FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2002
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 January 13, 2003, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 16,367,803 Common Units
EXPLANATORY NOTE
We are filing this Amendment on Form 10-Q/A in conjunction with the
filing of a Registration Statement on Form S-3 (File No. 333-107324). That
Registration Statement incorporates our quarterly report on Form 10-Q for the
quarterly period ended November 30, 2003, originally filed on January 14, 2003
(the "Original Filing"). This Form 10-Q/A amends and restates in its entirety
our quarterly report on Form 10-Q for the quarterly period ended November 30,
2003.
This Amendment makes certain changes in the form of additional or
supplemental disclosures as follows:
- Part I--Item 1. Financial Information and Notes to
Consolidated Financial Statements, pages 2-16: As described in
Note 2 to the Consolidated Financial Statements, we have
revised our previously reported Consolidated Statements of
Operations for the three months ended November 30, 2003 and
2002 and have made corresponding revisions to the Notes to
Consolidated Financial Statements to make the presentations
required by EITF 02-3. This information was previously shown
in the Consolidated Statements of Operations on a gross basis
in the separately presented line items of "Revenues-liquids
marketing", "Revenues--other" and "Costs and expenses--liquids
marketing", and is now presented on a net basis in a single
line item as "Liquids marketing, net". The revisions had no
effect on previously reported Operating Income or Net Income.
In addition, we have provided additional and supplemental
information regarding (i) the recording (loss) of the minority
interests of all partially owned subsidiaries, (ii) a
description of our Costs and Expenses, (iii) quarterly
distributions, (iv) Heritage's buying and selling of
derivative financial instruments and liquids marketing
contracts, and (v) our adoption of EITF 02-3.
- We have revised our previously reported Consolidated Balance
Sheet as of November 30, 2002 and the related Consolidated
Statements of Operations, Other Comprehensive Income (Loss),
Partners' Capital, and Cash Flows for the three months ended
November 30, 2002 and have made corresponding revisions to the
Notes to Consolidated Financial Statements to reflect the
adoption of the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123 Accounting for
Stock-based Compensation (SFAS 123) effective as of September
1, 2002. During the fourth quarter of 2003, Heritage adopted
the fair value recognition provisions following the modified
prospective method of adoption described in Statement of
Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure (SFAS
148). Following adoption, deferred compensation expense that
is recognized will be the same as that which would have been
recognized had the fair value recognition provisions of SFAS
123 been applied to all awards granted under the Restricted
Unit Plan and the Long Term Incentive Plan granted after its
original effective date. Results from prior years have not
been restated. It was our decision to adopt this preferable
method of accounting for our stock-based employee compensation
plans, as we believe it provides a better measurement of our
compensation costs.
- Part I--Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, pages 19-22: We
have revised to provide additional or supplemental disclosures
about results of operations, the terms of our credit
agreements and our long-term debt and other contractual
obligations, our adoption of EITF 02-3, the recording of the
minority interests of all partially owned subsidiaries and
Heritage's buying and selling of derivative financial
instruments. Additionally, we have retitled "EBITDA" as
"EBITDA, as adjusted" and made clarifications regarding how we
calculate EBITDA, as adjusted. These revisions did not change
how we calculate EBITDA, as adjusted, and it is calculated in
the same manner as we have historically presented such
information.
- Part I--Item 3. Quantitative and Qualitative Disclosure about
Market Risk, pages 23-25: We have provided additional or
supplemental disclosures about Heritage's buying and selling
of derivative financial instruments and liquids marketing
contracts,
This report continues to speak as of the date of the Original Filing,
and we have not updated the disclosure in this report to speak as of a later
date. All information contained in this report and the Original Filing is
subject to updating and supplementing as provided in our periodic reports filed
with the Securities and Exchange Commission.
i
FORM 10-Q/A
HERITAGE PROPANE PARTNERS, L.P.
TABLE OF CONTENTS
Pages
-----
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets -
November 30, 2002 and August 31, 2002............. 1
Consolidated Statements of Operations -
Three months ended November 30, 2002 and 2001..... 2
Consolidated Statements of Comprehensive Income -
Three months ended November 30, 2002 and 2001..... 3
Consolidated Statement of Partners' Capital
Three months ended November 30, 2002.............. 4
Consolidated Statements of Cash Flows
Three months ended November 30, 2002 and 2001..... 5
Notes to Consolidated Financial Statements.............. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............... 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK....................................... 24
ITEM 4. CONTROLS AND PROCEDURES................................. 27
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................ 28
SIGNATURE
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
(unaudited)
November 30, August 31,
2002 2002
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,223 $ 4,596
Marketable securities 2,559 2,559
Accounts receivable, net of allowance for doubtful accounts 57,619 30,898
Inventories 53,267 48,187
Assets from liquids marketing 813 2,301
Prepaid expenses and other 8,451 6,846
------------ ------------
Total current assets 127,932 95,387
PROPERTY, PLANT AND EQUIPMENT, net 402,567 400,044
INVESTMENT IN AFFILIATES 8,072 7,858
GOODWILL, net of amortization prior to adoption of SFAS No. 142 156,258 155,735
INTANGIBLES AND OTHER ASSETS, net 56,491 58,240
------------ ------------
Total assets $ 751,320 $ 717,264
============ ============
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Working capital facility $ 52,800 $ 30,200
Accounts payable 56,903 40,929
Accounts payable to related companies 4,558 5,002
Accrued and other current liabilities 28,505 23,962
Liabilities from liquids marketing 772 1,818
Current maturities of long-term debt 22,628 20,158
------------ ------------
Total current liabilities 166,166 122,069
LONG-TERM DEBT, less current maturities 418,607 420,021
MINORITY INTERESTS 3,528 3,564
------------ ------------
Total liabilities 588,301 545,654
------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Common Unitholders (15,816,347 and 15,815,847 units issued and
outstanding at November 30, 2002 and August 31, 2002,
respectively) 165,175 173,677
Class C Unitholders (1,000,000 units issued and outstanding at
November 30, 2002 and August 31, 2002) - -
General Partner 1,496 1,585
Accumulated other comprehensive loss (3,652) (3,652)
------------ ------------
Total partners' capital 163,019 171,610
------------ ------------
Total liabilities and partners' capital $ 751,320 $ 717,264
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
1
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)
(unaudited)
Three Months
Ended November 30,
----------------------------
2002 2001
------------ ------------
REVENUES:
Retail fuel $ 84,050 $ 83,200
Wholesale fuel 11,348 12,593
Liquids marketing, net 707 (3,325)
Other 17,355 15,490
------------ ------------
Total revenues 113,460 107,958
------------ ------------
COSTS AND EXPENSES:
Cost of products sold 57,020 60,235
Operating expenses 33,392 31,844
Depreciation and amortization 9,266 9,058
Selling, general and administrative 2,856 2,951
------------ ------------
Total costs and expenses 102,534 104,088
------------ ------------
OPERATING INCOME 10,926 3,870
OTHER INCOME (EXPENSE):
Interest expense (9,297) (9,216)
Equity in earnings of affiliates 213 129
Gain on disposal of assets 67 467
Other (278) (98)
------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS 1,631 (4,848)
Minority interests (127) 69
------------ ------------
NET INCOME (LOSS) 1,504 (4,779)
GENERAL PARTNER'S INTEREST IN NET
INCOME (LOSS) 233 168
------------ ------------
LIMITED PARTNERS' INTEREST IN NET INCOME (LOSS) $ 1,271 $ (4,947)
============ ============
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ 0.08 $ (0.32)
============ ============
BASIC AVERAGE NUMBER OF UNITS OUTSTANDING 15,816,347 15,644,580
============ ============
DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ 0.08 $ (0.32)
============ ============
DILUTED AVERAGE NUMBER OF UNITS OUTSTANDING 15,848,698 15,644,580
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
Three Months Ended
November 30,
----------------------
2002 2001
--------- ---------
Net income (loss) $ 1,504 $ (4,779)
Other comprehensive income (loss)
Reclassification adjustment for losses or
gains on derivative instruments included
in net income - (2,755)
Change in value of available-for-sale
securities - 377
--------- ---------
Comprehensive income (loss) $ 1,504 $ (7,157)
========= =========
RECONCILIATION OF ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance, beginning of period $ (3,652) $ (6,541)
Current period reclassification to
earnings - 1,590
Current period change - (2,378)
--------- ---------
Balance, end of period $ (3,652) $ (7,329)
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit data)
(unaudited)
Number of Units Accumulated
---------------------- Other
General Comprehensive
Common Class C Common Class C Partner Loss Total
---------- --------- ---------- ------- ------- --------------- ------------
BALANCE, AUGUST 31, 2002 15,815,847 1,000,000 $ 173,677 $ - $ 1,585 $ (3,652) $ 171,610
Unit distribution - - (10,082) - (322) - (10,404)
Conversion of phantom units 500 - - - - - -
Other - - 309 - - - 309
Net change in accumulated other
comprehensive income per
accompanying statements - - - - - - -
Net income - - 1,271 - 233 - 1,504
---------- --------- ---------- ------- ------- --------------- ------------
BALANCE, NOVEMBER 30, 2002 15,816,347 1,000,000 $ 165,175 $ - $ 1,496 $ (3,652) $ 163,019
========== ========= ========== ======= ======= =============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
November 30,
----------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,504 $ (4,779)
Reconciliation of net income (loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization 9,266 9,058
Provision for loss on accounts receivable 234 350
Gain on disposal of assets (67) (467)
Deferred compensation on restricted units and long-term
incentive plan 309 487
Undistributed earnings of affiliates (213) (146)
Minority interests (36) (213)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (26,887) (17,508)
Inventories (4,938) (13,297)
Assets from liquids marketing 1,488 (347)
Prepaid and other expenses (1,558) 8,801
Intangibles and other assets (64) (182)
Accounts payable 15,830 17,083
Accounts payable to related companies (444) 1,663
Accrued and other current liabilities 4,280 (2,621)
Liabilities from liquids marketing (1,046) 2,206
--------- ---------
Net cash provided by (used in) operating activities (2,342) 88
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (1,603) (7,344)
Capital expenditures (9,652) (9,792)
Proceeds from the sale of assets 1,491 1,116
--------- ---------
Net cash used in investing activities (9,764) (16,020)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 48,750 56,265
Principal payments on debt (25,613) (27,672)
Unit distributions (10,404) (10,059)
Other - (49)
--------- ---------
Net cash provided by financing activities 12,733 18,485
--------- ---------
INCREASE IN CASH AND CASH
EQUIVALENTS 627 2,553
CASH AND CASH EQUIVALENTS, beginning of period 4,596 5,620
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 5,223 $ 8,173
========= =========
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 519 $ 165
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 7,247 $ 7,741
========= =========
The accompanying notes are an integral part of these financial statements
5
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except unit and per unit data)
(unaudited)
1. OPERATIONS AND ORGANIZATION:
The accompanying financial statements should be read in conjunction with the
consolidated financial statements of Heritage Propane Partners, L.P. and
subsidiaries (the "Partnership") as of August 31, 2002, and the notes thereto
included in the Partnership's consolidated financial statements included in Form
10-K as filed with the Securities and Exchange Commission on November 27, 2002.
The accompanying financial statements include only normal recurring accruals and
all adjustments that the Partnership considers necessary for a fair
presentation. Due to the seasonal nature of the Partnership's business, the
results of operations for interim periods are not necessarily indicative of the
results to be expected for a full year.
In order to simplify the Partnership's obligations under the laws of several
jurisdictions in which it conducts business, the Partnership's activities are
conducted through a subsidiary operating partnership, Heritage Operating, L.P.
(the "Operating Partnership"). The Partnership and the Operating Partnership are
collectively referred to in this report as "Heritage." At November 30, 2002, the
Operating Partnership sold propane and propane-related products to more than
600,000 active residential, commercial, industrial, and agricultural customers
in 28 states. Heritage is also a wholesale propane supplier in the southwestern
and southeastern United States and in Canada, the latter through participation
in MP Energy Partnership. MP Energy Partnership is a Canadian partnership, in
which Heritage owns a 60% interest, engaged in supplying Heritage's northern
U.S. locations and lower-margin wholesale distribution. Heritage buys and sells
financial instruments for its own account through its wholly owned subsidiary,
Heritage Energy Resources L.L.C. ("Resources").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Partnership include the accounts of
its subsidiaries, including the Operating Partnership, MP Energy Partnership,
Heritage Service Corp., Guilford Gas Service, Inc., and Resources. A minority
interest liability and minority interest expense is recorded for all partially
owned subsidiaries. Heritage accounts for its 50% partnership interest in
Bi-State Propane, a propane retailer in the states of Nevada and California,
under the equity method. All significant intercompany transactions and accounts
have been eliminated in consolidation. For purposes of maintaining partner
capital accounts, the Partnership Agreement of Heritage Propane Partners, L.P.
specifies that items of income and loss shall be allocated among the partners in
accordance with their percentage interests. Normal allocations according to
percentage interests are made, however, only after giving effect to any priority
income allocations in an amount equal to the incentive distributions that are
allocated 100% to the General Partner. On February 4, 2002, at a special meeting
of the Partnership's Common Unitholders, the Common Unitholders approved the
substitution of U.S. Propane, L.P. ("U.S. Propane") as the successor General
Partner of the Partnership and the Operating Partnership, replacing Heritage
Holdings, Inc. ("Heritage Holdings"). At November 30, 2002, U.S. Propane's
1.0101% general partner interest in the Operating Partnership was accounted for
in the consolidated financial statements as a minority interest. For the three
months ended November 30, 2001, the 1.0101% general partner interest of the
former General Partner, Heritage Holdings, and U.S. Propane's 1.0101% limited
partner interest in the Operating Partnership were accounted for in the
consolidated financial statements as minority interests.
