1
THIS PROSPECTUS SUPPLEMENT RELATES TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, BUT IS NOT COMPLETE AND MAY BE CHANGED. THIS
PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
Filed pursuant to Rule 424B(5)
Registration No. 333-86057
SUBJECT TO COMPLETION DATED JULY 23, 2001.
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 13, 1999)
LOGO
2,500,000 COMMON UNITS
HERITAGE PROPANE PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
$ PER COMMON UNIT
------------------
We are selling 2,500,000 common units as described in this prospectus
supplement and the accompanying prospectus. The underwriters named in this
prospectus supplement may purchase up to 375,000 additional common units from us
under certain circumstances.
Our common units are traded on the New York Stock Exchange under the symbol
"HPG." On July 20, 2001, the last reported sale price of our common units on the
New York Stock Exchange was $30.00 per common unit.
------------------
INVESTING IN OUR COMMON UNITS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 3 OF THE ACCOMPANYING PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
------------------
PER
COMMON
UNIT TOTAL
-------- ------------
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Heritage Propane Partners, L.P. (before
expenses) $ $
The underwriters are offering the common units subject to various
conditions. The underwriters expect to deliver the common units to purchasers on
or about July , 2001.
------------------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
DAIN RAUSCHER WESSELS
FIRST UNION SECURITIES, INC.
July , 2001
2
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................... S-1
Risk Factors................................................ S-8
Use of Proceeds............................................. S-8
Capitalization.............................................. S-9
Distributions............................................... S-10
Selected Financial Information.............................. S-11
Our Business................................................ S-13
Our Management.............................................. S-18
Description of Units........................................ S-21
Recent Tax Developments..................................... S-25
Recently Issued Accounting Standards........................ S-26
Underwriting................................................ S-27
Legal Matters............................................... S-28
Experts..................................................... S-28
Forward Looking Statements.................................. S-29
Where You Can Find More Information......................... S-30
Index to Financial Statements............................... F-1
PROSPECTUS
Who We Are.................................................. 2
About This Prospectus....................................... 2
Risk Factors................................................ 3
Use of Proceeds............................................. 12
Ratio of Earnings to Fixed Charges.......................... 12
Description of Common Units................................. 13
Description of Debt Securities.............................. 15
Tax Considerations.......................................... 25
Plan of Distribution........................................ 40
Forward Looking Statements.................................. 41
Where You Can Find More Information......................... 42
Legal Opinions.............................................. 42
Experts..................................................... 43
IMPORTANT NOTICE ABOUT INFORMATION IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
THIS DOCUMENT IS IN TWO PARTS. THE FIRST PART IS THE PROSPECTUS SUPPLEMENT,
WHICH DESCRIBES OUR BUSINESS AND THE SPECIFIC TERMS OF THIS COMMON UNIT
OFFERING. THE SECOND PART, THE BASE PROSPECTUS, GIVES MORE GENERAL INFORMATION,
SOME OF WHICH MAY NOT APPLY TO THIS OFFERING. GENERALLY, WHEN WE REFER ONLY TO
THE "PROSPECTUS," WE ARE REFERRING TO BOTH PARTS COMBINED.
IF THE DESCRIPTION OF THE OFFERING VARIES BETWEEN THE PROSPECTUS SUPPLEMENT
AND THE BASE PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THE PROSPECTUS
SUPPLEMENT.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT, AND THE UNDERWRITERS HAVE NOT,
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING
AN OFFER OF THE COMMON UNITS IN ANY JURISDICTION WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS OR IN THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS.
(i)
3
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights some basic information from this prospectus
supplement and the accompanying prospectus to help you understand the common
units. It likely does not contain all the information that is important to you.
You should carefully read the entire prospectus supplement, the accompanying
prospectus and the other documents incorporated by reference to understand fully
the terms of the common units, as well as assess the tax and other
considerations that are important to you in making your investment decision.
Capitalized terms used but not defined in this prospectus supplement have the
meaning assigned to them in the accompanying prospectus. Throughout this
prospectus supplement and the accompanying prospectus, we refer to ourselves,
Heritage Propane Partners, L.P., as "we" or "us" or "our."
HERITAGE PROPANE PARTNERS, L.P.
WHO WE ARE
We are the fourth largest retail marketer of propane in the United States,
delivering approximately 350 million gallons a year to approximately 500,000
customers from over 250 customer service locations in 28 states. Our operations
extend from coast to coast, with concentrations in the western, upper
midwestern, northeastern and southeastern regions of the United States. We are a
publicly traded Delaware limited partnership formed in conjunction with our
initial public offering in June of 1996. Since the inception of our business in
1989, we have completed 81 acquisitions for an aggregate purchase price of
approximately $549 million, including the transfer by U.S. Propane, L.P. of its
propane operations to us for $181.4 million, plus working capital, in August
2000. The U.S. Propane transaction combined five of the nation's 50 largest
retail propane operations.
We maintain our principal executive offices at 8801 South Yale Avenue,
Suite 310, Tulsa, Oklahoma 74137, and our telephone number is (918) 492-7272.
OUR STRUCTURE AND OWNERSHIP
Our general partner is Heritage Holdings, Inc., which is a wholly owned
subsidiary of U.S. Propane. U.S. Propane is a joint venture among the following
four publicly traded southeastern utilities:
- TECO Energy, Inc. is a diversified, energy-related holding company. One
of TECO Energy's subsidiaries is Florida's largest natural gas
distributor, serving more than 260,000 customers. Its other businesses
include an electric utility that serves over 550,000 customers and an
independent power company that builds, owns and operates electric
generation facilities in the United States and Central America.
- AGL Resources, Inc. is a regional energy holding company engaged in
natural gas distribution, wholesale and retail energy services and
building telecommunications infrastructure. AGL Resources' principal
subsidiary is the second largest pure natural gas distributor in the
United States, serving more than 1.5 million customers in Georgia and
portions of Tennessee and Virginia.
- Piedmont Natural Gas Company, Inc. is an energy and services company
primarily engaged in the transportation, distribution and sale of natural
gas. Piedmont Natural Gas Company is the second largest natural gas
distributor in the Southeast, serving more than 690,000 customers in
North Carolina, South Carolina and Tennessee.
- Atmos Energy Corporation, which owns United Cities Propane Gas, Inc., is
an energy and services company primarily engaged in natural gas
distribution and nonregulated energy management and gas marketing
services. Atmos Energy is the fifth largest pure natural gas distributor
in the United States, serving approximately 1.4 million customers in 11
states.
Following the offering, our board of directors, management and key
supervisory employees will own an approximate 13.2% limited partner interest in
us, which we believe helps align their interests with those of our public
unitholders.
S-1
4
OUR BUSINESS STRATEGY
Our goal is to increase unitholder distributions by being a low-cost,
growth oriented retail propane distribution company. Our principal strategies
for achieving this goal are:
- Maintaining decentralized operations in order to foster an
entrepreneurial corporate culture by:
- Retaining billing, collection and pricing responsibilities at the local
and regional levels
- Aggressively managing operating and overhead costs
- Rewarding our employees for achieving financial targets at the local
level
- Completing selective, accretive acquisitions with a focus on companies
that:
- Are located in geographical regions with higher-than-average population
growth
- Provide a high percentage of sales to residential customers
- Have a strong reputation for quality customer service
- Own a high percentage of the propane tanks used by their customers
- Maintaining our strong financial position to support ongoing operations
and fund our future growth
RECENT STRATEGIC DEVELOPMENTS
Pending Acquisition of ProFlame
In July 2001, we entered into definitive agreements to acquire the
operations of ProFlame, Inc. and related propane distribution companies in
California and Nevada, which we refer to collectively as "ProFlame." For its
fiscal year ended August 31, 2000, ProFlame delivered approximately 25 million
retail gallons of propane to over 32,000 customers. ProFlame's propane
distribution network includes 20 customer service locations throughout
California and Nevada, as well as 11 additional locations (sites) that are
either rail car terminals and/or storage facilities located in areas such as the
San Francisco Bay, San Joaquin Valley, Redding and Barstow, California, and in
Reno and Las Vegas, Nevada. We believe the ProFlame acquisition will strengthen
our presence in a number of high growth markets and provide additional
geographical balance to our operations. We anticipate completing the acquisition
of ProFlame by July 31, 2001, subject to customary closing conditions, and we
expect the acquisition to be accretive to our cash flow per unit. We cannot
assure you, however, that we will be able to close this acquisition within this
time frame or at all.
For additional information regarding our acquisition of ProFlame, please
read the Unaudited Pro Forma Combined Financial Statements and the notes to
those statements beginning on page F-2 of this prospectus supplement.
Recent Acquisition of EnergyNorth Propane
During February 2001, we purchased all the common stock of EnergyNorth
Propane, Inc. from a subsidiary of Keyspan Corporation. EnergyNorth serves over
17,000 customers throughout New Hampshire, and its VGS Propane, LLC subsidiary
serves over 10,000 customers in Vermont and New Hampshire. EnergyNorth, in
combination with VGS Propane, delivered 22 million retail gallons of propane
during its fiscal year ended September 30, 2000. The operations of EnergyNorth
and VGS Propane, which we expect to be accretive to our cash flow per unit,
significantly expand our operations in the northern New England marketplace and
will further diversify our national presence.
S-2
5
New Field Technologies
Telemetry. We recently purchased 10,000 telemetry units from LPG Central,
Inc. These units allow us to monitor the levels of propane in our customers'
tanks from our customer service locations. We plan to use the telemetry units to
monitor the tank levels of our customers whose propane needs are not directly
related to temperature changes, such as our commercial, industrial and
agricultural customers. We believe that use of the telemetry units to monitor
these customers' tanks will reduce our delivery costs by allowing us to deliver
optimal quantities of propane when their tanks reach certain levels.
Mapping. We are currently testing mapping computer software that routes
our propane deliveries by the shortest driving distance at ten of our customer
service locations. We expect to expand testing of the software to additional
customer service locations and to fully implement the software once we have
assessed the efficiencies that the software provides and selected a provider. We
anticipate that use of the software will reduce our delivery costs and reduce
the overtime worked by our delivery personnel.
RECENT FINANCIAL DEVELOPMENTS
Recent Operating Results
We achieved record operating and financial results during the nine months
ended May 31, 2001. The increases in our operating and financial results during
the nine months ended May 31, 2001 as compared to the results for Predecessor
Heritage for the same period in the prior year were principally due to the U.S.
Propane transaction, which occurred in August 2000, additional acquisitions this
fiscal year and favorable winter weather conditions during this past heating
season. The transaction with U.S. Propane and the additional acquisitions we
completed this fiscal year affect the comparability of the nine months ended May
31, 2001 and 2000, because the volumes and results of operations for the nine
months ended May 31, 2001 include the volumes and results of the operations we
acquired in those transactions. Predecessor Heritage refers to the propane
operations of Heritage Propane Partners, L.P. prior to the U.S. Propane
transaction. Although we were the surviving legal entity of the U.S. Propane
transaction, U.S. Propane's propane operations were the acquiring entity for
accounting purposes.
For the nine months ended May 31, 2001, our EBITDA increased 130.7% to
$98.3 million as compared to $42.6 million for the same period in the prior
year, and retail gallons sold increased 82.3% to 282.8 million as compared to
155.1 million for the same period in the prior year. Net income for the nine
months ended May 31, 2001 was $39.4 million, or $2.97 per limited partner unit,
as compared to $14.0 million, or $1.43 per limited partner unit, for the same
period in the prior year. Operating expenses for the nine months ended May 31,
2001 were $96.0 million as compared to $45.7 million for the same period in the
prior year.
Increases in Cash Distributions
Effective with our distribution for the quarter ended May 31, 2001, which
we made on July 16, 2001, we increased our quarterly cash distribution to
$0.6125 from $0.60 per common unit. This was our fourth consecutive quarterly
increase in cash distributions. These increases reflect the successful
implementation of our strategies of keeping costs low while completing and
successfully integrating accretive acquisitions. Based on the most recent
distribution for the quarter ended May 31, 2001, our annualized distribution is
now $2.45 per common unit.
Issuance of Fixed Rate Senior Secured Notes
On May 24, 2001, we issued $70 million of our fixed rate senior secured
notes. The notes were sold to a group of institutional lenders and have 7-, 12-
and 15-year final maturities with an average coupon of 7.66%. The notes were
rated BBB, an investment grade rating, by Fitch IBCA, Duff & Phelps. We used the
net proceeds from the notes to repay the balance outstanding under our senior
revolving acquisition facility and to reduce other debt. We issued the notes
under our 2000 Note Purchase Agreement, which provided for the issuance of up to
$250 million of notes and under which we had issued $180 million of notes in
August 2000.
S-3
6
Extension of Credit Facilities
On July 16, 2001, we amended our senior revolving working capital facility
to extend its expiration date from June 30, 2002 to June 30, 2004, and we
amended our senior revolving acquisition facility to extend its initial
expiration date from December 31, 2001 to December 31, 2003, at which time the
facility will convert to a term loan payable in quarterly installments with a
final maturity of June 30, 2006. As of June 30, 2001 (and before our acquisition
of ProFlame), we had $55.1 million available under our working capital facility
and $48.5 million available under our acquisition facility.
Conversion of Remaining Subordinated Units and End of Subordination Period
As of July 6, 2001, all of the outstanding subordinated units converted
into common units, ending the subordination period under our partnership
agreement. All of the subordinated units were held by our general partner and
were a separate class of limited partner interests in our partnership that were
subordinated to the rights of holders of common units. The conversions of the
subordinated units occurred and the subordination period ended because we met
specified cash performance and distribution requirements under our partnership
agreement. As common units issued upon conversion of the subordinated units, the
new common units share equally with other common units in distributions of
available cash. There are 1,382,514 Class B subordinated units that were issued
in connection with the U.S. Propane transaction that remain outstanding. Please
read "Description of Units -- Class B Subordinated Units."
S-4
7
OUR STRUCTURE
The following chart depicts our organization and ownership structure after
giving effect to the offering of 2,500,000 common units described in this
prospectus. The percentages in the organization chart represent the approximate
ownership interest in our partnership and our operating partnership individually
and not on a combined basis, unlike the other presentations in this prospectus.
[CHART]
- ---------------
(1) The members of U.S. Propane L.L.C. and their membership interests are as
follows:
- - TECO Propane Ventures, LLC................................ 38.0%
- - AGL Energy Corporation.................................... 22.3%
- - Piedmont Propane Company.................................. 20.7%
- - United Cities Propane Gas, Inc. .......................... 19.0%
-----
100.0%
(2) Does not include approximately 160,400 common units issuable to our general
partner in connection with our planned acquisition of ProFlame.
(3) Includes common units held by our board of directors, management and key
supervisory employees which, with the Class B subordinated units they hold,
represent an approximate 13.2% limited partner interest in our partnership.
(4) All of the Class B subordinated units are held by members of our board of
directors or management.
S-5
8
THE OFFERING
Securities offered by us............ 2,500,000 common units
Price............................... $ per common unit
Units to be outstanding immediately
after the offering(1)............... 14,155,667 common units and 1,382,514
class B subordinated units. If the
underwriters exercise in full their
over-allotment option, we will issue an
additional 375,000 common units, which
will result in 14,530,667 common units
outstanding.
Use of proceeds..................... We expect to use approximately $45
million of the estimated $ million
of net proceeds of this offering to
reduce indebtedness under our senior
revolving acquisition facility,
substantially all of which will be
incurred in our planned acquisition of
ProFlame. We will use the balance of
the net proceeds for general
partnership purposes, including future
acquisitions and repayment of debt. If
we do not complete the acquisition of
ProFlame before the closing of this
offering, the net proceeds will be
invested in short term, investment
grade, interest-bearing securities
until the completion of the
acquisition. If we do not complete the
acquisition of ProFlame after the
closing of this offering, we will use
the net proceeds for general
partnership purposes.
New York Stock Exchange symbol...... HPG
- ---------------
(1) Does not include approximately 160,400 common units issuable to our general
partner in connection with our planned acquisition of ProFlame.
S-6
9
TAX CONSIDERATIONS
The tax consequences to you of an investment in common units will depend in
part on your own tax circumstances. For a discussion of the principal federal
income tax considerations associated with our operations and the purchase,
ownership and disposition of units, please read "Tax Considerations" beginning
on page 25 of the accompanying prospectus. For a description of recent federal
income tax developments, please read "Recent Tax Developments" on page S-25 of
this prospectus supplement. You should consult your own tax advisor about the
federal, state and local tax consequences applicable to your circumstances.
We estimate that a purchaser of common units in this offering who holds the
units through the record date for the quarter ended December 31, 2003 will be
allocated an amount of federal taxable income for that period that will be less
than 20% of the amount of cash distributed to the unitholder with respect to
that period. We further estimate that after the quarter ended December 31, 2003,
the taxable income allocable to the unitholders will constitute an increasing
percentage of the cash distributed to unitholders. These estimates are based on
the assumption that our available cash for distribution will approximate the
amount required to distribute cash to the holders of the common units and the
class B subordinated units in an amount equal to the quarterly distribution for
the quarter ended May 31, 2001 of $0.6125 per unit and other assumptions
regarding capital expenditures, cash flow and anticipated cash distributions.
These estimates and assumptions are subject to, among other things, numerous
business, economic, regulatory, competitive and political uncertainties beyond
our control. Further, the estimates are based on current tax law and tax
reporting positions that we have adopted and with which the Internal Revenue
Service could disagree. Accordingly, the estimates may not be correct. The
actual percentage of distributions that will constitute taxable income could be
higher or lower, and any differences could be material and could materially
affect the value of the units. Taxable income will be allocated to purchasers of
common units in this offering from the date of purchase, but cash distributions
will not be made on the common units purchased in this offering until on or
about October 15, 2001.
S-7
10
RISK FACTORS
The common units offered by this prospectus may involve a high degree of
risk. You should read carefully the discussion of the material risks relating to
an investment in the common units beginning on page 3 of the accompanying
prospectus.
USE OF PROCEEDS
We estimate that we will receive approximately $ million from the sale
of the common units, or $ million if the underwriters' over-allotment option
is exercised in full, in each case, after deducting underwriting discounts and
commissions and offering expenses. We expect to use approximately $45 million of
these net proceeds to reduce indebtedness under our senior revolving acquisition
facility, substantially all of which will be incurred in our planned acquisition
of ProFlame. We will use the balance of the net proceeds for general partnership
purposes, including future acquisitions and repayment of debt under our working
capital facility. If we do not complete the acquisition of ProFlame before the
closing of this offering, the net proceeds will be invested in short term,
investment grade, interest-bearing securities until the completion of the
acquisition. If we do not complete the acquisition of ProFlame after the closing
of this offering, we will use the net proceeds for general partnership purposes.
As of June 30, 2001, we had $1.5 million outstanding under our senior
revolving acquisition facility bearing interest at a rate of approximately 6.5%
per annum with a final maturity of June 30, 2006.
