ - $ 842,565 $ 239,947 $ -
Eliminations (7,378) (1,189) - (11,866) (1,189) -
Transportation 7,359 3,067 - 9,779 3,067 -
Domestic retail fuel 65,065 - 104,878 65,065 - 146,499
Domestic wholesale fuel 1,111 - 3,927 1,111 - 6,060
Foreign wholesale fuel 8,292 14,747 8,291 - 23,172
Other 2,117 - 4,868 2,117 - 9,709
--------- ---------- ---------- ---------- ----------- ------------
Total Cost of Sales $ 534,513 $ 174,504 $ 128,420 $ 917,062 $ 241,825 $ 185,440
======== ========== =========== ========== =========== ============
33
Operating Income
Midstream $ 16,484 $ 8,316 $ - $ 30,508 $ 12,049 $ -
Transportation 6,665 3,910 - 13,645 3,910 -
Domestic retail 36,204 - 66,277 36,204 - 79,713
Domestic wholesale fuel (231) - (885) (231) - (1,369)
Foreign wholesale fuel
Affiliated 169 - 374 169 - 484
Unaffiliated 894 - 1,121 894 - 1,627
Elimination (169) - (374) (169) - (484)
Liquids marketing 103 - 192 103 - 515
--------- ---------- ----------- ---------- ----------- ------------
Total $ 60,119 $ 12,226 $ 66,705 $ 81,123 $ 15,959 $ 80,486
========= ========== =========== ========== =========== ============
Three Months Three Months Three Months Six Months Five Months Six Months
Ended Ended Ended Ended Ended Ended
February 29, February 28, February 28, February 29, February 28, February 28,
2004 2003 2003 2004 2003 2003
----------- ------------ ------------ ------------ ----------- -----------
(Energy Transfer (Predecessor (Energy Transfer (Predecessor
Company) Heritage) Company) Heritage)
Gain on Disposal of
Assets:
Midstream $ 28 $ - $ - $ 25 $ - $ -
Transportation - - - - - -
Domestic retail propane 3 - 84 3 - 164
Domestic wholesale
propane - - 4 - - (9)
--------- ---------- ----------- ---------- ---------- -----------
Total $ 31 $ - $ 88 $ 28 $ - $ 155
========= ========== =========== ========== ========== ===========
Minority Interest
Expense:
Corporate $ - $ - $ 508 $ - $ - $ 522
Foreign wholesale
propane 175 - 313 175 - 425
--------- ---------- ----------- ---------- ---------- -----------
Total $ 175 $ - $ 821 $ 175 $ - $ 947
========= ========== =========== ========== ========== ===========
Three Months Three Months Three Months Six Months Five Months Six Months
Ended Ended Ended Ended Ended Ended
February 29, February 28, February 28, February 29, February 28, February 28,
2004 2003 2003 2004 2003 2003
----------- ------------ ------------ ------------ ----------- -----------
(Energy Transfer (Predecessor (Energy Transfer (Predecessor
Company) Heritage) Company) Heritage)
Depreciation and
amortization:
Midstream $ 3,230 $ 2,535 $ - $ 6,321 $ 4,185 $ -
Transportation 1,156 276 - 2,212 276 -
Domestic retail propane 5,016 - 9,318 5,016 - 18,451
Domestic wholesale
propane 67 - 124 67 - 252
Foreign wholesale
propane 3 - 5 3 - 10
------------ ------------ ----------- ---------- ------------ -----------
Total $ 9,472 $ 2,811 $ 9,447 $ 13,619 $ 4,461 $ 18,713
============ ============ =========== ========== ============ ===========
Interest Expense net of
interest income
Midstream $ 4,369 $ 3,440 $ - $ 7,675 $ 4,849 $ -
Transportation 1,718 102 - 3,761 102 -
Eliminations (1,536) - (3,133) - -
Domestic retail propane 4,344 - 9,317 4,344 - 18,613
------------ ------------ ----------- ---------- ------------ -----------
Total $ 8,895 $ 3,542 $ 9,317 $ 12,647 $ 4,951 $ 18,613
============ ============ =========== ========== ============ ===========
Income tax expense
Midstream $ - $ (1) $ - $ $ (1) $ -
Transportation 700 953 - 2,409 953 -
Domestic retail propane 48 - 1,285 48 1,285
------------ ------------ ----------- ---------- ------------ -----------
Total $ 748 $ 952 $ 1,285 $ 2,457 $ 952 $ 1,285
============ ============ =========== ========== ============ ===========
34
February 29, August 31, August 31,
2004 2003 2003
------------ ---------- ----------
(Energy
Transfer (Predecessor
Company) Heritage)
Total Assets:
Midstream $ 604,569 $ 415,962 $ -
Transportation 176,133 189,007 -
Domestic retail propane 897,299 - 691,900
Domestic wholesale propane 8,196 - 12,197
Foreign wholesale propane 10,933 - 13,912
Liquids marketing 13,905 - 4,474
Corporate 20,596 - 16,356
Elimination - (2,866) -
---------- ---------- ----------
Total $1,731,631 $ 602,103 $ 738,839
========== ========== ==========
Six Months Five Months Six Months
Ended Ended Ended
February 29, February 28, February 28,
2004 2003 2003
----------- ----------- ------------
(Energy
Transfer (Predecessor
Company) Heritage)
Additions to property, plant
and equipment including
acquisitions:
Midstream $ 33,294 $ 4,461 $ -
Transportation 38 9 -
Domestic retail propane 494,754 $ - 46,723
Domestic wholesale propane 4,251 - 166
Foreign wholesale propane 89 - -
Corporate - - 699
-------- -------- --------
Total $532,426 $ 4,470 $ 47,558
======== ======== ========
Corporate assets include vehicles, office equipment and computer software for
the use of administrative personnel. These assets are not allocated to segments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Energy Transfer 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 under the symbol "ETP". The Partnership's business
activities are primarily conducted through its subsidiaries, La Grange
Acquisition, L.P, a Texas limited partnership, and Heritage Operating, L.P., a
Delaware limited partnership (the "Operating Partnerships"). The Partnership and
the Operating Partnerships are sometimes referred to collectively in this report
as "Energy Transfer."
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 THE PARTNERSHIP IN PERIODIC PRESS RELEASES AND SOME
ORAL STATEMENTS OF ENERGY TRANSFER PARTNERS OFFICIALS DURING PRESENTATIONS ABOUT
THE PARTNERSHIP, INCLUDE CERTAIN "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. STATEMENTS USING WORDS SUCH AS "ANTICIPATE," "BELIEVE,"
"INTEND," "PROJECT," "PLAN," "CONTINUE," "ESTIMATE," "FORECAST," "MAY," "WILL,"
OR SIMILAR EXPRESSIONS HELP IDENTIFY FORWARD-LOOKING STATEMENTS. ALTHOUGH THE
PARTNERSHIP 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.
35
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 AMOUNT OF NATURAL GAS TRANSPORTED ON ENERGY TRANSFER'S PIPELINES
AND GATHERING SYSTEMS;
- THE LEVEL AND THROUGHPUT IN ENERGY TRANSFER'S NATURAL GAS PROCESSING
AND TREATING FACILITIES;
- THE FEES ENERGY TRANSFER CHARGES AND THE MARGINS REALIZED FOR ITS
SERVICES;
- THE PRICES AND MARKET DEMAND FOR, AND THE RELATIONSHIP BETWEEN, NATURAL
GAS AND NGLS;
- ENERGY PRICES GENERALLY;
- 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;
- THE LEVEL OF DOMESTIC OIL AND NATURAL GAS PRODUCTION;
- THE AVAILABILITY OF IMPORTED OIL AND NATURAL GAS;
- THE 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;
- ACTIONS TAKEN BY FOREIGN OIL AND GAS PRODUCING NATIONS;
- THE POLITICAL AND ECONOMIC STABILITY OF PETROLEUM PRODUCING NATIONS;
- THE EFFECT OF WEATHER CONDITIONS ON DEMAND FOR OIL, NATURAL GAS AND
PROPANE;
- THE WEATHER IN OUR OPERATING AREAS;
- AVAILABILITY OF LOCAL, INTRASTATE AND INTERSTATE TRANSPORTATION
SYSTEMS;
- THE CONTINUED ABILITY TO FIND AND CONTRACT FOR NEW SOURCES OF NATURAL
GAS SUPPLY;
- AVAILABILITY AND MARKETING OF COMPETITIVE FUELS;
- THE IMPACT OF ENERGY CONSERVATION EFFORTS;
- ENERGY EFFICIENCIES AND TECHNOLOGICAL TRENDS;
- THE EXTENT OF GOVERNMENTAL REGULATION AND TAXATION;
- HAZARDS OR OPERATING RISKS INCIDENTAL TO THE TRANSPORTING, TREATING AND
PROCESSING OF NATURAL GAS AND NGLS OR TO THE TRANSPORTING, STORING AND
DISTRIBUTING OF PROPANE THAT MAY NOT BE FULLY COVERED BY INSURANCE;
- THE MATURITY OF THE PROPANE INDUSTRY AND COMPETITION FROM OTHER PROPANE
DISTRIBUTORS;
- COMPETITION FROM OTHER MIDSTREAM COMPANIES;
36
- LOSS OF KEY PERSONNEL;
- LOSS OF KEY NATURAL GAS PRODUCERS OR THE PROVIDERS OF FRACTIONATION
SERVICES;
- REDUCTIONS IN THE CAPACITY OR ALLOCATIONS OF THIRD PARTY PIPELINES THAT
CONNECT WITH ENERGY TRANSFER'S PIPELINES AND FACILITIES;
- THE EFFECTIVENESS OF RISK-MANAGEMENT POLICIES AND PROCEDURES AND THE
ABILITY OF ENERGY TRANSFER'S LIQUIDS MARKETING COUNTERPARTIES TO
SATISFY THEIR FINANCIAL COMMITMENTS AND THE NONPAYMENT OR
NONPERFORMANCE BY ITS CUSTOMERS ;
- THE AVAILABILITY AND COST OF CAPITAL AND ENERGY TRANSFER'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;
- THE ABILITY TO SUCCESSFULLY IDENTIFY AND CONSUMMATE STRATEGIC
ACQUISITIONS AT PURCHASE PRICES THAT ARE ACCRETIVE TO THE PARTNERSHIP'S
FINANCIAL RESULTS; AND
- RISKS ASSOCIATED WITH THE CONSTRUCTION OF NEW PIPELINES AND TREATING
AND PROCESSING FACILITIES OR ADDITIONS TO ENERGY TRANSFER'S EXISTING
PIPELINES AND FACILITIES.
ENERGY TRANSFER TRANSACTION
On January 20, 2004, Heritage Propane Partners, L.P., ("Heritage") and La Grange
Energy, L.P. ("La Grange Energy") completed the series of transactions whereby
La Grange Energy contributed its subsidiary, La Grange Acquisition, L.P. and its
subsidiaries who conduct business under the assumed name of Energy Transfer
Company, ("ETC") (the "ETC Transaction") to Heritage in exchange for cash of
$300,000 less the amount of Energy Transfer Company debt in excess of $151,500,
less ETC's accounts payable and other specified liabilities, plus agreed upon
capital expenditures paid by La Grange Energy relating to the ETC business prior
to closing, $433,909 of Heritage Common and Class D Units, and the repayment of
the ETC debt of $151,500. In conjunction with the ETC Transaction and prior to
the contribution of ETC to Heritage, ETC distributed its cash and accounts
receivables to La Grange Energy and an affiliate of La Grange Energy contributed
an office building to ETC. La Grange Energy also received 3,742,515 Special
Units as consideration for certain assets described as the Bossier Pipeline. In
the event the Bossier Pipeline does not become commercially operational by
December 1, 2004, the Special Units will no longer be considered outstanding and
will not be entitled to any rights afforded any other of Heritage's units. In
accordance with Statement of Financial Accounting Standards No. 141, Business
Combinations ("SFAS 141") no value has been recorded with respect to the Special
Units.