REVENUE RECOGNITION
Sales of propane, propane appliances, parts, and fittings are recognized at the
later of the time of delivery of the product to the customer or the time of sale
or installation. Revenue from service labor is recognized upon completion of the
service and tank rent is recognized ratably over the period it is earned. The
Partnership does not separately charge shipping and handling costs to customers.
6
COSTS AND EXPENSES
Costs of products sold include actual cost of fuel sold adjusted for the effects
of qualifying cash flow hedges, storage fees and inbound freight, and the cost
of appliances, parts, and fittings. Operating expenses include all costs
incurred to provide products to customers, including compensation for operations
personnel, insurance costs, vehicle maintenance, advertising costs, shipping and
handling costs, purchasing costs, and plant operations. Selling, general and
administrative expenses include all corporate expenses and compensation for
corporate personnel.
ACCOUNTS RECEIVABLE
Heritage grants credit to its customers for the purchase of propane and
propane-related products. Accounts receivable consisted of the following:
November 30, August 31,
2002 2002
------------ ------------
Accounts receivable $ 60,129 $ 33,402
Less - allowance for doubtful accounts 2,510 2,504
------------ ------------
Total, net $ 57,619 $ 30,898
============ ============
The activity in the allowance for doubtful accounts consisted of the following:
For the three months ended
----------------------------
November 30, November 30,
2002 2001
------------ ------------
Balance, beginning of the period $ 2,504 $ 3,576
Provision for loss on accounts receivable 234 350
Accounts receivable written off, net of
recoveries (228) (359)
------------ ------------
Balance, end of period $ 2,510 $ 3,567
============ ============
INVENTORIES
Inventories are valued at the lower of cost or market. The cost of fuel
inventories is determined using weighted-average cost of fuel delivered to the
customer service locations and includes storage fees and inbound freight costs,
while the cost of appliances, parts, and fittings is determined by the first-in,
first-out method. Inventories consisted of the following:
November 30, August 31,
2002 2002
------------ ------------
Fuel $ 43,751 $ 38,523
Appliances, parts and fittings 9,516 9,664
------------ ------------
Total inventories $ 53,267 $ 48,187
============ ============
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the November
30, 2002 presentation. These reclassifications have no impact on net income or
net assets.
INCOME (LOSS) PER LIMITED PARTNER UNIT
Basic net income (loss) per limited partner unit is computed by dividing net
income (loss), after considering the General Partner's interest, by the weighted
average number of Common Units outstanding. Diluted net income (loss) per
limited partner unit is computed by dividing net income, after considering the
General Partner's interest, by the weighted average number of Common Units
outstanding and the weighted average number of restricted units
7
("Phantom Units") granted under the Restricted Unit Plan. A reconciliation of
net income (loss) and weighted average units used in computing basic and diluted
net income (loss) per unit is as follows:
Three Months Ended
November 30,
---------------------------
2002 2001
---- ----
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Limited Partners' interest in net income (loss) $ 1,271 $ (4,947)
------------ ------------
Weighted average limited partner units 15,816,347 15,644,580
============ ============
Basic net income (loss) per limited partner unit $ 0.08 $ (0.32)
============ ============
Three Months Ended
November 30,
---------------------------
2002 2001
---- ----
DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT:
Limited partners' interest in net income (loss) $ 1,271 $ (4,947)
============ ============
Weighted average limited partner units 15,816,347 15,644,580
Dilutive effect of phantom units (a) 32,351 -
------------ ------------
Weighted average limited partner units, assuming
dilutive effect of phantom units 15,848,698 15,644,580
============ ============
Diluted net income (loss) per limited partner unit $ 0.08 $ (0.32)
============ ============
(a) For the three months ended November 30, 2001, 41,900 phantom units were
excluded from the calculation of diluted net loss as such units were
anti-dilutive due to the net loss for the period.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership Agreement requires that the Partnership will distribute all of
its Available Cash to its Unitholders and its General Partner within 45 days
following the end of each fiscal quarter, subject to the payment of incentive
distributions to the holders of Incentive Distribution Rights to the extent that
certain target levels of cash distributions are achieved. The term Available
Cash generally means, with respect to any fiscal quarter of the Partnership, all
cash on hand at the end of such quarter, plus working capital borrowings after
the end of the quarter, less reserves established by the General Partner in its
sole discretion to provide for the proper conduct of the Partnership's business,
to comply with applicable laws or any debt instrument or other agreement, or to
provide funds for future distributions to partners with respect to any one or
more of the next four quarters. Available Cash is more fully defined in the
Partnership Agreement.
Prior to the Special Meeting on February 4, 2002, distributions by the
Partnership in an amount equal to 100% of Available Cash were made 97% to the
Common Unitholders, 1.0101% to U.S. Propane for its limited partner interest in
the Operating Partnership, and 1.9899% to the former General Partner, Heritage
Holdings. After the approval by the Common Unitholders of the substitution of
U.S. Propane as the General Partner, distributions by the Partnership in an
amount equal to 100% of Available Cash will generally be made 98% to the Common
Unitholders and 2% to the General Partner, subject to the payment of incentive
distributions to the holders of Incentive Distribution Rights to the extent that
certain target levels of cash distributions are achieved.
On October 15, 2002, a quarterly distribution of $0.6375 per unit, or $2.55
annually, was paid to Unitholders of record at the close of business on October
8, 2002 and to the General Partner for its general partner interest in the
Partnership, its minority interest, and its Incentive Distribution Rights. On
December 18, 2002, the Partnership declared a cash distribution for the first
quarter ended November 30, 2002 of $0.6375 per unit, or $2.55 per unit annually,
payable on January 14, 2003 to Unitholders of record at the close of business on
December 30, 2002. These quarterly distributions include incentive distributions
payable to the General Partner to the extent the quarterly distribution exceeds
$0.55 per unit. The total amount of distributions for the first quarter ended
November 30, 2002 on Common Units, the general partner interests and the
Incentive Distribution Rights totaled $10.1 million, $0.2 million and $0.2
million, respectively. All such distributions were made from Available Cash from
Operating Surplus.
8
STOCK BASED COMPENSATION PLANS
During the fourth quarter of 2003, Heritage adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123 Accounting for
Stock-based Compensation (SFAS 123) effective as of September 1, 2002. Heritage
adopted the fair value recognition provisions following the modified prospective
method of adoption described in Statement of Financial Accounting Standards No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure (SFAS
148). Following adoption, deferred compensation expense that is recognized in
the financial statements will be the same as that which would have been
recognized had the fair value recognition provisions of SFAS 123 been applied to
all awards under the Restricted Unit Plan and the Long Term Incentive Plan
granted after October 1, 1995.
RESTRICTED UNIT PLAN
The General Partner has adopted the Amended and Restated Restricted Unit Plan
dated August 10, 2000, amended February 4, 2002 as the Second Amended and
Restated Restricted Unit Plan (the "Restricted Unit Plan"), for certain
directors and key employees of the General Partner and its affiliates. The
Restricted Unit Plan covers rights to acquire 146,000 Common Units. The right to
acquire the Common Units under the Restricted Unit Plan, including any
forfeiture or lapse of rights is available for grant to key employees on such
terms and conditions (including vesting conditions) as the Compensation
Committee of the General Partner shall determine. Each director shall
automatically receive a Director's grant with respect to 500 Common Units on
each September 1 that such person continues as a director. Newly elected
directors are also entitled to receive a grant with respect to 2,000 Common
Units upon election or appointment to the Board. Directors who are employees of
U.S. Propane, TECO, Atmos Energy, Piedmont Natural Gas or AGL Resources or their
affiliates are not entitled to receive a Director's grant of Common Units.
Generally, the rights to acquire the Common Units will vest upon the later to
occur of (i) the three-year anniversary of the grant date, or on such terms as
the Compensation Committee may establish, which may include the achievement of
performance objectives. In the event of a "change of control" (as defined in the
Restricted Unit Plan), all rights to acquire Common Units pursuant to the
Restricted Unit Plan will immediately vest.
The issuance of the Common Units pursuant to the Restricted Unit Plan is
intended to serve as a means of incentive compensation for performance and not
primarily as an opportunity to participate in the equity appreciation in respect
of the Common Units. Therefore, no consideration will be payable by the plan
participants upon vesting and issuance of the Common Units. As of November 30,
2002, 41,400 restricted units were outstanding and 15,800 were available for
grants to non-employee directors and key employees.
Deferred compensation expense of $81 was recognized for the three months ended
November 30, 2002. For the three months ended November 30, 2001, Heritage
followed the disclosure only provisions of SFAS 123, as amended by SFAS 148 and
APB Opinion No. 25 Accounting for Stock Issued to Employees (APB 25). Under APB
25, the Restricted Unit Plan was classified as a variable plan so that an
estimate of compensation was required based on a combination of the fair market
value of the Common Units as of the end of the reporting period and an
assessment of meeting certain performance criteria. Deferred compensation
expense of $98 was recognized for three months ended November 30, 2001 on the
units based on the fair value of such units at the end of the period.
LONG-TERM INCENTIVE PLAN
Effective September 1, 2000, Heritage adopted a long-term incentive plan whereby
Common Units will be awarded based on achieving certain targeted levels of
Distributed Cash (as defined in the Long Term Incentive Plan) per unit. Awards
under the program will be made starting in 2003 based upon the average of the
prior three years' Distributed Cash per unit. A minimum of 250,000 Common Units
and if certain targeted levels are achieved, a maximum of 500,000 Common Units
will be awarded.
Deferred compensation expense on this plan of $228 was recognized for the three
months ended November 30, 2002. For the three months ended November 30, 2001,
Heritage followed the disclosure only provisions of SFAS 123, as amended by SFAS
148, and APB 25. Under APB 25, the Long Term Incentive Plan was classified as a
variable plan so that an estimate of compensation was required based on a
combination of the fair market value of the Common Units as of the end of the
reporting period and an assessment of meeting certain performance criteria.
Deferred compensation expense on this plan of $389 was recognized for the three
months ended November 30, 2001 based on the fair value of such units at the end
of the period. The expense was determined based on the Partnership achieving the
minimum award available under the plan.
9
SFAS 123 requires that significant assumptions be used during the year to
estimate the fair value, which includes the risk-free interest rate used, the
expected life of the grants under each of the plans, the expected volatility,
and the expected distributions on each of the grants. Heritage assumed a
weighted average risk free interest rate of 5.72% for the three months ended
November 30, 2002 and 5.90% for the three months ended November 20, 2001 in
estimating the present value of the future cash flows of the distributions
during the vesting period on the measurement date of each grant. Annual average
cash distributions at the grant date were estimated to be $2.39 for the three
months ended November 30, 2002, and $2.47 for the three months ended November
30, 2001. The expected life of each grant is assumed to be the minimum vesting
period under certain performance criteria of each grant. The following table
illustrates the effect on limited partners' interest in net income (loss) and
the basic and diluted net income (loss) per limited partner unit if Heritage had
applied the fair value recognition provisions of SFAS 123 to the Restricted Unit
Plan and the Long-Term Incentive Plan for all periods presented.