S-8
11
CAPITALIZATION
The following table sets forth our historical, pro forma and as adjusted
capitalization as of May 31, 2001. The pro forma information gives effect to our
acquisition of ProFlame. The as adjusted information gives effect to (i) the
offering of common units, assuming an issue price of $30.00, the last reported
sale price of the common units on the New York Stock Exchange on July 20, 2001,
(ii) the application of the net proceeds of the offering in the manner we
describe under "Use of Proceeds" and (iii) the capital contribution of our
general partner to maintain its aggregate 2% general partner interest in us and
Heritage Operating, L.P., our operating subsidiary, in connection with the
issuance of additional common units.
This table should be read in conjunction with our historical financial
statements and the notes to those financial statements that are incorporated by
reference in this prospectus.
AS OF MAY 31, 2001
------------------------------
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(IN THOUSANDS)
Cash................................................... $ 4,471 $ 4,570 $ 31,295
======== ======== ========
Long-term debt:
8.55% Senior Secured Notes........................... $120,000 $120,000 $120,000
Medium Term Note Program -- Senior Secured Notes,
Series A-E........................................ 45,571 45,571 45,571
Senior Secured Promissory Notes, Series A-I.......... 250,000 250,000 250,000
Senior Revolving Acquisition Facility................ 1,500 45,438 --
Other................................................ 17,334 24,584 24,584
-------- -------- --------
Total long-term debt, including current
maturities................................. 434,405 485,593 440,155
-------- -------- --------
Minority interests..................................... 5,203 5,253 6,026
-------- -------- --------
Partners' capital:
Common unitholders................................... 120,282 125,094 195,719
Subordinated unitholders(1).......................... 25,464 25,464 25,464
Class B subordinated unitholders..................... 18,207 18,207 18,207
General partner...................................... 1,341 1,390 2,155
Accumulated other comprehensive income............... (2,738) (2,738) (2,738)
-------- -------- --------
Total partners' capital...................... 162,556 167,417 238,807
-------- -------- --------
Total capitalization......................... $602,164 $658,263 $684,988
======== ======== ========
- ---------------
(1) These subordinated units converted into common units under the terms of our
partnership agreement on July 6, 2001. Please read "Description of
Units -- Subordinated Units."
S-9
12
DISTRIBUTIONS
The following table sets forth quarterly declared cash distributions on our
common units for the quarter with respect to which they were payable:
DISTRIBUTIONS DECLARED
PER COMMON UNIT(1)
----------------------
2001 Fiscal Year
Third Quarter ended May 31, 2001............... $0.6125
Second Quarter ended February 28, 2001......... 0.6000
First Quarter ended November 30, 2000.......... 0.5875
2000 Fiscal Year
Fourth Quarter ended August 31, 2000........... $0.5750
Third Quarter ended May 31, 2000............... 0.5625
Second Quarter ended February 29, 2000......... 0.5625
First Quarter ended November 30, 1999.......... 0.5625
1999 Fiscal Year
Fourth Quarter ended August 31, 1999........... $0.5625
Third Quarter ended May 31, 1999............... 0.5625
Second Quarter ended February 28, 1999......... 0.5625
First Quarter ended November 30, 1998.......... 0.5125
- ---------------
(1) For each quarter, an identical cash distribution was paid on all outstanding
subordinated units and, beginning with the fourth quarter of 2000, all
outstanding class B subordinated units, as applicable.
S-10
13
SELECTED FINANCIAL INFORMATION
The following table sets forth, for the periods and as of the dates
indicated, selected historical financial and operating data for Heritage Propane
Partners, L.P. Predecessor Heritage refers to the propane operations of Heritage
Propane Partners, L.P. prior to the transaction with U.S. Propane. The selected
historical, financial and operating data should be read in conjunction with the
financial statements of Heritage Propane Partners, L.P. and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
incorporated by reference in this prospectus. The amounts in the table below,
except per unit data, are in thousands.
NINE MONTHS
YEAR ENDED YEAR ENDED PERIOD ENDED ENDED
AUGUST 31, 1998 AUGUST 31, 1999 AUGUST 9, 2000 MAY 31, 2000 NINE MONTHS
(PREDECESSOR (PREDECESSOR (PREDECESSOR (PREDECESSOR ENDED
HERITAGE) HERITAGE) HERITAGE)(F) HERITAGE) MAY 31, 2001
--------------- --------------- --------------- ------------- -------------
(UNAUDITED)
STATEMENT OF OPERATING DATA:
Revenues......................... $185,987 $184,020 $242,491 $211,274 $624,757
Gross profit(a).................. 89,103 96,753 101,746 91,697 206,012
Depreciation and amortization.... 13,680 14,749 17,143 13,624 30,322
Operating income................. 22,929 24,567 23,475 27,415 65,679
Interest expense................. 14,599 15,915 17,664 14,094 26,423
Income before income taxes and
minority interest.............. 9,266 10,116 6,936 14,499 40,883
Net income....................... 8,790 9,662 6,504 13,965 39,448
General partner's interest in net
income......................... 88 97 65 140 849
Limited partners' interest in net
income......................... 8,702 9,565 6,439 13,825 38,599
Basic net income per limited
partner unit................... 1.04 1.11 0.66 1.43 2.97
Diluted net income per limited
partner unit................... 1.04 1.11 0.66 1.42 2.97
Basic weighted average number of
limited partner units
outstanding.................... 8,332 8,589 9,713 9,651 12,981
Diluted weighted average number
of limited partner units
outstanding.................... 8,365 8,646 9,788 9,726 13,012
CASH DISTRIBUTIONS DECLARED PER
UNIT:
Limited partner unit(b).......... $ 2.00 $ 2.20 $ 1.69 $ 1.69 $ 1.80
OPERATING AND OTHER FINANCIAL
DATA:
EBITDA(c)........................ $ 37,792 $ 41,047 $ 42,373 $ 42,590 $ 98,300
Net cash provided by operating
activities..................... 24,532 23,613 14,144 19,774 51,347
Net cash used in investing
activities..................... (27,124) (30,799) (58,283) (56,946) (71,505)
Net cash provided by financing
activities..................... 2,404 7,028 44,587 39,699 19,784
Capital expenditures(d)
Maintenance and growth......... 9,359 14,974 12,931 10,877 17,417
Acquisition.................... 23,276 17,931 46,801 46,803 48,789
Retail propane gallons sold...... 146,747 159,938 170,891 155,101 282,834
S-11
14
AUGUST 31,
------------------------------ MAY 31,
1998 1999 2000 2001
-------- -------- -------- --------
BALANCE SHEET DATA:
Current assets..................................... $ 26,257 $ 29,267 $ 84,869 $105,592
Property, plant and equipment, net................. 139,490 155,219 339,366 371,499
Total assets....................................... 239,964 262,958 615,779 676,403
Current liabilities................................ 35,444 47,492 102,212 77,816
Long-term debt, less current maturities............ 177,431 196,216 361,990 430,828
Partners' capital(e)............................... 27,089 19,062 146,756 162,556
- ---------------
(a) Gross profit is computed by reducing total revenue by the direct cost of
the products sold.
(b) Amounts shown represent declared cash distributions on our common units for
the period with respect to which they were payable.
(c) EBITDA is defined as operating income plus non-cash compensation,
depreciation and amortization (including the EBITDA of investees). EBITDA
does not include the EBITDA of the minority interest in M-P Energy
Partnership, a Canadian partnership in which we own a 60% interest. EBITDA
should not be considered as an alternative to net income (as an indicator
of operating performance) or as an alternative to cash flow (as a measure
of liquidity or ability to service debt obligations), but provides
additional information for evaluating our ability to make the minimum
quarterly distributions provided for in our partnership agreement. EBITDA
is not a calculation based on generally accepted accounting principles.
Investors should be cautioned that EBITDA as reported by us may not be
comparable in all instances to EBITDA as reported by other companies.
(d) Capital expenditures fall generally into three categories: (i) maintenance
capital expenditures, which include expenditures for repairs that extend
the life of the assets and replacement of property, plant and equipment,
(ii) growth capital expenditures, which include expenditures for purchases
of new propane tanks and other equipment and technology to facilitate
retail customer base expansion, and (iii) acquisition capital expenditures,
which include expenditures related to the acquisition of retail propane
operations and the portion of the purchase price allocated to intangibles
associated with such acquired business.
(e) Partners' capital is anticipated to decrease to the extent depreciation and
amortization exceeds maintenance capital expenditure requirements.
(f) The period ended August 9, 2000 represents approximately 11 months of
operations of Predecessor Heritage from September 1, 1999 through August 9,
2000.
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OUR BUSINESS
GENERAL
We are a publicly traded Delaware limited partnership and the fourth
largest retail marketer of propane in the United States, delivering
approximately 350 million gallons a year to approximately 500,000 customers from
over 250 customer service locations in 28 states. Our operations extend from
coast to coast, with concentrations in the western, upper midwestern,
northeastern and southeastern regions of the United States.
We have grown primarily through acquisitions of retail propane operations
and, to a lesser extent, through internal growth. Since the inception of our
business in 1989 until August 9, 2000, we completed 70 acquisitions for an
aggregate purchase price of approximately $297 million. On August 10, 2000, U.S.
Propane transferred its propane operations to us for $181.4 million, plus
working capital of approximately $11.4 million. This transaction combined five
of the nation's 50 largest retail propane operations.
Since our transaction with U.S. Propane in August 2000, we have completed
ten additional acquisitions for an aggregate purchase price of approximately $59
million, which have added approximately 35 million retail gallons annually and
increased our customer base by approximately 49,000 customers. Furthermore, we
have entered into definitive agreements to acquire ProFlame, Inc. and related
propane distribution companies in California and Nevada, which together
delivered approximately 25 million retail gallons for the fiscal year ended
August 31, 2000 to over 32,000 customers. The following table sets forth certain
retail propane statistics about these acquisitions and the pending ProFlame
acquisition:
APPROXIMATE
LOCATION(S) OF RETAIL
COMPANY(1) OPERATIONS ACQUISITION DATE CUSTOMERS(2) GALLONS(3)
- ---------- --------------- ---------------- ------------ -----------
ProFlame, Inc.(4)......... California and Expected 32,600 25,000,000
Nevada July 31, 2001
Foust Fuels, Inc. ........ Mebane, NC May 2001 3,300 2,375,000
Aubrey H. Efird Company,
Inc. ................... Albermarle, NC May 2001 2,400 1,850,000
EnergyNorth Propane,
Inc.(5)................. New Hampshire February 2001 27,000 22,000,000
and Vermont
Kirby's Propane Gas,
Inc. ................... Camden, TN January 2001 1,300 780,000
Adams LP Gas of Lake City,
Inc. ................... Lake City, FL November 2000 1,700 675,000
Truett's Propane
Service................. Albuquerque, NM November 2000 900 1,028,000
Grenier Gas Company....... Waterbury, VT September 2000 1,500 765,000
Paradee Gas Co............ Dover, DE September 2000 7,800 4,170,000
Lewis Gas Company......... Huntingdon, TN August 2000 1,200 940,000
TriGas Company............ Paris, TN August 2000 1,200 720,000
------ ----------
Total...........
80,900 60,303,000
====== ==========
- ---------------
(1) Operating name of acquired company as of acquisition date.
(2) Approximate number of customers as of acquisition date.
(3) Represents normalized retail gallons sold based on the twelve-month period
preceding acquisition date.
(4) Includes related companies.
(5) Includes VGS Propane, LLC.
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PRODUCTS, SERVICES AND MARKETING
We distribute propane through our nationwide retail distribution network of
over 250 customer service locations in 28 states. We also refer to these
customer service locations as "district locations" and the areas they serve as
"districts." Typically, district locations are located in suburban and rural
areas where natural gas is not readily available. Districts generally consist of
a one to two acre parcel of land, an office, a small warehouse and service
facility, a dispenser and one or more 18,000 to 30,000 gallon storage tanks.
We own, through our subsidiaries, a 60% interest in M-P Energy Partnership,
a Canadian partnership that supplies us propane as described below under
"-- Propane Supply and Storage." When we refer to or give information regarding
our domestic operations, we are excluding amounts attributable to M-P Energy
Partnership, unless we indicate otherwise in this prospectus.
Propane use falls into three broad categories: (i) residential
applications, (ii) industrial, commercial and agricultural applications and
(iii) other retail applications, including motor fuel sales. Approximately 96%
of our domestic propane gallons sold in the nine months ended May 31, 2001 were
to retail customers (59% to residential customers, 28% to industrial, commercial
and agricultural customers and 13% to motor fuel and other retail customers),
and approximately 4% were to wholesale customers. Sales to residential customers
in the nine months ended May 31, 2001 represented approximately 57% of total
domestic gallons sold and 66% of our domestic propane margin. Residential sales
have a greater profit margin and a more stable customer base than other markets
that we serve. No single customer accounted for 10% or more of our revenues for
the nine months ended May 31, 2001. Approximately 80% of our domestic retail
propane volume and 92% of our EBITDA in the nine months ended May 31, 2001 were
attributable to sales during the peak heating season from October 2000 through
March 2001, as many customers use propane for heating purposes. We estimate that
approximately 69% of our domestic retail propane volume and 92% of our EBITDA
for the twelve months ended August 31, 2001 will be attributable to sales during
the peak heating season from October 2000 through March 2001.
Residential customers use propane primarily for space and water heating.
Industrial customers use propane primarily as fuel for forklifts and stationary
engines, to fire furnaces, as a cutting gas, in mining operations and in other
process applications. Commercial customers, such as restaurants, motels,
laundries and commercial buildings, use propane in a variety of applications,
including cooking, heating and drying. In the agricultural market, propane is
primarily used for tobacco curing, crop drying, poultry brooding and weed
control. Other retail uses include motor fuel for cars and trucks, outdoor
cooking and other recreational uses, resale and sales to state and local
governments.
Propane is generally transported from refineries, pipeline terminals,
leased storage facilities and coastal terminals by rail or truck transports to
our district locations where it is unloaded into storage tanks. In order to make
a retail delivery of propane to a customer, a bobtail delivery truck is loaded
with propane from the storage tank. Propane is then pumped from the bobtail
truck, which generally holds 2,500 to 3,000 gallons of propane, into a
stationary storage tank on the customer's premises. The capacity of these
customer tanks ranges from approximately 100 gallons to 1,200 gallons, with a
typical tank having a capacity of 100 to 300 gallons in milder climates and from
500 to 1,000 gallons in colder climates. We also deliver propane to retail
customers in portable cylinders, which typically have a capacity of 5 to 35
gallons. When we deliver these cylinders to customers, we pick up empty
cylinders for refilling at our distribution locations or refill the cylinders in
place. We also deliver propane to certain other bulk end users of propane in
tractor-trailers known as transports, which typically have an average capacity
of approximately 10,500 gallons. End users receiving transport deliveries
include industrial customers, large-scale heating accounts, mining operations,
and large agricultural accounts.
We encourage our customers whose propane needs are temperature sensitive to
implement a regular delivery schedule by, in some cases, charging extra for
non-scheduled deliveries. Many of our residential customers receive their
propane supply pursuant to an automatic delivery system that eliminates the
customer's need to make an affirmative purchase decision and allows for more
efficient route scheduling and maximization of volumes delivered. We also sell,
install and service equipment related to our propane distribution business,
including heating and cooking appliances, from our district locations.
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The propane business is very seasonal with weather conditions significantly
affecting demand for propane. We believe that the geographic diversity of our
operations helps to minimize our nationwide exposure to regional weather.
Although overall demand for propane is affected by climate, changes in price and
other factors, we believe our business to be relatively stable, due to the
following characteristics:
- residential and commercial demand for propane has been relatively
unaffected by general economic conditions due to the largely
non-discretionary nature of most propane purchases,
- loss of customers to competing energy sources has historically been low,
- the tendency of customers to remain with us due to the fact that the
product is delivered pursuant to a regular delivery schedule and to our
ownership of over 87% of the storage tanks used by our customers, and
- our historic ability to more than offset customer losses through internal
growth of our customer base in existing markets.
Since home heating usage is the most sensitive to temperature, residential
customers account for the greatest usage variation due to weather. Variations in
the weather in one or more regions in which we operate can significantly affect
the total volume of propane we sell, the margins we realize and, consequently,
our results of operations. We believe that sales to the commercial and
industrial markets, while affected by economic patterns, are not as sensitive to
variations in weather conditions as sales to residential and agricultural
markets.
PROPANE SUPPLY AND STORAGE
Supplies of propane from our sources historically have been readily
available. We purchase propane from over 50 oil companies and natural gas
processors at numerous supply points located in the United States and Canada. In
the nine months ended May 31, 2001, Enterprise Products Operating L.P. and
Dynegy Liquids Marketing and Trade provided approximately 22% and 19% of our
total propane supply, respectively. In addition, M-P Oils, Ltd., one of our
wholly owned subsidiaries, procured 21% of our total propane supply during the
nine months ended May 31, 2001. M-P Oils holds a 60% interest in M-P Energy
Partnership, a Canadian partnership that buys and sells propane for its own
account and supplies us propane in the northern United States.
We believe that, if supplies from Enterprise and Dynegy were interrupted,
we would be able to secure adequate propane supplies from other sources without
a material disruption of our operations. Aside from Enterprise and Dynegy, no
single ultimate supplier provided more than 10% of our total propane supply
during the nine months ended May 31, 2001. We believe that our diversification
of suppliers will enable us to purchase all of our supply needs at market prices
if supplies are interrupted from any of the sources without a material
disruption of our operations.
We typically enter into one-year supply agreements subject to annual
renewal. The percentage of our contract purchases varies from year to year.
Supply contracts generally provide for pricing in accordance with posted prices
at the time of delivery or the current prices established at major delivery or
storage points, and some contracts include a pricing formula that typically is
based on these market prices. Most of these agreements provide maximum and
minimum seasonal purchase guidelines. We receive our supply of propane
principally through railroad tank cars and common carrier transport trucks.
Because our profitability is sensitive to changes in wholesale propane
costs, we generally seek to pass on increases in the cost of propane to
customers. We have generally been successful in maintaining retail gross margins
on an annual basis despite changes in the wholesale cost of propane, but there
is no assurance that we will always be able to pass on product cost increases
fully, particularly when product costs rise rapidly. Consequently, our
profitability will be sensitive to changes in wholesale propane prices.
We lease space in storage facilities in Michigan, Mississippi, North
Carolina and Arizona and smaller storage facilities in other locations and have
rights to use storage facilities in additional locations when we
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"pre-buy" products from these sources. We believe that we have adequate third
party storage to take advantage of supply purchasing advantages as they may
occur from time to time. Access to storage facilities allows us to buy and store
large quantities of propane during periods of low demand, which generally occur
during the summer months, helping to ensure a more secure supply of propane
during periods of intense demand or price instability.
PRICING POLICY
Pricing policy is an essential element in the marketing of propane. We rely
on regional management to set prices based on prevailing market conditions and
product cost, as well as local management input. All regional managers are
advised regularly of any changes in the posted price of the district's propane
suppliers. In most situations, we believe that our pricing methods will permit
us to respond to changes in supply costs in a manner that protects our gross
margins and customer base, to the extent possible. In some cases, however, our
ability to respond quickly to cost increases could occasionally cause our retail
prices to rise more rapidly than those of our competitors, possibly resulting in
a loss of customers.
