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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM to
------------
COMMISSION FILE NUMBER 1-11727
HERITAGE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1493906
(state or other jurisdiction or (I.R.S. Employer
incorporation or organization) Identification No.)
8801 SOUTH YALE AVENUE, SUITE 310
TULSA, OKLAHOMA 74137
(Address of principal
executive offices
and zip code)
(918) 492-7272
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
---
At July 10, 2000, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 8,139,940 Common Units
1,851,471 Subordinated Units
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FORM 10-Q
HERITAGE PROPANE PARTNERS, L.P.
TABLE OF CONTENTS
Pages
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets as of May 31, 2000 and August 31, 1999 1
Consolidated Statements of Operations for the three months and nine months
ended May 31, 2000 and 1999 2
Consolidated Statements of Comprehensive Income for the three months and
nine months ended May 31, 2000 and 1999 3
Consolidated Statement of Partners' Capital for the nine months ended
May 31, 2000 4
Consolidated Statements of Cash Flows for the nine months ended
May 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 17
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE
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PART I - FINANCIAL INFORMATION
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
May 31, August 31,
2000 1999
--------------- ---------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 4,206 $ 1,679
Accounts receivable 19,489 11,635
Inventories 17,857 14,784
Marketable securities 2,697 --
Prepaid expenses 1,608 1,169
--------------- ---------------
Total current assets 45,857 29,267
PROPERTY, PLANT AND EQUIPMENT, net 190,179 155,219
INVESTMENT IN AFFILIATE 5,924 5,202
INTANGIBLES AND OTHER ASSETS, net 92,606 73,270
--------------- ---------------
Total assets $ 334,566 $ 262,958
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Working capital facility $ 25,400 $ 19,900
Accounts payable 22,235 17,268
Accrued and other current liabilities 10,703 8,490
Current maturities of long-term debt 2,364 2,022
--------------- ---------------
Total current liabilities 60,702 47,680
LONG-TERM DEBT, less current maturities 225,149 196,216
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
Total liabilities 285,851 243,896
--------------- ---------------
PARTNERS' CAPITAL:
Common unitholders (7,214,204 and 5,825,674 units issued and
outstanding at May 31, 2000 and August 31, 1999, respectively) 44,085 17,077
Subordinated unitholders (2,777,207 units issued and outstanding at
May 31, 2000 and August 31, 1999, respectively) 1,050 1,809
General partner 407 176
Accumulated other comprehensive income 3,173 --
--------------- ---------------
Total partners' capital 48,715 19,062
--------------- ---------------
Total liabilities and partners' capital $ 334,566 $ 262,958
=============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
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HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)
(unaudited)
Three Months Ended Nine Months Ended
May 31, May 31,
2000 1999 2000 1999
---------- ---------- ---------- ----------
REVENUES:
Retail fuel $ 42,624 $ 33,779 $ 162,143 $ 118,022
Wholesale fuel 8,895 4,702 28,623 18,224
Other 5,705 4,669 20,508 16,960
---------- ---------- ---------- ----------
Total revenues 57,224 43,150 211,274 153,206
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of products sold 32,896 19,519 119,577 71,188
Operating expenses 15,092 13,447 45,689 38,983
Depreciation and amortization 4,888 3,716 13,624 10,908
Selling, general and administrative 1,616 1,459 4,969 4,485
---------- ---------- ---------- -----------
Total costs and expenses 54,492 38,141 183,859 125,564
---------- ---------- ---------- ----------
OPERATING INCOME 2,732 5,009 27,415 27,642
OTHER INCOME (EXPENSE):
Interest expense (4,871) (3,872) (14,094) (11,731)
Equity in earnings of affiliate 78 364 721 1,185
Gain on disposal of assets 44 30 419 545
Other (114) (96) 38 (197)
---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST (2,131) 1,435 14,499 17,444
Minority interest (67) (91) (534) (481)
---------- ---------- ---------- ----------
NET INCOME (LOSS) (2,198) 1,344 13,965 16,963
GENERAL PARTNER'S INTEREST IN NET INCOME (LOSS) (21) 13 140 169
---------- ---------- ---------- ----------
LIMITED PARTNERS' INTEREST IN NET INCOME (LOSS) $ (2,177) $ 1,331 $ 13,825 $ 16,794
========== ========== ========== ==========
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ (.22) $ .15 $ 1.43 $ 1.96
========== ========== ========== ==========
BASIC WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 9,984,297 8,594,807 9,650,928 8,584,770
========== ========== ========== ==========
DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ (.22) $ .15 $ 1.42 $ 1.94
========== ========== ========== ==========
DILUTED WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 9,984,297 8,652,731 9,725,841 8,640,424
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
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HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)
Three Months Ended Nine Months Ended
May 31, May 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net income (loss) $ (2,198) $ 1,344 $ 13,965 $ 16,963
Other comprehensive income 3,173 -- 3,173 --
----------- ----------- ----------- -----------
Comprehensive net income $ 975 $ 1,344 $ 17,138 $ 16,963
=========== =========== =========== ===========
RECONCILIATION OF ACCUMULATED
OTHER COMPREHENSIVE INCOME
Balance, beginning of period $ -- $ -- $ -- $ --
Current period change 3,173 -- 3,173 --
----------- ----------- ----------- -----------
Balance, end of period $ 3,173 $ -- $ 3,173 $ --
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
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HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit data)
(unaudited)
NUMBER OF UNITS
Common Subordinated
Common Subordinated Unitholders Unitholders General Partner
---------- ------------ ----------- ------------- ---------------
BALANCE, AUGUST 31, 1999 5,825,674 2,777,207 $ 17,077 $ 1,809 $ 176
Unit Distribution -- -- (11,335) (4,686) (189)
Issuance of restricted Common Units
in connection with certain
acquisitions 184,030 -- 4,064 -- --
Issuance of Common Units to public
net of related expenses 1,200,000 -- 24,054 -- --
Capital contribution from General
Partner in connection with
issuance of Common Units -- -- -- -- 278
Issuance of Common Units pursuant
to the vesting rights of the
Restricted Unit Plan 4,500 -- 29 (28) (1)
Other -- -- 236 90 3
Other comprehensive income -- -- --
Net income -- -- 9,960 3,865 140
---------- ---------- ---------- --------- --------
BALANCE, MAY 31, 2000 7,214,204 2,777,207 $ 44,085 $ 1,050 $ 407
========== ========== ========= ========= ========
Accumulated
Other
Comprehensive Total Partners'
Income Capital
------------- ---------------
BALANCE, AUGUST 31, 1999 $ -- $ 19,062
Unit Distribution -- (16,210)
Issuance of restricted Common Units
in connection with certain
acquisitions -- 4,064
Issuance of Common Units to public
net of related expenses -- 24,054
Capital contribution from General
Partner in connection with
issuance of Common Units -- 278
Issuance of Common Units pursuant
to the vesting rights of the
Restricted Unit Plan -- --
Other -- 329
Other comprehensive income 3,173 3,173
Net income -- 13,965
---------- ----------
BALANCE, MAY 31, 2000 $ 3,173 $ 48,715
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
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HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Nine Months Ended
May 31, May 31,
2000 1999
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,965 $ 16,963
Reconciliation of net income to net cash provided by
operating activities-
Depreciation and amortization 13,624 10,908
Provision for losses on accounts receivable 193 250
Gain on disposal of assets (419) (545)
Deferred compensation on restricted units 329 164
Undistributed earnings of affiliates (721) (864)
Minority interest 253 (33)
Unrealized gain on trading securities (284) --
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (7,659) (1,636)
Marketable securities (2,413) --
Inventories (1,635) 3,794
Prepaid expenses (501) (102)
Intangibles and other assets (435) 889
Accounts payable 4,349 (173)
Accrued and other current liabilities 1,128 (34)
------------- --------------
Net cash provided by operating activities 19,774 29,581
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (46,803) (16,763)
Capital expenditures (10,877) (10,541)
Proceeds from asset sales 734 1,701
------------- -------------
Net cash used in investing activities (56,946) (25,603)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 126,474 60,454
Principal payments on debt (94,897) (49,935)
Unit distribution (16,210) (13,657)
Net proceeds from issuance of common units 24,054 --
Capital contribution from General Partner 278 5
------------- -------------
Net cash provided by (used in) financing activities 39,699 (3,133)
------------- -------------
INCREASE IN CASH 2,527 845
CASH, beginning of period 1,679 1,837
------------- -------------
CASH, end of period $ 4,206 $ 2,682
============= =============
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 3,198 $ 2,540
Issuance of restricted common units in connection with certain
acquisitions $ 4,064 $ 502
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 12,046 $ 9,967
Other comprehensive income $ 3,173 $ --
The accompanying notes are an integral part of these consolidated
financial statements
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HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except unit data)
1. GENERAL:
Heritage Propane Partners, L.P. (the Partnership) was formed April 24, 1996, as
a Delaware limited partnership. The Partnership was formed to acquire, own and
operate the propane business and substantially all of the assets of Heritage
Holdings, Inc. (the Predecessor, Company or General Partner). In order to
simplify the Partnership's obligation under the laws of several jurisdictions in
which the Partnership conducts business, the Partnership's activities are
conducted through a subsidiary operating partnership, Heritage Operating, L.P.
(the Operating Partnership). The Partnership holds a 98.9899 percent limited
partner interest and the General Partner holds a 1.0101 percent general partner
interest in the Operating Partnership.
The Operating Partnership sells propane and propane-related products to a
current customer base of approximately 286,000 retail customers in 27 states
throughout the United States. The Partnership is also a wholesale propane
supplier in the southwestern United States and in Canada, the latter through
participation in M-P Energy Partnership. M-P Energy Partnership is a Canadian
partnership primarily engaged in lower-margin wholesale distribution in which
the Partnership owns a 60 percent interest. The Partnership grants credit to its
customers for the purchase of propane and propane-related products.