Simultaneously with the ETC Transaction, La Grange Energy obtained control of
Heritage by acquiring all of the interest in U.S. Propane, L.P., ("U.S.
Propane") the General Partner of Heritage, and U.S. Propane, L.P.'s 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. for
$30,000 (the "General Partner Transaction"). In conjunction with the General
Partner Transaction, U.S. Propane L.P. contributed its 1.0101% General Partner
interest in Heritage Operating, L.P. ("Heritage Operating") to Heritage in
exchange for an additional 1% General Partner interest in Heritage.
Simultaneously with these transactions, Heritage purchased the outstanding stock
of Heritage Holdings, Inc. ("HHI") for $100,000.
Concurrent with the ETC Transaction, ETC borrowed $325,000 from financial
institutions and Heritage raised $355,948 of gross proceeds through the sale of
9,200,000 Common Units at an offering price of $38.69 per unit. The net proceeds
were used to finance the transaction and for general partnership purposes.
The ETC and General Partner transactions affect the comparability of the
financial statements for the three and six months ended February 29, 2004 to the
three and five months ended February 28, 2003 because the consolidated financial
statements of the Partnership for the six months ended February 29, 2004 include
the three and six month
37
results for ETC and subsidiaries and the results of Heritage Operating and
subsidiaries and HHI only for the period from January 20, 2004 through February
29, 2004. The financial statements of ETC for the three and five months ended
February 28, 2003 reflect only the results of ETC and subsidiaries, and the
financial statements of Predecessor Heritage reflect the results of Heritage
Operating, L.P. and its subsidiaries (see note 3 to the Partnership's
consolidated financial statements.) The changes in the line items discussed
below are a result of these transactions.
GENERAL
The ETC Transaction was accounted for as a reverse acquisition in accordance
with SFAS 141. Although Heritage is the surviving parent entity for legal
purposes, ETC is the acquirer for accounting purposes. As a result, ETC's
historical financial statements will be the historical financial statements of
the registrant. The operations of Heritage prior to the ETC Transaction are
referred to as Predecessor Heritage.
ENERGY TRANSFER COMPANY
Midstream segment
The Partnership's midstream and transportation segments are operated by La
Grange Acquisition and its subsidiaries. These segments commenced operations in
October 2002 with ETC's acquisition of the natural gas gathering, processing and
transportation assets previously owned by Aquila, Inc. The assets acquired from
Aquila include the Southeast Texas system and the Oklahoma system as well as a
50% equity interest in the Oasis Pipe Line Company ("Oasis"). ETC purchased the
remaining 50% interest in Oasis on December 27, 2002. The equity method of
accounting was used to account for our Oasis pipeline from October 1, 2002
through December 27, 2002 at which time it became a fully consolidated
subsidiary.
ETC owns and operates approximately 4,500 miles of natural gas gathering and
transportation pipelines with an aggregate throughput capacity of 2.5 billion
cubic feet of natural gas per day, with natural gas treating and processing
plants located in Texas, Oklahoma, and Louisiana. Its major asset groups consist
of the Southeast Texas System, Elk City System and Oasis pipeline. The Southeast
Texas System has a throughput capacity of 260 MMcf/d. The system has 2,500 miles
of pipeline with 1,050 wells connected, the La Grange processing plant, and 5
natural gas treating facilities. The Elk City System has a throughput capacity
of 170 MMcf/d. The system has 315 miles of pipeline with 300 wells connected,
the Elk City processing plant, and a treating facility. The 583 mile long Oasis
pipeline, which connects the West Texas Waha Hub to the Katy Texas Tailgate, has
a throughput capacity of 830 MMcf/d.
Results from the midstream segment are determined primarily by the volumes of
natural gas gathered, compressed, treated, processed, purchased and sold through
ETC's pipeline and gathering systems and the level of natural gas and NGL
prices. ETC generates its midstream revenues and its gross margins principally
under fee-based arrangements or other arrangements. Under fee-based
arrangements, ETC receives a fee for natural gas gathering, compressing,
treating or processing services. The revenue it earns from these arrangements is
directly related to the volume of natural gas that flows through its systems and
is not directly dependent on commodity prices.
ETC also utilizes other types of arrangements in its midstream segment,
including (i) discount-to-index price arrangements which involve purchases of
natural gas at either (1) a percentage discount to a specified index price, (2)
a specified index price less a fixed amount or (3) a percentage discount to a
specified index price less an additional fixed amount, (ii)
percentage-of-proceeds arrangements under which ETC gathers and processes
natural gas on behalf of producers, selling the resulting residue gas and NGL
volumes at market prices and remitting to producers an agreed upon percentage of
the proceeds based on an index price, and (iii) keep-whole arrangements where
ETC gathers natural gas from the producer, processes the natural gas and sells
the resulting NGLs to third parties at market prices. In many cases, ETC
provides services under contracts that contain a combination of more than one of
the arrangements described above. The terms of ETC's contracts vary based on gas
quality conditions, the competitive environment at the time the contracts are
signed and customer requirements. Its contract mix may change as a result of
changes in producer preferences, expansion in regions where some types of
contracts are more common and other market factors.
ETC's ownership of the Oasis pipeline allows it to elect not to process natural
gas at the La Grange processing plant when processing margins are unfavorable.
ETC can bypass the La Grange processing plant and deliver natural gas meeting
pipeline quality specifications by blending rich natural gas from the Southeast
Texas System with lean natural gas transported on the Oasis pipeline. ETC can
also generally bypass the Elk City processing plant. The
38
natural gas supplied to the Elk City System has a relatively low NGL content and
does not require processing to meet pipeline quality specifications. During
periods of unfavorable processing margins, ETC can bypass the Elk City
processing plant and deliver the natural gas directly into connecting pipelines.
For the six months ended February 29, 2004, ETC's utilization of capacity at its
Southeast Texas System processing and treating facilities were approximately 59%
and 21% respectively. A portion of the excess capacity at the Southeast Texas
System processing facility was directly attributable to ETC's election to not
process or treat natural gas and deliver natural gas directly into the Oasis
pipeline in order to take advantage of high natural gas prices relative to NGL
prices. Additionally, in September 2003, ETC enhanced its utilization by moving
an idle 145 MMcf/d treating facility from the Southeast Texas System to the Elk
City System to take advantage of additional natural gas volumes.
ETC conducts its marketing operations through its producer services business, in
which ETC markets the natural gas that flows through its assets, which ETC
refers to as on-system gas, and attracts other customers by marketing volumes of
natural gas that do not move through its assets, which ETC refers to as
off-system gas. For both on-system and off-system gas, ETC purchases natural gas
from natural gas producers and other supply points and sells that natural gas to
utilities, industrial consumers, other marketers and pipeline companies, thereby
generating gross margins based upon the difference between the purchase and
resale prices.
Most of ETC's marketing activities involve the marketing of its on-system gas.
For the six months ended February 29, 2004, ETC marketed approximately 487
MMcf/d of natural gas, 52% of which was on-system gas. Substantially all of its
on-system marketing efforts involve natural gas that flows through either the
Southeast Texas System or the Oasis pipeline. ETC markets only a small amount of
natural gas that flows through the Elk City System.
For its off-system gas, ETC purchases gas or acts as an agent for small
independent producers that do not have marketing operations. ETC develops
relationships with natural gas producers, which facilitates its purchase of
their production on a long-term basis. ETC believes that this business provides
it with strategic insights and valuable market intelligence, which may impact
its expansion and acquisition strategy.
Transportation segment
Results from ETC's transportation segment are determined primarily by the amount
of capacity ETC's customers reserve as well as the actual volume of natural gas
that flows through the Oasis pipeline. Under Oasis pipeline customer contracts,
ETC charges its customers (i) a demand fee, which is a fixed fee for the
reservation of an agreed amount of capacity on the Oasis pipeline for a
specified period of time and which obligates the customer to pay ETC even if the
customer does not transport natural gas on the Oasis pipeline, (ii) a
transportation fee, which is based on the actual throughput of natural gas by
the customer on the Oasis pipeline, or a combination of both, generally payable
monthly.
For the six months ended February 29, 2004 and February 28, 2003 ETC transported
approximately 38% and 34%, respectively of its natural gas volumes on the Oasis
pipeline pursuant to long-term contracts. Its long-term contracts have a term of
one year or more. ETC also enters into short-term contracts with terms of less
than one year in order to utilize the capacity that is available on the Oasis
pipeline after taking into account the capacity reserved under ETC's long-term
contracts. For the six months ended February 29, 2004 and February 28, 2003 the
Oasis pipeline fees accounted for approximately 67% and 68%, respectively of
ETC's fee-based gross margin.
HERITAGE OPERATING
The Partnership's propane related segments are operated by Heritage Operating
and its subsidiaries who are engaged in the sale, distribution and marketing of
propane and other related products through its domestic retail, domestic
wholesale and foreign wholesale propane segments, (the propane segments) and
also through the liquids marketing activity of Resources. Predecessor Heritage
derived and Heritage Operating derives its revenue primarily from the retail
propane marketing segment. The General Partner believes that Predecessor
Heritage was, and the Partnership is now, the fourth largest retail marketer of
propane in the United States, based on retail gallons sold. The Partnership
serves more than 650,000 propane customers in from over 300 customer service
locations in 31 states.
The retail propane segment is a margin-based business in which gross profits
depend on the excess of sales price over propane supply cost. The market price
of propane is often subject to volatile changes as a result of supply or other
market conditions over which the Partnership will have no control. Product
supply contracts are one-year
39
agreements subject to annual renewal and generally permit suppliers to charge
posted prices (plus transportation costs) at the time of delivery or the current
prices established at major delivery points. Since rapid increases in the
wholesale cost of propane may not be immediately passed on to retail customers,
such increases could reduce gross profits. The Partnership generally has
attempted to reduce price risk by purchasing propane on a short-term basis. The
Partnership 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 Three months ended customer
service locations and in major storage facilities for future resale.
The retail propane business of the Partnership 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 propane
tanks located on the customers' premises, as well as to portable propane
cylinders. In the residential and commercial markets, propane is primarily used
for space heating, water heating, and cooking. In the agricultural market,
propane is primarily used for crop drying, tobacco curing, poultry brooding, and
weed control. In addition, propane is used for certain industrial applications,
including use as an engine fuel to power vehicles and forklifts and as a heating
source in manufacturing and mining processes.
Since its formation in 1989, Predecessor Heritage grew primarily through
acquisitions of retail propane operations and, to a lesser extent, through
internal growth. Since its inception through January 19, 2004, Predecessor
Heritage completed 105 acquisitions for an aggregate purchase price
approximating $720 million.
The Partnership'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 Predecessor Heritage's
retail propane volume and in excess of 80% of Predecessor 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 in the propane segments during the period from October through March
of each year and lower operating revenues and either net losses or lower net
income during the period from April through September of each year.
Consequently, sales and operating profits for the propane segments are
concentrated in the first and second fiscal quarters, however, cash flow from
operations is generally greatest during the second and third fiscal quarters
when customers pay for propane purchased during the six-month peak-heating
season. Sales to industrial and agricultural customers are much less weather
sensitive.
A substantial portion of the Partnership's propane is used in the
heating-sensitive residential and commercial markets causing the temperatures
realized in the Partnership's areas of operations, particularly during the
six-month peak-heating season, to have a significant effect on its financial
performance. In any given area, sustained warmer-than-normal temperatures will
tend to result in reduced propane use, while sustained colder-than-normal
temperatures will tend to result in greater propane use. The Partnership uses
information on normal temperatures in understanding how temperatures that are
colder or warmer than normal affect historical results of operations and in
preparing forecasts of future operations.
The retail propane segment's 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 propane
segment's margins are substantially lower than retail margins. In addition,
propane gross profit margins vary by geographical region. Accordingly, a change
in customer or geographic mix can affect propane gross profit without
necessarily affecting total revenues.