BILLING AND COLLECTION PROCEDURES
Customer billing and account collection responsibilities are handled at the
local level. We believe that this decentralized approach is beneficial because
- the customer is billed on a timely basis,
- the customer is more apt to pay a "local" business,
- cash payments are received more quickly, and
- local personnel have a current account status available to them at all
times to answer customer inquiries.
PROPERTIES
We operate bulk storage facilities at over 250 customer service locations.
We own substantially all these facilities and have entered into long-term leases
for those we do not own. We believe that the increasing difficulty associated
with obtaining permits for new propane distribution locations makes our high
level of site ownership and control a competitive advantage. We own
approximately 31 million gallons of above ground storage capacity at our various
plant sites and have leased an aggregate of approximately 50 million gallons of
underground storage facilities in Michigan, Mississippi, South Carolina,
Arizona, Missouri and Texas. We do not own or operate any underground storage
facilities (excluding customer and local distribution tanks) or pipeline
transportation assets (excluding local delivery systems).
We also own 50% of Bi-State Propane, a California general partnership that
conducts business in California and Nevada. Bi-State Propane operates nine
locations that are included on a gross basis in our site counts and in all site,
customer and other property descriptions contained in this prospectus.
The transportation of propane requires specialized equipment. The trucks
and railroad tank cars used for this purpose carry specialized steel tanks that
maintain the propane in a liquefied state. As of May 31, 2001, we utilized 32
transport truck tractors, 34 transport trailers, 7 railroad tank cars, 918
bobtails and 1,138 other delivery and service vehicles, all of which we own. As
of May 31, 2001, we owned approximately 410,000 customer storage tanks with
typical capacities of 120 to 1,000 gallons. These customer storage tanks serve
as collateral to secure our obligations under borrowings from banks and
noteholders.
We own and utilize a variety of trademarks and tradenames, including
"Heritage Propane." We believe that our strategy of retaining the names of the
companies we acquire has maintained the local identification of these companies
and has been important to the continued success of these businesses. We regard
our trademarks, tradenames and other proprietary rights as valuable assets and
believe that they have significant value in the marketing of our products.
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TRADING AND HEDGING ACTIVITIES
Commodity price risk arises from the risk of price changes in the propane
inventory that we buy and sell. The market price of propane is often subject to
volatile changes as a result of supply or other market conditions over which we
have no control. We attempt to minimize the effects of market price fluctuations
for our propane supply through trading activities and by entering into specified
financial contracts. Our trading activities include both purchases and sales of
product supply.
The financial contracts that we enter into are often referred to as swap
instruments. The swap instruments are contractual agreements to exchange
obligations of money between the buyer and seller of the instruments as propane
volumes during the pricing period are purchased. The swaps are tied to a fixed
price bid by the buyer and a floating price determination for the seller based
on certain indices at the end of the relevant trading period. We enter into
these swap instruments to hedge the projected propane volumes to be purchased
during each of the one-month periods during the projected heating season. We
take an active role in managing and controlling the risks inherent in our
trading and hedging activities by utilizing a variety of techniques, including
routine reporting to senior management, periodic monitoring procedures and
credit policies. However, our portfolio is subject to inherent risks resulting
from changing market conditions and from nonperformance by suppliers, customers
or financial counterparties to a contract.
ENVIRONMENTAL MATTERS RELATING TO PENDING PROFLAME ACQUISITION
ProFlame has received from the Environmental Protection Agency (EPA) an
information request letter with respect to property owned by ProFlame concerning
the Newmark groundwater contamination Superfund site in San Bernardino,
California. However, assuming we complete the acquisition of ProFlame, we do not
expect that any subsequent developments related to this information request will
have a material adverse effect on our results of operations or financial
condition.
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OUR MANAGEMENT
As is commonly the case with publicly-traded master limited partnerships,
we are managed and operated by the officers and directors of our general
partner. Substantially all of our personnel are employees of our general
partner. The following table sets forth specified information regarding the
executive officers and directors of our general partner. Directors are elected
annually by our general partner's sole shareholder, U.S. Propane, and hold
office until their successors are duly elected and qualified. Each executive
officer named in the following table has been elected to serve until his
successor is duly appointed or elected or until his earlier death, removal or
resignation from office. There are no family relationships between any of the
directors or any of the executive officers or between any of the executive
officers and any of the directors.
NAME AGE POSITION WITH GENERAL PARTNER
- ---- ---- -----------------------------
James E. Bertelsmeyer..................... 59 Chairman of the Board and Director
H. Michael Krimbill....................... 47 President, Chief Executive Officer and
Director
R. C. Mills............................... 63 Executive Vice President and Chief
Operating Officer
Larry J. Dagley........................... 53 Vice President, Chief Financial Officer,
Secretary & Treasurer
Bradley K. Atkinson....................... 46 Vice President of Corporate Development
Mark A. Darr.............................. 41 Vice President -- Southern Operations
Thomas H. Rose............................ 56 Vice President -- Northern Operations
Curtis L. Weishahn........................ 48 Vice President -- Western Operations
Bill W. Byrne............................. 71 Director
J. Charles Sawyer......................... 65 Director
Stephen L. Cropper........................ 51 Director
J. Patrick Reddy.......................... 48 Director
Tom S. Hawkins, Jr. ...................... 45 Director
Royston K. Eustace........................ 59 Director
William N. Cantrell....................... 48 Director
Ware F. Schiefer.......................... 63 Director
Clayton H. Preble......................... 53 Director
David J. Dzuricky......................... 49 Director
Paul R. Shlanta........................... 44 Director
Mr. Bertelsmeyer has over 25 years of experience in the propane industry,
including six years as President of Buckeye Gas Products Company, at the time
the nation's largest retail propane marketer. Mr. Bertelsmeyer served as Chief
Executive Officer of Heritage Holdings since its formation until the election of
Mr. Krimbill in March 2000. Mr. Bertelsmeyer began his career with Conoco Inc.
where he spent ten years in positions of increasing responsibility in the
pipeline and gas products departments. Mr. Bertelsmeyer has been a director of
the National Propane Gas Association for the past 24 years and is a former
president of the National Propane Gas Association.
Mr. Krimbill was Treasurer of a publicly traded, fully integrated oil
company prior to joining Heritage Holdings as Vice President and Chief Financial
Officer in 1990. Mr. Krimbill was promoted to President of Heritage Holdings in
April 1999 and to Chief Executive Officer in March 2000. Mr. Krimbill is a
director of the National Propane Gas Association.
Mr. Mills has over 40 years of experience in the propane industry. Mr.
Mills joined Heritage Holdings in 1991 as Executive Vice President and Chief
Operating Officer. Prior to joining Heritage Holdings, Mr. Mills spent 25 years
with Texgas Corporation and its successor, Suburban Propane, Inc. At the time he
left Suburban in 1991, Mr. Mills was Vice President of Supply and Wholesale.
Mr. Dagley became Heritage Holdings' Vice President and Chief Financial
Officer in August 2000, following the transaction with U.S. Propane. Prior to
joining Heritage Holdings, Mr. Dagley was Chief
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Operating Officer of U.S. Propane, LLC for approximately three months during its
transition in the transaction between U.S. Propane and us. Prior to that time,
Mr. Dagley served as Executive Vice President and Chief Financial Officer of
Atmos Energy Corporation, a Dallas-based gas distribution company, from May 1997
until April 2000, and Senior Vice President and Chief Financial Officer of
Pacific Enterprises, a California-based holding company whose primary subsidiary
is Southern California Gas Company, from August 1995 until April 1997.
Mr. Atkinson joined Heritage Holdings in April 1998 as Vice President of
Administration. Prior to joining Heritage Holdings, Mr. Atkinson spent 12 years
with MAPCO/Thermogas, eight of which were spent in the acquisitions and business
development of Thermogas. Mr. Atkinson was promoted to Vice President of
Corporate Development in August 2000.
Mr. Darr has 17 years of experience in the propane industry. Mr. Darr
joined Heritage Holdings in 1991 and has held various positions including
District Manager and Vice President and Regional Manager before his election to
Vice President -- Southern Operations, in August 2000. Prior to joining Heritage
Holdings, Mr. Darr held various positions with Texgas Corporation, and its
successor, Suburban Propane. He is currently serving as President of the Florida
Propane Gas Association and is the Florida Director of the National Propane Gas
Association.
Mr. Rose has 26 years of experience in the propane industry. Mr. Rose
joined Heritage Holdings in November 1994 as Vice President and Regional
Manager. Prior to joining Heritage Holdings, Mr. Rose held Regional Manager
positions with Texgas Corporation, its successor, Suburban Propane, and later
Vision Energy of Florida. Mr. Rose was appointed Vice President -- Northern
Operations in August 2000.
Mr. Weishahn has 24 years of experience in the propane industry. Mr.
Weishahn joined Heritage Holdings in 1995 as Vice President and Regional Manager
and was elected Vice President -- Western Operations in August 2000. Prior to
joining Heritage Holdings, Mr. Weishahn owned his own propane business, which
was acquired by Heritage Holdings. Prior to that time, Mr. Weishahn spent 12
years with AmeriGas/CalGas where, at the time of departing, he was Director of
Marketing/Strategic Development for the Western United States.
Mr. Byrne is the principal of Byrne & Associates, L.L.C., a gas liquids
consulting group based in Tulsa, Oklahoma, and has held that position since
1992. Prior to that time, he served as Vice President of Warren Petroleum
Company, the gas liquids division of Chevron Corporation, from 1982-1992. Mr.
Byrne has served as a director of Heritage Holdings since 1996 and is chairman
of the Audit Committee. Mr. Byrne is a former president and director of the
National Propane Gas Association.
Mr. Sawyer is the President and Chief Executive Officer of Computer Energy,
Inc., a provider of software to the propane industry, and has held that position
since 1984. Mr. Sawyer was Chief Executive Officer of Sawyer Gas Co., a regional
propane distributor, until it was purchased by Heritage Holdings in 1991. Mr.
Sawyer has served as a director of Heritage Holdings since 1991 and is a member
of the Audit Committee. Mr. Sawyer is a former president and director of the
National Propane Gas Association.
Mr. Cropper spent 25 years with The Williams Companies before retiring in
1998. At the time of his retirement, Mr. Cropper was President and Chief
Executive Officer of Williams Energy Services. Mr. Cropper is currently involved
in consulting and investing in the energy industry. Mr. Cropper has served as a
director of Heritage Holdings since April 2000 and is a member of the Audit
Committee.
Mr. Reddy is the Senior Vice President and Chief Financial Officer of Atmos
Energy Corporation, and has held that position since October 2000. Prior to
being named to that position, Mr. Reddy served as Atmos' Senior Vice President,
Chief Financial Officer and Treasurer from April 2000 to September 2000, and
prior to that time he served as Atmos' Vice President and Treasurer from
December 1998 to April 2000. Prior to joining Atmos in August 1998 as Vice
President, Corporate Development, Mr. Reddy held a number of management
positions with Pacific Enterprises, Inc. for 18 years, including Vice President,
Planning & Advisory Services from 1995 to August 1998. Mr. Reddy has served as a
director of Heritage Holdings since August 2000 and is a member of the
Compensation Committee.
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Mr. Hawkins is the President of Energas Company, a division of Atmos Energy
Corporation, and has held that position since October 2000. Prior to being named
to that position, he was Vice President -- Planning of Atmos from September 1997
through October 2000, and prior to that time he served as the Vice
President -- Finance of United Cities Gas Company from June 1988 through
September 1997. Mr. Hawkins has served as a director of Heritage Holdings since
August 2000.
Mr. Eustace is the Senior Vice President of Business Development for TECO
Energy, Inc. and has held that position since 1998. Mr. Eustace is also the
President of TECO Coalbed Methane and TECO Oil & Gas, and has held those
positions since 1991 and 1995, respectively. Mr. Eustace joined TECO in 1987 as
its Vice President of Strategic Planning and Business Development. Mr. Eustace
has served as a director of Heritage Holdings since August 2000.
Mr. Cantrell is the President of Peoples Gas System, a Florida gas
distribution company. He has held that position since June 1997. Mr. Cantrell is
also the President of TECO Solutions, an energy services company providing
services primarily in Florida. Peoples Gas System and TECO Solutions are
subsidiaries of TECO Energy, where Mr. Cantrell has been employed since 1975.
Mr. Cantrell has served as a director of Heritage Holdings since August 2000.
Mr. Schiefer is the President and Chief Executive Officer of Piedmont
Natural Gas Company, Inc. and has held that position since February 2000. Mr.
Schiefer is also a director of Piedmont. From February 1999 to February 2000, he
served as Piedmont's Chief Operating Officer. From 1995 to 1999, Mr. Schiefer
served as Executive Vice President, and prior to that time he served as
Piedmont's Vice President -- Marketing and Gas Supply. Mr. Schiefer has served
as a director of Heritage Holdings since August 2000.
Mr. Preble is the Senior Vice President of AGL Resources, Inc. and has held
that position since June 1999. Prior to being named to that position, Mr. Preble
served as the Senior Vice President -- Direct Marketing of SouthStar Energy
Services, L.L.C. and as the President of The Energy Spring, Inc., both
affiliates of AGL. Mr. Preble joined AGL in 1970 and served in various executive
capacities prior to these positions. Mr. Preble has served as a director of
Heritage Holdings since August 2000.
Mr. Dzuricky is the Senior Vice President and Chief Financial Officer of
Piedmont Natural Gas Company and has served in that capacity since May 1995.
Prior to being named to that position, Mr. Dzuricky held a variety of executive
officer positions with Consolidated Natural Gas Company during the period from
1982 to 1995. Mr. Dzuricky has served as a director of Heritage Holdings since
August 2000.
Mr. Shlanta is the Senior Vice President and General Counsel of AGL
Resources, Inc., and has held that position since September 1998. Prior to being
named to that position, he was a partner in the law firm of Rowe, Fultz &
Martin, P.C. in Atlanta, Georgia. Mr. Shlanta also serves as a director of
SouthStar Energy Services, L.L.C. Mr. Shlanta has served as a Director of
Heritage Holdings since August 2000.
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DESCRIPTION OF UNITS
UNITS
Common units, class B subordinated units and class C units represent
limited partner interests in our partnership that entitle the holders to the
rights and privileges specified in our partnership agreement. As of July 6,
2001, there were issued and outstanding 11,655,667 common units and 1,382,514
class B subordinated units representing, together with the 1.0101% limited
partner interest in Heritage Operating held by U.S. Propane, an aggregate
98.9899% limited partner interest in our partnership. Except as described below,
the common units and class B subordinated units generally participate pro rata
in our income, gains, losses, deductions, credits and distributions. There are
also 1,000,000 class C units outstanding that are entitled only to participate
in any incentive distributions we may make that are attributable to amounts
received by us in connection with specified litigation.
Prior to July 6, 2001, we also had subordinated units representing limited
partner interests that were issued and outstanding, all of which converted to
common units as described below under "-- Subordinated Units." Prior to
converting into common units, and except as described below, the subordinated
units generally participated pro rata with the common units and the class B
subordinated units in our income, gains, losses, deductions, credits and
distributions.
No person is entitled to preemptive rights in respect of issuances of
securities by us, except that Heritage Holdings, our general partner, has the
right to purchase sufficient partnership securities to maintain its equity
interest in us.
COMMON UNITS
The common units are registered under the Securities Exchange Act of 1934
and are listed for trading on the New York Stock Exchange. Each holder of a
common unit is entitled to one vote per unit on all matters presented to the
limited partners for a vote. However, if at any time any person or group (other
than our general partner and its affiliates) owns beneficially 20% or more of
all common units, any common units owned by that person or group may not be
voted on any matter and are not considered to be outstanding when sending
notices of a meeting of unitholders (unless otherwise required by law),
calculating required votes, determining the presence of a quorum or for other
similar purposes under our partnership agreement. The common units are entitled
to distributions of available cash as described below under "-- Cash
Distribution Policy."
SUBORDINATED UNITS
All of the subordinated units were held by Heritage Holdings, a wholly
owned subsidiary of U.S. Propane. The subordinated units were a separate class
of our limited partner interests, and the rights of holders of subordinated
units to participate in distributions to partners differed from, and were
subordinated to, the rights of the holders of common units.
Under our partnership agreement, 925,736 subordinated units converted into
common units as of July 7, 1999, 925,736 subordinated units converted into
common units as of July 5, 2000 and the remaining 1,851,471 subordinated units
converted into common units as of July 6, 2001. The conversions of the
subordinated units occurred and the subordination period ended because we met
specified cash performance and distribution requirements during successive
four-quarter periods commencing with our initial public offering in June of
1996. As common units issued upon conversion of the subordinated units, the new
common units share equally with other common units in distributions of available
cash.
CLASS B SUBORDINATED UNITS
The class B subordinated units represent a portion of the limited partner
interests issued to certain former stockholders of Heritage Holdings, who are
also members of management, in connection with the transaction with U.S.
Propane. The class B subordinated units have the same voting rights as
subordinated
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units outstanding before the end of the subordination period. Each class B
subordinated unit is entitled to one vote on each matter with respect to which
the class B subordinated units are entitled to vote.
In connection with the transaction with U.S. Propane and because the class
B subordinated units are not convertible into common units except by approval of
the common unitholders or a change in the rules of the New York Stock Exchange,
we agreed to submit to a vote or consent of our common unitholders a proposal to
change the terms of the class B subordinated units to provide that each class B
subordinated unit is convertible into one common unit. We intend to submit this
proposal to our common unitholders by December 31, 2001.
The rights of holders of class B subordinated units to participate in
distributions to partners differ from, and are subordinated to, the rights of
holders of common units. Please read "-- Cash Distribution Policy" below. If the
common unitholders approve the conversion of the class B subordinated units into
common units, or if at any time the rules of the New York Stock Exchange or
staff interpretations of such rules are changed, or facts and circumstances
arise so that no vote or consent of the unitholders is required as a condition
to the listing of any common units that may be issued upon such conversion, each
class B subordinated unit will automatically convert into one common unit. But
if the common unitholders do not approve the conversion by December 31, 2001,
the terms of the class B subordinated units will automatically be changed to
provide that the amount allocated or distributed to each class B subordinated
unit will equal 115% of the amount allocated or distributed to each common unit,
except that the common units will have priority over the class B subordinated
units with respect to the minimum quarterly distribution of $0.50 per common
unit and any arrearages on the minimum quarterly distribution.
The class B subordinated units have rights upon dissolution and liquidation
of our partnership, including the right to share in any liquidating
distributions, that are based on 100% (115% if the conversion of the class B
subordinated units is not approved) of the rights of the common units.
Accordingly, the amount of any liquidating distribution to each class B
subordinated unit will equal 100% (115% if the conversion of the class B
subordinated units is not approved) of the amount of such distribution to each
common unit, except that the rights of the class B subordinated units will have
the same order of priority relative to the rights of the common units as
subordinated units outstanding before the end of the subordination period.