The consolidated financial statements include the accounts of the Partnership,
its subsidiaries, including Heritage Operating Partnership and M-P Energy
Partnership. The Partnership accounts for its 50 percent partnership interest in
Bi-State Partnership, another propane retailer, under the equity method. All
significant intercompany transactions and accounts have been eliminated in
consolidation. The General Partner's 1.0101 percent interest in the Operating
Partnership is accounted for in the consolidated financial statements as a
minority interest. The accompanying financial statements should be read in
conjunction with the Partnership's consolidated financial statements as of
August 31, 1999, and the notes thereto included in the Partnership's
consolidated financial statements included in Form 10-K as filed with the
Securities and Exchange Commission on November 29, 1999. The accompanying
financial statements include only normal recurring accruals and all adjustments
that the Partnership considers necessary for a fair presentation. Due to the
seasonal nature of the Partnership's business, the results of operations for
interim periods are not necessarily indicative of the results to be expected for
a full year.
2. INVENTORIES:
Inventories are valued at the lower of cost or market. The cost of fuel
inventories is determined using average cost while the cost of appliances, parts
and fittings is determined by the first-in, first-out method. Inventories
consist of the following:
May 31, August 31,
2000 1999
---------- ----------
Fuel $ 11,428 $ 9,341
Appliances, parts and fittings 6,429 5,443
---------- ----------
$ 17,857 $ 14,784
========== ==========
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3. INCOME (LOSS) PER LIMITED PARTNER UNIT:
Basic net income (loss) per limited partner unit is computed by dividing net
income (loss), after considering the General Partner's one percent interest, by
the weighted average number of Common and Subordinated Units outstanding.
Diluted net income (loss) per limited partner unit is computed by dividing net
income (loss), after considering the General Partner's one percent interest, by
the weighted average number of Common and Subordinated Units outstanding and the
weighted average number of Restricted Units ("Phantom Units") granted under the
Restricted Unit Plan. For the three months ended May 31, 2000 75,343 weighted
average Phantom Units were excluded from the calculation of diluted net loss as
such units were anti-dilutive due to the net loss for the period. A
reconciliation of net income (loss) and weighted average units used in computing
basic and diluted earnings (loss) per unit is as follows:
For the Three Months Ended For the Nine Months Ended
May 31, May 31,
2000 1999 2000 1999
-------- -------- -------- -------
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Limited Partners' interest in net income (loss) $ (2,177) $ 1,331 $ 13,825 $ 16,794
============ =========== =========== ===========
Weighted average limited partner units 9,984,297 8,594,807 9,650,928 8,584,770
=========== =========== =========== ===========
Basic net income (loss) per limited partner unit $ (.22) $ .15 $ 1.43 $ 1.96
============ =========== =========== ===========
DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Limited partners' interest in net income (loss) $ (2,177) $ 1,331 $ 13,825 $ 16,794
============ =========== =========== ===========
Weighted average limited partner units 9,984,297 8,594,807 9,650,928 8,584,770
Dilutive effect of Phantom Units - 57,924 74,913 55,654
----------- ----------- ----------- -----------
Weighted average limited partner units, assuming dilutive
effect of Phantom Units 9,984,297 8,652,731 9,725,841 8,640,424
=========== =========== =========== ===========
Diluted net income (loss) per limited partner unit $ (.22) $ .15 $ 1.42 $ 1.94
============ =========== =========== ===========
CASH DISTRIBUTIONS
During the nine months ended May 31, 2000, the Partnership declared and paid a
cash distribution of $.5625 per unit on all units for the quarters ended August
31, 1999, November 30, 1999, and February 29, 2000. On June 23, 2000, the
Partnership declared a cash distribution for the third quarter ended May 31,
2000 of $.5625 per unit payable on July 14, 2000 to Unitholders of record at the
close of business on July 3, 2000. Distributions paid during the nine months
ended May 31, 2000 included distributions to the General Partner in the amount
of $189 and $193 for its General Partner interest in the Operating Partnership
and its Minority Interest, respectively, and its Incentive Distribution Rights.
4. WORKING CAPITAL FACILITIES AND LONG-TERM DEBT:
As of June 25, 1996, the Partnership entered into a credit agreement with
various financial institutions. Effective July 2, 1999, the Partnership entered
into the First Amended and Restated Credit Agreement (the "Agreement"). The
Agreement replaced one of the financial institutions from the previous amended
credit agreement and extended the maturities, leaving all the terms essentially
unchanged. The Partnership entered the Second Amendment ("the Amendment") to the
Agreement as of May 31, 2000, which is filed as an exhibit hereto, which added
defined terms to the agreement based on the proposed reorganization with the US
Propane merger (refer to Note 9). The effectiveness of the Amendment is subject
to the satisfaction of certain conditions in relation to the merger. The terms
of the Agreement as amended are as follows:
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A $35,000 Senior Revolving Working Capital Facility, expiring June 30,
2002, with $25,400 outstanding at May 31, 2000. The interest rate and
interest payment dates vary depending on the terms the Partnership
agrees to when the money is borrowed. The weighted average interest
rate was 6.80 percent for the amount outstanding at May 31, 2000. The
Partnership must be free of all working capital borrowings for 30
consecutive days each fiscal year. The maximum commitment fee payable
on the unused portion of the facility is .375 percent.
A $50,000 Senior Revolving Acquisition Facility is available through
December 31, 2001, with $46,250 outstanding at May 31, 2000, at which
time the outstanding amount must be paid in ten equal quarterly
installments, beginning March 31, 2002. The interest rate and interest
payment dates vary depending on the terms the Partnership agrees to
when the money is borrowed. The average interest rate was 6.80 percent
for the amount outstanding at May 31, 2000. The maximum commitment fee
payable on the unused portion of the facility is .375 percent.
5. REPORTABLE SEGMENTS:
The Partnership applies SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which requires the reporting of certain
financial information by business segment. The Partnership financial statements
reflect three reportable segments: the domestic retail operations of Heritage
Propane Partners, the domestic wholesale operations of Heritage Propane
Partners, and the foreign wholesale operations of M-P Energy Partnership, a 60
percent owned Canadian wholesale supplier that the Partnership consolidates. The
Partnership's reportable segments are strategic business units that sell
products and services to different types of users; retail and wholesale
customers. Intersegment sales by the foreign wholesale segment to the domestic
segment are priced in accordance with the partnership agreement. The Partnership
manages these segments separately as each segment involves different
distribution, sale and marketing strategies. The Partnership evaluates the
performance of its operating segments based on operating income. The operating
income below does not reflect selling, general, and administrative expenses of
$1,616 and $1,459 for the three months and $4,969 and $4,485 for the nine months
ended May 31, 2000 and 1999, respectively.
The following table presents financial information by segment:
For the Three Months Ended For the Nine Months Ended
May 31, May 31,
2000 1999 2000 1999
----------- ---------- ----------- -----------
Gallons:
Domestic retail 38,874 38,940 155,101 137,341
Domestic wholesale 2,170 2,145 6,644 7,102
Foreign wholesale
Affiliated 15,551 15,469 56,021 51,279
Unaffiliated 18,225 14,514 62,720 55,172
Elimination (15,551) (15,469) (56,021) (51,279)
----------- ---------- ----------- -----------
Total 59,269 55,599 224,465 199,615
=========== =========== =========== ===========
Revenues:
Domestic retail fuel $ 42,624 $ 33,779 $ 162,143 $ 118,022
Domestic wholesale fuel 1,423 933 4,036 3,104
Foreign wholesale fuel
Affiliated 8,127 4,636 24,925 12,973
Unaffiliated 7,472 3,769 24,587 15,120
Elimination (8,127) (4,636) (24,925) (12,973)
Other revenues 5,705 4,669 20,508 16,960
----------- ----------- ----------- -----------
Total $ 57,224 $ 43,150 $ 211,274 $ 153,206
=========== =========== =========== ===========
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For the Three Months Ended For the Nine Months Ended
May 31, May 31,
2000 1999 2000 1999
----------- ---------- ------------ -----------
Operating Income:
Domestic retail $ 3,902 $ 6,125 $ 30,628 $ 30,841
Domestic wholesale fuel 49 26 275 135
Foreign wholesale
Affiliated 176 142 541 458
Unaffiliated 397 317 1,481 1,151
Elimination (176) (142) (541) (458)
----------- ---------- ------------ -----------
Total $ 4,348 $ 6,468 $ 32,384 $ 32,127
=========== =========== =========== ===========
Depreciation and amortization:
Domestic retail $ 4,878 $ 3,701 $ 13,591 $ 10,861
Domestic wholesale 8 12 27 37
Foreign wholesale 2 3 6 10
----------- ----------- ----------- -----------
Total $ 4,888 $ 3,716 $ 13,624 $ 10,908
=========== =========== =========== ===========
As of As of
May 31, 2000 Aug. 31, 1999
------------ -------------
Total Assets:
Domestic retail $ 303,057 $ 236,215
Domestic wholesale 2,322 2,803
Foreign wholesale 6,183 4,566
Corporate 23,004 19,374
----------- ------------
Total $ 334,566 $ 262,958
=========== ============
6. SIGNIFICANT INVESTEE:
The Partnership holds a 50 percent interest in Bi-State Partnership. The
Partnership accounts for its 50 percent interest in Bi-State Partnership under
the equity method. The Partnership's investment in Bi-State Partnership totaled
$5,924 and $5,202 at May 31, 2000 and August 31, 1999, respectively. The
Partnership received distributions from Bi-State Partnership in the amount of
$470 for the year ended August 31, 1999.