Amounts discussed below reflect 100% of the results of MP Energy Partnership
(the foreign wholesale propane segment). MP Energy Partnership is a general
partnership in which Heritage Operating owns a 60% interest. Because MP Energy
Partnership is primarily engaged in lower-margin wholesale distribution, its
contribution to the Partnership's net income is not significant and the minority
interest of this partnership is excluded from the EBITDA, as adjusted
calculation.
THREE MONTHS ENDED FEBRUARY 29, 2004 COMPARED TO THE THREE MONTHS ENDED FEBRUARY
28, 2003
Volumes. Total volumes of natural gas sales, NGL sales including propane, and
natural gas transported by the Partnerships' midstream, transportation, retail
propane, domestic wholesale propane, and foreign wholesale propane segments for
the three months ended February 29, 2004 and February 28, 2003 are as follows:
40
Three months ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2003
------------ ------------ ------------
(Energy
Transfer (Predecessor
Company) Heritage)
Midstream
Natural gas MMBtu/d 968,000 390,000 -
NGLs bbls/d 12,600 9,900 -
Transportation
Natural gas MMBtu/d 873,000 763,000 -
Propane (gallons in thousands)
Retail Propane 84,435 - 166,622
Domestic wholesale propane 1,291 - 5,467
Foreign wholesale Propane (net) 11,876 - 25,358
The Partnership's midstream natural gas sales volume increased 578,000
MMBtu/d from 390,000 MMBtu/d to 968,000 MMBtu/d for the three months ended
February 29, 2004 compared to the three months ended February 28, 2003. The
increase in natural gas sales volume is a result of the Partnership's expanded
marketing efforts, enhanced relationships with producers and expanded credit
facilities with commodity counter-parties which lead to both higher throughput
on existing contracts and additional new contracts for natural gas sales
volumes.
Midstream NGL sales volume increased from 9,900 bbls/d to 12,600
bbls/d, for the three months ended February 29, 2004 an increase of 2,700 bbls/d
from the volumes sold in the three months ended February 28, 2003. The greater
NGL sales volumes were due to more favorable gas processing margins which
provided the Partnership with a better economic benefit from extracting NGLs
from the natural gas stream rather than by-passing its processing plants.
Transportation volume for the three months ended February 29, 2004 was
873,000 MMBtu/d, an increase of 110,000 MMBtu/d from the 763,000 MMBtu/d for the
three months ended February 28, 2003. The combination of a widening basis
differential between the Waha and Katy natural gas pricing hubs and additional
volumes on the west and middle segments of the pipeline system provided
producers an incentive to transport increased volumes of natural gas to a more
attractive marketplace.
Total retail propane, domestic wholesale propane, and foreign wholesale
propane gallons sold during the three months ended February 29, 2004 were 97.6
million with no retail propane gallons reflected in the three months ended
February 28, 2003. These propane volumes reflect only the amounts sold after the
ETC Transaction (from January 20, 2004 through February 29, 2004). As a
comparison, had the ETC Transaction occurred at the beginning of the periods
presented, Predecessor Heritage would have reflected pro forma volumes of 177.4
million retail gallons for the three months ended February 29, 2004 and actual
volumes of 166.6 million gallons for the three months ended February 28, 2003.
Of the 10.8 million gallon increase reflected by Predecessor Heritage, 9.9
million gallons is the result of volumes added through acquisitions, and 0.9
million gallons is the result of temperatures being an average of 4.6% colder in
the three months ended February 29, 2004 compared to the same period last year.
Also, as a comparison, Predecessor Heritage would have reflected a pro forma 3.4
million and 23.0 million domestic and foreign wholesale gallons, respectively
for the second quarter of fiscal 2004 as compared to actual volumes of 5.5
million and 25.4 million domestic and foreign wholesale gallons for the second
quarter of fiscal 2003. The decrease of 2.1 million domestic wholesale gallons
is primarily due to the loss of two commercial customers to alternative fuel
sources. The decrease in foreign gallons is due to an exchange contract that was
in effect during the three months ended February 28, 2003, which was not
economical to renew during the three months ended February 29, 2004.
Revenues. Total revenues for the three months ended February 29, 2004
were $629.3 million, an increase of $425.2 million, as compared to $204.1
million in the three months ended February 28, 2003. Of the increase,
41
$141.0 million is due to the ETC Transaction. This revenue reflects the full
three months of ETC's revenue consolidated with the revenue of Heritage
Operating after the ETC Transaction (from January 20, 2004 through February 29,
2004). If the ETC Transaction had occurred at the beginning of the periods
presented, total revenue would have been $777.2 million for the three months
ended February 29, 2004 as compared to $475.5 million for the three months ended
February 28, 2003.
Midstream revenues for the three months ended February 29, 2004 were
$470.3 million compared to $196.3 million for the three-month period ended
February 28, 2003, an increase of $274.0 million. The Partnership's midstream
segment experienced significant growth due to the Partnership's enhanced and
matured business relationships with commodity counter-parties. Of the revenue
increase of $274.0 million, $267.6 million is due to additional sales volumes,
$2.0 million is due to increases in commodity prices and $4.4 million is due to
additional fee based revenue along the midstream assets.
Transportation revenues were $18.0 million for the three months ended
February 29, 2004 compared to $7.8 million for the three months ended February
28, 2003. The increase of $10.2 million is primarily due to the increased
volumes to take advantage of the natural gas price difference between the Waha
and Katy market hubs. The three months ended February 29, 2004 also included a
full quarter of the operations of Oasis Pipeline Company as a wholly owned
subsidiary, which was not included in the three months ended February 28, 2003.
For the three months ended February 29, 2004, the Partnership had
domestic retail propane revenues of $122.0 million, U.S. wholesale revenues of
$1.3 million, foreign wholesale revenues of $9.2 million, other domestic
revenues of $8.2 million and net liquids marketing activities of $0.3 million,
an increase of 100% with no propane revenues reflected in the three months ended
February 28, 2003. These revenues reflect only the amounts earned after the ETC
Transaction (from January 20, 2004 through February 29, 2004). As a comparison,
for the three months ended February 29, 2004, Predecessor Heritage would have
reflected retail revenues of $249.1 million as compared to $212.7 million in the
three months ended February 28, 2003. Of the increase, $13.9 million was a
result of the increase in volumes sold by customer service locations added
through acquisitions, $21.2 million was due to higher selling prices, and $1.3
million was the result of increase in gallons sold due to the colder
temperatures described above. Domestic wholesale revenues would have been $3.0
million as compared to $4.3 million for the three months ended February 28,
2003; reflecting a $1.9 million decrease due to the lost commercial customers
described above, offset by a $0.6 million increase due to higher selling prices
in the domestic wholesale segment. Foreign wholesale revenues would have been
$17.7 million as compared to $15.9 million for the three months ended February
28 2003. The increase of $1.8 million is the result of a $3.6 million increase
due to higher selling prices offset by a $1.8 million decrease in due to
decreased volumes sold described above. Other domestic revenues would have been
$18.3 million compared to $16.5 million for the three months ended February 28,
2003; and net liquids marketing activities would have reflected $0.9 million as
compared to $0.4 million for the three months ended February 28, 2003.
Cost of Products Sold. Total cost of products sold increased to $534.5
million for the three months ended February 29, 2004 as compared to $174.5
million for the three months ended February 28, 2003. Of the $360.0 million
increase, $76.6 million is due to the ETC Transaction. This cost of products
sold reflects the full three months of ETC's cost of products sold consolidated
with the cost of products sold of Heritage Operating after the ETC Transaction
(from January 20, 2004 through February 29, 2004). If the ETC Transaction had
occurred at the beginning of the periods presented, total cost of products sold
would have been $616.7 million for the three months ended February 29, 2004 as
compared to $321.1 million for the three months ended February 28, 2003.
Midstream cost of sales increased $279.2 million to $450.6 million for
the three months ended February 29, 2004 compared to $171.4 million for the
three months ended February 28, 2003. Midstream cost of sales increased
proportionally with midstream revenue as the Partnership's business
relationships with commodity counter-parties matured throughout the period. Of
the $279.2 million increase, $251.0 million relates to increased purchase volume
and $28.2 million relates to increased commodity prices.
Transportation cost of sales increased $4.2 million to $7.3 million in
the three months ended February 29, 2004 compared to $3.1 million in the
three-month period ended February 28, 2003. The Partnership received a greater
amount of shipper's natural gas due to increased volumes, to compensate for fuel
used in operating the pipeline. These greater retained volumes together with
higher natural gas prices increased the cost of sales activity generated from
the sale of excess inventory or the recognition, either positive or negative, of
the unaccounted fuel within the pipeline system.
42
For the three months ended February 29, 2004, the Partnership had
domestic retail propane cost of sales of $65.1 million, U.S. wholesale cost of
sales of $1.1 million, foreign wholesale cost of sales of $8.3 million, and
other domestic cost of sales of $2.1 million an increase of 100% with no propane
cost of sales reflected in the three months ended February 28, 2003. These costs
reflect only the amounts that were incurred after the ETC Transaction (from
January 20, 2004 through February 29, 2004). As a comparison, for the three
months ended February 29, 2004, Predecessor Heritage would have reflected retail
cost of sales of $134.9 million as compared to $104.9 million in the three
months ended February 28, 2003. Of the $30.0 million increase, $8.2 million was
due to an increase in volumes sold as described above and $21.8 was due to
higher product costs this fiscal quarter. U.S. wholesale cost of sales would
have been $2.6 million as compared to $3.9 million for the three months ended
February 28, 2003. Of the decrease, $1.6 million was due to lost volumes
described above offset by a $0.3 million increase related to higher product
costs. Foreign wholesale cost of sales would have reflected an increase of $1.3
million to $16.1 million as compared to $14.8 million for the three months ended
February 28, 2003, of which, $2.9 million represents the increase of product
cost, offset by a decrease of $1.6 million due to decreased volumes described
above. Other cost of sales would have been $5.2 million as compared to $4.8
million for the three months ended February 28, 2003.
Gross Profit. Total gross profit for the three months ended February
29, 2004 was $94.8 million as compared to $29.6 million for the three months
ended February 28, 2003. This gross profit reflects the full three months of
ETC's gross profit consolidated with the gross profit of Heritage Operating
after the ETC Transaction (from January 20, 2004 through February 29, 2004). If
the ETC Transaction had occurred at the beginning of the periods presented,
total gross profit would have been $160.5 million for the three months ended
February 29, 2004 as compared to $154.4 million for the three months ended
February 28, 2003.
The midstream segment generated a gross profit of $19.7 million for the
three months ended February 29, 2004, as compared to $24.9 million in the three
months ended February 28, 2003. This increase is due to the changes in revenues
and cost of sales described above.
Transportation gross profit was $10.6 for the three months ended
February 29, 2004 as compared to $4.7 million for the three months ended
February 28, 2003 as a result of the changes is transportation revenues and
expenses described above.
For the three months ended February 29, 2004, the Partnership had
domestic retail propane gross profit of $56.9 million, U.S. wholesale gross
profit of $0.2 million, foreign wholesale gross profit of $0.9 million, other
domestic gross profit of $6.1 million, and a liquids marketing gross profit of
$0.3 million, an increase of 100% with no propane cost of sales reflected in the
three months ended February 28, 2003. These gross profits reflect only the
amounts that were incurred after the ETC Transaction (from January 20, 2004
through February 29, 2004). As a comparison, for the three months ended February
29, 2004, Predecessor Heritage would have reflected retail gross profit of
$114.2 million as compared to $107.8 million in the three months ended February
28, 2003, U.S. wholesale gross profit of $0.4 million as compared to $0.4
million for the three months ended February 28, 2003, foreign wholesale gross
profit of $1.6 million as compared to $1.1 million for the three months ended
February 28 2003, other gross profit of $13.1 million compared to $11.7 million
for the three months ended February 28, 2003, and liquids marketing gross profit
of $0.9 million as compared to $0.4 million for the three months ended February
28, 2003. The increase of $0.5 million is due to more favorable market positions
and market conditions experienced in the three months ended February 29, 2004
compared to the three months ended February 28, 2003.