CLASS C UNITS
In conjunction with the transaction with U.S. Propane and the change of
control of our general partner, we issued 1,000,000 newly created class C units
to Heritage Holdings in conversion of that portion of its incentive distribution
rights that entitled it to receive any distribution made by us attributable to
the net amount received by us in connection with the settlement, judgment, award
or other final nonappealable resolution of specified litigation filed by us
prior to the transaction with U.S. Propane, which we refer to as the
"litigation." The class C units have a zero initial capital account balance and
were distributed by Heritage Holdings to its former stockholders in connection
with the transaction with U.S. Propane. Thus, U.S. Propane will not receive any
distributions made with respect to the litigation.
All decisions of our general partner relating to the litigation will be
determined by a special litigation committee consisting of one or more
independent directors of our general partner. As soon as practicable after the
time, if any, that we receive the final cash payment as a result of the
resolution of the litigation, the special litigation committee will determine
the aggregate net amount of such proceeds distributable by us by deducting from
the amounts received all costs and expenses incurred by us and our affiliates in
connection with the litigation and such cash reserves as are necessary or
appropriate to provide for operating expenditures. Until the special litigation
committee decides to distribute the distributable proceeds, none of the
distributable proceeds will be deemed to be "available cash" under our
partnership agreement. Please read "-- Cash Distribution Policy -- General"
below for a discussion of available cash. When the special litigation committee
decides to distribute the distributable proceeds, the amount of the distribution
will be deemed to be available cash and will be distributed as described below
under "-- Cash Distribution Policy," provided that the amount of distributable
proceeds that would be distributed to
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holders of incentive distribution rights will instead be distributed to the
holders of the class C units, pro rata. We cannot predict whether we will
receive any cash payments as a result of the litigation and, if so, when such
distributions might be received.
Each holder of class C units receiving a distribution of cash in any
taxable year of our partnership will be allocated items of gross income with
respect to such taxable year in an amount equal to the cash distributed to the
holder. The holders of class C units will not be allocated any other items of
income, gain, loss, deduction or credit. The class C units do not have any
rights to share in any of our assets or distributions upon dissolution and
liquidation of our partnership, except to the extent that any such distributions
consist of proceeds from the litigation to which the class C unitholders would
have otherwise been entitled. The class C units do not have the privilege of
conversion into any other unit and do not have any voting rights except to the
extent provided by law, in which case the class C units will be entitled to one
vote.
The amount of cash distributions to which the incentive distribution rights
are entitled was not increased by the creation of the class C units; rather, the
class C units are a mechanism for dividing the incentive distribution rights
between Heritage Holdings and its former stockholders.
CASH DISTRIBUTION POLICY
Our partnership agreement requires us to distribute all of our "available
cash" to our unitholders and our general partner within 45 days following the
end of each fiscal quarter. The term "available cash" generally means, with
respect to any fiscal quarter of our partnership, all of our cash on hand at the
end of each quarter, plus working capital borrowings after the end of the
quarter, less reserves established by our general partner in its sole discretion
to provide for the proper conduct of our business, to comply with applicable law
or agreements, or to provide funds for future distributions to partners.
The subordination period ended as a result of the conversion into common
units of all remaining outstanding subordinated units (but not class B
subordinated units) as described above. Beginning with our fiscal quarter ending
August 31, 2001, and as long as class B subordinated units are outstanding, we
will distribute available cash, excluding any available cash to be distributed
to our class C unitholders, as follows:
- First, 97% to the holders of common units, pro rata, 1% to U.S. Propane
in respect of its limited partner interest in the operating partnership
and 2% to the general partner, until the holders of common units have
received $0.50 per common unit for such quarter and any prior quarter in
which they failed to receive $0.50 per common unit;
- Second, 97% to the holders of class B subordinated units, pro rata, 1% to
U.S. Propane in respect of its limited partner interest in the operating
partnership and 2% to the general partner, until the holders of Class B
subordinated units have received $0.50 per unit for such quarter;
- Third, 97% to all common unitholders and class B subordinated
unitholders, pro rata, 1% to U.S. Propane in respect of its limited
partner interest in the operating partnership and 2% to the general
partner, until all common unitholders have received at least $0.55 per
unit for such quarter;
- Fourth, 84% to all common unitholders and class B subordinated
unitholders, pro rata, 1% to U.S. Propane in respect of its limited
partner interest in the operating partnership, 13% to the holders of
incentive distribution rights, pro rata, and 2% to the general partner,
until all common unitholders have received at least $0.635 per unit for
such quarter;
- Fifth, 74% to all common unitholders and class B subordinated
unitholders, pro rata, 1% to U.S. Propane in respect of its limited
partner interest in the operating partnership, 23% to the holders of
incentive distribution rights, pro rata, and 2% to the general partner,
until all common unitholders have received at least $0.825 per unit for
such quarter; and
- Sixth, thereafter 49% to all common unitholders and class B subordinated
unitholders, pro rata, 1% to U.S. Propane in respect of its limited
partner interest in the operating partnership, 48% to the holders of
incentive distribution rights, pro rata, and 2% to the general partner.
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If the common unitholders have not approved the conversion of class B
subordinated units into common units by December 31, 2001, then the amount
distributed to each class B subordinated unit pursuant to the second through
sixth clauses above will be equal to 115% of the amount distributed to each
common unit pursuant to each such clause.
If the conversion of the class B subordinated units is approved, each class
B subordinated unit will be converted into one common unit and will then
participate pro rata with the other common units in distributions of available
cash. After the conversion of the class B subordinated units into common units,
we will distribute available cash, excluding any available cash to be
distributed to our class C unitholders, as follows:
- First, 97% to all unitholders, pro rata, 1% to U.S. Propane in respect of
its limited partner interest in the operating partnership, and 2% to the
general partner, until all unitholders have received $0.50 per unit for
such quarter;
- Second, 97% to all unitholders, pro rata, 1% to U.S. Propane in respect
of its limited partner interest in the operating partnership, and 2% to
the general partner, until all unitholders have received $0.55 per unit
for such quarter;
- Third, 84% to all unitholders, pro rata, 1% to U.S. Propane in respect of
its limited partner interest in the operating partnership, 13% to the
holders of incentive distribution rights, pro rata, and 2% to the general
partner, until all unitholders have received $0.635 per unit for such
quarter;
- Fourth, 74% to all unitholders, pro rata, 1% to U.S. Propane in respect
of its limited partner interest in the operating partnership, 23% to the
holders of incentive distribution rights, pro rata, and 2% to the general
partner, until all unitholders have received $0.825 per unit for such
quarter; and
- Fifth, thereafter 49% to all unitholders, pro rata, 1% to U.S. Propane in
respect of its limited partner interest in the operating partnership, 48%
to the holders of incentive distribution rights, pro rata, and 2% to the
general partner.
RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS
The 1,161,814 common units and the 1,382,514 class B subordinated units
issued to the former stockholders of Heritage Holdings in the U.S. Propane
transaction are subject to certain restrictions on transfer. On November 8,
2000, 473,473 of these class B subordinated units and 624,212 of these common
units became transferable. An additional 266,715 of the class B subordinated
units and 165,700 of the common units become transferable on August 10, 2001,
266,715 of the class B subordinated units and 165,700 of the common units become
transferable on August 10, 2002, and 375,611 of the class B subordinated units
and 206,202 of the common units become transferable on August 10, 2003. The
restrictions on transfer are also subject to exceptions contained in the
employment agreements of certain of the former stockholders and our management.
We agreed to grant the former stockholders of Heritage Holdings
registration rights with respect to the class B subordinated units and common
units that they purchased in the transaction with U.S. Propane. We also agreed
to pay the expenses of such registration (excluding discounts and commissions
and fees of underwriters and similar securities industry professionals relating
to the distribution of such registered units). Upon the written request of James
E. Bertelsmeyer, at any time after November 8, 2000 and prior to August 10,
2005, we have agreed to register up to one-half of the common units and class B
subordinated units acquired by Mr. Bertelsmeyer in connection with the
transaction with U.S. Propane, provided that no class B subordinated units owned
by Mr. Bertelsmeyer may be registered at his request until Mr. Bertelsmeyer has
requested that all of the common units that he received in connection with the
transaction with U.S. Propane be registered.
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RECENT TAX DEVELOPMENTS
Congress has recently enacted the Economic Growth and Tax Relief
Reconciliation Act of 2001. In addition, the IRS has recently finalized
regulations under Sections 743, 197, 1223 and 1(h) of the Internal Revenue Code.
To the extent set forth below and under "Tax Considerations -- Legal
Opinions and Advice" in the accompanying prospectus, this section represents the
opinion of Baker Botts L.L.P. insofar as it relates to matters of law and legal
conclusions. The opinion with respect to this section is subject to the same
assumptions and limitations as the opinion of Baker Botts L.L.P. described under
"Tax Considerations" in the accompanying prospectus.
The Economic Growth and Tax Relief Reconciliation Act of 2001 phases in a
reduction of the United States federal income tax rates for individuals.
Beginning July 1, 2001, the highest marginal income tax rate for individuals is
38.6%.
Under rules applicable to publicly traded partnerships, we withhold taxes
on actual cash distributions made quarterly to foreign unitholders. We will
withhold taxes on cash distributions to foreign unitholders at the highest
marginal tax rate applicable to individuals at the time of the distribution.
Treasury Regulations under Section 743 of the Internal Revenue Code
require, if the remedial method is adopted (which we have adopted), a portion of
the Section 743(b) adjustment attributable to property subject to cost recovery
deductions under Section 168 of the Internal Revenue Code to be recovered over
the remaining cost recovery period for the Section 704(c) built-in gain.
Recently finalized Treasury Regulations under Section 197 of the Internal
Revenue Code similarly require a portion of the Section 743(b) adjustment
attributable to amortizable Section 197 intangibles to be amortized over the
remaining amortization period for the Section 704(c) built-in gain. Under
Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b) adjustment
attributable to property subject to depreciation under Section 167 of the
Internal Revenue Code rather than cost recovery deductions under Section 168 is
generally required to be depreciated using either the straight-line method or
the 150% declining balance method. Under our partnership agreement, the general
partner is authorized to adopt a convention to preserve the uniformity of units
even if that convention is not consistent with these Treasury Regulations.
Although counsel is unable to opine on the validity of this approach
because there is no clear authority on this issue, we depreciate and amortize
the portion of a Section 743(b) adjustment attributable to unrealized
appreciation in the value of contributed property, to the extent of any
unamortized Section 704(c) built-in gain, using a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the common basis of the property, or treat that portion as
non-amortizable to the extent attributable to property the common basis of which
is not amortizable. This method is consistent with the recently finalized
Section 743(b) regulations but is arguably inconsistent with Treasury Regulation
Section 1.167(c)-1(a)(6). To the extent a Section 743(b) adjustment is
attributable to appreciation in value in excess of the unamortized Section
704(c) built-in gain, we apply the rules described in the Treasury Regulations
and legislative history. If the IRS successfully challenged our method for
depreciating or amortizing the Section 743(b) adjustment, the uniformity of
units might be affected, and the gain from the sale of units might be increased
without the benefit of additional deductions.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted basis for all those interests. Upon a sale or disposition of less than
all of those interests, a portion of that basis must be allocated to the
interests sold based upon relative fair market values. Although the ruling is
unclear as to how the holding period of these interests is to be determined once
they are combined, the IRS has recently finalized regulations under Section 1223
of the Internal Revenue Code that would allow a selling unitholder who can
identify the units transferred with an ascertainable holding period to elect to
use the actual holding period of the common units transferred. Thus, according
to the ruling, a unitholder will be unable to select high or low basis units to
sell as would be the case with corporate stock, but, according to the
regulations, may
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designate specific units sold for purposes of determining the holding period of
units transferred. A unitholder electing to use the actual holding period of
units transferred must use that identification method for all subsequent sales
or exchanges of units. A unitholder considering the purchase of additional units
or a sale of units purchased in separate transactions should consult his tax
advisor as to the possible consequences of this ruling and application of the
regulations.
The final regulations under Section 1(h) of the Internal Revenue Code
generally provide that a portion of the capital gain that a unitholder realizes
upon the sale or exchange of a unit may be subject to a maximum tax rate of 25%
(instead of 20%) to the extent attributable to prior depreciation claimed on
real property. This depreciation is referred to as "unrecaptured Section 1250
gain."
RECENTLY ISSUED ACCOUNTING STANDARDS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and
Other Intangible Assets. Statement No. 141 requires all business combinations
initiated after June 30, 2001, to be accounted for using the purchase method of
accounting. Under Statement 142, goodwill is no longer subject to amortization
over its estimated useful life. Rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value-based test.
Additionally, an acquired intangible asset should be separately recognized if
the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. There will
be more recognized intangible assets, such as unpatented technology and database
content, being separated from goodwill. Those assets will be amortized over
their useful lives, other than assets that have an indefinite life. Statement
No. 142 is required to be applied starting with fiscal years beginning after
December 15, 2001. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not previously been issued.
Statement No. 141 will apply to the accounting for Heritage's acquisition
of ProFlame, although management has not completed an analysis or appraisal of
the additional intangible assets that must be identified and valued.
Accordingly, for purposes of the unaudited pro forma financial statements,
management has recognized intangible assets for customer lists and covenants
not-to-compete, consistent with Heritage's past application of Accounting
Principles Board Opinion No. 16, Business Combinations. Management has not
determined the method or timing of adopting Statement No. 142. Management has
also not determined the impact of adopting Statement No. 142, although goodwill
amortization for the nine months ended May 31, 2001 was $5.2 million.
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UNDERWRITING
Under the terms and conditions stated in the underwriting agreement dated
the date of this prospectus supplement, each underwriter named below has
severally agreed to purchase from us, and we have agreed to sell to such
underwriter, the number of common units set forth opposite the name of such
underwriter.
NUMBER OF
COMMON
UNDERWRITERS UNITS
- ------------ ---------
Salomon Smith Barney Inc..................................
A.G. Edwards & Sons, Inc..................................
Dain Rauscher Incorporated................................
First Union Securities, Inc...............................
---------
Total........................................... 2,500,000
=========
The underwriting agreement provides that the obligations of the several
underwriters to purchase the common units included in this offering are subject
to approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the common units offered (other
than those covered by the over-allotment option described below) if they
purchase any of the common units offered.
The underwriters propose to offer some of the common units directly to the
public at the public offering price set forth on the cover page of this
prospectus supplement and some of the units to certain dealers at the public
offering price less a concession not in excess of $ per common unit. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per common unit on sales to certain other dealers. If all of the units
are not sold at the initial offering price, the underwriters may change the
public offering price and the other selling terms.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to 375,000 additional
common units at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent the
option is exercised, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional units approximately proportionate
to such underwriter's initial purchase commitment.
We, our general partner and certain officers have agreed, with certain
exceptions, not to directly or indirectly sell, offer to sell, grant any option
for the sale of, or otherwise dispose of any common units, or securities
convertible into or exercisable or exchangeable for common units or rights to
acquire common units, for a period of 90 days from the date of this prospectus
supplement, without the prior written consent of Salomon Smith Barney Inc.
Salomon Smith Barney Inc. in its sole discretion may release any of the common
units subject to these lock-up agreements at any time without notice.
The common units are listed on the New York Stock Exchange under the symbol
"HPG." The following table shows the per common unit and total underwriting
discounts and commissions to be paid to the underwriters by us in connection
with this offering. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional common units.
PAID BY HERITAGE
PROPANE PARTNERS
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
Per common unit............................................. $ $
Total............................................. $ $
In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell common units in the open market. These
transactions may include over-allotment, syndicate covering transactions and
stabilizing transactions. Over-allotment involves syndicate sales of
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common units in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common units in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of common units made for the purpose of preventing or retarding a
decline in the market price of the common units while the offering is in
progress.
The underwriters may also impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases common units originally sold by that
syndicate member.
Any of these activities by the underwriters may cause the price of the
common units to be higher than the price that otherwise would exist in the open
market in the absence of such transactions. These transactions may be effected
on the New York Stock Exchange or in the over-the-counter market, or otherwise
and, if commenced, may be discontinued by the underwriters at any time.
The underwriters have performed certain investment banking and advisory
services for us from time to time for which they have received customary fees
and expenses. The underwriters may, from time to time, engage in transactions
with and perform services for us in the ordinary course of their business. In
addition, Salomon Smith Barney has provided financial advisory services to
ProFlame, Inc. and the related propane distribution companies in connection with
their planned acquisition by us, for which Salomon Smith Barney will receive
customary compensation.
We estimate that our portion of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$625,000.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of any of those liabilities.
Because the National Association of Securities Dealers, Inc. views the
common units offered by this prospectus as interests in a direct participation
program, the offering is being made in compliance with Rule 2810 of the NASD's
Conduct Rules.
LEGAL MATTERS
Baker Botts L.L.P. will pass upon the validity of the common units being
offered and certain federal income tax matters related to the common units.
Certain legal matters with respect to the common units will be passed upon for
the underwriters by Andrews & Kurth L.L.P.
EXPERTS
The audited consolidated financial statements of Heritage Propane Partners,
L.P. and the audited consolidated balance sheet of Heritage Holdings, Inc.
incorporated by reference in this prospectus and elsewhere in the registration
statement of which this prospectus is a part, and the audited consolidated and
combined financial statements of ProFlame, Inc. and subsidiaries and affiliates
included in this prospectus and elsewhere in the registration statement of which
this prospectus is a part, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included or incorporated by reference herein in reliance upon the authority of
said firm as experts in giving said reports.
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FORWARD LOOKING STATEMENTS
This prospectus supplement contains statements that constitute "forward
looking statements" within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act. In general, any statement other than
a statement of historical fact is a forward looking statement. These statements
appear in a number of places in this prospectus supplement and include
statements regarding our plans, beliefs, estimates, projections and
expectations. Actual results may differ materially from those anticipated or
projected by forward-looking statements. Any differences could result from a
variety of factors, including, among others:
- changes in general economic conditions in the United States as well as
changes in general economic conditions and currencies in foreign
countries;
- weather conditions that vary significantly from historically normal
conditions;
- our success in hedging our positions;
- the general level of petroleum product demand, and the availability of
propane supplies;
- energy prices generally and specifically, the price of propane to the
consumer compared to the price of alternative and competing fuels;
- competition from other propane distributors and alternate fuels;
- the availability and cost of capital;
- changes in laws and regulations to which we are subject, including tax,
environmental and employment regulations;
- our ability to generate available cash for distribution to unitholders;
- the costs and effects of legal and administrative proceedings against us
or which may be brought against us;
- our ability to sustain historical levels of internal growth; and
- our ability to continue to locate and acquire other propane companies at
purchase prices that are accretive to our financial results.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read our SEC filings over the Internet at the
SEC's website at http://www.sec.gov. You may also read and copy documents at the
public reference room maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room.