Bi-State Partnership's financial position at May 31, 2000 and August 31, 1999 is
summarized below:
May 31, August 31,
2000 1999
----------- -----------
Current assets $ 3,692 $ 1,533
Noncurrent assets 14,194 14,281
----------- -----------
$ 17,886 $ 15,814
=========== ===========
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May 31, August 31,
2000 1999
----------- -----------
Current liabilities $ 3,323 $ 2,333
Long-term debt 4,325 4,804
Partners' capital:
Heritage 5,924 5,202
Other partner 4,314 3,475
----------- -----------
$ 17,886 $ 15,814
=========== ===========
Bi-State Partnership's results of operations are summarized below:
Three Months Ended Nine Months Ended
May 31, May 31,
2000 1999 2000 1999
------------ ----------- ----------- -----------
Revenues $ 3,289 $ 3,430 $ 11,138 $ 10,996
Gross profit 1,527 2,026 5,457 6,426
Net income:
Heritage 78 364 721 1,185
Other partner 120 384 839 1,281
7. MARKETABLE SECURITIES
The Partnership's marketable securities are classified as trading securities as
defined by SFAS No. 115 and are reflected as a current asset on the balance
sheet at their fair value. An unrealized gain of $284 was recorded as other
income based on the market value of the securities at the balance sheet date. A
realized gain of $16 was recognized on the sale of a portion of the marketable
securities during the period ended May 31, 2000 and recorded as other income.
8. SFAS 133 ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN
HEDGING ACTIVITIES:
The Partnership applies the provisions of Financial Accounting Standards Board
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement. Companies must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
The Partnership entered into certain financial swap instruments during the three
months ended May 31, 2000 that have been designated as cash flow hedging
instruments in accordance with SFAS No. 133. Financial swaps are a contractual
agreement to exchange obligations of money between the buyer and seller of the
instruments as propane volumes during the pricing period are purchased. The
swaps are tied to a set fixed price for the buyer and floating price
determinants for the seller priced on certain indices. The Partnership entered
into these instruments to hedge the forecasted propane volumes to be purchased
during of each of the one-month periods ending October 2000 through March 2001.
The Partnership utilizes hedging transactions to provide price protection
against significant fluctuations in propane prices. These instruments had a fair
value of $3,326 as of May 31, 2000, which was recorded as other assets on the
balance sheet through other comprehensive income, exclusive of $153 of minority
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interest. The Partnership will reclassify into earnings the gain that is
reported in accumulated other comprehensive income as the physical transactions
occur under these instruments.
9. SUBSEQUENT EVENTS:
Subsequent to May 31, 2000, the Partnership announced it has entered into an
agreement to merge with US Propane to create the Nation's fourth largest retail
propane marketer. The transaction will combine Heritage's 170 locations
throughout the United States with US Propane's 80 locations in Alabama, Florida,
Georgia, Kentucky, North Carolina, South Carolina and Tennessee. The combined
operations are expected to market over 300 million gallons per year to almost
485,000 customers in 28 states. Through a series of agreements, Heritage Propane
Partners, L.P. will purchase the assets of US Propane for $181 million in cash
and limited partner units. US Propane L.P. will purchase Heritage Holdings,
Inc., the general partner of Heritage Propane Partners, for $120 million in
cash. The existing shareholders, including the key officers and directors of
HHI, will then purchase approximately $50 million of common and subordinated
units of the Partnership, representing approximately 20% of all units
outstanding. All current officers and managers of HHI will continue in their
present positions. The transaction is expected to close in mid summer.
10. FOOTNOTES INCORPORATED BY REFERENCE:
Certain footnotes are applicable to the consolidated financial statements but
would be substantially unchanged from those presented on Form 10-K filed with
the Securities and Exchange Commission on November 29, 1999. Accordingly,
reference should be made to the Company's Annual Report filed with the
Securities and Exchange Commission on Form 10-K for the following:
NOTE DESCRIPTION
1. OPERATIONS AND ORGANIZATION
2. SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL
4. WORKING CAPITAL FACILITIES AND LONG-TERM DEBT
5. COMMITMENTS AND CONTINGENCIES
6. PARTNERS' CAPITAL
7. REGISTRATION STATEMENTS
8. PROFIT SHARING AND 401(k) SAVINGS PLAN
9. RELATED PARTY TRANSACTIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Since its formation in 1989, Heritage has grown primarily through
acquisitions of retail propane operations and, to a lesser extent, through
internal growth. Through May 31, 2000, Heritage and the Partnership completed 70
acquisitions for an aggregate purchase price of approximately $297 million. The
Partnership has completed 42 of these acquisitions since going public on June
25, 1996. The Partnership engages in the sale, distribution and marketing of
propane and other related products. The Partnership derives its revenue
primarily from the retail propane marketing business. The General Partner
believes that the Partnership is one of the largest retail marketers of propane
in the United States, based on retail gallons sold, currently serving more than
286,000 residential, industrial/commercial and agricultural customers in 27
states through 170 retail outlets. Subsequent to May 31, 2000, the Partnership
announced it has entered into an agreement to merge with US Propane to create
the Nation's fourth largest retail propane marketer. The transaction will
combine Heritage's 170 locations throughout the United States with US Propane's
80 locations in Alabama, Florida, Georgia, Kentucky, North Carolina, South
Carolina and Tennessee. The combined operations are expected to market over 300
million gallons per year to almost 485,000 customers in 28 states.
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The retail propane business of the Partnership consists principally of
transporting propane purchased in the contract and spot markets, primarily from
major energy companies, to its retail distribution outlets and then to tanks
located on the customers' premises, as well as to portable propane cylinders. In
the residential and commercial markets, propane is primarily used for space
heating, water heating and cooking. In the agricultural market, propane is
primarily used for crop drying, tobacco curing, poultry brooding and weed
control. In addition, propane is used for certain industrial applications,
including use as an engine fuel that burns in internal combustion engines that
power vehicles and forklifts and as a heating source in manufacturing and mining
processes.
The retail propane distribution business is largely seasonal due to
propane's use as a heating source in residential and commercial buildings.
Historically, approximately two-thirds of the Partnership's retail propane
volume and in excess of 80% of the Partnership's EBITDA is attributable to sales
during the six-month peak heating season of October through March. Consequently,
sales and operating profits are concentrated in the Partnership's first through
third fiscal quarters. Cash flow from operations, however, is greatest during
the second and third fiscal quarters when customers pay for propane purchased
during the six-month peak-heating season.
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 the financial
performance of the Partnership. 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 therefore uses information on normal temperatures in understanding
how temperatures that are colder or warmer than normal affect historical results
of operations and in preparing forecasts of future operations, which assumes
that normal weather will prevail in each of the Partnership's regions.
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales price over propane supply costs. The
market price of propane is often subject to volatile changes as a result of
supply or other market conditions over which the Partnership will have no
control. Product supply contracts are one-year agreements subject to annual
renewal and generally permit suppliers to charge posted prices (plus
transportation costs) at the time of delivery or the current prices established
at major delivery points. Since rapid increases in the wholesale cost of propane
may not be immediately passed on to retail customers, such increases could
reduce the Partnership's gross profits. In the past, the Partnership generally
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 service centers and in major
storage facilities for future resale.
Gross profit margins vary according to customer mix. For example, sales
to residential customers generate higher margins than sales to certain other
customer groups, such as agricultural customers. Wholesale margins are
substantially lower than retail margins. In addition, gross profit margins vary
by geographical region. Accordingly, a change in customer or geographic mix can
affect gross profit without necessarily affecting total revenues.
ANALYSIS OF UNAUDITED HISTORICAL RESULTS OF OPERATIONS
The following discussion reflects for the periods indicated the results
of operations and operating data for the Partnership. Most of the increases in
the line items discussed below result from the acquisitions made by the
Partnership subsequent to the prior period discussed. The acquisition activity
affects the comparability of prior period financial matters, as the volumes are
not included in the prior period's results of operations. As the Partnership has
grown through acquisitions, fixed costs such as personnel costs, depreciation
and amortization and interest expense have increased. Amounts discussed below
reflect 100% of the results of M-P Energy Partnership, a general partnership in
which the Partnership owns a 60% interest. Because M-P 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 calculation.
THREE MONTHS ENDED MAY 31, 2000 COMPARED TO THE THREE MONTHS ENDED MAY 31, 1999.
Volume. The Partnership sold 38.9 million retail gallons in the three
months ended May 31, 2000, which is unchanged from the retail gallons sold
during the three months ended May 31, 1999. The weather patterns and
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temperatures that were significantly warmer than normal and warmer than the
prior year conditions caused a reduction in retail volumes which was partially
offset by acquisition related volumes and to a lesser extent, internal growth.
The Partnership's wholesale gallons sold increased approximately 3.8
million gallons in the third quarter of fiscal 2000 to 20.4 million wholesale
gallons from the 16.6 million wholesale gallons sold in the third quarter of
fiscal 1999. U.S. wholesale volumes increased .1 million gallons to 2.2 million
gallons while the foreign volumes of M-P Energy Partnership increased 3.7
million gallons to 18.2 million gallons during the third quarter.
Revenues. Total revenues for the Partnership increased $14.1 million or
32.7% to $57.2 million for the three months ended May 31, 2000 as compared to
$43.1 million for the same three-month period last year. The current period's
domestic retail propane revenues increased $8.8 million or 26.0% to $42.6
million versus the prior year's comparable period results of $33.8 million due
to higher selling prices. The U.S. wholesale revenues increased to $1.4 million
in the current period as compared to $.9 million for the period ended May 31,
1999, primarily due to higher selling prices. Other revenues increased $1.0
million or 21.3% to $5.7 million as a result of acquisitions and internal
growth. Foreign revenues increased $3.8 million for the three months ended May
31, 2000, to $7.5 million as compared to $3.7 million for the three months ended
May 31, 1999, primarily as a result of higher selling prices and increased
volume. Sales price per gallon during the three months ended May 31, 2000
continued to remain above last year's level due to the higher cost of propane as
compared to the same period last year.