Operating Expenses. Operating expenses were $27.5 million, an increase of
$22.0 million for the three months ended February 29, 2004 as compared to $5.5
million for the three months ended February 28, 2003. Of the increase, $22.3
million is a result of the addition of the retail propane, domestic wholesale
propane, foreign wholesale propane, and liquids marketing operating expenses
included in the February 29, 2004 operating expenses as a result ETC
Transaction. The remaining decrease of $0.3 million is primarily the result of
the reduction in operating expense in the transportation segment's reduction in
environmental expense during the three months ending February 29, 2004 as
compared to the three months ending February 28, 2003. These operating expenses
reflect the full three months of ETC's operating expenses consolidated with the
operating expenses of Heritage Operating after the ETC Transaction (from January
20, 2004 through February 29, 2004). If the ETC Transaction had occurred at the
beginning of the periods presented, total operating expenses would have been
$51.9 million for the three months ended February 29, 2004 as compared to $51.4
million for the three months ended February 28, 2003.
43
Selling, General and Administrative. Selling, general and administrative
expenses were $6.4 million for the three months ended February 29, 2004,
compared to $4.3 million for the three-month period ended February 28, 2003. The
increase of $2.1 is comprised of $1.5 million due to the ETC Transaction
described above and $0.6 million due to the selling, general and administrative
expenses of Oasis being included in the entire three-month period ended February
29, 2004, that were consolidated only from December 27, 2002 to February 28,
2003 in the three months ended February 28, 2003. These selling, general and
administrative expenses reflect the full three months of ETC's selling, general
and administrative expenses consolidated with the selling, general and
administrative expenses of Heritage Operating after the ETC Transaction (from
January 20, 2004 through February 29, 2004). If the ETC Transaction had occurred
at the beginning of the periods presented, total selling, general and
administrative expenses would have been $13.3 million for the three months ended
February 29, 2004 as compared to the $9.1 million for the three months ended
February 28, 2003. The increase of $4.2 million includes approximately $4.5
million in transaction costs associated with the ETC Transaction.
Depreciation and Amortization. Depreciation and amortization was $9.5
million in the three months ended February 29, 2004 as compared to $2.8 million
in the three months ended February 28, 2003. Of the increase, $5.1 million is
due to the ETC Transaction described above and the remaining $1.6 million is
primarily due to a full three-month consolidation of Oasis during the three
months ended February 29, 2004 and higher deprecation due to the purchase
accounting step up of Oasis' assets. This depreciation and amortization reflects
the full three months of ETC's depreciation and amortization consolidated with
the depreciation and amortization of Heritage Operating after the ETC
Transaction (from January 20, 2004 through February 29, 2004). If the ETC
Transaction had occurred at the beginning of the periods presented, total
depreciation and amortization would have been $15.8 million for the three months
ended February 29, 2004 as compared to the $13.6 million for the three months
ended February 28, 2003.
Operating Income. For the three months ended February 29, 2004, the
Partnership had operating income of $58.6 million as compared to operating
income of $12.2 million for the three months ended February 28, 2003. This
increase is primarily due the changes in revenues, cost of sales and operating
expenses described above. This operating income reflects the full three months
of ETC's operating income consolidated with the operating income of Heritage
Operating after the ETC Transaction (from January 20, 2004 through February 29,
2004). If the ETC Transaction had occurred at the beginning of the periods
presented, total operating income would have been $86.7 million for the three
months ended February 29, 2004 as compared to the $75.4 million for the three
months ended February 28, 2003.
Interest Expense. Interest expense increased $5.4 million for the three
months ended February 29, 2004 to $8.9 million from $3.5 million for the same
three-month period last year. Of this increase, $4.3 million is due to the ETC
transaction and the remaining $1.1 million increase is primarily the result of
an increase in debt level as a result of the ETC transaction and additional debt
incurred related to the purchase of the Oasis pipeline on December 27, 2002.
This interest expense reflects the full three months of ETC's interest expense
consolidated with the interest expense of Heritage Operating after the ETC
Transaction (from January 20, 2004 through February 29, 2004). If the ETC
Transaction had occurred at the beginning of the periods presented, total
interest expense would have been $14.4 million for the three months ended
February 29, 2004 as compared to the $13.9 million for the three months ended
February 28, 2003.
Income Taxes. Income taxes for the three months ended February 29, 2004
were $0.7 million as compared to $1.0 million for the three months ended
February 28, 2003. If the ETC Transaction had occurred at the beginning of the
periods presented, income taxes would have been $1.8 million for the three
months ended February 29, 2004 as compared to the $3.8 million for the three
months ended February 28, 2003.
Net Income. For the three-month period ended February 29, 2004, the
Partnership recorded net income of $49.2 million, an increase of $41.4 million
as compared to net income for the three months ended February 28, 2003 of $7.8
million. The increase is primarily a result of the ETC Transaction and other
operating conditions described above. This net income reflects the full three
months of ETC's net income consolidated with the net income of Heritage
Operating after the ETC Transaction (from January 20, 2004 through February 29,
2004). If the ETC Transaction had occurred at the beginning of the periods
presented, total net income would have been $70.8 million for the three months
ended February 29, 2004 as compared to the $56.9 million for the three months
ended February 28, 2003.
EBITDA, as adjusted. EBITDA, as adjusted increased $53.0 million to
$68.1 million for the three months ended February 29, 2004, as compared to
EBITDA, as adjusted of $15.1 million for the three months ended
44
February 28, 2003. This increase is due to the ETC Transaction and operating
performance described above. This EBITDA, as adjusted reflects the full three
months of ETC's EBITDA, as adjusted consolidated with the EBITDA, as adjusted of
Heritage Operating after the ETC Transaction (from January 20, 2004 through
February 29, 2004). Predecessor Heritage would have reported EBITDA, as adjusted
of $76.0 million for the three months ended February 29, 2004 compared to $73.0
million for the three months ended February 28, 2003. If the ETC Transaction had
occurred at the beginning of the period presented, total EBITDA, as adjusted
would have been $103.8 million for the three months ended February 29, 2004,
which includes the effect of $3.3 million of transaction costs, net of non-cash
compensation, which were expensed due to the ETC Transaction. EBITDA, as
adjusted for the three months ended February 28, 2004 and February 28, 2003 is
computed as follows:
NET INCOME RECONCILIATION
(in millions)
Three Months Ended
---------------------------------------------------------------------------
February 29, February 29, February 28, February 28, February 28,
2004 2004 2003 2003 2003
------------ ------------ ------------ ----------- ------------
(Energy
Transfer (Predecessor
(Pro Forma) Company) (Pro forma) Heritage)
Net income $ 49.2 $ 70.8 $ 7.8 $ 56.9 $ 49.8
Depreciation and amortization 9.5 15.8 2.8 13.6 9.4
Interest 8.9 14.4 3.5 13.9 9.3
Taxes 0.7 1.8 1.0 3.8 1.3
Non-cash compensation expense - 1.1 - 0.3 0.3
Other expense (income) (0.2) (0.2) - - 2.3
Depreciation, amortization, and
interest of investee - 0.1 - 0.2 0.2
Minority interests - - - - 0.5
Less : Gain on disposal of assets - - - - (0.1)
------------- ------------ ------------ ------------ ----------
EBITDA, as adjusted (a) $ 68.1 $ 103.8 $ 15.1 $ 88.7 $ 73.0
============ ============ ============ ============ ==========
(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 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
45
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 note 4 of this Form 10-Q.
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, the Partnership'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 the Partnership 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.
SIX MONTHS ENDED FEBRUARY 29, 2004 COMPARED TO THE FIVE MONTHS ENDED FEBRUARY
28, 2003
Volume. Total volumes of natural gas sales, NGL sales including propane, and
natural gas transported by the Partnership's midstream, transportation, retail
propane, domestic wholesale propane, and foreign wholesale propane segments for
the six months ended February 29, 2004 and February 28, 2003 are as follows:
Six months Five months Six months
ended ended ended
February 29, February 28, February 28,
2004 2003 2003
------------ ------------ -------------
(Energy
Transfer (Predecessor
Company) Heritage)
Midstream
Natural gas MMBtu/d 946,000 336,000 -
NGLs bbls/d 13,800 12,000 -
Transportation
Natural gas MMBtu/d 831,000 787,000 -
Propane (gallons in thousands)
Retail Propane 84,435 - 243,343
Domestic wholesale propane 1,291 - 10,357
Foreign wholesale Propane (net) 11,876 - 42,553
46
The Partnership's midstream natural gas sales volume increased 610,000
MMBtu/d from 336,000 MMBtu/d to 946,000 MMBtu/d for the six months ended
February 29, 2004 compared to the five months ended February 28, 2003. The
increase in natural gas sales volume is a result of the Partnership's expanded
marketing efforts, enhanced relationships with producers and expanded credit
facilities with commodity counter-parties which lead to both higher throughput
on existing contracts and additional new contracts for natural gas sales
volumes.
Midstream NGL sales volume increased from 12,000 bbls/d to 13,800
bbls/d, an increase of 1,800 bbls/d for over volumes sold in the five months
ended February 28, 2003. The greater NGL sales volumes were due to more
favorable gas processing margins which provided the Partnership with a better
economic benefit from extracting NGLs from the natural gas stream rather than
by-passing its processing plants.
Transportation volume for the six months ended February 29, 2004 was
831,000 MMBtu/d, an increase of 44,000 MMBtu/d from the 787,000 MMBtu/d for the
five months ended February 28, 2003. The combination of a widening basis
differential between the Waha and Katy natural gas pricing hubs and additional
volumes on the west and middle segments of the pipeline system provided
producers an incentive to transport increased volumes of natural gas to a more
attractive marketplace.
Total retail propane gallons sold in the six months ended February 29,
2004 were 84.4 million gallons, with no retail propane gallons reflected in the
five months ended February 28, 2003. The difference in retail gallons sold is
due to the Energy Transfer transaction described above. The Partnership also
sold approximately 1.3 million and 11.9 domestic and foreign wholesale gallons,
respectively in this six months ended February 29 2004, with no domestic or
foreign wholesale gallons reflected for the five months ended February 28 2003.
As a comparison, Predecessor Heritage would have reflected pro forma volumes of
256.1 million retail gallons for the six months ended February 29, 2004 and
actual volumes of 243.3 million gallons for the six months ended February 28,
2003. Of the 12.8 million gallon increase, 16.8 million gallons are the result
of volumes sold by customer service locations added through acquisitions, offset
by a decrease of 4.0 million gallons that were weather related. While the
Partnership experienced temperatures that were slightly colder in the six months
ended February 29, 2004 compared to the same six months last year in its western
operations, the Partnership's northern and southern operations were warmer than
last year. The southern and northern operations generate the Partnership's
highest propane sales. Also, as a comparison, Predecessor Heritage would have
reflected a pro forma 6.7 million and 35.2 million domestic and foreign
wholesale gallons, respectively for the six months ended February 29, 2004 as
compared to actual volumes of 10.4 million and 42.6 million domestic and foreign
wholesale gallons for the six months ended February 28, 2003. The 3.7 million
gallon decrease in domestic wholesale gallons is primarily the result of the
loss of two commercial customers to alternative fuel sources, and the 7.4
million gallon decrease in foreign wholesale volumes is due to an exchange
contract that was in effect during the six months ended February 28, 2003, which
was not economical to renew during the six months ended February 29, 2004.
Revenues. Total revenues for the six months ended February 29, 2004
were $1,044.3 million, an increase of $761.9 million, as compared to $282.4
million in the five months ended February 28, 2003. These revenues reflect the
full six months of ETC's revenues consolidated with the revenues of Heritage
Operating after the ETC Transaction (from January 20, 2004 through February 29,
2004). Had the ETC Transaction occurred at the beginning of the periods
presented, total revenue would have been $1,316 million for the six months ended
February 29, 2004 as compared to the $701.2 million for the five months ended
February 28, 2003.