NET INCOME (LOSS) PER LIMITED
PARTNER UNIT: November 30,
2002 2001
------------ ------------
Limited partners' interest in net income (loss) $ 1,271 $ (4,947)
Add: Deferred compensation expense net of General Partner's and
minority interest included in limited partners' interest in net
income (loss) 304 477
Deduct: Deferred compensation expense net of General Partner's
and minority interest determined under the fair value based
method (304) (292)
------------ ------------
Pro forma limited partners' interest in net income (loss) $ 1,271 $ (4,762)
============ ============
Weighted average limited partner units 15,816,347 15,644,580
============ ============
Basic net income (loss) per limited partner unit as reported $ 0.08 $ (0.32)
============ ============
Basic net income (loss) per limited partner unit pro forma $ 0.08 $ (0.30)
============ ============
Weighted average limited partner units, assuming dilutive effect
of Phantom Units 15,848,698 15,644,580
============ ============
Diluted net income (loss) per limited partner unit as reported
$ 0.08 $ (0.32)
============ ============
Diluted net income (loss) per limited partner unit proforma $ 0.08 $ (0.30)
============ ============
As stated above, during the fourth quarter of 2003, Heritage adopted the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123 Accounting for Stock-based Compensation (SFAS 123) effective as of September
1, 2002. Accordingly, the following information compares the originally reported
consolidated statement of operations, reclassified for the adoption of EITF 02-3
for the three months ended November 30, 2002 and as adjusted for the adoption of
SFAS 123:
As adjusted
for the
As originally adoption of
reported SFAS 123
REVENUES:
Retail fuel $ 84,050 $ 84,050
Wholesale fuel 11,348 11,348
Liquids marketing, net 707 707
Other 17,355 17,355
------------- ------------
Total revenues 113,460 113,460
------------- ------------
COSTS AND EXPENSES:
Cost of products sold 57,020 57,020
Operating expenses 33,425 33,392
Depreciation and amortization 9,266 9,266
Selling, general and administrative 3,192 2,856
------------- ------------
Total costs and expenses 102,903 102,534
------------- ------------
OPERATING INCOME 10,557 10,926
10
OTHER INCOME (EXPENSE):
Interest expense (9,297) (9,297)
Equity in earnings of affiliates 213 213
Gain on disposal of assets 67 67
Other (278) (278)
------------- ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS 1,262 1,631
Minority interests (123) (127)
------------- ------------
NET INCOME (LOSS) 1,139 1,504
GENERAL PARTNER'S INTEREST IN NET INCOME (LOSS)
229 233
------------- ------------
LIMITED PARTNERS' INTEREST IN NET INCOME (LOSS) $ 910 $ 1,271
============= ============
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ 0.06 $ 0.08
============= ============
BASIC AVERAGE NUMBER OF UNITS OUTSTANDING 15,816,347 15,816,347
============= ============
DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ 0.06 $ 0.08
============= ============
DILUTED AVERAGE NUMBER OF UNITS OUTSTANDING 15,848,698 15,848,698
============= ============
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Heritage applies Financial Accounting Standards Board ("FASB") Statement No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
SFAS 133 requires that all derivatives be recognized in the balance sheet as
either an asset or liability measured at fair value. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statement of operations. During the three
months ended November 30, 2001, Heritage reclassified into earnings through cost
of products sold, a loss of $1,590 that was previously reported in accumulated
other comprehensive loss. There were no such financial instruments outstanding
as of November 30, 2002.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement
Obligations (SFAS 143). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. Heritage adopted the provisions of SFAS
143 on September 1, 2002. The adoption of SFAS 143 did not have a material
impact on the Partnership's consolidated financial position or results of
operations.
In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (SFAS 121), and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS 144 retains the fundamental
provisions of SFAS 121 for recognition and measurement of the impairment of
long-lived assets to be held and used, and measurement of long-lived assets to
be disposed of by sale. Heritage adopted the provisions of SFAS 144 on September
1, 2002. The adoption of SFAS 144 did not have a material impact on the
Partnership's consolidated financial position or results of operations.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
(SFAS 145). SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that Statement, FASB Statement
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS
145 also rescinds FASB
11
Statement No. 44, Accounting for Intangible Assets of Motor Carriers, amends
FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions and also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. Heritage
adopted the provisions of SFAS 145 on September 1, 2002. The adoption did not
have a material impact on the Partnership's consolidated financial position or
results of operations.
In October 2002, the EITF of the FASB discussed EITF Issue No. 02-3, Issues
Related to Accounting for Contracts Involved in Energy Trading and Risk
Management Activities (EITF 02-3). The EITF reached a consensus to rescind EITF
Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk
Management Activities (EITF 98-10), the impact of which is to preclude
mark-to-market accounting for energy trading contracts not within the scope of
SFAS 133. The EITF also reached a consensus that gains and losses on derivative
instruments within the scope of SFAS 133 should be shown net in the statement of
operations if the derivative instruments are held for trading purposes and what
the disclosure requirements should be. This consensus was effective for
financial statements issued for periods ending after July 15, 2002. Heritage
adopted EITF 02-3 as of August 31, 2002, and upon application reclassified
comparative financial statements for prior periods to conform to the consensus.
This adoption did not have a material impact on Heritage's financial position or
results of operations. The consensus regarding the rescission of EITF 98-10 is
applicable for fiscal periods beginning after December 15, 2002. Energy trading
contracts not within the scope of SFAS 133 purchased after October 25, 2002, but
prior to the implementation of the consensus are not permitted to apply
mark-to-market accounting. The adoption of EITF 02-3 as it relates to the
rescission of EITF 98-10 is not expected to have a material impact on Heritage's
financial position or results of operations.
The adoption of EITF 02-3 requires that realized and unrealized gains and losses
be shown net for all periods presented. The following table summarizes the
amounts that have been reclassified in the statement of operations:
For the Three Months Ended
November 30,
2002 2001
---------- ----------
Revenue - liquids marketing $ 60,730 $ 50,820
Costs and expenses - liquids marketing (60,023) (54,145)
---------- ----------
Net, as reclassified $ 707 $ (3,325)
========== ==========
In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. Heritage adopted the provisions of SFAS 146 effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption did not have a material impact on the Partnership's consolidated
financial position or results of operations.
In November 2002, the FASB issued Financial Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 expands the existing
disclosure requirements for guarantees and requires that companies recognize a
liability for guarantees issued after December 31, 2002. The implementation of
FIN 45 did not have a significant impact on Heritage's financial position or
results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments embedded
in other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS 133. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. Management does not believe that the adoption will have a
material impact on the Partnership's consolidated financial position or results
of operations.
12
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within the scope
of SFAS 150 as a liability (or an asset in some circumstances). This statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. Management does not believe that the adoption
will have a material impact on the Partnership's consolidated financial position
or results of operations.
3. WORKING CAPITAL FACILITY AND LONG-TERM DEBT:
Effective July 16, 2001, the Operating Partnership entered into the Fifth
Amendment to the First Amended and Restated Credit Agreement. The terms of the
Agreement as amended are as follows:
A $65,000 Senior Revolving Working Capital Facility is available
through June 30, 2004. The interest rate and interest payment dates
vary depending on the terms Heritage agrees to when the money is
borrowed. Heritage must be free of all working capital borrowings for
30 consecutive days each fiscal year. The weighted average interest
rate was 3.255% for the amount outstanding at November 30, 2002. The
maximum commitment fee payable on the unused portion of the facility is
0.50%. All receivables, contracts, equipment, inventory, general
intangibles, cash concentration accounts, and the capital stock of
Heritage's subsidiaries secure the Senior Revolving Working Capital
Facility. As of November 30, 2002, the Senior Revolving Working Capital
Facility had a balance outstanding of $52,800.
A $50,000 Senior Revolving Acquisition Facility is available through
December 31, 2003, at which time the outstanding amount must be paid in
ten equal quarterly installments beginning March 31, 2004. The interest
rate and interest payment dates vary depending on the terms Heritage
agrees to when the money is borrowed. The weighted average interest
rate was 3.255% for the amount outstanding at November 30, 2002. The
maximum commitment fee payable on the unused portion of the facility is
0.50%. All receivables, contracts, equipment, inventory, general
intangibles, cash concentration accounts, and the capital stock of
Heritage's subsidiaries secure the Senior Revolving Acquisition
Facility. As of November 30, 2002, the Senior Revolving Acquisition
Facility had a balance outstanding of $15,300.
4. REPORTABLE SEGMENTS:
The Partnership's financial statements reflect four reportable segments: the
domestic retail operations of Heritage, the domestic wholesale operations of
Heritage, the foreign wholesale operations of MP Energy Partnership, and the
liquids marketing activities of Resources. Heritage's reportable domestic and
wholesale fuel segments are strategic business units that sell products and
services to retail and wholesale customers. Intersegment sales by the foreign
wholesale segment to the domestic segment are priced in accordance with the
partnership agreement of MP Energy Partnership. Heritage manages these segments
separately as each segment involves different distribution, sale, and marketing
strategies. Heritage evaluates the performance of its operating segments based
on operating income, exclusive of selling, general, and administrative expenses
of $2,856 and $2,951 for the three months ended November 30, 2002 and 2001,
respectively. Selling, general and administrative expenses, interest expense and
other expenses are not allocated by segment. Investment in affiliates and equity
in earnings (losses) of affiliates relates primarily to Heritage's investment in
Bi-State Propane (see Note 6), and is part of the domestic retail fuel segment.
The following table presents the unaudited financial information by segment for
the following periods:
13
For the Three Months ended
November 30,
---------------------------
2002 2001
----------- -----------
Gallons:
Domestic retail fuel 76,721 74,790
Domestic wholesale fuel 4,890 4,997
Foreign wholesale fuel
Affiliated 20,380 15,071
Unaffiliated 17,195 18,264
Elimination (20,380) (15,071)
----------- -----------
Total 98,806 98,051
=========== ===========
Revenues:
Domestic retail fuel $ 84,050 $ 83,200
Domestic wholesale fuel 2,411 3,071
Foreign wholesale fuel
Affiliated 10,408 8,940
Unaffiliated 8,937 9,522
Elimination (10,408) (8,940)
Liquids marketing, net 707 (3,325)
Other 17,355 15,490
----------- -----------
Total $ 113,460 $ 107,958
=========== ===========
Operating Income (Loss):
Domestic retail $ 13,437 $ 10,523
Domestic wholesale fuel (484) (635)
Foreign wholesale fuel
Affiliated 110 -
Unaffiliated 506 338
Elimination (110) -
Liquids marketing 323 (3,405)
----------- -----------
Total $ 13,782 $ 6,821
=========== ===========
Gain on Disposal of Assets:
Domestic retail fuel $ 80 $ 216
Domestic wholesale fuel (13) 251
----------- -----------
Total $ 67 $ 467
=========== ===========
Minority Interest Expense:
Corporate $ 16 $ (99)
Foreign wholesale 111 30
----------- -----------
Total $ 127 $ (69)
=========== ===========
Depreciation and amortization:
Domestic retail $ 9,132 $ 8,989
Domestic wholesale 129 64
Foreign wholesale 5 5
----------- -----------
Total $ 9,266 $ 9,058
=========== ===========
14
As of As of
November 30, August 31,
2002 2002
-------------- ------------
Total Assets:
Domestic retail $ 694,665 $ 667,978
Domestic wholesale 14,891 14,372
Foreign wholesale 10,135 10,564
Liquids Marketing 16,169 6,919
Corporate 15,460 17,431
------------ ------------
Total $ 751,320 $ 717,264
============ ============
Additions to property, plant and
equipment including acquisitions:
Domestic retail fuel $ 10,995 $ 39,904
Domestic wholesale 38 -
Foreign wholesale - 46
Corporate 143 1,441
------------ ------------
Total $ 11,176 $ 41,391
============ ============
Corporate assets include vehicles, office equipment and computer software for
the use of administrative personnel. These assets are not allocated to segments.
Corporate minority interest expense relates to U.S. Propane's general partner
interest in the Operating Partnership.
5. SUBSEQUENT EVENT:
On January 2, 2003, the Partnership completed the acquisition of the propane
assets of V-1 Oil Co. ("V-1") of Idaho Falls, Idaho. Under the terms of the
acquisition, the Operating Partnership acquired all of the propane distribution
assets of V-1 for a total consideration of approximately $32.3 million, after
adjustments. The acquisition price was payable $17.3 million in cash, financed
by the Acquisition Facility, and by the issuance of 551,456 Common Units of the
Registrant valued at $15.0 million. The exchange price for the Common Units was
$27.20, determined under a formula based upon the average closing price of the
Registrant's Common Units for the twenty (20) consecutive trading days
commencing on the tenth trading day prior to the public announcement of the
transaction on December 10, 2002.
6. SIGNIFICANT INVESTEE:
Heritage holds a 50% interest in Bi-State Propane. Heritage accounts for this
50% interest in Bi-State Propane under the equity method. Heritage's investment
in Bi-State Propane totaled $7,691 and $7,485 at November 30, 2002 and August
31, 2002 respectively. Heritage did not receive any distributions from Bi-State
Propane for the three months ended November 30, 2002 or 2001. On March 1, 2002,
the Operating Partnership sold certain assets acquired in the ProFlame
acquisition to Bi-State Propane for approximately $9,730 plus working capital.