Cost of Sales. Total cost of sales increased $13.4 million or 68.7% to
$32.9 million for the three months ended May 31, 2000 as compared to $19.5
million for the three months ended May 31, 1999. This increase is the result of
a significant increase in the wholesale propane prices that started during the
first quarter as compared to the low wholesale costs experienced in the same
period last fiscal year. Retail fuel cost of sales increased $9.1 million or
66.4% to $22.8 million in the third quarter of fiscal 2000, compared to $13.7
million in the third quarter of fiscal 1999 due to the impact of the increase in
fuel cost. Domestic wholesale cost of sales increased to $1.3 million for the
three months ended May 31, 2000 as compared to $.7 million for the three months
ended May 31, 1999. Foreign cost of sales increased $3.6 million due to the
higher cost of fuel along with increased foreign wholesale volumes as compared
to the same period last fiscal year. Other cost of sales were $1.7 million for
the three months ended May 31, 2000 as compared to $1.6 million for the same
period last fiscal year.
Gross Profit. Total gross profit increased $.7 million or 3.0% to $24.3
million for the three months ended May 31, 2000, as compared to $23.6 million
for the three months ended May 31, 1999 due primarily to the increase in other
revenues. The increases in fuel revenues were more than offset by the increase
in cost of sales due to the reasons discussed above.
Operating Expenses. Operating expenses increased $1.7 million or 12.7%
to $15.1 million in the third quarter of fiscal 2000 as compared to $13.4
million in the third quarter of fiscal 1999 primarily due to acquisition related
operating expenses.
Selling, General and Administrative. Selling, general and
administrative expenses were $1.6 million for the three months ended May 31,
2000 as compared to $1.5 million reported for the same three month period last
fiscal year.
Depreciation and Amortization. Depreciation and amortization increased
$1.2 million for the third quarter ended May 31, 2000 to $4.9 million as
compared to $3.7 million for the third quarter ended May 31, 1999. This increase
is primarily the result of additional depreciation and amortization cost on the
fixed assets and intangible assets recorded in connection with acquisitions.
Operating Income. Operating income for the three months ended May 31,
2000 decreased $2.3 million or 46% to $2.7 million as compared to $5.0 million
for the same three-month period last fiscal year. This decrease is primarily
attributable to reduced volumes caused by the warmer weather this quarter along
with the acquisition-related increase in operating expenses and depreciation and
amortization.
Interest Expense. Interest expense increased $1.0 million to $4.9
million for the three months ended May 31, 2000 primarily due to increased
borrowings related to acquisitions.
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Net Income (Loss). In the third quarter of fiscal 2000, the Partnership
recorded a net loss of $2.2 million, a $3.5 million decrease over the net income
of $1.3 million for the third quarter of fiscal 1999. This decrease is the
result of the reduced operating income described above and an increase in
interest costs.
EBITDA. Earnings before interest, taxes, depreciation and amortization
decreased $1.2 million to $8.0 million for the third quarter ended May 31, 2000,
as compared to the revised third quarter 1999 EBITDA of $9.2 million. The third
quarter 1999 EBITDA was revised to account for the non-cash compensation expense
that was previously included. The Partnership's EBITDA includes the EBITDA of
investees, but does not include the EBITDA of the minority interest of M-P
Energy Partnership. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to cash
flow (as a measure of liquidity or ability to service debt obligations), but
provides additional information for evaluating the Partnership's ability to make
the Minimum Quarterly Distribution.
NINE MONTHS ENDED MAY 31, 2000 COMPARED TO THE NINE MONTHS ENDED MAY 31, 1999.
Volume. The Partnership sold 155.1 million retail gallons in the nine
months ended May 31, 2000, an increase of 17.8 million gallons or 13.0% over the
137.3 million gallons sold in the nine months ended May 31, 1999. This increase
was primarily attributable to acquisition-related volumes and to a lesser extent
internal growth, offset by warmer than normal weather.
The Partnership also sold approximately 69.3 million wholesale gallons
the first nine months of fiscal 2000, an increase of 7.0 million gallons or
11.2% from the 62.3 million wholesale gallons sold during the same period last
year. U.S. wholesale volumes decreased .5 million gallons to 6.6 million gallons
while the foreign volumes of M-P Energy Partnership increased 7.5 million
gallons to 62.7 million gallons during this time period.
Revenues. Total revenues for the Partnership increased $58.1 million or
37.9% to $211.3 million for the nine months ended May 31, 2000 as compared to
$153.2 million for the same nine-month period last year. The current period's
domestic retail propane revenues increased $44.2 million or 37.5% to $162.2
million versus the prior year's comparable period results of $118.0 million due
to increased volumes and higher selling prices. The U.S. wholesale revenues
increased slightly to $4.0 million as compared to $3.1 million in the nine-month
period, due to higher selling prices. Other revenues increased $3.5 million or
20.6% to $20.5 million as a result of acquisitions and internal growth. Foreign
revenues increased $9.5 million for the nine months ended May 31, 2000, to $24.6
million as compared to $15.1 million for the nine months ended May 31, 1999,
primarily as a result of higher selling prices and to a lesser degree, increased
volume. Sales price per gallon during the nine months ended May 31, 2000
continued to remain above last year's level due to the higher cost of propane as
compared to the same period last year.
Cost of Sales. Total cost of sales increased $48.4 million or 68.0% to
$119.6 million for the nine months ended May 31, 2000 as compared to $71.2
million for the nine months ended May 31, 1999. This increase is the result of a
significant increase in the wholesale propane prices that started during the
first quarter as compared to the low wholesale costs experienced in the same
period last fiscal year and the increase in gallons sold. Retail fuel cost of
sales increased $36.9 million or 75.5% to $85.8 million during the nine months
ended May 31, 2000, compared to $48.9 million for the same time period of fiscal
1999. Foreign wholesale cost of sales also reflected an increase, going from
$14.0 million for the nine months ended May 31, 1999 to $23.1 million for the
nine months ended May 31, 2000 due to the impact of the increase in the cost of
propane and increased volumes in this area. U. S. wholesale cost of sales
increased $1.0 million as a result of the higher cost of fuel. Other cost of
sales also increased $1.4 million during the nine-month period due to an
increase in other revenues.
Gross Profit. Total gross profit increased $9.7 million or 11.8% to
$91.7 million for the nine months ended May 31, 2000, as compared to $82.0
million for the nine months ended May 31, 1999 due to the increases in volumes
sold and revenues discussed above, offset by the increase in product costs.
Operating Expenses. Operating expenses increased $6.7 million or 17.2%
to $45.7 million in the nine months ended May 31, 2000 as compared to $39.0
million in the nine months ended May 31, 1999 primarily due to acquisition
related operating expenses.
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Selling, General and Administrative. Selling, general and
administrative expenses were $5.0 million for the nine months ended May 31,
2000, an increase of $.5 million from the $4.5 million reported for the nine
months ended May 31, 1999.
Depreciation and Amortization. Depreciation and amortization increased
$2.7 million for the nine months ended May 31, 2000 to $13.6 million as compared
to $10.9 million for the same period last year. This increase is primarily the
result of additional depreciation and amortization cost on the fixed assets and
intangible assets recorded in connection with acquisitions.
Operating Income. Operating income for the nine months ended May 31,
2000, decreased slightly by $.2 million to $27.4 million as compared to $27.6
million for the same nine-month period last fiscal year. This decrease is
primarily attributable to the results of the third quarter operating income
discussed above.
Interest Expense. Interest expense increased $2.4 million or 20.5% to
$14.1 million for the nine months ended May 31, 2000 as compared to $11.7
million for the nine months ended May 31, 1999. The increase was primarily due
to borrowings related to acquisitions and to lesser extent, increased borrowings
as a result of higher product costs.
Net Income. Net income for the nine months ended May 31, 2000 was $14.0
million as compared to the net income of $17.0 million for the same period last
year. The $3.0 million decrease is the result of the decrease in operating
income described above together with an increase in interest costs.
EBITDA. Earnings before interest, taxes, depreciation and amortization
increased $2.4 million to $42.6 million for the nine months ended May 31, 2000,
as compared to the revised nine month 1999 EBITDA of $40.2 million. The 1999
EBITDA was revised to account for the non-cash compensation expense that was
previously included. The Partnership's EBITDA includes the EBITDA of investees,
but does not include the EBITDA of the minority interest of M-P Energy
Partnership. EBITDA should not be considered as an alternative to net income (as
an indicator of operating performance) or as an alternative to cash flow (as a
measure of liquidity or ability to service debt obligations), but provides
additional information for evaluating the Partnership's ability to make the
Minimum Quarterly Distribution.
LIQUIDITY AND CAPITAL RESOURCES
The ability of 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 its control. Future capital needs of the Partnership are expected to be
provided by various sources as follows:
a) increases in working capital will be financed by the working
capital line of credit and repaid from subsequent seasonal
reductions in inventory and accounts receivable
b) payment of interest cost, and other debt services, will be
provided by the annual cash flow from operations
c) required maintenance capital, predominantly vehicle
replacement, will also be provided by the annual cash flow
from operations
d) growth capital, mainly for customer tanks, expended will be
financed by the revolving acquisition bank line of credit
e) acquisition capital expenditures will be financed with
additional indebtedness on the revolving acquisition bank line
of credit, other lines of credit, issues of additional Common
Units or a combination thereof.
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CASH FLOWS
Operating Activities. Cash provided by operating activities during the
nine months that ended May 31, 2000, was $19.8 million compared to cash provided
of $29.6 million in the nine months that ended May 31, 1999. The net cash
provided from operations for the nine months ended May 31, 2000 consisted of net
income of $14.0 million and the impact of working capital used of $7.2 offset by
noncash charges of $13.0 million, principally depreciation and amortization.