The current period's midstream revenues were $871.2 million compared to
$274.6 million for the five-month period ended February 28, 2003, an increase of
$596.6 million. The Partnership's midstream segment experienced significant
growth due to enhanced and matured business relationships with commodity
counter-parties. Of the revenue increase of $596.6 million, $573.3 million is
due to additional sales volumes, $12.8 million is due to increases in commodity
prices and $10.5 million is due to additional fee based revenue along the
midstream assets.
Transportation revenues were $32.1 million for the six months ended
February 29, 2004 compared to $7.8 million for the five months ended February
28, 2003. The increase of $24.3 million is in part due to the fact that the
transportation segment's revenue for the five months ending February 28, 2003
does not reflect revenue prior to January 2003 as the Oasis pipeline was
accounted for under the equity method of accounting prior to this time period.
The transportation segment's revenue is sensitive to the natural gas price
difference between the Waha and Katy market hubs. The average basis differential
was $0.182/MMBtu for the six months ending February 29, 2004 as compared to
$0.154/MMBtu for the five months ending February 28, 2003, an increase of
$0.028/MMBtu or 18.2%.
47
For the six months ended February 29, 2004, the Partnership had
domestic retail propane revenues of $122.0 million, U.S. wholesale revenues of
$1.3 million, foreign wholesale revenues of $9.2 million, other domestic
revenues of $8.2 million and net liquids marketing activities of $0.3 million
with no propane revenues reflected in the five months ended February 28, 2003.
These revenues reflect only the amounts earned after the ETC Transaction (from
January 20, 2004 through February 29, 2004). As a comparison, for the six months
ended February 29, 2004, Predecessor Heritage would have reflected retail
revenues of $343.5 million as compared to $296.8 million in the six months ended
February 28, 2003. Of the $46.7 million increase; $22.5 million is due to the
increase in volumes sold by customer service locations added through
acquisitions, $29.6 million is due to higher selling prices, offset by a
decrease of $5.4 million due to the decrease in weather related volumes
described above. Domestic wholesale revenues would have been $5.3 million as
compared to $6.7 million for the six months ended February 28, 2003. Of the
decrease, $2.9 million is due to the lost commercial customers described above;
offset by a $1.5 million increase related to higher selling prices. Foreign
wholesale revenues would have been $25.7 million as compared to $24.8 million
for the six months ended February 28 2003; due to a $6.3 million increase
related to higher selling prices offset by a decrease of $5.4 million due to the
decrease in volumes described above. Other domestic revenues would have been
$37.2 million compared to $33.9 million for the six months ended February 28,
2003; and net liquids marketing activities would have been $0.9 million as
compared to $1.1 million for the six months ended February 28, 2003. This
decrease is primarily due to a decrease in the number and volumes of contracts
sold offset by more favorable market conditions and positions in the six months
ended February 29, 2004 compared to the six months ended February 28, 2003.
Cost of Products Sold. Total cost of products sold increased to $917.1
million for the six months ended February 29, 2004 as compared to $241.8 million
for the five months ended February 28, 2003. These costs of sales reflect the
full six months of ETC's cost of sales consolidated with the cost of sales of
Heritage Operating after the ETC Transaction (from January 20, 2004 through
February 29, 2004). Had the ETC Transaction occurred at the beginning of the
periods presented, total cost of sales would have been $1.1 billion for the six
months ended February 29, 2004 as compared to the $473.1 million for the five
months ended February 28, 2003.
Midstream cost of sales increased $592.0 million to $830.7 million for
the six months ended February 29, 2004 compared to $238.7 million for the five
months ended February 28, 2003. Midstream cost of sales increased proportionally
with Midstream revenue as our business relationships with commodity
counter-parties matured throughout the period. Of the $592.0 million increase,
$533.8 million relates to increased purchase volume and $58.2 million relates to
increased commodity prices.
Transportation cost of sales increased $6.7 million to $9.8 million in
the six months ended February 29, 2004 compared to $3.1 million in the five
months ended February 28, 2003 The transportation segment generally retains a
portion of each shipper's gas to compensate for fuel used in operating the
pipeline. The actual usage of gas can differ from the amount retained from
transportation customers. Cost of sales activity from the transportation segment
is typically generated from the sale of excess inventory or the recognition,
either positive or negative, of the unaccounted fuel within the pipeline system.
For the six months ended February 29, 2004, the Partnership had
domestic retail propane cost of sales of $65.1 million, U.S. wholesale cost of
sales of $1.1 million, foreign wholesale cost of sales of $8.3 million, and
other domestic cost of sales of $2.1 million with no propane cost of sales
reflected in the five months ended February 28, 2003. These costs reflect only
the amounts that were incurred after the ETC Transaction (from January 20, 2004
through February 29, 2004). As a comparison, for the six months ended February
29, 2004, Predecessor Heritage would have reflected retail cost of sales of
$186.5 million as compared to $146.5 million in the six months ended February
28, 2003. Of the $40.0 million increase, $9.3 million reflects changes in
volumes described above and $30.7 reflects the increase due to higher selling
prices. Domestic wholesale cost of sales would have been $4.7 million as
compared to $6.1 million for the six months ended February 28, 2003. Of the
decrease, $2.6 million is due to volume decreases described above offset by $1.2
million increase due to increased selling prices. Foreign wholesale cost of
sales would have been $23.5 million as compared to $23.2 million for the six
months ended February 28, 2003. Of the increase, $5.2 million is related to
higher selling prices offset by a decrease of $4.9 million due to volume
decreases described above. Other cost of sales would have been $10.5 million as
compared to $9.6 million for the six months ended February 28, 2003.
Gross Profit. Total gross profit for the six months ended February 29,
2004 increased by $86.7 million to $127.2 million as compared to $40.5 million
for the five months ended February 28, 2003. This gross profit reflects the full
six months of ETC's gross profit consolidated with the gross profit of Heritage
Operating after the ETC Transaction (from January 20, 2004 through February 29,
2004). Had the ETC Transaction occurred at the
48
beginning of the periods presented, total gross profit would have been $250.3
million for the six months ended February 29, 2004 as compared to the $228.2
million for the five months ended February 28, 2003.
Midstream gross profit was $40.5 million for the six months ended
February 29, 2004, as compared to $35.9 million in the five months ended
February 28, 2003. This increase is attributable to the increases in revenues
and cost of sales described above.
Transportation gross profit was $22.3 million for the six months ended
February 29, 2004 compared to $4.7 million for the five months ended February
28, 2003. The increase of $17.6 million is attributable to the increases in
revenues and cost of sales described above.
For the six months ended February 29, 2004, the Partnership had
domestic retail propane gross profit of $56.9 million, U.S. wholesale gross
profit of $0.2 million, foreign wholesale gross profit of $0.9 million, other
domestic gross profit of $6.1 million, and a liquids marketing gross profit of
$0.3 million with no propane cost of sales reflected in the five months ended
February 28, 2003. These gross profits reflect only the amounts earned after the
ETC Transaction (from January 20, 2004 through February 29, 2004). As a
comparison, for the six months ended February 29, 2004, Predecessor Heritage
would have reflected retail gross profit of $157.0 million as compared to $150.3
million in the six months ended February 28, 2003; U.S. wholesale gross profit
of $0.6 million as compared to $0.7 million for the six months ended February
28, 2003; foreign wholesale gross profit of $2.2 million as compared to $1.6
million for the six months ended February 28 2003; other gross profit of $26.7
million compared to $24.2 million for the six months ended February 28, 2003,
and liquids marketing gross profit of $0.9 million s compared to $1.1 million
for the six months ended February 28, 2003.
Operating Expenses. Operating expenses increased $25.4 million to $32.9
million for the six months ended February 29, 2004 as compared to $7.5 million
for the five months ended February 28, 2003. Of the increase, $22.3 million is
the result of the ETC Transaction described above. The remaining increase of
$3.2 million is due to the effect of reporting for a six-month period as opposed
to a five-month period and the consolidation of the Oasis pipeline operating
expenses for the full six months ended February 29, 2004 which were only
included for the last two of the five months ended February 28, 2003. These
operating expenses reflect the full six months of ETC's operating expenses
consolidated with the operating expenses of Heritage Operating after the ETC
Transaction (from January 20, 2004 through February 29, 2004). Had the ETC
Transaction occurred at the beginning of the periods presented, total operating
expenses would have been $95.4 million for the six months ended February 29,
2004 as compared to the $87.8 million for the five months ended February 28,
2003.
Selling, General and Administrative. Selling, general and administrative
expenses were $11.3 million for the six months ended February 29, 2004 compared
to $5.9 million for the five months ended February 28, 2003. Of this increase is
$1.6 million is due to the ETC Transaction described above. These selling,
general and administrative expenses reflect the full six months of ETC's
selling, general and administrative expenses consolidated with the selling,
general and administrative expenses of Heritage Operating after the ETC
Transaction (from January 20, 2004 through February 29, 2004). Had the ETC
Transaction occurred at the beginning of the periods presented, total selling,
general and administrative expenses would have been $21.3 million for the six
months ended February 29, 2004 as compared to the $14.4 million for the five
months ended February 28, 2003. Selling general and administrative expenses for
the five months ending February 28, 2003 does not include expenses from Oasis
from October 2002 through December 2002 as Oasis was accounted for under the
equity method of accounting during this time period. The impact of the Oasis
consolidation in the six months ending February 29, 2004 was an additional $0.6
million in selling, general and administrative expense for the six months ending
February 29, 2004 as compared to the five months ending February 28, 2003. The
increase is also a reflection of a $1.2 million impact due to a six-month
reporting period for the six months ending February 29, 2004 compared to a
five-month reporting period for the five months ending February 28, 2003. In
addition, ETC's employee incentive expense increased $1.9 million during the six
months ending February 29, 2004 as compared to the five months ending February
28, 2003 due to overall improved financial results of ETC. The pro forma
increase also includes approximately $4.5 million in transaction costs related
to the ETC Transaction.
Depreciation and Amortization. Depreciation and amortization was $13.6
million for the six months ended February 29, 2004, compared to $4.5 in the five
months ended February 28, 2003. Of the increase, $5.1 million is due to the ETC
Transaction. The remaining $4.0 million increase is attributable to higher
depreciation on stepped up assets and the full consolidation of Oasis during the
six months ending February 29, 2004 compared to Oasis's equity method accounting
treatment for three out of five months for the five month period ending February
28, 2003, $0.9 million is due to an additional month in the reporting period for
the six months ending February 29, 2004
49
as compared to the five months ending February 28, 2003, and the impact of other
asset additions increased the Partnership's depreciation expense by $0.9 million
for the six months ending February 29, 2004 as compared to the five months
ending February 28, 2003. This depreciation and amortization reflects the full
six months of ETC's depreciation and amortization consolidated with the
depreciation and amortization of Heritage Operating after the ETC Transaction
(from January 20, 2004 through February 29, 2004). Had the ETC Transaction
occurred at the beginning of the periods presented, total depreciation and
amortization would have been $30.2 million for the six months ended February 29,
2004 as compared to the $25.8 million for the five months ended February 28,
2003.
Operating Income. For the six months ended February 29, 2004, the
Partnership had operating income of $79.6 million for the six months ended
February 29, 2004 as compared to operating income of $16.0 million for the five
months ended February 28, 2003. This increase is primarily due the ETC
Transaction and changes in revenues and expenses described above. This operating
income reflects the full six months of ETC's operating income consolidated with
the operating income of Heritage Operating after the ETC Transaction (from
January 20, 2004 through February 29, 2004). If the ETC Transaction had occurred
at the beginning of the periods presented, total operating income would have
been $113.6 million for the six months ended February 29, 2004 as compared to
$93.5 million for the five months ended February 28, 2003.
Interest Expense. Interest expense was $12.6 million for the six months
ended February 29, 2004 as compared to $5.0 million for the five months ended
February 28, 2003. Of the increase, $4.3 million is the result of the ETC
Transaction. The remaining $3.3 million increase is primarily the result of an
increase in debt level as a result of the ETC transaction and additional debt
incurred related to the purchase of the Oasis pipeline on December 27, 2002.