This sale was made pursuant to the provision in the Bi-State Propane partnership
agreement that requires each partner to offer to sell any newly acquired
businesses within Bi-State Propane's area of operations to Bi-State Propane. In
conjunction with this sale, the Operating Partnership guaranteed $5 million of
debt incurred by Bi-State Propane to a financial institution. Based on the
current financial condition of Bi-State Propane, management considers the
likelihood of Heritage incurring a liability resulting from the guarantee to be
remote. Heritage has not recorded a liability on the balance sheets as of
November 30, 2002 or August 31, 2002 for this guarantee because the guarantee
was in effect prior to the issuance of FIN 45, and there have been no amendments
to the original guarantee. Bi-State Propane's financial position is summarized
below:
15
November 30, August 31,
2002 2002
------------ ----------
Current assets $ 3,776 $ 3,321
Noncurrent assets 22,701 23,105
------------ ----------
$ 26,477 $ 26,426
============ ==========
Current liabilities $ 2,974 $ 3,344
Long-term debt 9,450 9,450
Partners' capital:
Heritage 7,691 7,485
Other partner 6,362 6,147
------------ ----------
$ 26,477 $ 26,426
============ ==========
Bi-State Propane's results of operations for the three months ended November 30,
2002 and 2001, respectively are summarized below:
For the Three Months Ended
November 30,
--------------------------
2002 2001
----------- ---------
Revenues $ 4,641 $ 2,860
Gross profit 2,285 1,455
Net income:
Heritage 206 126
Other Partner 215 143
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Heritage Propane Partners, L.P. (the "Registrant" or "Partnership"), is a
Delaware limited partnership. The Partnership's common units are listed on the
New York Stock Exchange. The Partnership's business activities are primarily
conducted through its subsidiary, Heritage Operating, L.P. (the "Operating
Partnership"), a Delaware limited partnership. The Partnership is the sole
limited partner of the Operating Partnership, with a 98.9899% limited partner
interest. The Partnership and the Operating Partnership are sometimes referred
to collectively in this report as "Heritage."
The following is a discussion of the historical financial condition and results
of operations of the Partnership and its subsidiaries, and should be read in
conjunction with the Partnership's historical consolidated financial statements
and accompanying notes thereto included elsewhere in this Quarterly Report on
Form 10-Q.
FORWARD-LOOKING STATEMENTS
CERTAIN MATTERS DISCUSSED IN THIS REPORT, EXCLUDING HISTORICAL INFORMATION, AS
WELL AS SOME STATEMENTS BY HERITAGE IN PERIODIC PRESS RELEASES AND SOME ORAL
STATEMENTS OF HERITAGE OFFICIALS DURING PRESENTATIONS ABOUT THE PARTNERSHIP,
INCLUDE CERTAIN "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934. STATEMENTS USING WORDS SUCH AS "ANTICIPATE," "BELIEVE," "INTEND,"
"PROJECT," "PLAN," "CONTINUE," "ESTIMATE," "FORECAST," "MAY," "WILL," OR SIMILAR
EXPRESSIONS HELP IDENTIFY FORWARD-LOOKING STATEMENTS. ALTHOUGH HERITAGE BELIEVES
SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS AND CURRENT
EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS, NO ASSURANCE CAN BE GIVEN THAT
EVERY OBJECTIVE WILL BE REACHED.
16
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM ANY RESULTS PROJECTED, FORECASTED,
ESTIMATED, OR EXPRESSED IN FORWARD-LOOKING STATEMENTS SINCE MANY OF THE FACTORS
THAT DETERMINE THESE RESULTS ARE DIFFICULT TO PREDICT AND ARE BEYOND
MANAGEMENT'S CONTROL. SUCH FACTORS INCLUDE:
- CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE UNITED STATES OF
AMERICA AS WELL AS CHANGES IN GENERAL ECONOMIC CONDITIONS AND
CURRENCIES IN FOREIGN COUNTRIES;
- WEATHER CONDITIONS THAT VARY SIGNIFICANTLY FROM HISTORICALLY
NORMAL CONDITIONS WHICH MAY ADVERSELY AFFECT THE DEMAND FOR
PROPANE AND HERITAGE'S FINANCIAL CONDITION;
- HERITAGE'S SUCCESS IN HEDGING ITS PRODUCT SUPPLY POSITIONS;
- THE EFFECTIVENESS OF RISK-MANAGEMENT POLICIES AND PROCEDURES
AND THE ABILITY OF HERITAGE'S LIQUIDS MARKETING COUNTER
PARTIES TO SATISFY THEIR FINANCIAL COMMITMENTS;
- THE GENERAL LEVEL OF PETROLEUM PRODUCT DEMAND AND THE
AVAILABILITY AND PRICE OF PROPANE SUPPLIES;
- SUDDEN AND SHARP PROPANE PRICE INCREASES AND MARKET VOLATILITY
MAY ADVERSELY AFFECT HERITAGE'S OPERATING RESULTS;
- THE POLITICAL AND ECONOMIC STABILITY OF PETROLEUM PRODUCING
NATIONS;
- HERITAGE'S ABILITY TO CONDUCT BUSINESS IN FOREIGN COUNTRIES;
- HERITAGE'S ABILITY TO OBTAIN ADEQUATE SUPPLIES OF PROPANE FOR
RETAIL SALE IN THE EVENT OF AN INTERRUPTION IN SUPPLY OR
TRANSPORTATION;
- ENERGY PRICES GENERALLY AND SPECIFICALLY, THE PRICE OF PROPANE
TO THE CONSUMER COMPARED TO THE PRICE OF ALTERNATIVE AND
COMPETING FUELS;
- THE MATURITY OF THE PROPANE INDUSTRY AND COMPETITION FROM
OTHER PROPANE DISTRIBUTORS AND OTHER ENERGY SOURCES;
- ENERGY EFFICIENCIES AND TECHNOLOGICAL TRENDS MAY AFFECT DEMAND
FOR PROPANE;
- THE AVAILABILITY AND COST OF CAPITAL;
- HERITAGE'S ABILITY TO ACCESS CERTAIN CAPITAL SOURCES MAY
REQUIRE IT TO OBTAIN A DEBT RATING;
- CHANGES IN LAWS AND REGULATIONS TO WHICH HERITAGE IS SUBJECT,
INCLUDING TAX, ENVIRONMENTAL, TRANSPORTATION, AND EMPLOYMENT
REGULATIONS;
- OPERATING RISKS INCIDENTAL TO TRANSPORTING, STORING, AND
DISTRIBUTING PROPANE, INCLUDING LITIGATION RISKS WHICH MAY NOT
BE COVERED BY INSURANCE;
- HERITAGE'S ABILITY TO GENERATE AVAILABLE CASH FOR
DISTRIBUTIONS TO UNITHOLDERS;
- THE COSTS AND EFFECTS OF LEGAL AND ADMINISTRATIVE PROCEEDINGS
AGAINST HERITAGE OR WHICH MAY BE BROUGHT AGAINST IT;
- HERITAGE'S ABILITY TO SUSTAIN HISTORICAL LEVELS OF INTERNAL
GROWTH;
- HERITAGE'S ABILITY TO CONTINUE TO LOCATE AND ACQUIRE OTHER
PROPANE COMPANIES AT PURCHASE PRICES THAT ARE ACCRETIVE TO ITS
FINANCIAL RESULTS;
17
- CASH DISTRIBUTIONS TO UNITHOLDERS ARE NOT GUARANTEED AND MAY
FLUCTUATE WITH HERITAGE'S PERFORMANCE AND OTHER EXTERNAL
FACTORS, INCLUDING RESTRICTIONS IN HERITAGE'S DEBT AGREEMENTS;
AND
- HERITAGE MAY SELL ADDITIONAL LIMITED PARTNER INTERESTS, THUS
DILUTING THE EXISTING INTEREST OF UNITHOLDERS.
GENERAL
The retail propane business is a margin-based business in which gross profits
depend on the excess of sales price over propane supply cost. The market price
of propane is often subject to volatile changes as a result of supply or other
market conditions over which Heritage will have no control. Product supply
contracts are one-year agreements subject to annual renewal and generally permit
suppliers to charge posted prices (plus transportation costs) at the time of
delivery or the current prices established at major delivery points. Since rapid
increases in the wholesale cost of propane may not be immediately passed on to
retail customers, such increases could reduce gross profits. Heritage generally
has attempted to reduce price risk by purchasing propane on a short-term basis.
Heritage has on occasion purchased significant volumes of propane during periods
of low demand, which generally occur during the summer months, at the then
current market price, for storage both at its customer service locations and in
major storage facilities for future resale.
The retail propane business of Heritage consists principally of transporting
propane purchased in the contract and spot markets, primarily from major fuel
suppliers, to its customer service locations and then to tanks located on the
customers' premises, as well as to portable propane cylinders. In the
residential and commercial markets, propane is primarily used for space heating,
water heating, and cooking. In the agricultural market, propane is primarily
used for crop drying, tobacco curing, poultry brooding, and weed control. In
addition, propane is used for certain industrial applications, including use as
an engine fuel that burns in internal combustion engines that power vehicles and
forklifts and as a heating source in manufacturing and mining processes.
Since its formation in 1989, Heritage has grown primarily through acquisitions
of retail propane operations and, to a lesser extent, through internal growth.
Since its inception through August 31, 2002, Heritage completed 91 acquisitions
for an aggregate purchase price approximating $633 million, including the
transfer by U.S. Propane of its propane operations to Heritage for $181.4
million, plus working capital of approximately $12.9 million. During the three
months ended November 30, 2002, Heritage completed two acquisitions for an
aggregate purchase price of $2.5 million, which includes $1.6 million in cash
and $0.9 million in notes payable on non-compete agreements and liabilities
assumed. Subsequent to November 30, 2002, Heritage purchased the propane assets
of V-1 Oil Co, which was one of the largest privately held propane marketers in
the northwest. Management believes that Heritage is the fourth largest retail
marketer of propane in the United States, based on retail gallons sold. Heritage
now serves more than 650,000 customers from nearly 300 customer service
locations in 29 states, following the acquisition of the propane assets of V-1.
Heritage's propane distribution business is largely seasonal and dependent upon
weather conditions in its service areas. Propane sales to residential and
commercial customers are affected by winter heating season requirements.
Historically, approximately two-thirds of Heritage's retail propane volume and
in excess of 80% of Heritage's EBITDA, as adjusted is attributable to sales
during the six-month peak-heating season of October through March. This
generally results in higher operating revenues and net income during the period
from October through March of each year and lower operating revenues and either
net losses or lower net income during the period from April through September of
each year. Consequently, sales and operating profits are concentrated in the
first and second fiscal quarters, however, cash flow from operations is
generally greatest during the second and third fiscal quarters when customers
pay for propane purchased during the six-month peak-heating season. Sales to
industrial and agricultural customers are much less weather sensitive.
A substantial portion of Heritage's propane is used in the heating-sensitive
residential and commercial markets causing the temperatures realized in
Heritage's areas of operations, particularly during the six-month peak-heating
season, to have a significant effect on its financial performance. In any given
area, sustained warmer-than-normal temperatures will tend to result in reduced
propane use, while sustained colder-than-normal temperatures will tend to result
in greater propane use. Heritage uses information on normal temperatures in
understanding how temperatures that are colder or warmer than normal affect
historical results of operations and in preparing forecasts of future
operations.
18
Gross profit margins are not only affected by weather patterns, but also vary
according to customer mix. For example, sales to residential customers generate
higher margins than sales to certain other customer groups, such as commercial
or agricultural customers. Wholesale margins are substantially lower than retail
margins. In addition, gross profit margins vary by geographical region.
Accordingly, a change in customer or geographic mix can affect gross profit
without necessarily affecting total revenues.
Amounts discussed below reflect 100% of the results of MP Energy Partnership. MP
Energy Partnership is a general partnership in which Heritage owns a 60%
interest. Because MP Energy Partnership is primarily engaged in lower-margin
wholesale distribution, its contribution to Heritage's net income is not
significant and the minority interest of this partnership is excluded from the
EBITDA, as adjusted calculation.