Accounts receivable have increased over last year as a result of the net effect
of the increase in propane costs which in part was passed on to the customers
and a larger customer base due to acquisitions. Accounts payable has also
increased due to the same related reasons of increased cost of propane and
acquisitions.
Investing Activities. The Partnership has completed eleven acquisitions
during the nine months ended May 31, 2000 spending $46.8 million, net of cash
received, to purchase propane companies. This capital expenditure amount is
reflected in the cash used in investing activities of $56.9 million along with
$10.9 million spent for maintenance needed to sustain operations at current
levels and customer tanks to support growth of operations.
Financing Activities. Cash provided by financing activities during the
third quarter of fiscal 2000 of $39.7 million is primarily the result of net
proceeds received in an equity offering of 1,200,000 Common Units representing
limited partner interest in Heritage Propane Partners, L.P. utilizing the
Partnership's Registration Statement No. 333-86057 on Form S-3 dated September
13, 1999. The underwriters delivered the Common Units to purchasers on October
28, 1999, at a public offering price of $22.00 per Common Unit. The net proceeds
of approximately $24 million were used to repay a portion of the outstanding
indebtedness under the acquisition facility that was incurred to acquire propane
businesses. Other cash provided by financing activities of $15.6 million was
mainly from a net increase in the working capital facility of $5.5 million and a
net increase in the acquisition facility of $27.9 million used to acquire other
propane businesses. These increases were offset by cash distributions to
unitholders of $16.2 million and payments on other long-term debt of $1.8
million.
FINANCING AND SOURCES OF LIQUIDITY
The Partnership has a Bank Credit Facility, which includes a Working
Capital Facility, a revolving credit facility providing for up to $35.0 million
of borrowings to be used for working capital and other general partnership
purposes, and an Acquisition Facility, a revolving credit facility providing for
up to $50.0 million of borrowings to be used for acquisitions and improvements.
As of May 31, 2000, the Acquisition Facility had $3.7 million available to fund
future acquisitions and the Working Capital Facility had $9.6 million available
for borrowings.
The Partnership uses its cash provided by operating and financing
activities to provide distributions to unitholders and to fund acquisition,
maintenance and growth capital expenditures. Acquisition capital expenditures,
which include expenditures related to the acquisition of retail propane
operations and intangibles associated with such acquired businesses, were $46.8
million for the nine months ended May 31, 2000, as compared to $16.8 million
during the same period of fiscal 1999. In addition to the $46.8 million of cash
expended for acquisitions during the first nine months of fiscal 2000, $4.1
million of Common Units and $3.2 million for notes payable on non-compete
agreements were issued in connection with certain acquisitions and $.4 million
of liabilities were assumed.
Under the Partnership Agreement of Heritage, the Partnership will
distribute to its partners, 45 days after the end of each fiscal quarter, an
amount equal to all of its Available Cash for such quarter. Available cash
generally means, with respect to any quarter of the Partnership, all cash on
hand at the end of such quarter less the amount of cash reserves established by
the General Partner in its reasonable discretion that is necessary or
appropriate to provide for future cash requirements. The current distribution
level is $.5625 per unit ($2.25 annually). To the extent the quarterly
distribution exceeds $.55 per unit ($2.20 annually), incentive distributions are
payable to the General Partner. Pursuant to the Partnership Agreement, 925,736
Subordinated Units held by the General Partner converted to Common Units on July
5, 2000. The conversion of these units was dependent on meeting certain cash
performance and distribution requirements during the period that commenced with
the Partnership's public offering in June of 1996. As more fully described in
the Form 10-K for the year ended August 31, 1999, the subordination period
applicable to the remaining Subordinated Units will end the first day of any
quarter ending after May 31, 2001, in which certain cash performance and
distribution requirements have been met.
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The assets utilized in the propane business do not typically require
lengthy manufacturing process time nor complicated, high technology components.
Accordingly, the Partnership does not have any significant financial commitments
for capital expenditures. In addition, the Partnership has not experienced any
significant increases attributable to inflation in the cost of these assets or
in its operations.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this report, excluding historical
information, include certain forward-looking statements. Although Heritage
believes such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be reached. Such statements are
made in reliance on the "safe harbor" protections provided under the Private
Securities Litigation Reform Act of 1995.
As required by that law, the Partnership hereby identifies the
following important factors that could cause actual results to differ materially
from any results projected, forecasted, estimated or budgeted by the Partnership
in forward-looking statements.
o Risks and uncertainties impacting the Partnership as a whole
relate to changes in general economic conditions in the United
States; the availability and cost of capital; changes in laws
and regulations to which the Partnership is subject, including
tax, environmental and employment laws and regulations; the
cost and effects of legal and administrative claims and
proceedings against the Partnership or which may be brought
against the Partnership and changes in general and economic
conditions and currencies in foreign countries.
o The uncertainty of the ability of the Partnership to sustain
its rate of internal sales growth and its ability to locate
and acquire other propane companies at prices that are
accretive to the Partnership.
o Risks and uncertainties related to energy prices and the
ability of the Partnership to develop expanded markets and
products offerings as well as their ability to maintain
existing markets. In addition, future sales will depend on the
cost of propane compared to other fuels, competition from
other propane retailers and alternate fuels, the general level
of petroleum product demand, and weather conditions, among
other things.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Partnership has very little cash flow exposure due to rate changes for
long-term debt obligations. The Partnership primarily enters debt obligations to
support general corporate purposes including capital expenditures and working
capital needs. The Partnership's long-term debt instruments are typically issued
at fixed interest rates. When these debt obligations mature, the Partnership may
refinance all or a portion of such debt at then-existing market interest rates
which may be more or less than the interest rates on the maturing debt.
Commodity price risk arises from the risk of price changes in the propane
inventory that the Partnership buys and sells. The market price of propane is
often subject to volatile changes as a result of supply or other market
conditions over which the Partnership will have no control. In the past, price
changes have generally been passed along to the Partnership's customers to
maintain gross margins, mitigating the commodity price risk. The Partnership in
the past 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 service centers and in major
storage facilities. The Partnership utilizes hedging transactions to provide
price protection against significant fluctuations in propane prices. As of May
31, 2000, the Partnership was a party to financial swap contracts with another
party to hedge forecasted propane volumes purchased during set monthly pricing
periods. Cash settlement of these instruments will occur during each pricing
period as the physical transactions occur. Market risk of these instruments is
monitored daily for compliance with the Partnership's Trading and Hedging
Policy. The fair value of these instruments as of May 31, 2000, was $3.3
million. These instruments are deemed to be highly effective as of May 31, 2000,
and are accounted for as cash flow hedges under the provisions of SFAS No. 133
(see Footnote 8 to the Financial Statements).
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the three months ended May 31, 2000, the Partnership issued 58,318
Common Units ("Units") to Heritage Holdings, Inc., the Partnership's
General Partner. These Units were issued in connection with the assumption
of certain liabilities by the General Partner with respect to the prior
stock acquisitions of other propane companies. The General Partner's Units
were not registered with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, by virtue of an exemption under Section
4(2) thereof. The above Units carry a restrictive legend with regard to
transfer of the Units.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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.
(7) 10.1 First Amended and Restated Credit Agreement with Banks Dated May 31, 1999
(8) 10.1.1 First Amendment to the First Amended and Restated Credit Agreement dated as of October 15, 1999
(*) 10.1.2 Second Amendment to First Amended and Restated Credit Agreement dated as of May 31, 2000
(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, 2996) 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
(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
(2) 10.7 Employment Agreement for James E. Bertelsmeyer
(1) 10.8 Employment Agreement for R. C. Mills
(1) 10.9 Employment Agreement for G.A. Darr
(1) 10.10 Employment Agreement for H. Michael Krimbill
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21
Exhibit
Number Description
------ -----------
(6) 10.11 Employment Agreement for Bradley K. Atkinson
(7) 10.12 First Amended and Restated Revolving Credit Agreement between Heritage Service Corp. and Banks Dated May
31, 1999
(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
(*) 10.16.3 Third Amendment Agreement dated May 31, 2000 to November 19, 1997 Note Purchase Agreement and June 25,
1996 Note Purchase Agreement
(8) 21.1 List of Subsidiaries
27.1 Financial Data Schedule - Filed with EDGAR version only
(8) 99.1 Balance Sheet of Heritage Holdings, Inc. as of August 31, 1999
- - ----------
(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.
(*) Filed herewith.
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERITAGE PROPANE PARTNERS, L.P.
By: Heritage Holdings, Inc., General Partner
Date: July 14, 2000 By: /s/ H. Michael Krimbill
------------------------------------------------
H. Michael Krimbill
(CEO, President and Chief Financial Officer
and officer duly authorized to sign on
behalf of the registrant)
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INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
(1) 3.1 Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(7) 10.1 First Amended and Restated Credit Agreement with Banks Dated May 31, 1999
(8) 10.1.1 First Amendment to the First Amended and Restated Credit Agreement dated as of October 15, 1999
(*) 10.1.2 Second Amendment to First Amended and Restated Credit Agreement dated as of May 31, 2000
(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, 2996) 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
(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
(2) 10.7 Employment Agreement for James E. Bertelsmeyer
(1) 10.8 Employment Agreement for R. C. Mills
(1) 10.9 Employment Agreement for G.A. Darr
(1) 10.10 Employment Agreement for H. Michael Krimbill
(6) 10.11 Employment Agreement for Bradley K. Atkinson
(7) 10.12 First Amended and Restated Revolving Credit Agreement between Heritage Service Corp. and Banks Dated May
31, 1999
(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
(*) 10.16.3 Third Amendment Agreement dated May 31, 2000 to November 19, 1997 Note Purchase Agreement and June 25,
1996 Note Purchase Agreement
24
Exhibit
Number Description
------- -----------
(8) 21.1 List of Subsidiaries
27.2 Financial Data Schedule - Filed with EDGAR version only
(8) 99.1 Balance Sheet of Heritage Holdings, Inc. as of August 31, 1999
- - ----------
(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.