This interest expense reflects the full six months of ETC's interest expense
consolidated with the interest expense of Heritage Operating after the ETC
Transaction (from January 20, 2004 through February 29, 2004). If the ETC
Transaction had occurred at the beginning of the periods presented, total
interest expense would have been $27.3 million for the six months ended February
29, 2004 as compared to $25.5 million for the five months ended February 28,
2003.
Income Taxes. Income tax expense was $2.5 million for the six months
ended February 29, 2004 compared to $1.0 million for the five months ended
February 28, 2003. If the ETC Transaction had occurred at the beginning of the
periods presented, total income taxes would have been $4.7 million for the six
months ended February 29, 2004 as compared to $6.2 million for the five months
ended February 28, 2003.
Net Income. For the six month period ended February 29, 2004, the
Partnership had net income of $64.9 million, an increase of $53.3 million, as
compared to a net income for the five months ended February 28, 2003 of $11.6
million. The increase is primarily a result of the ETC Transaction and other
operating conditions described above. This net income reflects the full six
months of ETC's net income consolidated with the net income of Heritage
Operating after the ETC Transaction (from January 20, 2004 through February 29,
2004). If the ETC Transaction had occurred at the beginning of the periods
presented, total net income would have been $82.1 million for the six months
ended February 29, 2004 as compared to the $61.9 million for the five months
ended February 28, 2003.
EBITDA, as adjusted. EBITDA, as adjusted increased $72.7 million to $93.4
million for the six months ended February 29 2004 as compared to EBITDA, as
adjusted of $21.9 million for the five months ended February 28, 2003. This
increase is due to the ETC Transaction and operating performance described
above. This EBITDA, as adjusted reflects the full six months of ETC's EBITDA, as
adjusted consolidated with the EBITDA, as adjusted of Heritage Operating after
the ETC Transaction (from January 20, 2004 through February 29, 2004).
Predecessor Heritage would have had EBITDA, as adjusted of $92.5 for the six
months ended February 29, 2004 compared to EBITDA, as adjusted of $93.8 million
for the six months ended February 28, 2003. If the ETC Transaction had occurred
at the beginning of the periods presented, total EBITDA, as adjusted would have
been $145.6 million for the six months ended February 29, 2004 as compared to
the $121.0 million for the five months ended February 28, 2003, which includes
the effect of $3.3 million of transaction costs, net of non-cash compensation,
which were expensed due to the ETC Transaction. EBITDA, as adjusted is computed
as follows:
50
Six
Months
(in millions) Six Months Ended Five Months Ended Ended
----------------------------- ---------------------------- -----------
February 29, February 29, February 28, February 28, February 28,
2004 2004 2003 2003 2003
------------ ------------ ------------ ------------ -----------
(Energy
Transfer (Predecessor
(Pro forma) Company) (Pro forma) Heritage)
NET INCOME RECONCILIATION
Net income $ 64.9 $ 82.1 $ 11.6 $ 61.9 $ 51.3
Depreciation and amortization 13.6 30.2 4.5 25.8 18.7
Interest 12.6 27.3 4.9 25.5 18.6
Taxes 2.5 4.7 0.9 6.2 1.3
Non-cash compensation expense - 1.2 - 0.6 0.6
Other expense (income) (0.2) (0.2) - 0.5 2.5
Depreciation, amortization, and
interest of investee - 0.3 - 0.5 0.5
Minority interests - - - - 0.5
Less : Gain on disposal of assets - - - (0.2)
------------- ------------ ------------ ------------ -----------
EBITDA, as adjusted $ 93.4 $ 145.6 $ 21.9 $ 121.0 $ 93.8
============= ============ ============ ============ ===========
LIQUIDITY AND CAPITAL RESOURCES
The ability of the Partnership 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 the Partnership's business will generally consist
of:
- maintenance capital expenditures which include capital expenditures
made to connect additional wells to the Partnership's natural gas
systems in order to maintain or increase throughput on existing assets;
- growth capital expenditures, mainly for customer propane tanks to
expand and constructing new pipelines, processing plants and treating
plants; and
- acquisition capital expenditures including acquisition of new pipeline
systems and propane operations.
The Partnership believes that cash generated from the operations of its
businesses will be sufficient to meet anticipated maintenance capital
expenditures, which the Partnership anticipates would be approximately $15.5
million on a pro forma basis for fiscal 2004 (if the ETC transaction had
happened on September 1, 2003) for the propane operations and $10.0 million for
the midstream and transportation operations. The Partnership will and
Predecessor Heritage had initially financed all capital requirements by cash
flows from operating activities. To the extent the Partnership's future capital
requirements exceed cash flows from operating activities:
- maintenance capital expenditures will be financed by the proceeds of
borrowings under the working capital facility of Heritage Operating and
the new Energy Transfer credit facility described below, which will be
repaid by subsequent season reductions in inventory and accounts
receivable:
- growth capital expenditures will be financed by the proceeds of
borrowings under the working capital facility of Heritage Operating and
by the new Energy Transfer credit facility; and
- acquisition capital expenditures will be financed by the proceeds of
borrowings under the acquisition facility of Heritage Operating and by
the new Energy Transfer credit facility, other lines of credit,
long-term debt, the issuance of additional Common Units or a
combination thereof.
The assets utilized in the Operating Partnerships do not typically require
lengthy manufacturing process time or complicated, high technology components.
Accordingly, the Partnership does not have any significant financial
51
commitments for maintenance capital expenditures. In addition, the Partnership
does not experience any significant increases attributable to inflation in the
cost of these assets.
The Partnership anticipates that it will continue to invest significant amounts
of capital to construct and acquire midstream and transportation assets. For
example, the Partnership is in the process of constructing the Bossier Pipeline
connecting its Katy pipeline in Grimes County to natural gas supplies in east
Texas. The Partnership anticipates that the remaining capital expenditures for
the Bossier Pipeline will be approximately $34 million. The Bossier Pipeline is
expected to complete by mid-2004.
Cash paid for acquisitions of $165.6 million, is the cash paid in the ETC
Transaction including $100 million for the purchase of Heritage Holdings, Inc.
In addition to the $22.3 million of cash expended for acquisitions of retail
propane operations by Predecessor Heritage for the period ended January 19,
2004, $17.9 million of Common Units and $2.4 million of non-competes were issued
and $3.8 of liabilities were assumed in connection with certain acquisitions.
Operating Activities. Cash provided by operating activities during the six
months ended February 29, 2004, was $69.6 million as compared to cash provided
by operating activities of $9.8 million for the five-month period ended February
28, 2003. The net cash provided by operations for the six months ended February
29, 2004 consisted of net income of $64.9 million, non-cash charges of $12.6
million, principally depreciation and amortization, and a decrease in working
capital of $7.9 million.
Investing Activities. Cash used in investing activities during the six months
ended February 29, 2004 of $210.3 million is comprised of the ETC Transaction
acquisition expenditure amount of $165.6 million, which includes $100 million
for the purchase of Heritage Holdings, Inc., and $10.3 million invested for
maintenance and $34.8 million for growth needed to sustain operations at current
levels and for customer propane tanks to support growth of operations. Cash used
in investing activities also includes proceeds from the sale of idle property of
$0.4 million.
Financing Activities. Cash received from financing activities during the six
months ended February 29, 2004 of $198.1 million resulted mainly from the Second
Amended and Restated Credit Agreement entered into on January 20, 2004 by La
Grange Acquisition in connection with the ETC Transaction. The proceeds of
$325.0 were used to retire $226.0 million of debt outstanding at the time of the
ETC Transaction, satisfy ETC's accounts payable and other specified liabilities
as they became due and fund certain other expenses in connection with the ETC
Transaction. The net decrease in Heritage Operating's Bank Facility was $50.3
million since the ETC Transaction. The Partnership raised $334.8 million of net
proceeds through the sale of 9,200,000 Common Units at an offering price of
$38.69 per unit. The total of the proceeds were used to finance the ETC
Transaction and for general partnership purposes. Proceeds from the equity
offering and La Grange Acquisition's Second Amended and Restated Credit
Agreement funded a total distribution of $196.7 million to La Grange Energy in
connection with the terms of the ETC Transaction. The General Partner made a
contribution of $15.6 million to maintain their 2% General Partners' interest.
FINANCING AND SOURCES OF LIQUIDITY
Upon consummation of the Energy Transfer Transaction, the Partnership maintains
separate credit facilities for each of Heritage Operating and La Grange
Acquisition. Each credit facility is secured only by the assets of the operating
partnership that it finances, and neither operating partnership nor its
subsidiaries will guarantee the debt of the other operating partnership.
Energy Transfer Facilities
La Grange Acquisition has a $325 million Term Loan Facility that matures on
January 18, 2008. Interest is paid quarterly and is based on the LIBOR rate plus
3% which was 4.10% at February 29, 2004. The Term Loan Facility is secured by
substantially all of the La Grange Acquisition's assets. A $175 million
Revolving Credit Facility is available through January 18, 2008. Amounts
borrowed under the La Grange Acquisition Credit Facility bear interest at a rate
based on either a Eurodollar rate or a prime rate. The maximum commitment fee
payable on the unused portion of the facility is 0.50%. The facility is fully
secured by substantially all of La Grange Acquisition's assets. As of February
29, 2004, there were no amounts outstanding under the Revolving Credit Facility,
and $10.9
52
million in letters of credit outstanding which reduce the amount available for
borrowing under the Revolving Credit Facility. Letters of Credit under the
Revolving Credit Facility may not exceed $40 million.
Heritage Operating Facilities
Effective December 31, 2003, Heritage Operating entered into the Second Amended
and Restated Credit Agreement. A $75 million Senior Revolving Working Capital
Facility is available through December 31, 2006. Amounts borrowed under the
Working Capital Facility bear interest at a rate based on either a Eurodollar
rate, or a prime rate. The amounts outstanding at February 29, 2004 were
Eurodollar rate loans. The weighted average interest rate was 2.9738% for the
amount outstanding at February 29, 2004. The maximum commitment fee payable on
the unused portion of the facility is 0.50%. Heritage Operating must reduce the
principal amount of working capital borrowings to $10 million for a period of
not less than 30 consecutive days at least one time during each fiscal year. All
receivables, contracts, equipment, inventory, general intangibles, cash
concentration accounts, and the capital stock of Heritage Operating's
subsidiaries secure the Senior Revolving Working Capital Facility. As of
February 29, 2004, the Senior Revolving Working Capital Facility had a balance
outstanding of $65.5 million. A $5 million Letter of Credit issuance is
available to Heritage Operating for up to 30 days prior to the maturity date of
the Working Capital Facility. Letter of Credit Exposure plus the Working Capital
Loan cannot exceed the $75 million maximum Working Capital Facility. Heritage
Operating had no outstanding Letters of Credit at February 29, 2004.
A $75 million Senior Revolving Acquisition Facility is available through
December 31, 2006, at which time the outstanding amount must be paid in full.
Amounts borrowed under the Acquisition Credit Facility bear interest at a rate
based on either a Eurodollar rate or a prime rate. The amounts outstanding at
February 29, 2004 were Eurodollar rate loans. The weighted average interest rate
was 2.9738% for the amount outstanding at February 29, 2004. 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 Operating's
subsidiaries secure the Senior Revolving Acquisition Facility. As of February
29, 2004, the Senior Revolving Acquisition Facility had a balance outstanding of
$21.2 million.