We also provide information to the NYSE because the common units are traded
on the NYSE. You may obtain reports and other information at the offices of the
NYSE at 20 Broad Street, New York, New York 10002.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose to you important information
contained in other documents filed with the SEC by referring you to those
documents. The information incorporated by reference is an important part of
this prospectus. Information we later file with the SEC will automatically
update and supersede this information. We incorporate by reference the documents
listed below:
- our annual report on Form 10-K for the year ended August 31, 2000;
- our quarterly reports on Form 10-Q for the quarters ended November 30,
2000, February 28, 2001 and May 31, 2001;
- the description of the common units in our registration statement on Form
8-A (File No. 1-11727) filed pursuant to the Securities Exchange Act of
1934 on May 14, 1996 and any amendments or reports filed to update the
description;
- our current reports on Form 8-K or 8-K/A filed October 24, 2000 and July
12, 2001; and
- all documents filed by us under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 between the date of this prospectus
supplement and the termination of the registration statement.
The discussion of recently issued accounting standards on page S-26 of this
prospectus supplement should be read in conjunction with the audited and
unaudited financial statements and management's discussion and analysis
incorporated by reference into this prospectus. If information in incorporated
documents conflicts with information in this prospectus you should rely on the
most recent information. If information in an incorporated document conflicts
with information in another incorporated document, you should rely on the most
recent incorporated document.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Heritage Propane Partners, L.P.
8801 S. Yale Avenue, Suite 310
Tulsa, Oklahoma 74137
Attention: H. Michael Krimbill
Telephone: (918) 492-7272
You should only rely on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. We are making offers of
the securities only in states where the offer is permitted. You should not
assume that the information in this prospectus or any prospectus supplement is
accurate as of any date other than the date on the front of those documents.
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HERITAGE PROPANE PARTNERS, L.P.
INDEX TO FINANCIAL STATEMENTS
Pro Forma Financial Statements
Heritage Propane Partners, L.P. and Subsidiaries Unaudited
Pro Forma Combined Financial Statements:
Introduction........................................... F-2
Unaudited Pro Forma Combined Balance Sheets -- May 31,
2001.................................................. F-3
Unaudited Pro Forma Combined Statements of
Operations -- Nine Months Ended May 31, 2001.......... F-4
Unaudited Pro Forma Combined Statements of
Operations -- Year Ended August 31, 2000.............. F-5
Notes to Unaudited Pro Forma Combined Financial
Statements............................................ F-6
Historical Financial Statements
ProFlame, Inc. and Subsidiaries and Affiliates:
Report of Independent Public Accountants............... F-9
Consolidated and Combined Balance Sheets -- May 31,
2001 (unaudited) and August 31, 2000 and 1999......... F-10
Consolidated and Combined Statements of
Operations -- Nine Months Ended May 31, 2001 and 2000
(unaudited) and Years Ended August 31, 2000 and
1999.................................................. F-11
Consolidated and Combined Statements of Stockholders'
Equity -- Nine Months Ended May 31, 2001 (unaudited)
and Years Ended August 31, 2000 and 1999.............. F-12
Consolidated and Combined Statements of Cash
Flows -- Nine Months Ended May 31, 2001 and 2000
(unaudited) and Years Ended August 31, 2000 and
1999.................................................. F-13
Notes to Consolidated and Combined Financial
Statements............................................ F-14
F-1
34
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements present (i)
unaudited pro forma combined balance sheet at May 31, 2001, giving effect to the
acquisition of ProFlame, Inc. and subsidiaries and affiliates (ProFlame) as if
the acquisition had been consummated on that date, (ii) unaudited pro forma
combined statements of operations for the nine months ended May 31, 2001 and the
year ended August 31, 2000, giving effect to the acquisition of ProFlame as if
the acquisition had been consummated on September 1, 1999, (iii) the effects of
this offering (assuming the Underwriters' over-allotment is not exercised) had
this offering occurred on May 31, 2001 for purposes of the unaudited pro forma
combined balance sheet and (iv) the effects of this offering (assuming the
Underwriters' over-allotment is not exercised) had this offering occurred on
September 1, 1999 for purposes of the unaudited pro forma statements of
operations. The unaudited pro forma combined balance sheet at May 31, 2001
combines balance sheets of Heritage Propane Partners, L.P. and subsidiaries
(Heritage) as of May 31, 2001 and ProFlame as of May 31, 2001, after giving
effect to pro forma adjustments. The unaudited pro forma combined statement of
operations for the nine month period ended May 31, 2001 combines the results of
operations of Heritage for the nine month period ended May 31, 2001 with the
results of operations for ProFlame for the nine month period ended May 31, 2001.
The unaudited pro forma combined statement of operations for the year ended
August 31, 2000 combines the results of operations of Heritage (formerly Peoples
Gas Company) for the eight month period ended August 31, 2000 and the results of
operations of Peoples Gas Company for the three month period ended December 31,
1999 with the results of operations for ProFlame for the year ended August 31,
2000, after giving effect to pro forma adjustments. The unaudited pro forma
combined statement of operations for the year ended August 31, 2000 omits the
results of operations of Peoples Gas for the month ended September 30, 1999;
however, such omission is not material to the unaudited pro forma combined
statement of operations.
On July 5, 2001, Heritage signed definitive agreements to acquire directly
and indirectly through Heritage Holdings, Inc. (Heritage's general partner) the
propane operations of ProFlame, Inc. and subsidiaries and affiliates in a series
of mergers and stock and asset purchases. Upon closing, Heritage will complete
the asset purchases and Heritage Holdings, Inc. (HHI) will complete the stock
purchases and mergers. HHI will then transfer the assets acquired and
liabilities assumed to Heritage. HHI will retain any income tax liability
associated with the assets transferred and will be compensated by Heritage
through the issuance of common units by Heritage to HHI.
The purchases of stock and assets will be accounted for as an acquisition
using the purchase method of accounting. On July 20, 2001, the Financial
Accounting Standards Board approved the issuance of Statement No. 141, Business
Combinations, and Statement No. 142, Goodwill and Other Intangible Assets.
Please read "Recently Issued Accounting Standards" on page S-26. Statements No.
141 and 142 will impact the purchase allocations for the acquisition of ProFlame
and the amortization of certain intangibles, including goodwill. Management has
not completed an analysis or appraisal of the additional intangible assets that
must be identified and valued. Accordingly, for purposes of the unaudited pro
forma financial statements, management has recognized intangible assets for
customer lists and covenants not-to-compete, consistent with Heritage's past
application of Accounting Principles Board Opinion No. 16, Business
Combinations. Accordingly, the following pro forma combined financial statements
do not reflect any impact of Statements No. 141 or 142.
A final determination of purchase accounting adjustments, including the
allocation of the purchase price to the assets acquired and liabilities assumed
based on their respective fair values, has not been made. Accordingly, the
purchase accounting adjustments made in connection with the development of the
following unaudited pro forma combined financial statements are preliminary and
have been made solely for purposes of developing such pro forma financial
information. The pro forma adjustments are based upon currently available
information and certain estimates and assumptions, and therefore, the actual
adjustments may differ from the unaudited pro forma adjustments. However,
management does not believe that final adjustments will be materially different
from the amounts presented herein, except for the impact of Statements No. 141
and 142.
The following unaudited pro forma combined financial statements are
provided for informational purposes only and should be read in conjunction with
the separate audited consolidated financial statements and related notes of
Heritage (which are filed with Heritage's Annual Report filed on Form 10-K with
the Securities and Exchange Commission on November 29, 2000, incorporated herein
by reference) and ProFlame (which are included elsewhere in this Prospectus
Supplement). The following unaudited pro forma combined financial statements are
based on certain assumptions and do not purport to be indicative of the results
which actually would have been achieved if the acquisition of ProFlame and the
offerings had been consummated on the dates indicated or which may be achieved
in the future.
F-2
35
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MAY 31, 2001
(IN THOUSANDS)
HERITAGE PRO FORMA
PROPANE PROFLAME, ADJUSTMENTS PRO FORMA PRO FORMA
PARTNERS, L.P. INC. FOR FOR ADJUSTMENTS AS
HISTORICAL HISTORICAL ACQUISITION ACQUISITION FOR OFFERING ADJUSTED
-------------- ---------- ----------- ----------- ------------ ---------
ASSETS
CURRENT ASSETS:
Cash................................ $ 4,471 $ 914 $ (914)(a) $ 4,570 $ 72,163(i) $ 31,295
43,938(g) (45,438)(j)
(43,938)(h)
99(f)
Marketable securities............... 6,980 -- -- 6,980 -- 6,980
Accounts receivable................. 44,398 3,501 -- 47,899 -- 47,899
Inventories......................... 45,403 1,411 -- 46,814 -- 46,814
Assets from trading activities...... 2,746 -- -- 2,746 -- 2,746
Current portion of notes receivable
from related parties.............. -- 2,883 (2,883)(a) -- -- --
Prepaid expenses and other.......... 1,594 687 (351)(a) 1,930 -- 1,930
-------- ------- -------- -------- -------- --------
Total current assets.......... 105,592 9,396 (4,049) 110,939 26,725 137,664
PROPERTY, PLANT AND EQUIPMENT, net.... 371,499 7,174 18,756(b) 397,429 -- 397,429
INVESTMENT IN AFFILIATES.............. 7,232 -- -- 7,232 -- 7,232
INTANGIBLES AND OTHER ASSETS, net..... 192,080 144 3,414(c) 220,844 -- 220,844
7,020(d)
18,186(e)
-------- ------- -------- -------- -------- --------
Total assets.................. $676,403 $16,714 $ 43,327 $736,444 $ 26,725 $763,169
======== ======= ======== ======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable.................... $ 37,044 $ 1,601 $ -- $ 38,645 $ -- $ 38,645
Accounts payable to related
companies......................... 9,028 1,487 (1,487)(a) 9,028 -- 9,028
Accrued and other current
liabilities....................... 25,729 3,574 (1,233)(a) 28,070 -- 28,070
Liabilities from trading
activities........................ 2,438 -- -- 2,438 -- 2,438
Current maturities of long-term
debt.............................. 3,577 461 (374)(a) 3,664 -- 3,664
-------- ------- -------- -------- -------- --------
Total current liabilities..... 77,816 7,123 (3,094) 81,845 -- 81,845
LONG-TERM DEBT, less current
maturities.......................... 430,828 143 43,938(g) 481,929 (45,438)(j) 436,491
7,020(d)
MINORITY INTERESTS.................... 5,203 -- 50(f) 5,253 773(i) 6,026
NOTES PAYABLE TO RELATED PARTIES...... -- 210 (210)(a) -- -- --
DEFERRED TAX LIABILITIES.............. -- 281 (281)(a) -- -- --
-------- ------- -------- -------- -------- --------
Total liabilities............. 513,847 7,757 47,423 569,027 (44,665) 524,362
-------- ------- -------- -------- -------- --------
PARTNERS' CAPITAL:
Common unitholders.................. 120,282 -- 4,812(f) 125,094 70,625(i) 195,719
Subordinated unitholders............ 25,464 -- -- 25,464 -- 25,464
Class B subordinated unitholders.... 18,207 -- -- 18,207 -- 18,207
General partner..................... 1,341 -- 49(f) 1,390 765(i) 2,155
Accumulated other comprehensive
income............................ (2,738) -- -- (2,738) -- (2,738)
Preferred stock..................... -- 627 (627)(a) -- -- --
Common stock........................ -- 322 (322)(a) -- -- --
Additional paid-in capital.......... -- 531 (531)(a) -- -- --
Retained earnings................... -- 8,103 (8,103)(a) -- -- --
Treasury stock...................... -- (626) 626(a) -- -- --
-------- ------- -------- -------- -------- --------
Total partners' capital....... 162,556 8,957 (4,096) 167,417 71,390 238,807
-------- ------- -------- -------- -------- --------
Total liabilities and
partners' capital........... $676,403 $16,714 $ 43,327 $736,444 $ 26,725 $763,169
======== ======= ======== ======== ======== ========
F-3
36
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MAY 31, 2001
(IN THOUSANDS, EXCEPT PER UNIT DATA)
HERITAGE
PROPANE PRO FORMA
PARTNERS, PROFLAME, ADJUSTMENTS PRO FORMA PRO FORMA
L.P. INC. FOR FOR ADJUSTMENTS AS
HISTORICAL HISTORICAL ACQUISITION ACQUISITION FOR OFFERING ADJUSTED
---------- ---------- ----------- ----------- ------------ ---------
REVENUES:
Retail fuel......................... $386,235 $32,641 $ -- $418,876 $ -- $418,876
Wholesale fuel...................... 52,948 10,254 -- 63,202 -- 63,202
Liquids marketing................... 152,155 -- -- 152,155 -- 152,155
Other............................... 33,419 3,713 (392)(k) 36,740 -- 36,740
-------- ------- ------- -------- ------ --------
Total revenues............... 624,757 46,608 (392) 670,973 -- 670,973
-------- ------- ------- -------- ------ --------
COSTS AND EXPENSES:
Cost of products sold............... 268,480 28,981 -- 297,461 -- 297,461
Trading activities.................. 150,265 -- -- 150,265 -- 150,265
Operating expenses.................. 96,008 7,479 -- 103,487 -- 103,487
Depreciation and amortization....... 30,322 959 1,437(l) 32,718 -- 32,718
Selling, general and
administrative.................... 14,003 4,344 -- 18,347 -- 18,347
-------- ------- ------- -------- ------ --------
Total costs and expenses..... 559,078 41,763 1,437 602,278 -- 602,278
-------- ------- ------- -------- ------ --------
OPERATING INCOME (LOSS)............... 65,679 4,845 (1,829) 68,695 -- 68,695
OTHER INCOME (EXPENSE):
Interest expense.................... (26,423) (270) 258(m) (28,897) 2,216(t) (26,681)
(2,143)(n)
(319)(o)
Interest income..................... -- 201 (149)(p) 52 -- 52
Equity in earnings (losses) of
affiliates........................ 1,568 -- -- 1,568 -- 1,568
Gain on disposal of assets.......... 502 246 -- 748 -- 748
Other............................... (443) -- -- (443) -- (443)
-------- ------- ------- -------- ------ --------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND INCOME TAXES.................... 40,883 5,022 (4,182) 41,723 2,216 43,939
Minority interest................... (1,435) -- (17)(q) (1,452) (45)(q) (1,497)
-------- ------- ------- -------- ------ --------
INCOME (LOSS) BEFORE INCOME TAXES..... 39,448 5,022 (4,199) 40,271 2,171 42,442
Income taxes........................ -- 1,060 (1,060)(r) -- -- --
-------- ------- ------- -------- ------ --------
NET INCOME (LOSS)..................... 39,448 3,962 (3,139) 40,271 2,171 42,442
GENERAL PARTNER'S INTEREST IN NET
INCOME (LOSS)....................... 849 -- 8(s) 857 22(s) 879
-------- ------- ------- -------- ------ --------
LIMITED PARTNERS' INTEREST IN NET
INCOME (LOSS)....................... $ 38,599 $ 3,962 $(3,147) $ 39,414 $2,149 $ 41,563
======== ======= ======= ======== ====== ========
BASIC NET INCOME PER LIMITED PARTNER
UNIT................................ $ 2.97 $ 2.66
======== ========
BASIC WEIGHTED AVERAGE NUMBER OF UNITS
OUTSTANDING......................... 12,981 15,641
======== ========
DILUTED NET INCOME PER LIMITED PARTNER
UNIT................................ $ 2.97 $ 2.65
======== ========
DILUTED WEIGHTED AVERAGE NUMBER OF
UNITS OUTSTANDING................... 13,012 15,672
======== ========
F-4
37
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 2000
(IN THOUSANDS, EXCEPT PER UNIT DATA)
HERITAGE PRO FORMA
PROPANE PEOPLES GAS PROFLAME, ADJUSTMENTS PRO FORMA PRO FORMA
PARTNERS, L.P. COMPANY INC. FOR FOR ADJUSTMENTS AS
HISTORICAL HISTORICAL HISTORICAL ACQUISITION ACQUISITION FOR OFFERING ADJUSTED
-------------- ----------- ---------- ----------- ----------- ------------ ----------
REVENUES:
Retail fuel............... $43,815 $10,133 $27,550 $ -- $ 81,498 $ -- $ 81,498
Wholesale fuel............ 3,807 -- 7,323 -- 11,130 -- 11,130
Liquids marketing......... 12,262 -- -- -- 12,262 -- 12,262
Other..................... 3,188 -- 3,018 (398)(k) 5,808 -- 5,808
------- ------- ------- ------- -------- ------ --------
Total revenues...... 63,072 10,133 37,891 (398) 110,698 -- 110,698
------- ------- ------- ------- -------- ------ --------
COSTS AND EXPENSES:
Cost of products sold..... 29,962 5,198 21,629 -- 56,789 -- 56,789
Trading activities........ 11,538 -- -- -- 11,538 -- 11,538
Operating expenses........ 16,581 3,601 9,590 -- 29,772 -- 29,772
Depreciation and
amortization............ 4,686 779 1,357 1,838(l) 8,660 -- 8,660
Selling, general and
administrative.......... 1,019 -- 3,790 -- 4,809 -- 4,809
------- ------- ------- ------- -------- ------ --------
Total costs and
expenses.......... 63,786 9,578 36,366 1,838 111,568 -- 111,568
------- ------- ------- ------- -------- ------ --------
OPERATING INCOME (LOSS)..... (714) 555 1,525 (2,236) (870) -- (870)
OTHER INCOME (EXPENSE):
Interest expense.......... (2,409) -- (319) 303(m) (5,761) 2,955(t) (2,806)
(2,858)(n)
(478)(o)
Interest income........... -- -- 226 (175)(p) 51 -- 51
Equity in earnings
(losses) of
affiliates.............. (67) -- -- -- (67) -- (67)
Gain on disposal of
assets.................. 121 -- 266 -- 387 -- 387
Other..................... (478) 18 -- -- (460) -- (460)
------- ------- ------- ------- -------- ------ --------
INCOME (LOSS) BEFORE
MINORITY INTEREST AND
INCOME TAXES.............. (3,547) 573 1,698 (5,444) (6,720) 2,955 (3,765)
Minority interest......... 80 -- -- 76(q) 156 (60)(q) 96
------- ------- ------- ------- -------- ------ --------
INCOME (LOSS) BEFORE INCOME
TAXES..................... (3,467) 573 1,698 (5,368) (6,564) 2,895 (3,669)
Income taxes.............. 379 289 32 (32)(r) 668 -- 668
------- ------- ------- ------- -------- ------ --------
NET INCOME (LOSS)........... (3,846) 284 1,666 (5,336) (7,232) 2,895 (4,337)
GENERAL PARTNER'S INTEREST
IN NET INCOME (LOSS)...... (46) 1 -- (37)(s) (82) (29)(s) (111)
------- ------- ------- ------- -------- ------ --------
LIMITED PARTNERS' INTEREST
IN NET INCOME (LOSS)...... $(3,800) $ 283 $ 1,666 $(5,299) $ (7,150) $2,924 $ (4,226)
======= ======= ======= ======= ======== ====== ========
BASIC NET INCOME (LOSS) PER
LIMITED PARTNER UNIT...... $ (0.37) $ 0.16 $ (0.32)
======= ======= ========
BASIC WEIGHTED AVERAGE
NUMBER OF UNITS
OUTSTANDING............... 10,225 1,732 13,357
======= ======= ========
DILUTED NET INCOME (LOSS)
PER LIMITED PARTNER
UNIT...................... $ (0.37) $ 0.16 $ (0.32)
======= ======= ========
DILUTED WEIGHTED AVERAGE
NUMBER OF UNITS
OUTSTANDING............... 10,225 1,732 13,357
======= ======= ========
F-5
38
HERITAGE PROPANE PARTNERS, L.P.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED MAY 31, 2001 AND YEAR ENDED AUGUST 31, 2000
(IN THOUSANDS, EXCEPT UNIT DATA)
1. Presentation:
The unaudited pro forma combined financial statements do not give any
effect to any restructuring cost, potential cost savings, or other operating
efficiencies that are expected to result from the acquisition. The unaudited pro
forma combined financial statements are based on certain assumptions and do not
purport to be indicative of the results which actually would have been achieved
if the acquisition had been consummated on the dates indicated or which may be
achieved in the future. The purchase accounting adjustments made in connection
with the development of the unaudited pro forma combined financial statements
are preliminary and have been made solely for purposes of presenting such pro
forma financial information.