(9) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1998.
(10) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 1999.
(11) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1999.
(*) Filed herewith.
1
EXHIBIT 10.1.2
SECOND AMENDMENT TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT,
dated effective as of May 31, 2000 (the "Second Amendment"), is entered into
between and among HERITAGE OPERATING, L.P., a Delaware limited partnership (the
"Borrower") and BANK OF OKLAHOMA, NATIONAL ASSOCIATION ("BOk"), FIRSTAR BANK
N.A., (formerly known as Mercantile Bank National Association) ("Firstar") and
LOCAL OKLAHOMA BANK, N.A. ("Local") (BOk, Firstar and Local, together with each
other Person that becomes a Bank pursuant to Article XI of the Credit Agreement
(hereinafter defined) collectively referred to herein as the "Banks"), BOk, as
administrative agent for the Banks (in such capacity, the "Administrative
Agent") and Firstar, as co-agent for the Banks (in such capacity, the
"Co-Agent").
WHEREAS, the Borrower, the Banks, the Administrative Agent and the
Co-Agent entered into (i) that certain First Amended and Restated Credit
Agreement dated as of May 31, 1999 (the "Original Restated Credit Agreement"),
and (ii) that certain First Amendment to First Amended and Restated Credit
Agreement dated as of October 15, 1999 (the "First Amendment"); and
WHEREAS, the Original Restated Credit Agreement, as amended and
modified by the First Amendment, is hereinafter sometimes referred to as the
"Credit Agreement"; and
WHEREAS, capitalized terms used herein without definition shall have
the respective meanings assigned to such terms in the Credit Agreement; and
WHEREAS, the Borrower has heretofore sent the Administrative Agent a
letter dated May 15, 2000, (the "Reorganization Letter"), describing certain
acquisitions by the Borrower, a proposed change in the ownership of the General
Partner, a proposed change in ownership of Common Units of the Master
Partnership and other matters set forth therein (the "Proposed Reorganization");
and
WHEREAS, the Borrower has requested the Banks, the Administrative Agent
and the Co-Agent to (i) consent, subject to the satisfaction of certain
conditions to effectiveness, to an amendment to the Credit Agreement, and (ii)
consent to an amendment to Section 2.2.2 of the Credit Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Upon satisfaction of each of the conditions to effectiveness
set forth in paragraph 6 below:
A. Section 1.1 of the Credit Agreement shall be amended by
adding thereto, at the appropriate alphabetical position, the
following additional defined terms:
2
"`Adjusted Consolidated EBITDA' shall mean, as of any
date of determination for any applicable period,
Consolidated EBITDA calculated
(x) with respect to the consolidated group comprised of
the General Partner, the Master Partnership and the Borrower
and its Subsidiaries (rather than with respect to the
consolidated group comprised of the Borrower and its
Subsidiaries), and
(y) as if the terms `Consolidated Non-Cash Charges',
`Consolidated Net Income', `Consolidated Interest Expense',
`Consolidated Income Tax Expense', `Asset Sale', and `Asset
Acquisition', were calculated with respect to the
consolidated group comprised of the General Partner, the
Master Partnership and the Borrower and its Subsidiaries
(rather than with respect to the consolidated group
comprised of the Borrower and its Subsidiaries)."
"`Adjusted Consolidated Funded Indebtedness' shall mean
Consolidated Funded Indebtedness calculated with respect to
the consolidated group comprised of the General Partner, the
Master Partnership and the Borrower and its Subsidiaries
(rather than with respect to the consolidated group
comprised of the Borrower and its Subsidiaries)."
"`Designated Current Managers' shall mean R. C. Mills
and H. Michael Krimbill, current executive officers of the
General Partner, together, in the case of either such
executive officer, with the heirs of, and trusts for the
benefit of family members controlled by, such executive
officer."
"`Lock-Up Period' shall mean, with respect to each
Designated Current Manager, the period from the date of the
closing of the Proposed Reorganization to the earlier to
occur of (x) the third anniversary of such closing, and (y)
the first date on which such Designated Current Manager
shall cease to be employed by the General Partner, the
Master Partnership or any of their respective Affiliates."
"`Proposed Reorganization' shall have the meaning set
forth in the fourth "Whereas" clause of the Second
Amendment, dated as of May 31, 2000, with respect to this
Agreement."
"`Specified Entities' shall mean any one or more of the
following entities: (i) Atmos Energy Corporation, a Texas
and Virginia corporation, (ii) Piedmont Natural Gas Company,
Inc., a
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North Carolina corporation, (iii) AGL Resources, Inc., a
Georgia corporation, and (iv) TECO Energy, Inc., a Florida
corporation, or a Successor to any entity referred to in
clause (i), (ii), (iii) or (iv) of this definition."
"`Successor' shall mean, with respect to a Specified
Entity, any entity in which the holders of the Capital Stock
of such Specified Entity outstanding immediately prior to a
consolidation, acquisition or merger involving such
Specified Entity hold, directly or indirectly through
Wholly-Owned Subsidiaries, at least a majority of the
Capital Stock immediately after such consolidation,
acquisition or merger."
B. Section 7B.1 of the Credit Agreement shall be amended by
adding the following new clause (iii):
"(iii) Ratio of Adjusted Consolidated Funded
Indebtedness to Adjusted Consolidated EBITDA. The ratio as
at the end of any fiscal quarter of Adjusted Consolidated
Funded Indebtedness to Adjusted Consolidated EBITDA to
exceed 6.25 to 1.00."
C. Section 9.1(xv) of the Credit Agreement shall be amended
by (i) adding before clause (a) the phrase "any of the events
described in clauses (a), (b), (c) or (d) shall occur: ", and
(ii) deleting clause (c) and inserting in lieu thereof the
following new clauses (c) and (d):
"(c) the Specified Entities shall own, directly or
indirectly through Wholly-Owned Subsidiaries, in the
aggregate less than 51% of the Capital Stock of the General
Partner, or (d) either Designated Current Manager shall, at
any time during the Lock-up Period applicable to such
Designated Current Manager, own, directly or indirectly,
less than 50% of the Common Units of the Master Partnership
owned, directly or indirectly, by such Designated Current
Manager immediately after giving effect to the Proposed
Reorganization; or".
2. Section 2.2.2 of the Credit Agreement is deleted in its
entirety and replaced with the following:
"2.2.2. Maximum Amount of Working Capital Credit. The term
`Maximum Amount of Working Capital Credit' means, on any date,
$35,000,000 minus the outstanding principal balance on the
Indebtedness permitted by Section 7B.2(v) or such lesser amount
as the Borrower may
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specify from time to time by notice from the Borrower to the
Administrative Agent; provided that the aggregate outstanding
principal amount of Working Capital Loan shall be $0 for a period
of not less than 30 consecutive calendar days at least one time
during each fiscal year of the Borrower ending subsequent to
September 1, 2000 (the "Annual Clean-Up"). Failure by the
Borrower to comply with the provisions of the Annual Clean-Up
shall constitute a failure to pay the Loans when due and an Event
of Default under Section 9.1."
3. Existing Credit Agreement/Counterparts. All of the remaining
terms, provisions and conditions of the Credit Agreement, except as
otherwise expressly amended and modified by this Second Amendment,
shall continue in full force and effect in all respects. This Second
Amendment may be executed in multiple counterparts, each of which
shall be deemed an original and all of which shall constitute a single
Second Amendment. Delivery of an executed counterpart of a signature
page to this Second Amendment by telecopier shall be as effective as
delivery of a manually executed counterpart of this Second Amendment.
4. Further Assurances. The Borrower will, upon the request of the
Administrative Agent from time to time, promptly execute, acknowledge
and deliver, and file and record, all such instruments and notices,
and take all such action, as the Administrative Agent deems necessary
or advisable to carry out the intent and purposes of this Second
Amendment and the Credit Agreement.
5. General. The Credit Agreement and all of the other Loan
Documents are each confirmed as being in full force and effect. This
Second Amendment, the Credit Agreement and the other Loan Documents
referred to herein or therein constitute the entire understanding of
the parties with respect to the subject matter hereof and thereof and
supersede all prior and current understandings and agreements, whether
written or oral, with respect to such subject matter. The invalidity
or unenforceability of any provision hereof shall not affect the
validity and enforceability of any other term or provision hereof. The
headings in this Second Amendment are for convenience of reference
only and shall not alter, limit or otherwise affect the meaning
hereof. Each of this Second Amendment and the Credit Agreement is a
Loan Document and may be executed in any number of counterparts, which
together shall constitute one instrument, and shall bind and inure to
the benefit of the parties and their respective successors and assigns
including as such successors and assigns all holders of any Note. This
Second Amendment shall be governed by and construed in accordance with
the laws (other than the conflict of law rules) of the State of
Oklahoma.
6. Conditions to Effectiveness. The effectiveness of this Second
Amendment is subject to the satisfaction of the following conditions:
(a) the Required Banks under the Credit Agreement shall have
consented to this Second Amendment as evidenced by their
execution thereof;
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(b) the requisite percentages of holders of Private
Placement Notes shall have agreed to all amendments necessary to
effect the Proposed Reorganization and a copy thereof shall have
been provided to the Administrative Agent. In the event the
Borrower agrees that the holders of any Private Placement Notes
shall be granted any additional or more restrictive financial or
negative covenants or events of default than are imposed on the
Borrower under the Credit Agreement, as amended hereby, the
Borrower agrees that the Banks shall also be granted such more
restrictive covenants or events of defaults;
(c) each of the Banks shall have received an amendment fee
from the Borrower in an amount equal to .10% of the aggregate
principal amount of the Loan owing to such Bank on the date
hereof (the "Amendment Fee") and a Responsible Officer of the
Borrower shall have certified to the Administrative Agent (the
truth and accuracy of which certification shall constitute a
condition of effectiveness hereunder) that the holders of the
Private Placement Notes have received no amendment fees or other
consideration (including increase in coupon) greater than the
Amendment Fee;
(d) the Administrative Agent shall have received evidence
that (i) the Master Partnership shall have transferred to the
Borrower an equity contribution in the amount of at least
$45,000,000 (the "Equity Contribution"), and (ii) the entire
amount of such Equity Contribution shall have been applied to the
payment of outstanding Indebtedness of the Borrower;
(e) counsel to the Banks shall have been paid fees and
expenses incurred in connection with this Second Amendment; and
(f) materials reasonably satisfactory to the Administrative
Agent shall have been delivered evidencing that the Proposed
Reorganization has become effective.