As stated above, during the fourth quarter of 2003, Heritage adopted the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123 Accounting for Stock-based Compensation (SFAS 123) effective as of September
1, 2002. Accordingly, the following information compares the originally reported
consolidated statement of operations, reclassified for the adoption of EITF 02-3
for the three months ended November 30, 2002 and as adjusted for the adoption of
SFAS 123:
As adjusted for
As Originally the adoption of
Reported SFAS 123
REVENUES:
Retail fuel $ 84,050 $ 84,050
Wholesale fuel 11,348 11,348
Liquids marketing, net 707 707
Other 17,355 17,355
----------- -----------
Total revenues 113,460 113,460
----------- -----------
COSTS AND EXPENSES:
Cost of products sold 57,020 57,020
Operating expenses 33,425 33,392
Depreciation and amortization 9,266 9,266
Selling, general and administrative 3,192 2,856
----------- -----------
Total costs and expenses 102,903 102,534
----------- -----------
OPERATING INCOME 10,557 10,926
OTHER INCOME (EXPENSE):
Interest expense (9,297) (9,297)
Equity in earnings of affiliates 213 213
Gain on disposal of assets 67 67
Other (278) (278)
----------- -----------
INCOME (LOSS) BEFORE MINORITY INTERESTS 1,262 1,631
Minority interests (123) (127)
----------- -----------
NET INCOME (LOSS) 1,139 1,504
GENERAL PARTNER'S INTEREST IN NET INCOME (LOSS) 229 233
----------- -----------
LIMITED PARTNERS' INTEREST IN NET INCOME (LOSS) $ 910 $ 1,271
=========== ===========
BASIC NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ 0.06 $ 0.08
=========== ===========
BASIC AVERAGE NUMBER OF UNITS OUTSTANDING 15,816,347 15,816,347
=========== ===========
DILUTED NET INCOME (LOSS) PER LIMITED PARTNER UNIT $ 0.06 $ 0.08
=========== ===========
DILUTED AVERAGE NUMBER OF UNITS OUTSTANDING 15,848,698 15,848,698
=========== ===========
19
THREE MONTHS ENDED NOVEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED NOVEMBER
30, 2001
Volume. Total retail gallons sold in the three months ended November
30, 2002 were 76.7 million, an increase of 1.9 million over the 74.8 million
gallons sold in the three months ended November 30, 2001. Of the 1.9 million
gallon increase in volume, 1.6 million gallons reflects the benefits of the
volume added through acquisitions and 0.3 million gallons from more favorable
weather conditions in some of Heritage's areas of operations, offset by warmer
than normal weather conditions in other areas of operations. Heritage also sold
approximately 22.1 million wholesale gallons in this first quarter of fiscal
2003, a decrease of 1.2 million gallons from the 23.3 million wholesale gallons
sold in the first quarter of fiscal 2002. U.S. wholesale gallons decreased 0.1
million gallons to 4.9 million gallons and the foreign volumes of MP Energy
Partnership decreased 1.1 million gallons to 17.2 million for the first quarter.
Revenues. Total revenues for the three months ended November 30, 2002
were $113.5 million, an increase of $5.5 million, as compared to $108.0 million
in the three months ended November 30, 2001. The current period's domestic
retail propane revenues increased $0.8 million to $84.0 million versus the prior
year's revenues of $83.2 million due to a $0.3 million increase in retail
volumes sold, a $1.8 million increase due to acquisitions offset by $1.3 million
decrease due to slightly lower selling prices in the current period. The U.S.
wholesale revenues decreased to $2.5 million, as compared to $3.1 million for
the period ended November 30, 2001, primarily due to lower selling prices.
Foreign revenues decreased $0.6 million for the three months ended November 30,
2002 to $8.9 million as compared to $9.5 million for the three months ended
November 30, 2001, as a result of decreased volumes described above. The net
liquids marketing activity conducted through Resources was $0.7 million versus
the prior year's activity of $(3.3) million due to more favorable movement in
product prices in the current fiscal period. Other domestic revenues increased
by $1.9 million, to $17.4 million as compared to $15.5 million in the prior year
as a result of acquisitions.
Cost of Products Sold. Total cost of products sold decreased to $57.0
million for the three months ended November 30, 2002 as compared to $60.2
million for the three months ended November 30, 2001. The current period's
domestic retail cost of sales decreased $2.8 million to $41.6 million as
compared to $44.4 million in the prior year of which, $3.8 million was due to a
lower cost of fuel per gallon this period offset by $1.0 million increase due to
slightly increased volumes compared to the same period last fiscal year. The
U.S. wholesale cost of sales decreased to $2.1 million as compared to $2.9
million for the period ended November 30, 2001, of which $0.7 million was due to
lower wholesale fuel costs and $0.1 million was due to slightly lower volumes
than those incurred during the same period last fiscal year. Foreign cost of
sales decreased $0.8 million to $8.4 million as compared to $9.2 million in the
prior year of which $0.3 million was due to a decrease in wholesale fuel costs
and $0.5 million was due to lower volumes. Other cost of sales increased $1.2
million to $4.9 million as compared to $3.7 million for the three months ended
November 30, 2001.
Gross Profit. Total gross profit for the three months ended November
30, 2002 increased by $8.7 million to $56.4 million as compared to $47.7 million
for the three months ended November 30, 2001. For the three months ended
November 30, 2002, retail fuel gross profit was $42.4 million, U.S. wholesale
was $0.3 million, and other gross profit was $12.5 million. Foreign wholesale
gross profit was $0.5 million and liquids marketing gross profit was $0.7
million. As a comparison, for the three months ended November 30, 2001, Heritage
recorded retail fuel gross profit of $38.9 million, U.S. wholesale was $0.2
million, and other gross profit was $11.6 million. Foreign wholesale gross
profit was $0.3 million and liquids marketing was a loss of $3.3 million for the
three months ended November 30, 2001. The increase in gross profit is primarily
attributable to lower fuel costs and slightly increased volumes, offset by
slightly lower selling prices.
Operating Expenses. Operating expenses were $33.4 million for the three
months ended November 30, 2002 as compared to $31.8 million for the three months
ended November 30, 2001. The increase of $1.6 million is primarily the result of
a $0.7 million increase in employee-related costs, and a $0.7 million increase
related to industry-wide increases in business insurance costs.
Selling, General and Administrative. Selling, general and
administrative expenses were $2.8 million for the three months ended November
30, 2002, a $0.1 million decrease from the $2.9 million for the same three-month
period last year. Of the decrease, $0.2 million was related to the adoption of
SFAS 123 described above.
Depreciation and Amortization. Depreciation and amortization was $9.3
million in the three months ended November 30, 2002 as compared to $9.1 million
in the three months ended November 30, 2001. This increase is
20
due to additional depreciation and amortization of property, plant and
equipment, and other intangible assets from acquisitions.
Operating Income. For the three months ended November 30, 2002,
Heritage had operating income of $10.9 million as compared to operating income
of $3.9 million for the three months ended November 30, 2001. This increase is a
combination of an increase of $0.2 million related to the adoption of SFAS 123,
and increased gross profit offset by increased operating expenses described
above.
Interest Expense. Interest expense increased $0.1 million for the three
months ended November 30, 2002 to $9.3 million from $9.2 million for the same
three-month period last year.
Net Income(Loss). For the three month period ended November 30, 2002,
Heritage had net income of $1.5 million, an increase of $6.3 million as compared
to a net loss for the three months ended November 30, 2001 of $4.8 million. The
increase is primarily the result of an increase of $0.2 million relating to the
adoption of SFAS 123 and the increase in operating income related to operating
performance described above.
EBITDA, as adjusted. EBITDA, as adjusted increased $7.1 million to
$20.8 million for the three months ended November 30, 2002, as compared to
EBITDA, as adjusted of $13.7 million for the period ended November 30, 2001.
This increase is due to the operating conditions described above, and is a
record level EBITDA, as adjusted for the first quarter results of Heritage.
EBITDA, as adjusted for the three months ended November 30, 2002 and November
30, 2001 is computed as follows:
NET INCOME RECONCILIATION Three Months Ended
- ------------------------- November 30,
(in millions) ------------------
2002 2001
-------- -------
Net income (loss) $ 1.5 $ (4.8)
Depreciation and amortization 9.3 9.1
Interest 9.3 9.2
Non-cash compensation expense 0.3 0.5
Other expense 0.3 0.1
Depreciation, amortization, and interest of investee 0.2 0.1
Minority interest in the Operating Partnership - (0.1)
Less: Gain on disposal of assets (0.1) (0.4)
-------- -------
EBITDA, as adjusted (a) $ 20.8 $ 13.7
-------- -------
(a) EBITDA, as adjusted is defined as the Partnership's earnings before
interest, taxes, depreciation, amortization and other non-cash items,
such as compensation charges for unit issuances to employees, gain or
loss on disposal of assets, and other expenses. We present EBITDA, as
adjusted, on a Partnership basis which includes both the general and
limited partner interests. Non-cash compensation expense represents
charges for the value of the Common Units awarded under the
Partnership's compensation plans that have not yet vested under the
terms of those plans and are charges which do not, or will not, require
cash settlement. Non-cash income such as the gain arising from our
disposal of assets is not included when determining EBITDA, as
adjusted. EBITDA, as adjusted (i) is not a measure of performance
calculated in accordance with generally accepted accounting principles
and (ii) should not be considered
21
in isolation or as a substitute for net income, income from operations
or cash flow as reflected in our consolidated financial statements.
EBITDA, as adjusted is presented because such information is relevant
and is used by management, industry analysts, investors, lenders and
rating agencies to assess the financial performance and operating
results of the Partnership's fundamental business activities.
Management believes that the presentation of EBITDA, as adjusted is
useful to lenders and investors because of its use in the propane
industry and for master limited partnerships as an indicator of the
strength and performance of the Partnership's ongoing business
operations, including the ability to fund capital expenditures, service
debt and pay distributions. Additionally, management believes that
EBITDA, as adjusted provides additional and useful information to the
Partnership's investors for trending, analyzing and benchmarking the
operating results of the Partnership from period to period as compared
to other companies that may have different financing and capital
structures. The presentation of EBITDA, as adjusted allows investors to
view the Partnership's performance in a manner similar to the methods
used by management and provides additional insight to the Partnership's
operating results.
EBITDA, as adjusted is used by management to determine our operating
performance, and along with other data as internal measures for setting
annual operating budgets, assessing financial performance of the
Partnership's numerous business locations, as a measure for evaluating
targeted businesses for acquisition and as a measurement component of
incentive compensation. The Partnership has a large number of business
locations located in different regions of the United States. EBITDA, as
adjusted can be a meaningful measure of financial performance because
it excludes factors which are outside the control of the employees
responsible for operating and managing the business locations, and
provides information management can use to evaluate the performance of
the business locations, or the region where they are located, and the
employees responsible for operating them. To present EBITDA, as
adjusted on a full Partnership basis, we add back the minority interest
of the general partner because net income is reported net of the
general partner's minority interest. Our EBITDA, as adjusted includes
non-cash compensation expense which is a non-cash expense item
resulting from our unit based compensation plans that does not require
cash settlement and is not considered during management's assessment of
the operating results of the Partnership's business. By adding these
non-cash compensation expenses in EBITDA, as adjusted allows management
to compare the Partnership's operating results to those of other
companies in the same industry who may have compensation plans with
levels and values of annual grants that are different than the
Partnership's. Other expenses include other finance charges and other
asset non-cash impairment charges that are reflected in the
Partnership's operating results but are not classified in interest,
depreciation and amortization. We do not include gain on the sale of
assets when determining EBITDA, as adjusted since including non-cash
income resulting from the sale of assets increases the performance
measure in a manner that is not related to the true operating results
of the Partnership's business. In addition, Heritage's debt agreements
contain financial covenants based on EBITDA, as adjusted. For a
description of these covenants, please read "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Description of Indebtedness" included in the Partnership's
Form 10-K/A for the fiscal year ended August 31, 2002, as filed with
the Securities and Exchange Commission on November 26, 2003.
There are material limitations to using a measure such as EBITDA, as
adjusted, including the difficulty associated with using it as the sole
measure to compare the results of one company to another, and the
inability to analyze certain significant items that directly affect a
company's net income or loss. In addition, Heritage's calculation of
EBITDA, as adjusted may not be consistent with similarly titled
measures of other companies and should be viewed in conjunction with
measurements that are computed in accordance with GAAP. EBITDA, as
adjusted for the periods described herein is calculated in the same
manner as presented by Heritage in the past. Management compensates for
these limitations by considering EBITDA, as adjusted in conjunction
with its analysis of other GAAP financial measures, such as gross
profit, net income (loss), and cash flow from operating activities.
We have provided a reconciliation of EBITDA, as adjusted to net
income(loss).
22
LIQUIDITY AND CAPITAL RESOURCES
The ability of Heritage to satisfy its obligations will depend on its future
performance, which will be subject to prevailing economic, financial, business
and weather conditions, and other factors, many of which are beyond management's
control. Future capital requirements of Heritage are expected to be provided by
cash flows from operating activities. To the extent future capital requirements
exceed cash flows from operating activities:
a) working capital will be financed by the working capital line of
credit and repaid from subsequent seasonal reductions in inventory
and accounts receivable;
b) growth capital expenditures, mainly for customer tanks, will be
financed by the revolving acquisition bank line of credit; and
c) acquisition capital expenditures will be financed by the revolving
acquisition bank line of credit; other lines of credit, long term
debt, issuance of additional Common Units or a combination
thereof.