2. It has been assumed that for purposes of the unaudited pro forma
combined balance sheet, the acquisition of ProFlame and this offering occurred
on May 31, 2001 and for purposes of the unaudited pro forma combined statements
of operations, the acquisition of ProFlame and this offering occurred on
September 1, 1999. The unaudited pro forma combined balance sheet at May 31,
2001 combines balance sheets of Heritage Propane Partners, L.P. and subsidiaries
(Heritage) as of May 31, 2001 and ProFlame, Inc. and subsidiaries and affiliates
as of May 31, 2001, after giving effect to pro forma adjustments. The unaudited
pro forma combined statement of operations for the nine months ended May 31,
2001 combines the results of operations of Heritage for the nine months ended
May 31, 2001 with the results of operations for ProFlame for the nine months
ended May 31, 2001. The unaudited pro forma combined statement of operations for
the year ended August 31, 2000 combines the results of operations of Heritage
(formerly Peoples Gas Company) for the eight months ended August 31, 2000 and
the results of operations of Peoples Gas Company for the three months ended
December 31, 1999 with the results of operations for ProFlame for the year ended
August 31, 2000, after giving effect to pro forma adjustments.
On July 5, 2001, Heritage signed definitive agreements to acquire directly
and indirectly through Heritage Holdings, Inc. (Heritage's general partner), the
propane operations of ProFlame, Inc. and subsidiaries and affiliates in a series
of mergers and stock and asset purchases. Upon closing, the asset purchases will
be completed by Heritage and Heritage Holdings, Inc. (HHI) will complete the
mergers and stock purchases. HHI will then transfer the assets acquired and
liabilities assumed to Heritage. HHI will retain any income tax liability
associated with the assets transferred and will be reimbursed by Heritage
through the payment of cash and/or the issuance of common units by Heritage to
HHI. For purposes of the preparation of the unaudited pro forma combined
financial statements, the reimbursement to HHI has been assumed to be in common
units only.
The purchases of stock and assets will be accounted for as an acquisition
using the purchase method of accounting. On July 5, 2001, the Financial
Accounting Standards Board approved the issuance of Statement No. 141, Business
Combinations, and Statement No. 142, Goodwill and Other Intangible Assets.
Please read "Recently Issued Accounting Standards" on page S-39. Statements No.
141 and 142 will impact the purchase allocations for the acquisition of ProFlame
and the amortization of certain intangibles, including goodwill. Management has
not completed an analysis or appraisal of the additional intangible assets that
must be identified and valued. Accordingly, for purposes of the unaudited pro
forma financial statements, management has recognized intangible assets for
customer lists and covenants not-to-compete, consistent with Heritage's past
application of Accounting Principles Board Opinion No. 16, Business
Combinations. Accordingly, the following pro forma combined financial statements
do not reflect any impact of Statements No. 141 or 142.
Heritage has agreed to pay the sellers of ProFlame cash consideration of
$39,800 at the closing of the acquisition. Heritage will also reimburse the
sellers of ProFlame for working capital in an amount estimated to be $4,138. To
the extent working capital is more or less than $4,138, the reimbursement will
F-6
39
HERITAGE PROPANE PARTNERS, L.P.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
change. Heritage will also reimburse HHI $4,812 through the payment of cash
and/or the issuance of Common Units in Heritage for the income tax liability
retained by HHI. Heritage will enter into covenants not to compete with certain
key members of management of the seller, subject to certain conditions. The
discounted value of the covenants not to compete is $7,020. The cash
consideration of $39,800 and the working capital reimbursement of $4,138 will be
financed through borrowings under Heritage's Senior Revolving Acquisition
Facility.
3. The pro forma adjustments are as follows:
(a) Reflects the elimination of assets not acquired and liabilities not
assumed by Heritage and the elimination of ProFlame's equity accounts, including
preferred stock.
(b) Reflects the pro forma allocation of the step-up to property, plant and
equipment to fair value.
(c) Reflects the pro forma allocation of the purchase price to customer
lists.
(d) Reflects the discounted value of the non-compete agreements entered
into with the former management of ProFlame.
(e) Reflects the pro forma allocation of the residual value of the purchase
price to goodwill.
(f) Reflects the issuance of 160,400 common units of Heritage, valued at
$30 per unit, to HHI, and the cash contribution of $99 by HHI to maintain its
general partner interest.
(g) Reflects the proceeds from borrowings under Heritage's Senior Revolving
Acquisition Facility at a rate of 6.504 percent.
(h) Reflects payment of the combined purchase price of ProFlame, Inc. and
subsidiaries and affiliates.
(i) Reflects net proceeds to Heritage of approximately $70,625 from the
issuance and sale of 2,500,000 common units at an assumed offering price of $30
per common unit, net of the Underwriters' discounts and commissions (estimated
to be $3,750) and offering expenses (estimated to be $625). Also reflects cash
contribution of $1,538 by HHI to maintain its general partner interest.
(j) Reflects use of the proceeds from the offering for the repayment of the
outstanding balance of the Senior Revolving Acquisition Facility.
(k) Reflects the elimination of profits from employee leasing program to
ProFlame related entities that discontinues after the acquisition of ProFlame.
(l) Reflects increased depreciation and amortization related to the excess
purchase price over ProFlame's cost allocated to property, plant and equipment
(3-30 years), customer lists (15 years) and goodwill (30 years). Also, reflects
amortization of the non-compete agreements (10 years).
(m) Reflects elimination of interest expense related to debt not assumed by
Heritage.
(n) Reflects interest expense related to borrowings under the Senior
Revolving Acquisition Facility at a rate of 6.504 percent.
(o) Reflects imputed interest on the discounted value of the non-compete
agreements.
(p) Reflects elimination of interest income related to notes receivable
from related parties not acquired by Heritage.
(q) Reflects the adjustment to minority interest expense for Heritage
Operating, L.P.
(r) Reflects the elimination of income tax expense, as income taxes are
borne by the partners.
F-7
40
HERITAGE PROPANE PARTNERS, L.P.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(s) Reflects the adjustment to the general partner's interest in the net
income of Heritage.
(t) Reflects the elimination of interest expense at 6.504 percent from the
repayment of the Senior Revolving Acquisition Facility.
4. The ProFlame historical financial statements include the following
nonrecurring charges which are expected to be eliminated through implementation
of the Heritage business and operating strategy.
NINE MONTHS ENDED YEAR ENDED
MAY 31, AUGUST 31,
2001 2000
----------------- ----------
Personnel costs(a)..................................... 2,950 3,250
Transaction expenses(b)................................ 1,000 --
------- -------
$ 3,950 $ 3,250
======= =======
- ---------------
(a) Reflects the personnel costs for directors, officers and management of
ProFlame who will resign at closing.
(b) Reflects expenses recorded by ProFlame related to the acquisition by
Heritage.
F-8
41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of ProFlame, Inc.:
We have audited the accompanying consolidated and combined balance sheets
of ProFlame, Inc. (a Nevada corporation) and subsidiaries and affiliates
identified in Note 1, as of August 31, 2000 and 1999, and the related
consolidated and combined statements of operations, stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ProFlame, Inc. and
subsidiaries and affiliates, as of August 31, 2000 and 1999, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Tulsa, Oklahoma
June 29, 2001
F-9
42
PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES
CONSOLIDATED AND COMBINED BALANCE SHEETS
(IN THOUSANDS)
MAY 31, AUGUST 31, AUGUST 31,
2001 2000 1999
----------- ---------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 914 $ 3,032 $ 1,334
Accounts receivable, net.................................. 3,501 2,694 1,764
Inventories, net.......................................... 1,411 988 804
Current portion of notes receivable from related parties
and other.............................................. 2,883 1,062 1,694
Other current assets...................................... 687 863 1,113
------- ------- -------
Total current assets.............................. 9,396 8,639 6,709
PROPERTY, PLANT AND EQUIPMENT, net.......................... 7,174 7,473 8,064
NOTES RECEIVABLE FROM RELATED PARTIES AND
OTHER, less current portion............................... -- -- 1,037
INTANGIBLES AND OTHER ASSETS, net........................... 144 194 199
------- ------- -------
Total assets...................................... $16,714 $16,306 $16,009
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,601 $ 1,238 $ 824
Accounts payable to related parties....................... 1,487 2,614 1,414
Accrued and other current liabilities..................... 3,574 3,082 3,140
Current maturities of long-term debt...................... 461 524 518
------- ------- -------
Total current liabilities......................... 7,123 7,458 5,896
LONG-TERM DEBT, less current maturities..................... 143 460 638
NOTES PAYABLE TO RELATED PARTIES............................ 210 210 210
DEFERRED INCOME TAXES....................................... 281 334 448
COMMITMENTS AND CONTINGENCIES...............................
------- ------- -------
Total liabilities................................. 7,757 8,462 7,192
------- ------- -------
STOCKHOLDERS' EQUITY:
Preferred stock........................................... 627 627 627
Common stock.............................................. 322 337 492
Additional paid-in capital................................ 531 531 835
Retained earnings......................................... 8,103 6,349 6,863
Treasury stock (at cost).................................. (626) -- --
------- ------- -------
Total stockholders' equity........................ 8,957 7,844 8,817
------- ------- -------
Total liabilities and stockholders' equity........ $16,714 $16,306 $16,009
======= ======= =======
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-10
43
PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED
MAY 31, AUGUST 31,
------------------------- -------------------
2001 2000 2000 1999
----------- ----------- -------- --------
(UNAUDITED)
REVENUES:
Retail fuel..................................... $32,641 $23,035 $27,550 $26,814
Wholesale fuel.................................. 10,254 5,712 7,323 5,420
Other........................................... 3,713 2,011 3,018 3,074
------- ------- ------- -------
Total revenues.......................... 46,608 30,758 37,891 35,308
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of products sold........................... 28,981 17,656 21,629 16,036
Operating expenses.............................. 7,479 7,046 9,590 10,222
Depreciation and amortization................... 959 1,035 1,357 1,217
Selling, general and administrative............. 4,344 2,839 3,790 3,182
------- ------- ------- -------
Total costs and expenses................ 41,763 28,576 36,366 30,657
------- ------- ------- -------
OPERATING INCOME.................................. 4,845 2,182 1,525 4,651
OTHER INCOME (EXPENSE):
Interest expense................................ (270) (219) (319) (327)
Interest income................................. 201 170 226 236
Gain on disposal of assets...................... 246 356 266 200
------- ------- ------- -------
INCOME BEFORE INCOME TAXES........................ 5,022 2,489 1,698 4,760
Income taxes.................................... 1,060 274 32 1,068
------- ------- ------- -------
NET INCOME........................................ $ 3,962 $ 2,215 $ 1,666 $ 3,692
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-11
44
PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED TREASURY
STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
--------- ------ ---------- -------- -------- -------
Balance, September 1, 1998.......... $627 $ 492 $ 835 $ 4,721 $ -- $ 6,675
Net income.......................... -- -- -- 3,692 -- 3,692
Distributions....................... -- -- -- (1,550) -- (1,550)
---- ----- ----- ------- ----- -------
Balance, August 31, 1999............ 627 492 835 6,863 -- 8,817
Repurchase and cancellation of
common stock...................... -- (155) (304) -- -- (459)
Net income.......................... -- -- -- 1,666 -- 1,666
Distributions....................... -- -- -- (2,180) -- (2,180)
---- ----- ----- ------- ----- -------
Balance, August 31, 2000............ 627 337 531 6,349 -- 7,844
Purchase of treasury stock -- cost
method (unaudited)................ -- -- -- -- (626) (626)
Repurchase and cancellation of
common stock (unaudited).......... -- (15) -- (720) -- (735)
Net income (unaudited).............. -- -- -- 3,962 -- 3,962
Distributions (unaudited)........... -- -- -- (1,488) -- (1,488)
---- ----- ----- ------- ----- -------
Balance, May 31, 2001 (unaudited)... $627 $ 322 $ 531 $ 8,103 $(626) $ 8,957
==== ===== ===== ======= ===== =======
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-12
45
PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED
MAY 31, AUGUST 31,
------------------------- -------------------
2001 2000 2000 1999
----------- ----------- -------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 3,962 $ 2,215 $ 1,666 $ 3,692
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 959 1,035 1,357 1,217
Gain on sale of capital assets............... (246) (356) (266) (200)
Deferred income taxes........................ (51) (153) (156) (71)
Change in assets and liabilities:
Accounts receivable........................ (807) (899) (930) 751
Inventories................................ (423) (200) (184) (90)
Other current assets....................... 174 (541) 292 (766)
Intangibles and other assets............... 26 (27) (27) 13
Accounts payable........................... 363 738 414 191
Accrued and other current liabilities...... 492 (825) (58) 649
------- ------- ------- -------
Net cash provided by operating
activities............................ 4,449 987 2,108 5,386
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................ (691) (583) (906) (825)
Proceeds from sale of property, plant and
equipment.................................... 301 412 438 383
------- ------- ------- -------
Net cash used in investing activities... (390) (171) (468) (442)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders................... (1,488) (2,510) (2,180) (1,550)
Change in notes receivable from related
parties...................................... (1,821) (501) 1,669 (1,393)
Change in accounts payable to related parties... (1,127) 964 1,200 (1,122)
Payments of long-term debt...................... (380) (34) (172) (266)
Purchase of treasury stock...................... (626) -- -- --
Repurchase and cancellation of common stock..... (735) -- (459) --
------- ------- ------- -------
Net cash provided by (used in) financing
activities............................ (6,177) (2,081) 58 (4,331)
------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH................... (2,118) (1,265) 1,698 613
CASH AT BEGINNING OF PERIOD....................... 3,032 1,334 1,334 721
------- ------- ------- -------
CASH AT END OF PERIOD............................. $ 914 $ 69 $ 3,032 $ 1,334
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Interest paid................................... $ 242 $ 191 $ 280 $ 327
Income taxes paid............................... $ 248 $ 350 $ 350 $ 1,616
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-13
46
PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED AS TO MAY 31, 2001 AND 2000 DATA)
1. OPERATIONS AND FINANCIAL STATEMENT PRESENTATION
The consolidated and combined financial statements include the accounts of
ProFlame, Inc. (a Nevada corporation, "ProFlame Nevada") and its majority-owned
subsidiaries which have been consolidated -- ProFlame, Inc. (an Oklahoma
corporation, "ProFlame Oklahoma"), Hesperia Liquid Gas Co. (a Nevada
corporation), Coastside Gas Service (a California corporation), ProFlame Gas
Company (a California corporation) and San Diego ProFlame (a California
corporation). These companies are collectively referred to herein as
consolidated ProFlame Nevada.
Additionally, certain affiliated companies under common control and
involved in propane-related operations have been combined with consolidated
ProFlame Nevada, including California Western Gas Company (a Delaware
corporation), Coast Liquid Gas, Inc. (a California corporation), Growth
Properties (a California corporation), L.P.G. Associates (a California
subchapter S corporation) and WMJB, Inc. (a California subchapter S
corporation). These companies are collectively referred to herein as the
combined companies.
All of the companies referred to above are under common management and are
parties to a definitive agreement whereby the businesses of each would be
acquired by Heritage Holdings, Inc., the general partner of Heritage Propane
Partners, L.P., or its affiliates (collectively referred to herein as Heritage).
The terms of the definitive agreement are disclosed in Note 9. Other affiliated
companies under common management, which are unrelated to the propane operations
and are not parties to the definitive agreement, are not included in the
consolidated and combined financial statements. Additionally, certain balances
and transactions of the companies included in the consolidated and combined
financial statements have been eliminated from the presentation herein as they
are not to be acquired by Heritage.
The companies included in the consolidated and combined financial
statements are collectively referred to as the Company. All significant
intercompany accounts and transactions have been eliminated, except for the
equity accounts of the companies being combined as no parent-subsidiary
relationship exists.
The Company sells propane and propane-related products from retail outlets
located principally in California and Nevada. The Company is also a wholesale
propane supplier in those regions.
The accompanying unaudited consolidated and combined financial statements
as of May 31, 2001, and for the nine months ended May 31, 2001 and 2000, have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information, including all adjustments of a
normal and recurring nature which are, in the opinion of the Company's
management, necessary for the fair presentation of interim results. Not all
information and notes required for complete financial statements are included.
The results of operations presented are not necessarily indicative of the
results for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL
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.
F-14
47
PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are valued at the lower of cost or market. The cost of fuel
inventories is determined using weighted-average cost, while the cost of
appliances, parts and fittings is determined by the specific identification
method. Inventories consisted of the following:
AUGUST 31,
MAY 31, -----------
2001 2000 1999
------- ---- ----
Fuel........................................................ $1,200 $790 $508
Appliances, parts and fittings.............................. 211 198 296
------ ---- ----
$1,411 $988 $804
====== ==== ====
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed principally by the straight-line method
over the estimated useful lives of the assets. Expenditures for maintenance and
repairs are expensed as incurred. Components and useful lives of property, plant
and equipment were as follows:
AUGUST 31,
MAY 31, -----------------
2001 2000 1999
------- ------- -------
Land.................................................... $ 2,148 $ 2,207 $ 2,207
Buildings and improvements (10 to 30 years)............. 1,171 1,178 1,166
Plant facilities and equipment (5 to 30 years).......... 2,418 2,374 2,309
Tanks and other equipment (5 to 30 years)............... 13,460 12,910 12,606
Transportation equipment (5 to 15 years)................ 3,579 3,633 3,553
Furniture and fixtures (5 to 10 years).................. 647 626 618
------- ------- -------
23,423 22,928 22,459
Less -- accumulated depreciation........................ 16,249 15,455 14,395
------- ------- -------
Property, plant and equipment, net.................... $ 7,174 $ 7,473 $ 8,064
======= ======= =======
Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. If such a review should indicate that the carrying amount of
long-lived assets is not recoverable, the Company reduces the carrying amount of
such assets to fair value. No impairment of long-lived assets was required
during the period ended May 31, 2001, or the years ended August 31, 2000 and
1999.