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IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to First Amended and Restated Credit Agreement to be duly executed and
delivered in Tulsa, Oklahoma, effective as of the 31st day of May, 2000, by the
undersigned duly authorized officers thereof.
"Borrower"
HERITAGE OPERATING, L.P., a Delaware
limited partnership
By: Heritage Holdings, Inc., a Delaware
corporation, general partner
By:
--------------------------------
H. Michael Krimbill
President
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"Banks"
BANK OF OKLAHOMA, NATIONAL ASSOCIATION
By:
-----------------------------------
Its:
----------------------------------
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FIRSTAR BANK N.A. (formerly known as
Mercantile Bank National Association)
By:
-----------------------------------
Its:
----------------------------------
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LOCAL OKLAHOMA BANK, N.A.
By:
-----------------------------------
Its:
----------------------------------
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"Administrative Agent"
BANK OF OKLAHOMA, NATIONAL
ASSOCIATION
By:
-----------------------------------
Its:
----------------------------------
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"Co-Agent"
FIRSTAR BANK N.A. (formerly known as
Mercantile Bank National Association)
By:
-----------------------------------
Its:
----------------------------------
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EXHIBIT 10.16.3
HERITAGE OPERATING, L.P.
THIRD AMENDMENT AGREEMENT
Re: Note Purchase Agreement dated as of June 25, 1996
Note Purchase Agreement dated as of November 19, 1997
Dated as of
May 31, 2000
To each of the Holders named
in Schedule 1 to this Consent and
Third Amendment Agreement
Ladies and Gentlemen:
Reference is made to
(i) the Note Purchase Agreement dated as of June 25, 1996 (the
"Original 1996 Agreement"), among Heritage Operating, L.P., a Delaware limited
partnership (the "Company") and the Purchasers named in the Purchaser Schedule
attached thereto, as amended by a First Amendment Agreement (the "First
Amendment Agreement") dated as of October 15, 1998 and a Second Amendment
Agreement (the "Second Amendment Agreement") dated as of September 1, 1999
(said Original 1996 Agreement, as amended by the First Amendment Agreement and
the Second Amendment Agreement, being hereinafter referred to as the
"Outstanding 1996 Agreement") under and pursuant to which the Company issued,
and there are presently outstanding, $120,000,000 aggregate principal amount of
its 8.55% Senior Secured Notes due 2011 (the "1996 Notes"); and
(ii) the Note Purchase Agreement dated as of November 19, 1997 (the
"Basic 1997 Agreement"), among the Company and the Purchasers named in the
Initial Purchaser Schedule attached thereto, as amended by the First Amendment
Agreement and the Second Amendment Agreement (said Basic 1997 Agreement, as so
amended, being hereinafter referred to as the "Amended Basic 1997 Agreement"),
under and pursuant to which the Company issued, and there are presently
outstanding, $12,000,000 aggregate principal amount of its 7.17% Series A
Senior Secured Notes due November 19, 2009 (the "Series A Notes") and
$20,000,000 aggregate principal amount of its 7.26% Series B Senior Secured
Notes due November 19, 2012 (the "Series B Notes"), as supplemented by the
First Supplemental Note Purchase Agreement dated as of March 13, 1998 the
"First Supplemental Agreement" among the Company and the Purchasers named in
the Supplemental Purchaser Schedule attached thereto, under and pursuant to
which (a) the Company issued $5,000,000 aggregate principal amount of its 6.50%
Series C
2
Senior Secured Notes due March 13, 2007 (the "Series C Notes"), $4,285,714.29
of which are presently outstanding, and (b) the Company issued, and there are
presently outstanding, (x) $5,000,000 aggregate principal amount of its 6.59%
Series D Senior Secured Notes due March 13, 2010 (the "Series D Notes") and (y)
$5,000,000 aggregate principal amount of its 6.67% Series E Senior Secured
Notes due March 13, 2013 (the "Series E Notes").
The Amended Basic 1997 Agreement, as supplemented by the First Supplemental
Agreement is hereinafter sometimes referred to as the "Outstanding 1997
Agreement". The Outstanding 1996 Agreement and the Outstanding 1997 Agreement
are hereinafter sometimes collectively referred to as the "Outstanding
Agreements". The 1996 Notes, Series A Notes, Series B Notes, Series C Notes,
Series D Notes and Series E Notes are hereinafter sometimes collectively
referred to as the "Outstanding Notes." Capitalized terms used herein without
definition shall have the respective meanings assigned to such terms in the
Outstanding Agreements.
Exhibit A hereto contains letters of the Company dated May 11, 2000
and May 19, 2000 (collectively, the "Transaction Description"), describing
certain acquisitions by the Company, a proposed change in the ownership of the
General Partner, a proposed change in ownership of Common Units of the Master
Partnership and other matters set forth therein (collectively, the "Proposed
Reorganization").
The Company now seeks your agreement to an amendment with respect to
the each of the Outstanding Agreements necessary in order to effect the
Proposed Reorganization. You are the owner and holder of the Outstanding Notes
set forth opposite your name on Schedule 1 hereto. The Company hereby requests
that from and after the satisfaction of each of the Conditions to Effectiveness
set forth in Article II below, said amendment shall be deemed to have been
given and said Outstanding Agreements shall be amended in the respects, but
only in the respects, hereinafter set forth.
ARTICLE I
AMENDMENTS TO OUTSTANDING AGREEMENTS
I-A. Section 6A of each of the Outstanding Agreements shall be amended
by (x) changing the period at the end of clause (ii) to a semicolon, (y) adding
the word "or" after such semicolon, and (z) adding the following new clause
(iii):
"(iii) Ratio of Adjusted Consolidated Funded Indebtedness to
Adjusted Consolidated EBITDA. The ratio as at the end of any fiscal
quarter of Adjusted Consolidated Funded Indebtedness to Adjusted
Consolidated EBITDA to exceed 6.25 to 1.00."
I-B. Section 7A(xv) of each of the Outstanding Agreements shall be
amended by (i) adding before clause (a) the phrase "any of the events described
in clauses (a), (b), (c) or (d)
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shall occur:", (ii) adding before clause (b) the word "or" and (iii) deleting
clause (c) and inserting in lieu thereof the following new clauses (c) and (d):
"(c) the Specified Entities shall own, directly or indirectly through
Wholly-Owned Subsidiaries, in the aggregate less than 51% of the
Capital Stock of the General Partner, or (d) either Designated
Current Manager shall, at any time during the Lock-up Period
applicable to such Designated Current Manager, own, directly or
indirectly, less than 50% of the Common Units of the Master
Partnership owned, directly or indirectly, by such Designated Current
Manager immediately after giving effect to the Proposed
Reorganization; or"
I-C. Section 10B of each of the Outstanding Agreements shall be
amended by adding thereto, at the appropriate alphabetical position, the
following additional defined terms
"`Adjusted Consolidated EBITDA' shall mean, as of any date
of determination for any applicable period, Consolidated EBITDA
calculated
(x) with respect to the consolidated group
comprised of the General Partner, the Master Partnership and
the Company and its Subsidiaries (rather than with respect to
the consolidated group comprised of the Company and its
Subsidiaries), and
(y) as if the terms `Consolidated Non-Cash
Charges', `Consolidated Net Income', `Consolidated Interest
Expense', `Consolidated Income Tax Expense', `Asset Sale',
and `Asset Acquisition', were calculated with respect to the
consolidated group comprised of the General Partner, the
Master Partnership and the Company and its Subsidiaries
(rather than with respect to the consolidated group comprised
of the Company and its Subsidiaries)."
"`Adjusted Consolidated Funded Indebtedness' shall mean
Consolidated Funded Indebtedness calculated with respect to the
consolidated group comprised of the General Partner, the Master
Partnership and the Company and its Subsidiaries (rather than with
respect to the consolidated group comprised of the Company and its
Subsidiaries).
"`Designated Current Managers' shall mean R. C. Mills and H.
Michael Krimbill, current executive officers of the General Partner,
together with, in the case of either such executive officer, the heirs
of, and trusts for the benefit of family members controlled by, such
executive officer."
"`Lock-Up Period' shall mean, with respect to any Designated
Current Manager, the period from the date of the closing of the
Proposed Reorganization to the earlier to occur of (x) the third
anniversary of such closing, and (y) the first
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date on which such Designated Current Manager shall cease to be
employed by the General Partner, the Master Partnership or any of
their respective Affiliates."
"`Proposed Reorganization' shall have the meaning set forth
in the introductory portion of the Third Amendment Agreement, dated as
of May 31, 2000, with respect to this Agreement."
"`Specified Entities' shall mean any one or more of the
following entities: (i) Atmos Energy Corporation, a Texas and Virginia
corporation, (ii) Piedmont Natural Gas Company, Inc., a North Carolina
corporation, (iii) AGL Resources, Inc., a Georgia corporation, and
(iv) TECO Energy, Inc., a Florida corporation, or a Successor to any
entity referred to in clause (i), (ii), (iii) or (iv) of this
definition."