Operating Activities. Cash used in operating activities during the
three months ended November 30, 2002, was $2.3 million as compared to cash
provided by operating activities of $0.1 million for the same three-month period
ended November 30, 2001. The net cash used in operations for the three months
ended November 30, 2002 consisted of net income of $1.5 million and non-cash
charges of $9.5 million, principally depreciation and amortization, offset by
the impact of an increase in working capital of $13.3 million. The increase in
working capital for the quarter ended November 30, 2002 as compared to the
quarter ended November 30, 2001 is primarily due to the effect of timing of
collection of the high accounts receivable related to the cold winter of fiscal
2001 and the timing of the purchase of inventory between the two periods.
Investing Activities. Heritage completed two acquisitions during the
three months ended November 30, 2002 spending a net of $1.6 million, after
deducting cash received in such acquisitions. This capital expenditure amount is
reflected in the cash used in investing activities of $9.8 million along with
$9.7 million invested for maintenance needed to sustain operations at current
levels and for customer tanks to support growth of operations. Cash used in
investing activities also includes proceeds from the sale of idle property of
$1.5 million.
Financing Activities. Cash provided by financing activities during the
three months ended November 30, 2002 of $12.7 million resulted mainly from a net
increase in the Working Capital Facility of $22.6 million and a net increase in
the Acquisition Facility of $1.3 million used to acquire other propane
businesses. These increases were offset by cash distributions to Unitholders of
$10.4 million and payments on other long-term debt of $0.8 million.
FINANCING AND SOURCES OF LIQUIDITY
Heritage has a Bank Credit Facility with various financial institutions, which
includes a Working Capital Facility, providing for up to $65.0 million of
borrowings for working capital and other general partnership purposes, and an
Acquisition Facility providing for up to $50.0 million of borrowings for
acquisitions and improvements. The weighted average interest rate was 3.255% for
the amounts outstanding at November 30, 2002 on both the Working Capital
Facility and the Acquisition Facility. As of November 30, 2002, the Working
Capital Facility had $12.2 million available for borrowings and the Acquisition
Facility had $34.7 million available to fund future acquisitions. Subsequent to
November 30, 2002, approximately $17.3 million was drawn on the Acquisition
Facility to fund the acquisition of V-1. Management believes that its Bank
Credit Facility is adequate to fund the future operating and capital needs of
the Partnership.
Heritage uses its cash provided by operating and financing activities to provide
distributions to the Partnership's Unitholders and to fund acquisition,
maintenance, and growth capital expenditures. Acquisition capital expenditures,
which include expenditures related to the acquisition of retail propane
operations and intangibles associated with such acquired businesses, were $1.6
million for the three months ended November 30, 2002. In addition to the $1.6
million of cash expended for acquisitions, $0.5 million for notes payable on
non-compete agreements were issued and liabilities of $0.4 million were assumed
in connection with certain acquisitions.
23
Under the Partnership Agreement, the Partnership will distribute to its partners
within 45 days after the end of each fiscal quarter, an amount equal to all of
its Available Cash for such quarter. Available cash generally means, with
respect to any quarter of the Partnership, all cash on hand at the end of such
quarter less the amount of cash reserves established by the General Partner in
its reasonable discretion that is necessary or appropriate to provide for future
cash requirements. The Partnership's commitment to its Unitholders is to
distribute the increase in its cash flow while maintaining prudent reserves for
the Partnership's operations. The Partnership paid a quarterly distribution of
$0.6375 (or $2.55 annually) on October 15, 2002 for the fourth quarter ended
August 31, 2002, and declared a distribution of $0.6375 (or $2.55 annually) on
December 18, 2002 payable on January 14, 2003. The current distribution level
includes incentive distributions payable to the General Partner to the extent
the quarterly distribution exceeds $0.55 per unit ($2.20 annually).
The assets utilized in the propane business do not typically require lengthy
manufacturing process time or complicated, high technology components.
Accordingly, the Partnership does not have any significant financial commitments
for capital expenditures. In addition, the Partnership has not experienced any
significant increases attributable to inflation in the cost of these assets or
in its operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Heritage has little cash flow exposure due to rate changes for long-term debt
obligations. The Operating Partnership had $68.1 million of variable rate debt
outstanding as of November 30, 2002 through its Bank Credit Facility described
elsewhere in this report. The balance outstanding in the Bank Credit Facility
generally fluctuates throughout the year. A theoretical change of 1% in the
interest rate on the balance outstanding at November 30, 2002 would result in an
approximate $681 thousand change in annual net income. Heritage primarily enters
debt obligations to support general corporate purposes including capital
expenditures and working capital needs. The Operating Partnership's long-term
debt instruments were typically issued at fixed interest rates. When these debt
obligations mature, Heritage may refinance all or a portion of such debt at
then-existing market interest rates which may be more or less than the interest
rates on the maturing debt.
Commodity price risk arises from the risk of price changes in the propane
inventory that Heritage buys and sells. The market price of propane is often
subject to volatile changes as a result of market conditions over which
management will have no control. In the past, price changes have generally been
passed along to Heritage's customers to maintain gross margins, mitigating the
commodity price risk. In order to help ensure that adequate supply sources are
available to Heritage during periods of high demand, Heritage will, from time to
time, purchase significant volumes of propane during periods of low demand,
which generally occur during the summer months, at the then current market
price, for storage both at its customer service centers and in major storage
facilities and for future delivery.
Heritage also attempts to minimize the effects of market price fluctuations for
its propane supply by entering into certain financial contracts. In order to
manage a portion of its propane price market risk, Heritage uses contracts for
the forward purchase of propane, propane fixed-price supply agreements, and
derivative commodity instruments such as price swap and option contracts. Swap
instruments are a contractual agreement to exchange obligations of money between
the buyer and seller of the instruments as propane volumes during the pricing
period are purchased. Swaps are tied to a fixed price bid by the buyer and a
floating price determination for the seller based on certain indices at the end
of the relevant trading period. Heritage has entered into these swap instruments
in the past to hedge the projected propane volumes to be purchased during each
of the one-month periods during the projected heating season.
At November 30, 2002, Heritage had no outstanding propane hedges. Heritage
continues to monitor propane prices and may enter into additional propane hedges
in the future. Inherent in the portfolio from the liquids marketing activities
are certain business risks, including market risk and credit risk. Market risk
is the risk that the value of the portfolio will change, either favorably or
unfavorably, in response to changing market conditions. Credit risk is the risk
of loss from nonperformance by suppliers, customers, or financial counter
parties to a contract. Heritage takes an active role in managing and controlling
market and credit risk and has established control procedures which are reviewed
on an ongoing basis. Heritage monitors market risk through a variety of
techniques, including routine reporting to senior management. Heritage attempts
to minimize credit risk exposure through credit policies and periodic monitoring
procedures.
24
LIQUIDS MARKETING
Heritage buys and sells derivative financial instruments, which are within the
scope of SFAS 133 and that are not designated as accounting hedges. Heritage
also enters into energy trading contracts, which are not derivatives, and
therefore are not within the scope of SFAS 133. EITF Issue No. 98-10, Accounting
for Contracts Involved in Energy Trading and Risk Management Activities (EITF
98-10), applied to energy trading contracts not within the scope of SFAS 133
that were entered into prior to October 25, 2002. The types of contracts
Heritage utilizes in its liquids marketing segment include energy commodity
forward contracts, options, and swaps traded on the over-the-counter financial
markets. In accordance with the provisions of SFAS 133, derivative financial
instruments utilized in connection with Heritages' liquids marketing activity
are accounted for using the mark-to-market method. Additionally, all energy
trading contracts entered into prior to October 25, 2002 were accounted for
using the mark-to-market method in accordance with the provisions of EITF 98-10.
Under the mark-to-market method of accounting, forwards, swaps, options, and
storage contracts are reflected at fair value, and are shown in the consolidated
balance sheet as assets and liabilities from liquids marketing activities. As of
August 31, 2002, Heritage adopted the applicable provisions of EITF Issue No.
02-3, Issues Related to Accounting for Contracts Involved in Energy Trading and
Risk Management Activities (EITF 02-3), which requires that gains and losses on
derivative instruments be shown net in the statement of operations if the
derivative instruments are held for trading purposes. Net realized and
unrealized gains and losses from the financial contracts and the impact of price
movements are recognized in the statement of operations as liquids marketing
revenue. Changes in the assets and liabilities from the liquids marketing
activities result primarily from changes in the market prices, newly originated
transactions, and the timing and settlement of contracts. EITF 02-3 also
rescinds EITF 98-10 for all energy trading contracts entered into after October
25, 2002 and specifies certain disclosure requirements. Consequently, Heritage
does not apply mark-to-market accounting for any contracts entered into after
October 25, 2002 that are not within the scope of SFAS 133. Heritage attempts to
balance its contractual portfolio in terms of notional amounts and timing of
performance and delivery obligations. However, net unbalanced positions can
exist or are established based on management's assessment of anticipated market
movements.
The adoption of EITF 02-3 requires that realized and unrealized gains and losses
be shown net for all periods presented. The following table summarizes the
amounts that have been reclassified in the statement of operations:
For the Three Months Ended
November 30,
2002 2001
----------- -----------
Revenue - liquids marketing $ 60,730 $ 50,820
Costs and expenses - liquids marketing (60,023) (54,145)
----------- ----------
Net, as reclassified $ 707 $ (3,325)
=========== ==========
25
The notional amounts and terms of these financial instruments as of November 30,
2002 and 2001 include fixed price payor for 586,000 and 1,592,500 barrels of
propane and butane, and fixed price receiver of 440,000 and 1,221,964 barrels of
propane and butane, respectively. Notional amounts reflect the volume of the
transactions, but do not represent the amounts exchanged by the parties to the
financial instruments. Accordingly, notional amounts do not accurately measure
Heritage's exposure to market or credit risks.
The fair value of the financial instruments related to liquids marketing
activities as of November 30, 2002 and August 31, 2002, was assets of $0.8 and
$2.3 million respectively, and liabilities of $0.8 and $1.8 million,
respectively, related to propane and butane.
Estimates related to Heritage's liquids marketing activities are sensitive to
uncertainty and volatility inherent in the energy commodities markets and actual
results could differ from these estimates. A theoretical change of 10% in the
underlying commodity value of the liquids marketing contracts would result in an
approximate $273 change in the market value of the contracts as there were
approximately 6.1 million gallons of net unbalanced positions at November 30,
2002.
Inherent in the resulting contractual portfolio are certain business risks,
including market risk and credit risk. Market risk is the risk that the value of
the portfolio will change, either favorably or unfavorably, in response to
changing market conditions. Credit risk is the risk of loss from nonperformance
by suppliers, customers, or financial counterparties to a contract. Heritage
takes an active role in managing and controlling market and credit risk and have
established control procedures, which are reviewed on an ongoing basis. Heritage
monitors market risk through a variety of techniques, including routine
reporting to senior management. Heritage attempts to minimize credit risk
exposure through credit policies and periodic monitoring procedures.
The following table summarizes the fair value of Heritage's contracts,
aggregated by method of estimating fair value of the contracts as of November
30, 2002 and August 31, 2002 where settlement had not yet occurred. Heritage's
contracts all have a maturity of less than 1 year. The market prices used to
value these transactions reflect management's best estimate considering various
factors including closing average spot prices for the current and outer months
plus a differential to consider time value and storage costs.
November 30, August 31,
Source of Fair Value 2002 2002
- ------------------------------------------------------- ------------ ----------
Prices actively quoted $ 616 $ 1,276
Prices based on other valuation methods 197 1,025
---------- ----------
Assets from liquids marketing $ 813 $ 2,301
========== ==========
Prices actively quoted $ 585 $ 669
Prices based on other valuation methods 187 1,149
---------- ----------
Liabilities from liquids marketing $ 772 $ 1,818
========== ==========
Unrealized gains in fair value of contracts outstanding $ 41 $ 483
========== ==========
26
The following table summarizes the changes in the unrealized fair value of
Heritage's contracts where settlement had not yet occurred for the three months
ending November 30, 2002 and 2001.
November 30, November 30,
2002 2001
------------ ------------
Unrealized gains (losses) in fair value of contracts
outstanding at the beginning of the period $ 483 $ (665)
Other unrealized gains (losses) recognized during the
period 224 (2,660)
Less: Realized gains (losses) recognized during the
period 666 (801)
--------- ---------
Unrealized gains (losses) in fair value of contracts
outstanding at the end of the period $ 41 $ (2,524)
========= =========
The following table summarizes the gross transaction volumes in barrels for
liquids marketing contracts that were physically settled for the three months
ended November 30, 2002, and 2001.
(in thousands)
Three months ended November 30, 2002 44
Three months ended November 30, 2001 112
ITEM 4. CONTROLS AND PROCEDURES
The Partnership maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Partnership files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC. Within 90 days prior to the filing date of this report, an
evaluation was performed under the supervision and with the participation of the
Partnership's management, including the Chief Executive Officer and the Chief
Financial Officer of the General Partner of the Partnership, of the
effectiveness of the design and operation of the Partnership's disclosure
controls and procedures (as such terms are defined in Rule 13a-14(c) and
15d-14(c) of the Exchange Act). Based upon that evaluation, management,
including the Chief Executive Officer and the Chief Financial Officer of the
General Partner of the Partnership, concluded that the Partnership's disclosure
controls and procedures were adequate and effective as of November 30, 2002.