F-15
48
PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following:
AUGUST 31,
MAY 31, ---------------
2001 2000 1999
------- ------ ------
Interest payable........................................... $ 67 $ 39 $ --
Wages and payroll taxes.................................... 462 1,651 1,120
Deferred tank rent......................................... 585 585 575
Customer deposits.......................................... 271 254 246
Taxes other than income.................................... 124 175 142
Income taxes payable....................................... 889 26 188
Professional services...................................... 1,000 -- --
Other...................................................... 176 352 869
------ ------ ------
Accrued and other current liabilities............ $3,574 $3,082 $3,140
====== ====== ======
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred income
taxes are recorded based upon differences between the financial reporting and
tax basis of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the underlying assets are received and
liabilities are settled.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value
The carrying amount of accounts receivable and accounts payable
approximates their fair value. Based on the estimated borrowing rates currently
available to the Company for long-term loans with similar terms and average
maturities, the aggregate fair value at August 31, 2000 of the Company's
long-term debt approximates the aggregate carrying amount.
Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" and by Statement No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, and for hedging activities,
be recorded on the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's
F-16
49
PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
gains and losses to offset related results on the hedged item in the income
statement and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting.
The Company adopted SFAS 133 on September 1, 2000. The adoption had no
impact on the Company's financial statements, as it is not currently using
derivative instruments. Additional volatility in earnings and comprehensive
income may occur as a result of the adoption of SFAS 133 should the Company use
derivative instruments in the future.
3. INCOME TAXES
The provision for income taxes for the period ended May 31, 2001 and 2000,
and the years ended August 31, 2000 and 1999, was comprised of the following:
FOR THE NINE
MONTHS ENDED FOR THE YEARS
MAY 31, ENDED AUGUST 31,
-------------- ----------------
2001 2000 2000 1999
------ ----- ------ -------
Income tax provision (benefit):
Current........................................... $1,111 $ 427 $ 188 $1,139
Deferred.......................................... (51) (153) (156) (71)
------ ----- ----- ------
Total..................................... $1,060 $ 274 $ 32 $1,068
====== ===== ===== ======
The income tax effect of temporary differences comprising the current
deferred tax asset and long-term deferred tax liability on the accompanying
balance sheets are a result of the following:
MAY 31, AUGUST 31, AUGUST 31,
2001 2000 1999
------- ---------- ----------
Current deferred income taxes:
Vacation accrual..................................... $ 55 $ 29 $ 29
Deferred tank revenue................................ 189 189 189
Other................................................ 44 72 30
----- ----- -----
Total current deferred tax asset............. $ 288 $ 290 $ 248
===== ===== =====
Long-term deferred income taxes:
Depreciation......................................... $(417) $(457) $(557)
Amortization......................................... 28 24 18
Interest on subordinated notes....................... 108 99 91
----- ----- -----
Total long-term deferred tax liability....... $(281) $(334) $(448)
===== ===== =====
Income taxes differ from amounts computed by applying the federal statutory
rates to pre-tax income as follows:
FOR THE NINE FOR THE
MONTHS ENDED YEARS ENDED
MAY 31, AUGUST 31,
------------ ------------
2001 2000 2000 1999
---- ---- ---- ----
Federal income taxes at statutory rate................... 35% 35% 35% 35%
S corporation income..................................... (11)% (21)% (30)% (10)%
State income tax, net.................................... (3)% (3)% (3)% (3)%
--- --- --- ---
Provision for income taxes..................... 21% 11% 2% 22%
=== === === ===
F-17
50
PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consisted of the following at May 31, 2001, August 31, 2000
and 1999:
MAY 31, AUGUST 31, AUGUST 31,
2001 2000 1999
------- ---------- ----------
Note payable to a Bank, due May 31, 2006; monthly
payments of principal and interest (approximately $5)
with the remaining balance due at maturity; interest
at Bank's Prime Rate plus 0.5% (9.86% at August 31,
2000). Secured by personal property of the Company... $ -- $331 $ 393
Note payable to a Corporation, due May 16, 2003;
monthly payments of principal and interest
(approximately $8) with the remaining balance due at
maturity; interest at 7.0%. Secured by certain assets
of the Company....................................... 198 237 313
6% subordinated notes.................................. 374 353 326
Other.................................................. 32 63 124
---- ---- ------
604 984 1,156
Less -- current portion of long-term debt.............. 461 524 518
---- ---- ------
$143 $460 $ 638
==== ==== ======
The 6% subordinated notes have an original face value of $94 and are owned
by various note holders unrelated to the Company. The notes were due on December
31, 1977. The Company has increased the carrying value of the notes each year to
reflect the accrual of interest on the outstanding notes that will be paid when
the notes are retired. The Company has recorded accrued interest of $280, $259
and $232 as of May 31, 2001, August 31, 2000 and August 31, 1999, respectively.
The notes are classified as current maturities of long-term debt on the balance
sheet as the notes have matured.
Future maturities of long-term debt at August 31, 2000 were as follows:
2001........................................................ $524
2002........................................................ 173
2003........................................................ 127
2004........................................................ 58
2005........................................................ 58
Thereafter.................................................. 44
----
$984
====
F-18
51
PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
Certain property and equipment is leased under non-cancelable leases, which
require fixed monthly rental payments and expire at various dates through 2026.
Rental expense under these leases totaled approximately $1,266 and $1,119 for
the years ending August 31, 2000 and 1999 and $806 and $1,042 for the nine
months ending May 31, 2001 and 2000, respectively. Future minimum lease
commitments as of August 31, 2000, for such leases were as follows:
2001........................................................ $102
2002........................................................ 83
2003........................................................ 69
2004........................................................ 40
2005........................................................ 34
Thereafter.................................................. 341
----
$669
====
Subsequent to August 31, 2000, the Company purchased vehicles for approximately
$1,612, which were previously being leased under month-to-month leases.
The Company has received from the Environmental Protection Agency (EPA) an
information request letter with respect to property owned by the Company
concerning the Newmark groundwater contamination Superfund site in San
Bernadino, California. The Company has responded timely to the EPA's request for
information and the inquiry is in preliminary stages. Management cannot estimate
the likelihood of an outcome assigning any responsibility to the Company.
However, management does not expect the ultimate outcome of this matter to have
a material adverse effect on the Company's results of operations or its
financial position.
The Company is a party to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, all such matters are covered by insurance, are without merit or
involve amounts, which, if resolved unfavorably, would not have a significant
effect on the financial position or results of operations of the Company. The
Company has entered into several purchase and supply commitments with varying
terms as to quantities and prices, which expire at various dates through March
2002.
6. STOCKHOLDERS' EQUITY
The following represents the equity summaries of the combined companies as
of August 31, 2000:
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED TREASURY
STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
--------- ------ ---------- -------- -------- ------
ProFlame Nevada (consolidated)...... $ -- $ -- $531 $3,435 $-- $3,966
California Western Gas Co........... 627 -- -- 950 -- 1,577
Coast Liquid Gas, Inc. ............. -- 15 -- 823 -- 838
Growth Properties................... -- 322 -- 554 -- 876
L.P.G. Associates................... -- -- -- 880 -- 880
WMJB, Inc. ......................... -- -- -- (293) -- (293)
---- ---- ---- ------ --- ------
Total..................... $627 $337 $531 $6,349 $-- $7,844
==== ==== ==== ====== === ======
Each share of preferred stock is due dividends payable in arrears at a rate
of $1.50 per year. The amount of dividends in arrears at August 31, 2000 related
to shareholders outside of the combined group was $371, which is not reflected
in the accompanying financial statements. California Western Gas Co.
F-19
52
PROFLAME, INC. AND SUBSIDIARIES AND AFFILIATES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
may redeem the outstanding preferred stock, at any time, by paying the preferred
shareholder $26 per share, plus dividends in arrears. The preferred stock shall,
with respect to dividend rights and rights upon liquidation, rank prior to any
common stock.
7. PROFIT SHARING AND 401(k) SAVINGS PLAN
The Company sponsors a defined contribution 401(k) savings plan (the
"Plan"), which covers all employees subject to service period requirements.
Contributions are made to the Plan at the discretion of the Board of Directors.
Total expense related to the Plan during the years ended August 31, 2000 and
1999, was approximately $135 and $133, respectively. Total expense related to
the Plan during the nine months ended May 31, 2001 and 2000 was $107 and $108,
respectively.
8. RELATED PARTY TRANSACTIONS
The Company enters into various transactions with related parties. These
transactions include the borrowing and lending of cash. The payables and
receivables derived from the borrowing and lending of cash to various related
parties are classified on the balance sheet as notes receivable from related
parties and other and accounts payable to related parties. Interest is charged
on the balances between related parties at a rate of 5.25%. The Company
recognized interest income from related parties of approximately $149, $138,
$175 and $174 for the nine months ended May 31, 2001 and 2000 and the years
ending August 31, 2000 and 1999, respectively. The Company recognized interest
expense from related parties of approximately $182, $138, $192 and $175 for the
nine months ended May 31, 2001 and 2000 and for the years ended August 31, 2000
and 1999, respectively.
The Company has notes payable to related parties. These notes are due on
April 15, 2004, with interest payments of 18% due annually and principal due at
maturity. The Company incurred interest expense of approximately $28, $28, $38
and $38 for the nine months ended May 31, 2001 and 2000 and for the years ended
August 31, 2000 and 1999, respectively.
In addition, L.P.G. Associates leases certain employees to affiliated
companies. L.P.G. Associates charges the affiliated companies an amount equal to
the payroll cost of the leased employees plus a mark-up. The margin related to
the employee leasing activity is included in other revenue in the consolidated
and combined statements of operations. The margin recorded by L.P.G. Associates
was approximately $392, $300, $398 and $268 for the nine months ended May 31,
2001 and 2000, and for the years ended August 31, 2000 and 1999, respectively.
The majority owners of the Company are also officers of the Company.
Salaries and bonuses paid to these officers were approximately $2,950, $2,438,
$3,250 and $2,650 for the nine months ended May 31, 2001 and 2000, and for the
years ended August 31, 2000 and 1999, respectively.
9. SUBSEQUENT EVENTS
In May 2001, the Company entered into an agreement with an officer (and a
shareholder) of the Company, whereby the Company would loan the officer a total
of $1,454. The Company loaned the officer $442 in May 2001, which has been
recorded in notes receivable from related parties and others in the May 31,
2001, consolidated and combined balance sheet. The Company loaned the remaining
$1,011 in June 2001. The officer signed a promissory note with the Company at an
interest rate of 7.0 percent. The note is payable on demand.
In July 2001, the Company signed a definitive agreement whereby the
businesses of the Company would be acquired by Heritage.
F-20
53
PROSPECTUS
$150,000,000
HERITAGE PROPANE PARTNERS, L.P.
COMMON UNITS
DEBT SECURITIES
This prospectus provides you with a general description of the securities
we may offer. Each time we sell securities we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change information
contained in this prospectus. You should read this prospectus and any supplement
carefully before you invest.
The common units are traded on the New York Stock Exchange under the symbol
"HPG." On September 10, 1999, the last reported sales price for the common units
as reported on the New York Stock Exchange Composite Transactions Tape was
$22.50 per common unit. We will provide information in the prospectus supplement
for the expected trading market, if any, for the debt securities.
You should carefully consider each of the risk factors described under
"Risk Factors" beginning on page 3 of this Prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is prohibited.
The date of this Prospectus is September 13, 1999.
54
TABLE OF CONTENTS
WHO WE ARE.................................................. 2
ABOUT THIS PROSPECTUS....................................... 2
RISK FACTORS................................................ 3
USE OF PROCEEDS............................................. 12
RATIO OF EARNINGS TO FIXED CHARGES.......................... 12
DESCRIPTION OF COMMON UNITS................................. 13
DESCRIPTION OF DEBT SECURITIES.............................. 15
TAX CONSIDERATIONS.......................................... 25
PLAN OF DISTRIBUTION........................................ 40
FORWARD LOOKING STATEMENTS.................................. 41
WHERE YOU CAN FIND MORE INFORMATION......................... 42
LEGAL OPINIONS.............................................. 42
EXPERTS..................................................... 43
WHO WE ARE
We are a publicly traded Delaware limited partnership engaged in the sale,
distribution and marketing of propane and other related products in the United
States. We believe that we are the seventh largest retail marketer of propane in
the United States (as measured by retail gallons sold). We currently serve more
than 250,000 residential, commercial, industrial and agricultural customers from
149 district locations in 26 states. Our operations extend from coast to coast
with concentrations in the western, upper midwestern and southeastern regions of
the United States, with expansion into the northeastern United States in the
last two years.
We maintain our principal executive offices at 8801 South Yale Avenue,
Suite 310, Tulsa, Oklahoma 74137, and our telephone number is (918) 492-7272.
As used in this prospectus, "we," "us," "our" and "Heritage Propane" mean
Heritage Propane Partners, L.P. and, unless the context requires otherwise, our
subsidiary operating partnership, Heritage Operating, L.P., and our wholly owned
subsidiary, Heritage Service Corp. Our subsidiary operating partnership is
sometimes referred to in this prospectus as the "Operating Partnership."
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission using a "shelf" registration process.
Under this shelf registration process, we may sell the common units and debt
securities described in this prospectus in one or more offerings. The common
units and debt securities are sometimes referred to in this prospectus as the
"Securities." This prospectus provides you with a general description of us and
the Securities. Each time we sell Securities with this prospectus, we will
provide a prospectus supplement that will contain specific information about the
terms of that offering. The prospectus supplement may also add to, update or
change information in this prospectus. The information in this prospectus is
accurate as of its date. You should carefully read this prospectus, the
prospectus supplement and the documents we have incorporated by reference under
the heading "Where You Can Find More Information."
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RISK FACTORS
Before you invest in the Securities, you should be aware that there are
risks in doing so, including those described below. You should consider
carefully these risk factors together with all of the other information included
in this prospectus, any prospectus supplement and the documents we have
incorporated by reference.
If any of the following risks actually occurs, then our business, financial
condition or results of operations could be materially adversely affected. In
such event, we may be unable to make distributions to our unitholders or pay
interest on or the principal of any debt securities, the trading price of our
Securities could decline and you may lose all or part of your investment.
RISKS INHERENT IN OUR BUSINESS
Since weather conditions may adversely affect demand for propane, our
financial condition is vulnerable to warm winters
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many of our customers rely heavily on
propane as a heating fuel. Typically, we sell approximately 66% of our retail
propane volume during the peak heating season of October through March. Lower
sales volume due to warmer winter weather will adversely affect our results of
operations. Furthermore, variations in weather in one or more of the regions
where we operate can significantly affect the total volume of propane that we
sell and the profits realized on these sales. In fiscal 1998, temperatures were
significantly warmer than normal in areas in which we sell propane. Agricultural
demand for propane is also affected by weather during the harvest season as poor
harvests reduce demand for propane used in crop drying.
Sudden and sharp propane price increases may adversely affect our operating
results
The amount of gross profit we make selling propane retail depends on the
excess of the sales price we receive over our propane supply costs. Propane is a
commodity and the price we pay for it can change significantly in response to
changes in supply or other market conditions over which we have no control.
Since we may not be able to pass on to our customers immediately or in full all
increases in our wholesale cost of propane, these increases could reduce our
gross profits.
Market volatility may cause us to sell inventory at less than the price we
purchased it, which could adversely affect our operating results
Because of the potential volatility of propane prices, the market price for
propane could fall below the price at which we purchased it, which would
adversely affect our profits or render sales from such inventory unprofitable.
While we generally attempt to minimize this inventory risk by purchasing propane
on a short-term basis, we may on occasion, depending on inventory and price
outlooks, purchase and store propane at both our service centers and in our
major storage facilities for future resale. We may purchase large volumes of
propane during periods of low demand and low prices, which generally occur
during the summer months, at the then current market price.
We are dependent on our principal suppliers which increases the risk of an
interruption in supply
During the first nine months of fiscal 1999, 67% of our propane was
purchased from domestic suppliers, and 33% was purchased through M-P Oils, Ltd.,
one of our wholly owned subsidiaries. M-P Oils, Ltd. holds a 60% interest in a
Canadian partnership that supplies our volume requirements in the northern
states. Although we believe that alternative sources of propane are readily
available, if we were unable to purchase propane from our usual sources, the
failure to obtain alternate sources at competitive prices and on a timely basis
could have a material adverse effect on our business. Because we purchase
propane from foreign sources, our business is subject to risks of disruption in
foreign supply.
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Because of the highly competitive nature of the retail propane business, we
may not be able to maintain existing customers or acquire new customers, which
would have an adverse impact on our operating results and financial condition
If we are unable to compete effectively in the propane business, we may
lose existing customers or fail to acquire new customers, which will have a
material adverse effect on our results of operations and financial condition. We
compete with a number of large national and regional firms and several thousand
small independent firms. Because of the relatively low barriers to entry into
the retail propane market, there is potential for small independent propane
retailers, as well as other companies who may not be engaged in retail propane
distribution, to compete with our retail outlets. As a result, we are always
subject to the risk of additional competition in the future. Certain of our
competitors have greater financial resources than we do. Should a competitor
attempt to increase market share by decreasing prices, our financial condition
and results of operations could be materially adversely affected. Generally,
warmer-than-normal weather further intensifies competition. We believe that our
ability to compete effectively depends on the reliability of our service, our
responsiveness to customers and our ability to maintain competitive retail
prices.
Propane competes with other sources of energy, some of which are less
costly for equivalent energy value. We compete for customers against suppliers
of electricity, natural gas and fuel oil. Competition from alternative energy
sources has been increasing as a result of reduced regulation of many utilities,
including natural gas and electricity. Except for certain industrial and
commercial applications, propane is generally not competitive with natural gas
in areas where natural gas pipelines already exist because natural gas is a
significantly less expensive source of energy than propane. The gradual
expansion of the nation's natural gas distribution systems has resulted in the
availability of natural gas in many areas that previously depended upon propane.
Although propane is similar to fuel oil in certain applications and market
demand, propane and fuel oil compete to a lesser extent primarily because of the
cost of converting from one to the other.
If we do not make acquisitions on economically acceptable terms, our future
financial performance will be limited
The retail propane industry is mature, and we foresee only limited growth
in total retail demand for propane. Moreover, because of long-standing customer
relationships that are typical in our industry, the inconvenience of switching
tanks and suppliers and propane's higher cost relative to other energy sources,
such as natural gas, it may be difficult for us to acquire new retail customers
except through acquisitions. Therefore, our ability to grow will depend
primarily upon our ability to acquire other retail propane distributors and to
successfully integrate them into our existing operations and to make cost-saving
changes. We cannot guarantee that we will identify attractive acquisition
candidates in the future, that we will be able to acquire such businesses on
economically acceptable terms or successfully integrate them into our existing
operations and make cost-saving changes, that any acquisition will not dilute
earnings and distributions to our unitholders or that any additional debt
incurred to finance an acquisition will not adversely affect our ability to make
distributions to unitholders. We are subject to certain covenants contained in
our debt agreements that may restrict our ability to incur debt to finance
acquisitions. In addition, to the extent that warm weather or other factors
adversely affects our operating and financial results, our access to capital and
our acquisition activities may be limited.