Cash Distributions
The Partnership will use its cash provided by operating and financing activities
from the Operating Partnerships to provide distributions to the Partnership's
Unitholders. 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. Predecessor Heritage paid all quarterly
distributions since its inception in 1996 up to and including the quarterly
distribution of $0.65 per unit paid on January 14, 2004. Predecessor Heritage
had raised its quarterly distribution over the years from $0.50 per unit in 1996
to $0.65 per unit as of the quarterly distribution paid on January 14, 2004. On
March 23, 2004, the Partnership announced that it raised the quarterly
distribution to $0.70 per unit (an annualized rate of $2.80) an increase of
$0.05 per unit (an annualized increase of $0.20 per unit). The distribution is
payable on April 14, 2004 to Unitholders of record as of April 2, 2004. The
current distribution includes incentive distributions payable to the General
Partner to the extent the quarterly distribution exceeds $0.55 per unit (an
annualized rate of $2.20).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Exposure
Heritage Operating has little cash flow exposure due to rate changes for
long-term debt obligations. The Heritage Operating had $86.7 million of variable
rate debt outstanding as of February 29, 2004 through its Bank Credit Facility
described elsewhere in this report. The balance outstanding in the Bank Credit
Facility generally fluctuates throughout the year. A theoretical change of 1% in
the interest rate on the balance outstanding at February 29, 2004 would result
in an approximate $867 thousand change in annual net income. Heritage primarily
enters debt obligations to support general corporate purposes including capital
expenditures and working capital needs. Heritage Operating's long-term debt
instruments were typically issued at fixed interest rates. When these debt
obligations mature, Heritage Operating 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.
53
La Grange Acquisition is exposed to market risk for changes in interest rates
related to its term note. An interest rate swap agreement is used to manage a
portion of the exposure to changing interest rates by converting floating rate
debt to fixed-rate debt. The interest rate swap has a notional value of $75
million and matures in October 2005. Under the terms of the interest rate swap
agreement, Energy Transfer pays a fixed rate of 2.76% and receives three-month
LIBOR. Management has elected to designate the swap as a hedge for accounting
purposes. The swap had a fair value of $93 and $807 as of February 29, 2004
and August 31, 2003, respectively which is recorded as price risk management
assets or liabilities on the balance sheet.
The agreements for each of the Senior Secured Notes, Medium Term Note Program,
Senior Secured Promissory Notes, and the Operating Partnerships' bank credit
facilities contain customary restrictive covenants applicable to the Operating
Partnerships, including limitations on substantial disposition of assets,
changes in ownership of the Operating Partnerships, the level of additional
indebtedness, and creation of liens. These covenants require the Operating
Partnerships to maintain ratios of Consolidated Funded Indebtedness to
Consolidated EBITDA (as these terms are similarly defined in the bank credit
facilities and the Note Agreements) of not more than, 4.75 to 1 and 4.00 to 1
and Consolidated EBITDA to Consolidated Interest Expense (as these terms are
similarly defined in the bank credit facilities and the Note Agreements) of not
less than 2.25 to 1 and 2.75 to 1 for Heritage Operating and La Grange
Acquisition, respectively. The Consolidated EBITDA used to determine these
ratios is calculated in accordance with these debt agreements. For purposes of
calculating the ratios under the bank credit facilities and the Note Agreements,
Consolidated EBITDA is based upon the Operating Partnerships' EBITDA, as
adjusted for the most recent four quarterly periods, and modified to give pro
forma effect for acquisitions and divestures made during the test period and is
compared to Consolidated Funded Indebtedness as of the test date and the
Consolidated Interest Expense for the most recent twelve months. These debt
agreements also provide that the Operating Partnerships may declare, make, or
incur a liability to make, restricted payments during each fiscal quarter, if:
(a) the amount of such restricted payment, together with all other restricted
payments during such quarter, do not exceed Available Cash with respect to the
immediately preceding quarter; (b) no default or event of default exists before
such restricted payments; and (c) each Operating Partnership's restricted
payment is not greater than the product of each Operating Partnership's
Percentage of Aggregate Available Cash multiplied by the Aggregate Partner
Obligations (as these terms are similarly defined in the bank credit facilities
and the Note Agreements). The debt agreements further provide that Heritage
Operating's Available Cash is required to reflect a reserve equal to 50% of the
interest to be paid on the notes and in addition, in the third, second and first
quarters preceding a quarter in which a scheduled principal payment is to be
made on the notes, Available Cash is required to reflect a reserve equal to 25%,
50%, and 75%, respectively, of the principal amount to be repaid on such payment
dates.
Failure to comply with the various restrictive and affirmative covenants of the
Operating Partnerships' bank credit facilities and the Note Agreements could
negatively impact the Operating Partnerships' ability to incur additional debt
and/or the Partnership's ability to pay distributions. The Operating
Partnerships are required to measure these financial tests and covenants
quarterly and were in compliance with all requirements, tests, limitations, and
covenants related to the Senior Secured Notes, Medium Term Note Program and
Senior Secured Promissory Notes, and the bank credit facilities at February 29,
2004.
See Note 5 - "Working Capital Facility and Long-Term Debt" to the Consolidated
Financial Statements located elsewhere in this report for further discussion of
the long-term classifications and the maturity dates and interest rates related
to long-term debt.
Commodity Price Risk
Commodity price risk arises from the risk of price changes in the propane
inventory that Heritage Operating 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 had generally been
passed along to Predecessor 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 Operating during periods of high
demand, Heritage Operating will and Predecessor Heritage did, 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.
Energy Transfer's primary market risk is commodity price risk in its inventory
and exchange positions, forward physical contracts and commodity derivative
positions.
54
Energy Transfer's inventory and exchange position is generally not material and
the imbalances turn over monthly. Inventory imbalances generally arise when
actual volumes delivered differ from nominated amounts or due to other timing
differences. Energy Transfer attempts to balance its purchases and sales each
month to prevent inventory imbalances from occurring and if necessary attempts
to clear any imbalance that arises in the following month. As a result, the
volumes involved are generally not significant and turn over quickly. Because
Energy Transfer believes that the cost approximates the market value at the end
of each month, Energy Transfer has adopted a policy of valuing inventory and
imbalances at market value at the end of each month.
Market and Credit Risk
Heritage Operating will also attempt 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 Operating may use and Predecessor Heritage used, contracts for the
forward purchase of propane, propane fixed-price supply agreements, and
derivative commodity instruments such as price swap and option contracts. Swap
instruments are a contractual agreement to exchange obligations of money between
the buyer and seller of the instruments as propane volumes during the pricing
period are purchased. Swaps are tied to a fixed price bid by the buyer and a
floating price determination for the seller based on certain indices at the end
of the relevant trading period. Call options would give the Heritage Operating
the right, but not the obligation, to buy a specified number of gallons of
propane at a specified price at any time until a specified expiration date.
Heritage Operating may enter and Predecessor Heritage did enter into these
financial instruments to hedge pricing on the projected propane volumes to be
purchased during each of the one-month periods during the projected heating
season.
At February 29,2004, Heritage Operating had no outstanding propane hedges.
Heritage Operating will continue to monitor propane prices and may enter into
propane hedges in the future. Inherent in the portfolio from Resources 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. Management takes an
active role in managing and controlling market and credit risk and has
established control procedures, which are reviewed on an ongoing basis.
Management monitors market risk through a variety of techniques, including
routine reporting to senior management. Heritage Operating attempts to minimize
credit risk exposure through credit policies and periodic monitoring procedures,
as did Predecessor Heritage.
Energy Transfer enters into forward physical commitments as a convenience to its
customers or to take advantage of market opportunities. Energy Transfer
generally attempts to mitigate any market exposure to its forward commitments by
either entering into offsetting forward commitments or financial derivative
positions. Energy Transfer enters into commodity derivative contracts to manage
its exposure to commodity prices for both natural gas and NGLs. Energy Transfer
is diligent in attempting to ensure that it issues credit only to credit-worthy
counterparties. However, its purchase and resale of gas exposes Energy Transfer
to significant credit risk because the margin on any sale is generally a very
small percentage of the total sales price. Therefore, a credit loss can be very
large relative to Energy Transfer's overall profitability. Historically, Energy
Transfer's credit losses have not been significant.
All derivatives that are designated and documented as hedges are presented as
other comprehensive income until the settlement month. At the end of the
settlement month, any gain or loss previously recorded in other comprehensive
income is recognized in the income statement. Gains or losses on derivatives not
designated as hedges are recognized in the month in which they occur. The
Partnership's derivative instruments were as follows at February 29, 2004:
55
Notional
Volume Fair
Commodity MMBTU Maturity Value
--------- ----------- -------- ----------
Basis Swaps IFERC/Nymex Gas 45,685,000 2004 $ (2,538)
Basis Swaps IFERC/Nymex Gas 57,637,500 2004 3,563
----------
$ 1,025
Swing Swaps IFERC Gas
Swing Swaps IFERC Gas 102,035,000 2004-2005 $ (2,334)
64,340,000 2004-2005 2,057
----------
$ (277)
Futures Nymex Gas 3,525,000 2004-2005 $ (232)
Futures Nymex Gas 145,222,507 2004-2005 1,691
----------
$ 1,459
Estimates related to the Partnership's gas marketing activities are sensitive to
uncertainty and volatility inherent in the energy commodities markets and actual
results could differ from these estimates. The Partnership believes it is
protected from the volatility in the energy commodities markets because it does
not have unbalanced positions. Long-term physical contracts are tied to index
prices. System gas, which is also tied to index prices, will provide the gas
required by the Partnership's long-term physical contracts. When third-party gas
is required to supply long-term contracts, a hedge is put in place to protect
the margin on the contract. Financial contracts, which are not tied to physical
delivery, will be offset with financial contracts to balance the Partnership's
positions.
The following represents gain (loss) on derivative activity:
Three Months Three Months Six Months Five Months
Ended Ended Ended Ended
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
------------ ------------ ------------ ------------
(Energy (Energy
Transfer Transfer
(in thousands) Company) Company)
Realized and unrealized gain (loss)
on derivative activities recognized
in earnings $ (7,168) $ 4,828 $(10,202) $ 6,693
Realized gain (loss) on interest rate
swap included in interest expense $ (623) $ (242) $ (1,061) $ (350)
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
Officers 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 Officers
of the General Partner of the Partnership, concluded that the Partnership's
disclosure controls and procedures were adequate and effective as of February
29, 2004. There have been no change in the Partnership's internal controls over
financial reporting (as defined in Rule 13(a) - 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.
56
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 20, 2004, the Partnership issued 9,200,000 Common Units, with a
net value of $334.8 million in an underwritten public offering at a public
offering price of $38.69 per unit. This sale included the exercise of the
underwriters' over-allotment option to purchase an additional 1,200,000 Common
Units. The proceeds of the units were used for the ETC transaction and for
general partnership purposes.
In connection with the ETC Transaction on January 20, 2004, the Partnership
issued 4,419,177 Common Units, 7,721,452 Class D Units, and 3,742,515 Special
Units to La Grange Energy, L.P. All of the foregoing Units were not registered
with the Securities and Exchange Commission under the Securities Act of 1933 by
virtue of an exemption under Section 4(2) thereof.
As a result of the ETC Transaction, on January 20, 2004, the Partnership issued
21,600 Common Units to employees that had previously received awards under the
terms of the Partnership's Restricted Unit Plan and 150,018 Common Units to
executive officers under the terms of the Partnership's Long-Term Incentive
Compensation Plan. All of the foregoing Units were not registered with the
Securities and Exchange Commission under the Securities Act of 1933 by virtue of
an exemption under Section 4(2) thereof.
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.
* 3.1.5 Amendment No. 5 to Amended and Restated Agreement of Limited Partnership of
Heritage Propane Partners, L.P.
* 3.1.6 Amendment No. 6 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.
57
Exhibit
Number Description
------- ------------------------------------------------------------------------------------
(19) 3.2.2 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage
Operating, L.P.
* 3.2.3 Amendment No. 3 to Amended and Restated Agreement of Limited Partnership of Heritage
Operating, L.P.
* 3.3 Amended Certificate of Limited Partnership of Energy Transfer 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.
* 4.2 Unitholder Rights Agreement dated January 20, 2004 among Heritage Propane Partners,
L.P., Heritage Holdings, Inc., TAAP LP and La Grange Energy, L.P.