There have been no significant changes in the Partnership's internal controls or
in other factors subsequent to such evaluation, and there have been no
corrective actions with respect to significant deficiencies and material
weaknesses in our internal controls.
27
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the following Exhibit Index are filed as part of this
Report. Exhibits required by Item 601 of Regulation S-K, but which are not
listed below, are not applicable.
Exhibit
Number Description
---------- ----------------------------------------------------------------------------------------
(1) 3.1 Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(10) 3.1.1 Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Heritage
Propane Partners, L.P.
(16) 3.1.2 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage
Propane Partners, L.P.
(19) 3.1.3 Amendment No. 3 to Amended and Restated Agreement of Limited Partnership of Heritage
Propane Partners, L.P.
(19) 3.1.4 Amendment No. 4 to Amended and Restated Agreement of Limited Partnership of Heritage
Propane Partners, L.P.
(1) 3.2 Agreement of Limited Partnership of Heritage Operating, L.P.
(12) 3.2.1 Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Heritage
Operating, L.P.
(19) 3.2.2 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage
Operating, L.P.
(18) 3.3 Amended Certificate of Limited Partnership of Heritage Propane Partners, L.P.
(18) 3.4 Amended Certificate of Limited Partnership of Heritage Operating, L.P.
(20) 4.1 Registration Rights Agreement for Limited Partner Interests of Heritage Propane Partners,
L.P.
(7) 10.1 First Amended and Restated Credit Agreement with Banks Dated May 31, 1999
(8) 10.1.1 First Amendment to the First Amended and Restated Credit Agreement dated as of October
15, 1999
(9) 10.1.2 Second Amendment to First Amended and Restated Credit Agreement dated as of May 31, 2000
(10) 10.1.3 Third Amendment dated as of August 10, 2000 to First Amended and Restated Credit
Agreement
(13) 10.1.4 Fourth Amendment to First Amended and Restated Credit Agreement dated as of December 28,
2000
28
Exhibit
Number Description
---------- ----------------------------------------------------------------------------------------
(16) 10.1.5 Fifth Amendment to First Amended and Restated Credit Agreement dated as of July 16, 2001
(1) 10.2 Form of Note Purchase Agreement (June 25, 1996)
(3) 10.2.1 Amendment of Note Purchase Agreement (June 25, 1996) dated as of July 25, 1996
(4) 10.2.2 Amendment of Note Purchase Agreement (June 25, 1996) dated as of March 11, 1997
(6) 10.2.3 Amendment of Note Purchase Agreement (June 25, 1996) dated as of October 15, 1998
(8) 10.2.4 Second Amendment Agreement dated September 1, 1999 to June 25, 1996 Note Purchase
Agreement
(11) 10.2.5 Third Amendment Agreement dated May 31, 2000 to June 25, 1996 Note Purchase Agreement and
November 19, 1997 Note Purchase Agreement
(10) 10.2.6 Fourth Amendment Agreement dated August 10, 2000 to June 25, 1996 Note Purchase Agreement
and November 19, 1997 Note Purchase Agreement
(13) 10.2.7 Fifth Amendment Agreement dated as of December 28, 2000 to June 25, 1996 Note Purchase
Agreement, November 19, 1997 Note Purchase Agreement and August 10, 2000 Note Purchase
Agreement
(1) 10.3 Form of Contribution, Conveyance and Assumption Agreement among Heritage Holdings, Inc.,
Heritage Propane Partners, L.P. and Heritage Operating, L.P.
(1) 10.6 Restricted Unit Plan
(4) 10.6.1 Amendment of Restricted Unit Plan dated as of October 17, 1996
(12) 10.6.2 Amended and Restated Restricted Unit Plan dated as of August 10, 2000
(18) 10.6.3 Second Amended and Restated Restricted Unit Plan dated as of February 4, 2002
(12) 10.7 Employment Agreement for James E. Bertelsmeyer dated as of August 10, 2000
(18) 10.7.1 Consent to Assignment of Employment Agreement for James E. Bertelsmeyer dated February 3,
2002
(21) 10.7.2 Amendment 1 of Employment Agreement for James E. Bertelsmeyer dated August 10, 2002
(12) 10.8 Employment Agreement for R. C. Mills dated as of August 10, 2000
(18) 10.8.1 Consent to Assignment of Employment Agreement for R.C. Mills dated February 3, 2002
(12) 10.9 Employment Agreement for Larry J. Dagley dated as of August 10, 2000
(18) 10.9.1 Consent to Assignment of Employment Agreement for Larry J. Dagley dated February 3, 2002
(12) 10.10 Employment Agreement for H. Michael Krimbill dated as of August 10, 2000
29
Exhibit
Number Description
---------- ----------------------------------------------------------------------------------------
(18) 10.10.1 Consent to Assignment of Employment Agreement for H. Michael Krimbill dated February 3,
2002
(12) 10.11 Employment Agreement for Bradley K. Atkinson dated as of August 10, 2000
(18) 10.11.1 Consent to Assignment of Employment Agreement for Bradley K. Atkinson dated
February 3, 2002
(7) 10.12 First Amended and Restated Revolving Credit Agreement between Heritage Service
Corp. and Banks Dated May 31, 1999
(16) 10.12.1 First Amendment to First Amended and Restated Revolving Credit Agreement, dated October
15, 1999
(16) 10.12.2 Second Amendment to First Amended and Restated Revolving Credit Agreement, dated August
10, 2000
(16) 10.12.3 Third Amendment to First Amended and Restated Revolving Credit Agreement, dated December
28, 2000
(16) 10.12.4 Fourth Amendment to First Amended and Restated Revolving Credit Agreement, dated July 16,
2001
(12) 10.13 Employment Agreement for Mark A. Darr dated as of August 10, 2000
(18) 10.13.1 Consent to Assignment of Employment Agreement for Mark A. Darr dated February 3, 2002
(12) 10.14 Employment Agreement for Thomas H. Rose dated as of August 10, 2000
(18) 10.14.1 Consent to Assignment of Employment Agreement for Thomas H. Rose dated February 3, 2002
(12) 10.15 Employment Agreement for Curtis L. Weishahn dated as of August 10, 2000
(18) 10.15.1 Consent to Assignment of Employment Agreement for Curtis L. Weishahn dated February 3,
2002
(5) 10.16 Note Purchase Agreement dated as of November 19, 1997
(6) 10.16.1 Amendment dated October 15, 1998 to November 19, 1997 Note Purchase Agreement
(8) 10.16.2 Second Amendment Agreement dated September 1, 1999 to November 19, 1997 Note Purchase
Agreement and June 25, 1996 Note Purchase Agreement
(9) 10.16.3 Third Amendment Agreement dated May 31, 2000 to November 19, 1997 Note Purchase Agreement
and June 25, 1996 Note Purchase Agreement
(10) 10.16.4 Fourth Amendment Agreement dated August 10, 2000 to November 19, 1997 Note Purchase
Agreement and June 25, 1996 Note Purchase Agreement
(13) 10.16.5 Fifth Amendment Agreement dated as of December 28, 2000 to June 25, 1996 Note Purchase
Agreement, November 19, 1997 Note Purchase Agreement and August 10, 2000 Note Purchase
Agreement
30
Exhibit
Number Description
---------- ----------------------------------------------------------------------------------------
(10) 10.17 Contribution Agreement dated June 15, 2000 among U.S. Propane, L.P., Heritage Operating,
L.P. and Heritage Propane Partners, L.P.
(10) 10.17.1 Amendment dated August 10, 2000 to June 15, 2000 Contribution Agreement
(10) 10.18 Subscription Agreement dated June 15, 2000 between Heritage Propane Partners, L.P. and
individual investors
(10) 10.18.1 Amendment dated August 10, 2000 to June 15, 2000 Subscription Agreement
(16) 10.18.2 Amendment Agreement dated January 3, 2001 to the June 15, 2000 Subscription Agreement.
(17) 10.18.3 Amendment Agreement dated October 5, 2001 to the June 15, 2000 Subscription
Agreement.
(10) 10.19 Note Purchase Agreement dated as of August 10, 2000
(13) 10.19.1 Fifth Amendment Agreement dated as of December 28, 2000 to June 25, 1996 Note Purchase
Agreement, November 19, 1997 Note Purchase Agreement and August 10, 2000 Note Purchase
Agreement
(14) 10.19.2 First Supplemental Note Purchase Agreement dated as of May 24, 2001 to the August 10,
2000 Note Purchase Agreement
(15) 10.20 Stock Purchase Agreement dated as of July 5, 2001 among the shareholders of ProFlame,
Inc. and Heritage Holdings, Inc.
(15) 10.21 Stock Purchase Agreement dated as of July 5, 2001 among the shareholders of Coast Liquid
Gas, Inc. and Heritage Holdings, Inc.
(15) 10.22 Agreement and Plan of Merger dated as of July 5, 2001 among California Western Gas
Company, the Majority Stockholders of California Western Gas Company signatories thereto,
Heritage Holdings, Inc. and California Western Merger Corp.
(15) 10.23 Agreement and Plan of Merger dated as of July 5, 2001 among Growth Properties, the
Majority Shareholders signatories thereto, Heritage Holdings, Inc. and Growth Properties
Merger Corp.
(15) 10.24 Asset Purchase Agreement dated as of July 5, 2001 among L.P.G. Associates, the
Shareholders of L.P.G. Associates and Heritage Operating, L.P.
(15) 10.25 Asset Purchase Agreement dated as of July 5, 2001 among WMJB, Inc., the Shareholders of
WMJB, Inc. and Heritage Operating, L.P.
(15) 10.25.1 Amendment to Asset Purchase Agreement dated as of July 5, 2001 among WMJB, Inc., the
Shareholders of WMJB, Inc. and Heritage Operating, L.P.
(18) 10.26 Assignment, Conveyance and Assumption Agreement between U.S. Propane, L.P. and Heritage
Holdings, Inc., as the former General Partner of Heritage Propane Partners, L.P. dated as
of February 4, 2002
(18) 10.27 Assignment, Conveyance and Assumption Agreement between U.S. Propane, L.P. and Heritage
Holdings, Inc., as the former General Partner of Heritage Operating, L.P., dated as of
February 4, 2002
31
Exhibit
Number Description
---------- ----------------------------------------------------------------------------------------
(22) 10.28 Assignment for Contribution of Assets in Exchange for Partnership Interest dated December
9, 2002 amount V-1 Oil Co., the shareholders of V-1 Oil Co., Heritage Propane Partners,
L.P. and Heritage Operating, L.P.
(**) 10.29 Employment Agreement for Michael L. Greenwood dated as of July 1, 2002
(21) 21.1 List of Subsidiaries
(*) 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(*) 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(*) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(*) 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
------------------
(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement of Form S-1, File No. 333-04018, filed with the
Commission on June 21, 1996.
(2) Incorporated by reference to Exhibit 10.11 to Registrant's Registration
Statement on Form S-1, File No. 333-04018, filed with the Commission on
June 21, 1996.
(3) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 1996.
(4) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended February 28, 1997.
(5) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended May 31, 1998.
(6) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1998.
(7) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 1999.
(8) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1999.
(9) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2000.
(10) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 23, 2000.
32
(11) File as Exhibit 10.16.3.
(12) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2000.
(13) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2001.
(14) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2001.
(15) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 15, 2001.
(16) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2001.
(17) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended November 30, 2001.
(18) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2002.
(19) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2002.
(20) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated February 4, 2002.
(21) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2002.
(22) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated January 6, 2003.
(*) Filed herewith.
(**) Filed with the January 14, 2003 Original Filing.
(b) Reports on Form 8-K
The Partnership filed no reports on Form 8-K during the three months ended
November 30, 2002.
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERITAGE PROPANE PARTNERS, L.P.
By: U.S. Propane, L.P.., General Partner
By: U.S. Propane, L.L.C., General Partner
Date: November 26, 2003 By: /s/ Michael L. Greenwood
---------------------------------------
Michael L. Greenwood
(Vice President, Chief
Financial Officer and officer duly authorized to sign on behalf of the
registrant)
34
INDEX TO EXHIBITS
Exhibit
Number Description
(1) 3.1 Agreement of Limited Partnership of Heritage Propane
Partners, L.P.
(10) 3.1.1 Amendment No. 1 to Amended and Restated Agreement of
Limited Partnership of Heritage Propane Partners,
L.P.
(16) 3.1.2 Amendment No. 2 to Amended and Restated Agreement of
Limited Partnership of Heritage Propane Partners,
L.P.