"`Successor' shall mean, with respect to a Specified Entity,
any entity in which the holders of the Capital Stock of such Specified
Entity outstanding immediately prior to a consolidation, acquisition
or merger involving such Specified Entity hold, directly or indirectly
through Wholly-Owned Subsidiaries, at least a majority of the Capital
Stock immediately after such consolidation, acquisition or merger."
ARTICLE II
CONDITIONS OF EFFECTIVENESS
The effectiveness of this Third Amendment Agreement is subject to the
satisfaction of the following conditions:
(a) the Required Holders under each of the of Outstanding
Agreements shall have consented to this Third Amendment Agreement as
evidenced by their execution thereof;
(b) the requisite percentage of lenders under the Credit
Agreement (the "Lenders") shall have agreed to all amendments
necessary to effect the Proposed Reorganization and a copy thereof
shall have been provided to the holders of the Outstanding Notes. In
the event the Company agrees that the Lenders or holders of any of the
Outstanding Notes shall be granted any additional or more restrictive
financial or negative covenants or events of default than are imposed
on the Company under the Outstanding Agreements, as amended hereby,
the Company agrees that the holders of all other Outstanding Notes
shall also be granted such more restrictive covenants or events of
defaults;
(c) each of the holders of the Outstanding Notes shall have
received an amendment fee from the Company in an amount equal to .10%
of the aggregate principal
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amount of the Outstanding Notes held by such holder (the "Amendment
Fee") and a Responsible Officer of the Company shall have certified to
each such holder (the truth and accuracy of which certification shall
constitute a Condition of Effectiveness) that the Lenders have
received no amendment fees or other consideration (including increase
in coupon) greater than the Amendment Fee;
(d) the Holders of the Outstanding Notes shall have received
evidence that (i) the Master Partnership shall have transferred to the
Company an equity contribution in the amount of at least $45,000,000
(the "Equity Contribution"), and (ii) the entire amount of such Equity
Contribution shall have been applied to the payment of outstanding
Indebtedness of the Company;
(e) all counsel to the holders of the Outstanding Notes
shall have been paid fees and expenses incurred in connection with
this Third Amendment Agreement;
(f) materials reasonably satisfactory to the holders of the
Outstanding Notes shall have been delivered evidencing that the
Proposed Reorganization has become effective; and
(g) each of the Designated Current Managers shall have
entered into an employment agreement to act as an executive manager of
the General Partner for a period of at least three years, all as
contemplated in the Proposed Reorganization.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
In order to induce the holders of the Notes to enter into this Third
Amendment, the Company represents and warrants that, (a) no Event of Default
has occurred and is continuing; (b) after giving effect to the Proposed
Reorganization, no Event of Default shall have occurred; and (c) the
information set forth in the Transaction Description does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
ARTICLE IV
MISCELLANEOUS
IV-A. If the foregoing is acceptable to you, kindly note your acceptance
in the space provided below and upon satisfaction of the Conditions to
Effectiveness set forth in Article II above, your consent to the Proposed
Reorganization shall be deemed to have been given and the Outstanding
Agreements shall be amended as set forth above.
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6
IV-B. This Third Amendment Agreement may be executed by the parties
hereto individually, or in any combination of the parties hereto in several
counterparts, all of which taken together shall constitute one and the same
Third Amendment Agreement.
IV-C. Except as amended hereby, all of the representations, warranties,
provisions, covenants, terms and conditions of the Outstanding Agreements shall
remain unaltered and in full force and effect and the Outstanding Agreements,
as amended hereby, are in all respects agreed to, ratified and confirmed by the
Company. The Company acknowledges and agrees that the granting of amendments
herein shall not be construed as establishing a course of conduct on the part
of the holders of the Outstanding Notes upon which the Company may rely at any
time in the future.
IV-D. Upon the effectiveness of this Third Amendment Agreement, each
reference in each Outstanding Agreement and in other documents describing or
referencing such Outstanding Agreement to "this Agreement," "hereunder,"
"hereof," "herein," or words of like import referring to such Outstanding
Agreement, shall mean and be a reference to such Outstanding Agreement, as
amended hereby.
Very truly yours,
HERITAGE OPERATING, L.P.
By Heritage Holdings, Inc., General Partner
By
Its
----------------------------------------
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The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
JOHN HANCOCK LIFE INSURANCE
COMPANY
By
----------------------------------
Its
JOHN HANCOCK VARIABLE LIFE INSURANCE
COMPANY
By
----------------------------------
Its
MELLON BANK, N.A., solely in its capacity as
Trustee for the Long-Term Investment Trust
(as directed by John Hancock Life Insurance
Company), and not in its individual capacity
By
----------------------------------
Its
THE NORTHERN TRUST COMPANY, as Trustee of the
Lucent Technologies Inc. Master Pension Trust
By: John Hancock Life Insurance Company,
As Investment Manager
By
----------------------------
Its
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8
The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY
By
----------------------------------
Its
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9
The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
PRINCIPAL LIFE INSURANCE COMPANY
(f/k/a Principal Mutual Life Insurance Company)
By
----------------------------------
Its
By
----------------------------------
Its
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The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
NEW YORK LIFE INSURANCE COMPANY
By
----------------------------------
Its
NEW YORK LIFE INSURANCE AND ANNUITY
CORPORATION
By: New York Life Asset Management
Operating Company, LLC,
its Investment Manager
By
----------------------------------
Its
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The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By
----------------------------------
Its
-11-
12
The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
KEYPORT LIFE INSURANCE COMPANY
By Stein Roe & Farnham Incorporated, as agent
By
----------------------------------
Its
-12-
13
The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
J. ROMEO & CO.
By
----------------------------------
Its
-13-
14
The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
PACIFIC LIFE INSURANCE COMPANY
(formerly Pacific Mutual Life Insurance Company)
By
----------------------------------
Its
By
----------------------------------
Its
PACIFIC LIFE INSURANCE COMPANY
By
----------------------------------
Its
By
----------------------------------
Its
-14-
15
The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
PHOENIX HOME LIFE MUTUAL INSURANCE
COMPANY
By
----------------------------------
Its
-15-
16
The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
RELIASTAR LIFE INSURANCE COMPANY
By
----------------------------------
Its
-16-
17
The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
COLUMBIA UNIVERSAL LIFE INSURANCE COMPANY
By
----------------------------------
Its
-17-
18
The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
PROTECTIVE LIFE INSURANCE COMPANY
By
----------------------------------
Its
By
----------------------------------
Its
-18-
19
The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
ALLSTATE LIFE INSURANCE COMPANY
By
----------------------------------
Name:
By
----------------------------------
Name:
Authorized Signatories
-19-
20
The foregoing Third Amendment Agreement and the amendments referred to
therein are hereby accepted and agreed to as of May 31, 2000, and the
undersigned hereby confirms that on May 31, 2000 it held the aggregate
principal amount of Outstanding Notes of the Company set forth on Schedule 1
hereto and that on the date of execution hereof it continues to hold such
Outstanding Notes.
JEFFERSON PILOT FINANCIAL INSURANCE COMPANY
(FKA Chubb Life Insurance Company of America)
By
----------------------------------
Its
-20-
21
SCHEDULE 1
PRINCIPAL AMOUNT AND
SERIES OF OUTSTANDING
NAME OF HOLDER NOTES HELD AS OF
OF OUTSTANDING NOTES MAY 31, 2000
John Hancock Life Insurance Company $13,000,000 1996 Notes
John Hancock Life Insurance Company $ 8,000,000 1996 Notes
John Hancock Variable Life Insurance Company $ 1,000,000 1996 Notes
Mellon Bank, N.A., Trustee under the Long-Term
Investment Trust dated October 1, 1996 $ 960,000 1996 Notes
The Northern Trust Company, as Trustee of the
Lucent Technologies Inc. Master Pension Trust $ 2,040,000 1996 Notes
Massachusetts Mutual Life Insurance Company $15,000,000 1996 Notes
Principal Life Insurance Company $15,000,000 1996 Notes
New York Life Insurance Company $12,500,000 1996 Notes
Teachers Insurance and Annuity Association of America $12,500,000 1996 Notes
Keyport Life Insurance Company $10,000,000 1996 Notes
J. Romeo & Co. $ 3,500,000 1996 Notes
J. Romeo & Co. $ 4,000,000 1996 Notes
Pacific Mutual Life Insurance Company $ 5,500,000 1996 Notes
Phoenix Home Life Mutual Insurance Company $ 5,000,000 1996 Notes
ReliaStar Life Insurance Company $ 5,000,000 1996 Notes
Columbia Universal Life Insurance Company $ 2,000,000 1996 Notes
22
Allstate Life Insurance Company $ 2,000,000 1996 Notes
Protective Life Insurance Company $ 3,000,000 1996 Notes
Pacific Life Insurance Company $12,000,000 Series A Notes
Pacific Life Insurance Company $ 8,000,000 Series B Notes
New York Life Insurance Company $ 5,000,000 Series B Notes
New York Life Insurance and Annuity Corporation $ 7,000,000 Series B Notes
Allstate Life Insurance Company $ 4,285,714.29 Series C Notes
Chubb Life Insurance Company of America $ 5,000,000 Series D Notes
J. Romeo & Co. $ 5,000,000 Series E Notes
5
3-MOS 9-MOS
AUG-31-2000 AUG-31-2000
MAR-01-2000 SEP-01-1999
MAY-31-2000 MAY-31-2000
4,206 4,206
2,697 2,697
19,855 19,855
366 366
17,857 17,857
45,857 45,857
241,930 241,930
51,751 51,751
334,566 334,566
60,702 60,702
225,149 225,149
0 0
0 0
0 0
48,715 48,715
334,566 334,566
57,224 211,274
57,224 211,274
32,896 119,577
47,988 165,266
0 0
0 0
4,871 14,094
(2,131) 14,499
0 0
(2,198) 13,965
0 0
0 0
0 0
(2,198) 13,965
(.22) 1.43
(.22) 1.42