(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
* 10.2.8 Sixth 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) ** 10.8 Employment Agreement for R. C. Mills dated as of August 10, 2000
58
Exhibit
Number Description
------- ------------------------------------------------------------------------------------
(18) 10.8.1 Consent to Assignment of Employment Agreement for R.C. Mills dated February 3, 2002
* 10.8.2 Termination of Employment Agreement for R. C. Mills dated as of August 10, 2000
(12)** 10.10 Employment Agreement for H. Michael Krimbill dated as of August 10, 2000
(18) 10.10.1 Consent to Assignment of Employment Agreement for H. Michael Krimbill dated February
3, 2002
* 10.10.2 Termination of Employment Agreement for H. Michael Krimbill dated as of August 10,
2000
(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
* 10.11.2 Termination of Employment Agreement for Bradley K. Atkinson dated as of August 10,
2000
(7) 10.12 First Amended and Restated Revolving Credit Agreement between Heritage Service Corp.
and Banks Dated May 31, 1999
(16) 10.12.1 First Amendment to First Amended and Restated Revolving Credit Agreement, dated
October 15, 1999
(16) 10.12.2 Second Amendment to First Amended and Restated Revolving Credit Agreement, dated
August 10, 2000
(16) 10.12.3 Third Amendment to First Amended and Restated Revolving Credit Agreement, dated
December 28, 2000
(16) 10.12.4 Fourth Amendment to First Amended and Restated Revolving Credit Agreement, dated
July 16, 2001
(12)** 10.13 Employment Agreement for Mark A. Darr dated as of August 10, 2000
(18) 10.13.1 Consent to Assignment of Employment Agreement for Mark A. Darr dated February 3,
2002
* 10.13.2 Termination of Employment Agreement for Mark A. Darr dated as of August 10, 2000
(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
* 10.14.2 Termination of Employment Agreement for Thomas H. Rose dated as of August 10, 2000
(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
* 10.15.2 Termination of Employment Agreement for Curtis L. Weishahn dated as of August 10,
2000
59
Exhibit
Number Description
------- ------------------------------------------------------------------------------------
(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
(26) 10.16.6 Sixth Amendment Agreement dated as of November 18, 2003 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.
(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
(26) 10.19.3 Sixth 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
(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.
60
Exhibit
Number Description
------- ------------------------------------------------------------------------------------
(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
* 10.29.1 Termination of Employment Agreement for Michael L. Greenwood dated as of July 1, 2002
(24) 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.
(24) 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.
(25) 10.31.1 Amendment No. 1 dated December 7, 2003 to Contribution Agreement dated November 6,
2003 among La Grange Energy, L.P. and Heritage Propane Partners, L.P. and U.S.
Propane, L.P.
(24) 10.32 Stock Purchase Agreement dated November 6, 2003 among the owners of Heritage Holdings,
Inc. and Heritage Propane Partners, L.P.
(*) 10.33 Second Amended and Restated Credit Agreement among Heritage Operating, L.P. and the
Banks dated December 31, 2003
(*) 10.34 Second Amended and Restated Credit Agreement among La Grange Acquisition, L.P. and Banks
dated January 20, 2004
(21) 21.1 List of Subsidiaries
61
Exhibit
Number Description
------- -----------------------------------------------------------------------------------
(*) 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(*) 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(*) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(*) 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
------------------
(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement of Form S-1, File No. 333-04018, filed with the
Commission on June 21, 1996.
(2) Incorporated by reference to Exhibit 10.11 to Registrant's Registration
Statement on Form S-1, File No. 333-04018, filed with the Commission on
June 21, 1996.
(3) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 1996.
(4) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended February 28, 1997.
(5) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended May 31, 1998.
(6) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1998.
(7) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 1999.
(8) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1999.
(9) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2000.
(10) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 23, 2000.
(11) File as Exhibit 10.16.3.
(12) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2000.
(13) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2001.
(14) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2001.
62
(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 Registrant's
Form 10-K for the year ended August 31, 2003
(25) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 2003).
(26) Filed as Exhibit 10.2.8 herewith
(*) Filed herewith.
(**) Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Partnership filed five reports on Form 8-K during the three months
ended February 28, 2003:
Form 8-K dated December 10, 2003, was filed to provide the press
release dated December 4, 2003 announcing the Partnership's receipt of
consents and approvals from lenders, required to be obtained prior to
the ETC Transaction.
Form 8-K filed December 17, 2003 to provide additional information
regarding the ETC Transaction, including information relating to the
terms of the transaction, information relating to the business of
Energy Transfer, historical financial information relating to Energy
Transfer and related entities and pro forma financial statements. This
information was filed in order to update the Partnership's Registration
Statement on Form S-4 as filed with the Securities and Exchange
Commission on November 17, 1997 (Registration No. 333-40407) pursuant
to which the Partnership issues common units from time to time in
connection with acquisitions.
Form 8-K/A was filed January 21, 2004 announcing the closing of the ETC
Transaction and to provide unaudited pro forma combined financial
statements of Heritage which give pro forma effect to the ETC
transaction as if the transaction had occurred on August 31, 2003.
63
Form 8-K dated January 28, 2004 was filed to provide the press release
announcing that the underwriters in the Partnership's January 20, 2004
equity offering had exercised their over-allotment option and purchased
an additional 1,200,000 Common Units.
Form 8-K filed on February 4, 2004 reporting a change in the
registrant's independent auditor that resulted from the ETC
Transaction. At the date of the ETC Transaction, Ernst & Young LLP was
the independent auditor for Energy Transfer Company, and Grant Thornton
LLP was the independent auditor for the Partnership. On February 3,
2004, the Partnership's Audit Committee dismissed Ernst & Young LLP and
appointed Grant Thornton LLP to serve as the Registrant's independent
auditors for the current fiscal year ending August 31, 2004.
64
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.
ENERGY TRANSFER PARTNERS, L.P.
By: U.S. Propane, L.P.., General Partner
By: U.S. Propane, L.L.C., General Partner
Date: April 14, 2004 By: /s/ H. Michael Krimbill
-------------------------------------
H. Michael Krimbill
(President and officer duly authorized
to sign on behalf of the registrant)
65
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.
* 3.1.5 Amendment No. 5 to Amended and Restated Agreement of Limited Partnership of
Heritage Propane Partners, L.P.
* 3.1.6 Amendment No. 6 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.
Exhibit
Number Description
------- ------------------------------------------------------------------------------------
(19) 3.2.2 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage
Operating, L.P.
* 3.2.3 Amendment No. 3 to Amended and Restated Agreement of Limited Partnership of Heritage
Operating, L.P.
* 3.3 Amended Certificate of Limited Partnership of Energy Transfer 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.
* 4.2 Unitholder Rights Agreement dated January 20, 2004 among Heritage Propane Partners,
L.P., Heritage Holdings, Inc., TAAP LP and La Grange Energy, L.P.
(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
* 10.2.8 Sixth 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) ** 10.8 Employment Agreement for R. C. Mills dated as of August 10, 2000
Exhibit
Number Description
------- ------------------------------------------------------------------------------------
(18) 10.8.1 Consent to Assignment of Employment Agreement for R.C. Mills dated February 3, 2002
* 10.8.2 Termination of Employment Agreement for R. C. Mills dated as of August 10, 2000
(12)** 10.10 Employment Agreement for H. Michael Krimbill dated as of August 10, 2000
(18) 10.10.1 Consent to Assignment of Employment Agreement for H. Michael Krimbill dated February
3, 2002
* 10.10.2 Termination of Employment Agreement for H. Michael Krimbill dated as of August 10,
2000
(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
* 10.11.2 Termination of Employment Agreement for Bradley K. Atkinson dated as of August 10,
2000
(7) 10.12 First Amended and Restated Revolving Credit Agreement between Heritage Service Corp.
and Banks Dated May 31, 1999
(16) 10.12.1 First Amendment to First Amended and Restated Revolving Credit Agreement, dated
October 15, 1999
(16) 10.12.2 Second Amendment to First Amended and Restated Revolving Credit Agreement, dated
August 10, 2000
(16) 10.12.3 Third Amendment to First Amended and Restated Revolving Credit Agreement, dated
December 28, 2000
(16) 10.12.4 Fourth Amendment to First Amended and Restated Revolving Credit Agreement, dated
July 16, 2001
(12)** 10.13 Employment Agreement for Mark A. Darr dated as of August 10, 2000
(18) 10.13.1 Consent to Assignment of Employment Agreement for Mark A. Darr dated February 3,
2002
* 10.13.2 Termination of Employment Agreement for Mark A. Darr dated as of August 10, 2000
(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
* 10.14.2 Termination of Employment Agreement for Thomas H. Rose dated as of August 10, 2000
(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
* 10.15.2 Termination of Employment Agreement for Curtis L. Weishahn dated as of August 10,
2000
Exhibit
Number Description
------- ------------------------------------------------------------------------------------
(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
(26) 10.16.6 Sixth Amendment Agreement dated as of November 18, 2003 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.
(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
(26) 10.19.3 Sixth 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
(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.
Exhibit
Number Description
------- ------------------------------------------------------------------------------------
(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
* 10.29.1 Termination of Employment Agreement for Michael L. Greenwood dated as of July 1, 2002
(24) 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.
(24) 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.
(25) 10.31.1 Amendment No. 1 dated December 7, 2003 to Contribution Agreement dated November 6,
2003 among La Grange Energy, L.P. and Heritage Propane Partners, L.P. and U.S.
Propane, L.P.
(24) 10.32 Stock Purchase Agreement dated November 6, 2003 among the owners of Heritage Holdings,
Inc. and Heritage Propane Partners, L.P.
(*) 10.33 Second Amended and Restated Credit Agreement among Heritage Operating, L.P. and the
Banks dated December 31, 2003
(*) 10.34 Second Amended and Restated Credit Agreement among La Grange Acquisition, L.P. and Banks
dated January 20, 2004
(21) 21.1 List of Subsidiaries
Exhibit
Number Description
------- -----------------------------------------------------------------------------------
(*) 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(*) 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(*) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(*) 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
------------------
(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement of Form S-1, File No. 333-04018, filed with the
Commission on June 21, 1996.
(2) Incorporated by reference to Exhibit 10.11 to Registrant's Registration
Statement on Form S-1, File No. 333-04018, filed with the Commission on
June 21, 1996.
(3) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 1996.
(4) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended February 28, 1997.
(5) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended May 31, 1998.
(6) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1998.
(7) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 1999.
(8) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1999.
(9) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2000.
(10) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 23, 2000.
(11) File as Exhibit 10.16.3.
(12) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2000.
(13) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2001.
(14) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2001.
(15) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 15, 2001.
(16) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2001.
(17) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended November 30, 2001.
(18) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2002.
(19) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2002.
(20) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated February 4, 2002.
(21) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2002.
(22) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated January 6, 2003.
(23) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended November 30, 2002.
(24) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-K for the year ended August 31, 2003
(25) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 2003).
(26) Filed as Exhibit 10.2.8 herewith
(*) Filed herewith.
(**) Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Partnership filed five reports on Form 8-K during the three months
ended February 28, 2003:
Form 8-K dated December 10, 2003, was filed to provide the press
release dated December 4, 2003 announcing the Partnership's receipt of
consents and approvals from lenders, required to be obtained prior to
the ETC Transaction.
Form 8-K filed December 17, 2003 to provide additional information
regarding the ETC Transaction, including information relating to the
terms of the transaction, information relating to the business of
Energy Transfer, historical financial information relating to Energy
Transfer and related entities and pro forma financial statements. This
information was filed in order to update the Partnership's Registration
Statement on Form S-4 as filed with the Securities and Exchange
Commission on November 17, 1997 (Registration No. 333-40407) pursuant
to which the Partnership issues common units from time to time in
connection with acquisitions.
Form 8-K/A was filed January 21, 2004 announcing the closing of the ETC
Transaction and to provide unaudited pro forma combined financial
statements of Heritage which give pro forma effect to the ETC
transaction as if the transaction had occurred on August 31, 2003.