(19) 3.1.3 Amendment No. 3 to Amended and Restated Agreement of
Limited Partnership of Heritage Propane Partners,
L.P.
(19) 3.1.4 Amendment No. 4 to Amended and Restated Agreement of
Limited Partnership of Heritage Propane Partners,
L.P.
(1) 3.2 Agreement of Limited Partnership of Heritage
Operating, L.P.
(12) 3.2.1 Amendment No. 1 to Amended and Restated Agreement of
Limited Partnership of Heritage Operating, L.P.
(19) 3.2.2 Amendment No. 2 to Amended and Restated Agreement of
Limited Partnership of Heritage Operating, L.P.
(18) 3.3 Amended Certificate of Limited Partnership of
Heritage Propane Partners, L.P.
(18) 3.4 Amended Certificate of Limited Partnership of
Heritage Operating, L.P.
(20) 4.1 Registration Rights Agreement for Limited Partner
Interests of Heritage Propane Partners, L.P.
(7) 10.1 First Amended and Restated Credit Agreement with
Banks Dated May 31, 1999
(8) 10.1.1 First Amendment to the First Amended and Restated
Credit Agreement dated as of October 15, 1999
(9) 10.1.2 Second Amendment to First Amended and Restated Credit
Agreement dated as of May 31, 2000
(10) 10.1.3 Third Amendment dated as of August 10, 2000 to First
Amended and Restated Credit Agreement
(13) 10.1.4 Fourth Amendment to First Amended and Restated Credit
Agreement dated as of December 28, 2000
Exhibit
Number Description
(16) 10.1.5 Fifth Amendment to First Amended and Restated Credit
Agreement dated as of July 16, 2001
(1) 10.2 Form of Note Purchase Agreement (June 25, 1996)
(3) 10.2.1 Amendment of Note Purchase Agreement (June 25, 1996)
dated as of July 25, 1996
(4) 10.2.2 Amendment of Note Purchase Agreement (June 25, 1996)
dated as of March 11, 1997
(6) 10.2.3 Amendment of Note Purchase Agreement (June 25, 1996)
dated as of October 15, 1998
(8) 10.2.4 Second Amendment Agreement dated September 1, 1999 to
June 25, 1996 Note Purchase Agreement
(11) 10.2.5 Third Amendment Agreement dated May 31, 2000 to June
25, 1996 Note Purchase Agreement and November 19,
1997 Note Purchase Agreement
(10) 10.2.6 Fourth Amendment Agreement dated August 10, 2000 to
June 25, 1996 Note Purchase Agreement and November
19, 1997 Note Purchase Agreement
(13) 10.2.7 Fifth Amendment Agreement dated as of December 28,
2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August
10, 2000 Note Purchase Agreement
(1) 10.3 Form of Contribution, Conveyance and Assumption
Agreement among Heritage Holdings, Inc., Heritage
Propane Partners, L.P. and Heritage Operating, L.P.
(1) 10.6 Restricted Unit Plan
(4) 10.6.1 Amendment of Restricted Unit Plan dated as of October
17, 1996
(12) 10.6.2 Amended and Restated Restricted Unit Plan dated as of
August 10, 2000
(18) 10.6.3 Second Amended and Restated Restricted Unit Plan
dated as of February 4, 2002
(12) 10.7 Employment Agreement for James E. Bertelsmeyer dated
as of August 10, 2000
(18) 10.7.1 Consent to Assignment of Employment Agreement for
James E. Bertelsmeyer dated February 3, 2002
(21) 10.7.2 Amendment 1 of Employment Agreement for James E.
Bertelsmeyer dated August 10, 2002
(12) 10.8 Employment Agreement for R. C. Mills dated as of
August 10, 2000
(18) 10.8.1 Consent to Assignment of Employment Agreement for
R.C. Mills dated February 3, 2002
(12) 10.9 Employment Agreement for Larry J. Dagley dated as of
August 10, 2000
(18) 10.9.1 Consent to Assignment of Employment Agreement for
Larry J. Dagley dated February 3, 2002
(12) 10.10 Employment Agreement for H. Michael Krimbill dated as
of August 10, 2000
Exhibit
Number Description
(18) 10.10.1 Consent to Assignment of Employment Agreement for H.
Michael Krimbill dated February 3, 2002
(12) 10.11 Employment Agreement for Bradley K. Atkinson dated as
of August 10, 2000
(18) 10.11.1 Consent to Assignment of Employment Agreement for
Bradley K. Atkinson dated February 3, 2002
(7) 10.12 First Amended and Restated Revolving Credit Agreement
between Heritage Service Corp. and Banks Dated May
31, 1999
(16) 10.12.1 First Amendment to First Amended and Restated
Revolving Credit Agreement, dated October 15, 1999
(16) 10.12.2 Second Amendment to First Amended and Restated
Revolving Credit Agreement, dated August 10, 2000
(16) 10.12.3 Third Amendment to First Amended and Restated
Revolving Credit Agreement, dated December 28, 2000
(16) 10.12.4 Fourth Amendment to First Amended and Restated
Revolving Credit Agreement, dated July 16, 2001
(12) 10.13 Employment Agreement for Mark A. Darr dated as of
August 10, 2000
(18) 10.13.1 Consent to Assignment of Employment Agreement for
Mark A. Darr dated February 3, 2002
(12) 10.14 Employment Agreement for Thomas H. Rose dated as of
August 10, 2000
(18) 10.14.1 Consent to Assignment of Employment Agreement for
Thomas H. Rose dated February 3, 2002
(12) 10.15 Employment Agreement for Curtis L. Weishahn dated as
of August 10, 2000
(18) 10.15.1 Consent to Assignment of Employment Agreement for
Curtis L. Weishahn dated February 3, 2002
(5) 10.16 Note Purchase Agreement dated as of November 19, 1997
(6) 10.16.1 Amendment dated October 15, 1998 to November 19, 1997
Note Purchase Agreement
(8) 10.16.2 Second Amendment Agreement dated September 1, 1999 to
November 19, 1997 Note Purchase Agreement and June
25, 1996 Note Purchase Agreement
(9) 10.16.3 Third Amendment Agreement dated May 31, 2000 to
November 19, 1997 Note Purchase Agreement and June
25, 1996 Note Purchase Agreement
(10) 10.16.4 Fourth Amendment Agreement dated August 10, 2000 to
November 19, 1997 Note Purchase Agreement and June
25, 1996 Note Purchase Agreement
(13) 10.16.5 Fifth Amendment Agreement dated as of December 28,
2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August
10, 2000 Note Purchase Agreement
Exhibit
Number Description
(10) 10.17 Contribution Agreement dated June 15, 2000 among U.S.
Propane, L.P., Heritage Operating, L.P. and Heritage
Propane Partners, L.P.
(10) 10.17.1 Amendment dated August 10, 2000 to June 15, 2000
Contribution Agreement
(10) 10.18 Subscription Agreement dated June 15, 2000 between
Heritage Propane Partners, L.P. and individual
investors
(10) 10.18.1 Amendment dated August 10, 2000 to June 15, 2000
Subscription Agreement
(16) 10.18.2 Amendment Agreement dated January 3, 2001 to the June
15, 2000 Subscription Agreement.
(17) 10.18.3 Amendment Agreement dated October 5, 2001 to the June
15, 2000 Subscription Agreement.
(10) 10.19 Note Purchase Agreement dated as of August 10, 2000
(13) 10.19.1 Fifth Amendment Agreement dated as of December 28,
2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August
10, 2000 Note Purchase Agreement
(14) 10.19.2 First Supplemental Note Purchase Agreement dated as
of May 24, 2001 to the August 10, 2000 Note Purchase
Agreement
(15) 10.20 Stock Purchase Agreement dated as of July 5, 2001
among the shareholders of ProFlame, Inc. and Heritage
Holdings, Inc.
(15) 10.21 Stock Purchase Agreement dated as of July 5, 2001
among the shareholders of Coast Liquid Gas, Inc. and
Heritage Holdings, Inc.
(15) 10.22 Agreement and Plan of Merger dated as of July 5, 2001
among California Western Gas Company, the Majority
Stockholders of California Western Gas Company
signatories thereto, Heritage Holdings, Inc. and
California Western Merger Corp.
(15) 10.23 Agreement and Plan of Merger dated as of July 5, 2001
among Growth Properties, the Majority Shareholders
signatories thereto, Heritage Holdings, Inc. and
Growth Properties Merger Corp.
(15) 10.24 Asset Purchase Agreement dated as of July 5, 2001
among L.P.G. Associates, the Shareholders of L.P.G.
Associates and Heritage Operating, L.P.
(15) 10.25 Asset Purchase Agreement dated as of July 5, 2001
among WMJB, Inc., the Shareholders of WMJB, Inc. and
Heritage Operating, L.P.
(15) 10.25.1 Amendment to Asset Purchase Agreement dated as of
July 5, 2001 among WMJB, Inc., the Shareholders of
WMJB, Inc. and Heritage Operating, L.P.
(18) 10.26 Assignment, Conveyance and Assumption Agreement
between U.S. Propane, L.P. and Heritage Holdings,
Inc., as the former General Partner of Heritage
Propane Partners, L.P. dated as of February 4, 2002
(18) 10.27 Assignment, Conveyance and Assumption Agreement
between U.S. Propane, L.P. and Heritage Holdings,
Inc., as the former General Partner of Heritage
Operating, L.P., dated as of February 4, 2002
Exhibit
Number Description
(22) 10.28 Assignment for Contribution of Assets in Exchange for
Partnership Interest dated December 9, 2002 amount
V-1 Oil Co., the shareholders of V-1 Oil Co.,
Heritage Propane Partners, L.P. and Heritage
Operating, L.P.
(**) 10.29 Employment Agreement for Michael L. Greenwood dated
as of July 1, 2002
(21) 21.1 List of Subsidiaries
(*) 31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(*) 31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(*) 32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(*) 32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
--------------
(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement of Form S-1, File No. 333-04018, filed with the
Commission on June 21, 1996.
(2) Incorporated by reference to Exhibit 10.11 to Registrant's Registration
Statement on Form S-1, File No. 333-04018, filed with the Commission on
June 21, 1996.
(3) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 1996.
(4) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended February 28, 1997.
(5) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended May 31, 1998.
(6) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1998.
(7) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 1999.
(8) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1999.
(9) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2000.
(10) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 23, 2000.
(11) File as Exhibit 10.16.3.
(12) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2000.
(13) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2001.
(14) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2001.
(15) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 15, 2001.
(16) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2001.
(17) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended November 30, 2001.
(18) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2002.
(19) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2002.
(20) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated February 4, 2002.
(21) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2002.
(22) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated January 6, 2003.
(*) Filed herewith.
(**) Filed with the January 14, 2003 Original Filing.
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, H. Michael Krimbill, certify that:
1. I have reviewed this amended quarterly report on Form 10-Q/A
of Heritage Propane Partners, L.P.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant,
including its consolidated subsidiaries, is made
known to us by others within those entities,
particularly during the period in which this report
is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the
end of the period covered by this report based on
such evaluation; and
c. Disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has
materially affected, or is reasonably likely to
materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize, and report financial information;
and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
Date: November 26, 2003
/s/ H. Michael Krimbill
----------------------------------------
H. Michael Krimbill
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael L. Greenwood, certify that:
1. I have reviewed this amended quarterly report on Form 10-Q/A
of Heritage Propane Partners, L.P.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
a. Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant,
including its consolidated subsidiaries, is made
known to us by others within those entities,
particularly during the period in which this report
is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the
end of the period covered by this report based on
such evaluation; and
c. Disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has
materially affected, or is reasonably likely to
materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize, and report financial information;
and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
Date: November 26, 2003
/s/ Michael L. Greenwood
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Michael L. Greenwood
Vice President and Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the amended quarterly report of Heritage Propane Partners,
L.P. (the "Partnership") on Form 10-Q/A for the three months ended November 30,
2003 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, H. Michael Krimbill, Chief Executive Officer, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Partnership.
Date: November 26, 2003
/s/ H. Michael Krimbill
--------------------------------------
H. Michael Krimbill
President and Chief Executive Officer
*A signed original of this written statement required by 18 U.S.C. Section 1350
has been provided to and will be retained by Heritage Propane Partners, L.P.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the amended quarterly report of Heritage Propane Partners,
L.P. (the "Partnership") on Form 10-Q/A for the three months ended November 30,
2003, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Michael L. Greenwood, Vice President and Chief Financial
Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Partnership.
Date: November 26, 2003
/s/ Michael L. Greenwood
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Michael L. Greenwood
Vice President and Chief Financial Officer
*A signed original of this written statement required by 18 U.S.C. Section 1350
has been provided to and will be retained by Heritage Propane Partners, L.P.