We are subject to operating and litigation risks that could adversely
affect our operating results to the extent not covered by insurance
Our operations are subject to all operating hazards and risks normally
incidental to handling, storing and delivering combustible liquids like propane.
As a result, we have been, and are likely to be, a defendant in various legal
proceedings arising in the ordinary course of business. We maintain insurance
policies with insurers in such amounts and with such coverages and deductibles
as we believe are reasonable and prudent. However, we cannot guarantee that our
insurance will be adequate to protect us from all material expenses related to
potential future claims for personal injury and property damage or that such
levels of insurance will be available at economical prices.
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Energy efficiency and technological advances may affect the demand for
propane and adversely affect our operating results
The national trend toward increased conservation and technological
advances, including installation of improved insulation and the development of
more efficient furnaces and other heating devices, has decreased the demand for
propane by retail customers. We cannot predict how future conservation measures
or technological advances in heating, conservation, energy generation or other
devices might affect our operations.
Our results of operations and financial condition may be adversely affected
by governmental regulation and associated environmental and regulatory costs
The propane business is subject to a wide range of federal and state laws
and regulations related to environmental and other regulated matters. We have
implemented environmental programs and policies designed to avoid potential
liability and costs under applicable environmental laws. It is possible,
however, that we will have increased costs due to stricter pollution control
requirements or liabilities resulting from non-compliance with operating or
other regulatory permits. New environmental regulations might adversely impact
our operations, storage and transportation of propane. It is possible that
material costs and liabilities will be incurred, including those relating to
claims for damages to property and persons.
RISKS INHERENT IN AN INVESTMENT IN HERITAGE PROPANE
Cash distributions are not guaranteed and may fluctuate with our
performance and other external factors
Because distributions on the common units are dependent on the amount of
cash generated, distributions may fluctuate based on our performance. The actual
amount of cash that is available will depend upon numerous factors, including:
- cash flow generated by operations;
- required principal and interest payments on our debt;
- the costs of acquisitions;
- restrictions contained in our debt instruments;
- issuances of debt and equity securities;
- fluctuations in working capital;
- capital expenditures;
- adjustments in reserves made by the general partner in its discretion;
- prevailing economic conditions; and
- financial, business and other factors, a number of which will be beyond
our control.
Cash distributions are dependent primarily on cash flow, including from
reserves, and not on profitability, which is affected by non-cash items.
Therefore, cash distributions might be made during periods when we record losses
and might not be made during periods when we record profits.
The partnership agreement gives the general partner discretion in
establishing reserves for the proper conduct of our business. These reserves
will also affect the amount of cash available for distribution.
The distribution priority of holders of common units terminates at the end
of the subordination period
Currently the common units have the right to receive distributions of
available cash from our operations in an amount equal to $0.50 per unit before
any distributions of such available cash are made on our subordinated units.
This priority right is scheduled to end when certain financial tests, which are
related to generating cash from operations and distributing at least $0.50 per
unit on all common units and subordinated
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units, are satisfied for each of three consecutive four-quarter periods ending
on or after May 31, 2001. If these financial tests are met, the subordinated
units will convert into common units and will thereafter share equally with
other common units in distributions of available cash. Pursuant to the terms of
the partnership agreement, on July 7, 1999, 925,736 subordinated units converted
into common units. The conversion of the subordinated units was dependent on
meeting these financial tests for the period commencing with our public offering
in June 1996. An additional 925,736 subordinated units will convert to common
units after May 31, 2000 if these financial tests are met for the three
consecutive four-quarter periods ending on such date. We met these financial
tests for the four-quarter periods ended May 31, 1997, May 31, 1998 and May 31,
1999 and expect that we will meet the remaining financial test in the
four-quarter period ending May 31, 2000. The period during which the common
units have a priority right in distributions and in which the right of the
subordinated units to distributions is subordinated is referred to as the
subordination period.
We may sell additional limited partner interests, diluting existing
interests of unitholders
Our partnership agreement generally allows us to issue additional limited
partner interests and other equity securities without the approval of the
unitholders. During the subordination period, however, which will generally
extend at least through May 31, 2001, the number of common units that we may
issue is subject to certain limitations. These limitations do not apply to
issuances in connection with acquisitions or capital improvements that are
accretive, the repayment of certain indebtedness or certain employee benefit
plans. When we issue additional equity securities, your proportionate
partnership interest will decrease and the amount of cash distributed on each
unit and the market price of common units could decrease. Issuance of additional
common units will also diminish the relative voting strength of each previously
outstanding unit. Following the end of the subordination period, there are no
limits on the total number of common units or other equity securities that we
may issue.
Our debt agreements may limit our ability to make distributions to
unitholders and our financial
flexibility
As of May 31, 1999, we had outstanding $167 million in senior secured
promissory notes with insurance companies and $22.8 million outstanding under
our bank credit facility. Our leverage may adversely affect our ability to
finance future operations and capital needs, limit our ability to pursue
acquisitions and other business opportunities and make our results of operations
more susceptible to adverse economic conditions. We may in the future incur
additional debt to finance acquisitions or for general business purposes, which
could result in a significant increase in our leverage. The payment of principal
and interest on our debt will reduce the cash available to make distributions on
the common units. We will not be able to make any distributions to our
unitholders if there is or will be an event of default under our debt
agreements. Our ability to make principal and interest payments depends on
future performance, which performance is subject to many factors, several of
which will be outside our control. We have granted liens on substantially all of
our personal property (other than vehicles) to secure our existing debt. If an
event of default occurs, the lenders can foreclose on the collateral.
The notes and the bank credit facility contain provisions relating to
changes in ownership. If these provisions are triggered, the outstanding debt
may become due. If that happens, we cannot guarantee that we would be able to
pay the debt. The general partner and its stockholders are not prohibited from
entering into a transaction that would trigger these change-in-ownership
provisions. The notes and the bank credit facility also contain restrictive
covenants that limit our ability to incur additional debt and to engage in
certain transactions. This could reduce our ability to capitalize on business
opportunities that arise. Any new indebtedness could have similar or greater
restrictions.
Our holding company structure may limit our ability to repay debt
securities.
We are a holding company and have no material operations and only limited
assets. Accordingly, our ability to service our debt obligations will be
entirely dependent upon the receipt of distributions from the Operating
Partnership.
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Our holding company structure results in two principal risks:
- The Operating Partnership may be restricted by contractual provisions or
applicable laws from providing us the cash that we need to pay our debt
service obligations, including payments on any debt securities we offer
under this prospectus; and
- In any liquidation, reorganization or insolvency proceeding involving
Heritage Propane or in any other proceeding involving claims of creditors
(other than Heritage Propane) of the Operating Partnership (including
trade creditors, secured creditors, taxing authorities and creditors
holding guarantees), your claim as a holder of any debt securities we
offer under this prospectus will be effectively junior to the claims of
holders of any indebtedness of the Operating Partnership.
RISKS ARISING FROM OUR PARTNERSHIP STRUCTURE AND RELATIONSHIPS WITH OUR GENERAL
PARTNER
The general partner is not elected by the unitholders and cannot be removed
without its consent
The general partner manages and operates Heritage Propane. Unlike the
holders of common stock in a corporation, common unitholders will have only
limited voting rights on matters affecting our business. Common unitholders will
have no right to elect the general partner or the directors of the general
partner on an annual or other continuing basis, and the general partner may not
be removed except upon the vote of the holders of at least 66 2/3% of the
outstanding units (including units owned by the general partner and its
affiliates) and the election of a successor general partner by the vote of the
holders of not less than a majority of the outstanding common units and the
holders of not less than a majority of the outstanding subordinated units, each
voting as a separate class. Because the general partner owns all of the
subordinated units and more than one-third of all units, the general partner
cannot be removed without its consent.
Persons owning 20% or more of the common units cannot vote
Any units held by a person that owns 20% or more of any class of units then
outstanding cannot be voted. This limitation does not apply to the general
partner and its affiliates. This provision may:
- discourage a person or group from attempting to remove the general
partner or otherwise changing management; and
- reduce the price at which the common units will trade under certain
circumstances.
Unitholders may be required to sell their units to the general partner at
an undesirable time or price
If at any time less than 20% of the outstanding units of any class are held
by persons other than the general partner and its affiliates, the general
partner will have the right to acquire all, but not less than all, of those
units at a price no less than their then-current market price. As a consequence,
a unitholder may be required to sell his common units at an undesirable time or
price. The general partner may assign this purchase right to any of its
affiliates or Heritage Propane.
The general partner can protect itself against dilution
Whenever we issue equity securities to any person other than the general
partner and its affiliates, the general partner has the right to purchase
additional limited partnership interests on the same terms to maintain its
percentage interest in Heritage Propane. No other unitholder has a similar
right. Therefore, only the general partner may protect itself against dilution
caused by the issuance of additional equity securities.
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Unitholders may not have limited liability in certain circumstances and may
be liable for the return of
certain distributions
A number of states have not clearly established limitations on the
liabilities of limited partners for the obligations of a limited partnership.
The unitholders might be held liable for our obligations as if they were a
general partner if:
- a court or government agency determined that we were conducting business
in the state but had not complied with the state's partnership statute;
or
- unitholders' rights to act together to remove or replace the general
partner or take other actions under the partnership agreement constitute
"control" of our business.
Unitholders may have liability to repay distributions
Unitholders will not be liable for assessments in addition to their initial
capital investment in the common units. Under certain circumstances, however,
unitholders may have to repay Heritage Propane amounts wrongfully returned or
distributed to them. Under Delaware law, we may not make a distribution to you
if the distribution causes the liabilities of Heritage Propane to exceed the
fair value of Heritage Propane's assets. Liabilities to partners on account of
their partnership interests and non-recourse liabilities are not counted for
purposes of determining whether a distribution is permitted. Delaware law
provides that a limited partner who receives such a distribution and knew at the
time of the distribution that the distribution violated Delaware law will be
liable to the limited partnership for the distribution amount for three years
from the distribution date. Under Delaware law, an assignee who becomes a
substituted limited partner of a limited partnership is liable for the
obligations of the assignor to make contributions to the partnership. However,
such an assignee is not obligated for liabilities unknown to him at the time he
or she became a limited partner if the liabilities could not be determined from
the partnership agreement.
The partnership agreement modifies the fiduciary duties of the general
partner under Delaware law
Our partnership agreement contains language limiting the liability of the
general partner to us and the unitholders. For example, our partnership
agreement provides that:
- The general partner does not breach any duty to us or the unitholders by
borrowing funds or approving any borrowing. The general partner is
protected even if the purpose or effect of the borrowing is to increase
incentive distributions to the general partner or to hasten the
conversion of subordinated units into common units;
- The general partner does not breach any duty to us or the unitholders by
taking any actions consistent with the standards of reasonable discretion
outlined in the definitions of Available Cash and Operating Surplus
contained in our partnership agreement; and
- The general partner does not breach any standard of care or duty by
resolving conflicts of interest unless the general partner acts in bad
faith.
The modifications of state law standards of fiduciary duty contained in our
partnership agreement may significantly limit the ability of unitholders to
successfully challenge the actions of the general partner as being a breach of
what would otherwise have been a fiduciary duty. These standards include the
highest duties of good faith, fairness and loyalty to the limited partners. Such
a duty of loyalty would generally prohibit a general partner of a Delaware
limited partnership from taking any action or engaging in any transaction for
which it has a conflict of interest. Under the partnership agreement, the
general partner may exercise its broad discretion and authority in the
management of Heritage Propane and the conduct of its operations as long as the
general partner's actions are in the best interest of Heritage Propane.
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POTENTIAL CONFLICTS OF INTEREST RELATED TO THE OPERATION OF HERITAGE PROPANE
Certain conflicts of interest could arise among the general partner and
Heritage Propane. Such conflicts may include, among others, the following
situations:
- we do not have any employees and we rely solely on employees of the
general partner and its affiliates;
- under the partnership agreement, we reimburse the general partner for the
costs of managing and operating Heritage Propane;
- decisions of the general partner concerning the amount and timing of cash
expenditures, borrowings, issuances of additional units and reserves in
any quarter may affect the level of cash available to pay quarterly
distributions to unitholders;
- the general partner tries to avoid being personally liable for Heritage
Propane's obligations. The general partner is permitted to protect its
assets in this manner by the partnership agreement. Under the partnership
agreement, the general partner does not breach its fiduciary duty even if
Heritage Propane could have obtained more favorable terms without
limitations on the general partner's liability;
- under the partnership agreement, the general partner may pay its
affiliates for any services rendered on terms fair and reasonable to
Heritage Propane. The general partner may also enter into additional
contracts with any of its affiliates on Heritage Propane's behalf.
Agreements or contracts between Heritage Propane and the general partner
(and its affiliates) are not the result of arms length negotiations;
- the general partner does not breach the partnership agreement by
exercising its call rights to purchase limited partnership interests or
by assigning its call rights to one of its affiliates or to Heritage
Propane.
TAX RISKS
For a general discussion of the expected federal income tax consequences of
owning and disposing of common units, see "Tax Considerations."
Tax treatment is dependent on partnership status
The availability to a common unitholder of the federal income tax benefits
of an investment in the common units depends, in large part, on our
classification as a partnership for federal income tax purposes. Based on
certain representations of the general partner and Heritage Propane, Baker &
Botts, L.L.P., our tax counsel, is of the opinion that, under current law, we
will be classified as a partnership for federal income tax purposes. However, no
ruling from the IRS as to such status has been or is expected to be requested.
Instead, we are relying on the opinion of our tax counsel, which is not binding
on the IRS. One of the representations on which the opinion of our tax counsel
is based is that at least 90% of our gross income for each taxable year will be
"qualifying income" within the meaning of Section 7704 of the Internal Revenue
Code. Whether we will continue to be classified as a partnership in part depends
on our ability to meet this qualifying income test in the future.
If we were classified as an association taxable as a corporation for
federal income tax purposes, we would pay tax on our income at corporate rates
(currently a 35% federal rate). Distributions to the common unitholders would
generally be taxed a second time as corporate distributions, and no income,
gains, losses or deductions would flow through to the unitholders. Because a tax
would be imposed upon us as an entity, the cash available for distribution to
the common unitholders would be substantially reduced. Treatment of us as a
taxable entity would cause a material reduction in the anticipated cash flow and
after-tax return to the common unitholders, likely causing a substantial
reduction in the value of the common units.
We cannot guarantee that the law will not be changed so as to cause us to
be treated as an association taxable as a corporation for federal income tax
purposes or otherwise to be subject to entity-level taxation. Our partnership
agreement provides that if a law is enacted or existing law is modified or
interpreted in a manner that subjects us to taxation as a corporation or
otherwise subjects us to entity-level taxation for federal, state or
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local income tax purposes, certain provisions of our partnership agreement will
be subject to change. Such changes would include a decrease in the minimum
quarterly distribution and the target distribution levels to reflect the impact
of such law on us.
We have not requested an IRS ruling with respect to our classification as a
partnership
We have not requested a ruling from the IRS with respect to our
classification as a partnership for federal income tax purposes, whether our
propane operations generate "qualifying income" under Section 7704 of the
Internal Revenue Code or any other matter affecting us. Accordingly, the IRS may
adopt positions that differ from the conclusions of our tax counsel expressed in
this prospectus or the positions taken by us. It may be necessary to resort to
administrative or court proceedings in an effort to sustain some or all of our
tax counsel's conclusions or the positions taken by us. A court may not concur
with some or all of our conclusions. Any contest with the IRS may materially and
adversely impact the market for the common units and the prices at which they
trade. In addition, the costs of any contest with the IRS will be borne directly
or indirectly by some or all of the unitholders and the general partner.
A unitholder's tax liability could exceed cash distributions on his units
A unitholder will be required to pay federal income taxes and, in some
cases, state and local income taxes on his allocable share of our income, even
if he receives no cash distributions from us. We cannot guarantee that a
unitholder will receive cash distributions equal to his allocable share of our
taxable income or even the tax liability to him resulting from that income.
Further, a unitholder may incur a tax liability, in excess of the amount of cash
received, upon the sale of his common units.
Ownership of common units may have adverse tax consequences for tax-exempt
organizations and
certain other investors
Investment in common units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to them. For
example, virtually all of our taxable income allocated to organizations exempt
from federal income tax, including individual retirement accounts and other
retirement plans, will be unrelated business taxable income and thus will be
taxable to the unitholder. Very little of our income will be qualifying income
to a regulated investment company. Distributions to foreign persons will be
reduced by withholding taxes.
Only calendar-year taxpayers may become partners
Only calendar-year taxpayers may purchase common units. Any unitholder who
is not a calendar-year taxpayer will not be admitted to Heritage Propane as a
partner, will not be entitled to receive distributions or federal income tax
allocations from Heritage Propane and may only transfer these interests to a
purchaser or other transferee.
There are limits on the deductibility of losses
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any losses generated by us will only
be available to offset our future income and cannot be used to offset income
from other activities, including other passive activities or investments. Unused
losses may be deducted when the unitholder disposes of his entire investment in
us in a fully taxable transaction with an unrelated party. A unitholder's share
of our net passive income may be offset by unused losses from us carried over
from prior years, but not by losses from other passive activities, including
losses from other publicly traded partnerships.
Tax shelter registration could increase risk of potential audit by the IRS
We are registered with the IRS as a "tax shelter." The IRS has issued us
the following tax shelter registration number: 96234000014. Issuance of the
registration number does not indicate that an investment in us or the claimed
tax benefits have been reviewed, examined or approved by the IRS. We cannot
guarantee
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that we will not be audited by the IRS or that tax adjustments will not be made.
The rights of a unitholder owning less than a 1% profits interest in us to
participate in the income tax audit process are very limited. Further, any
adjustments in our tax returns will lead to adjustments in the unitholders' tax
returns and may lead to audits of unitholders' tax returns and adjustments of
items unrelated to us. Each unitholder would bear the cost of any expenses
incurred in connection with an examination of his personal tax return.
Tax gain or loss on disposition of common units could be different than
expected
A unitholder who sells common units will recognize gain or loss equal to
the difference between the amount realized and his tax basis in the common
units. Prior distributions in excess of cumulative net taxable income allocated
for a common unit which decreased a unitholder's tax basis in that common unit
will, in effect, become taxable income if the common unit is sold at a price
greater than the unitholder's tax basis in that common unit, even if the price
is less than his original cost. A portion of the amount realized, whether or not
representing gain, may be ordinary income. Furthermore, should the IRS
successfully contest some conventions used by us, a unitholder could recognize
more gain on the sale of common units than would be the case under those
conventions, without the benefit of decreased income in prior years.
Reporting of partnership tax information is complicated and subject to
audits
We will furnish each unitholder with a Schedule K-1 that sets forth his
allocable share of income, gains, losses and deductions. In preparing these
schedules, we will use various accounting and reporting conventions and adopt
various depreciation and amortization methods. We cannot guarantee that these
schedules will yield a result that conforms to statutory or regulatory
requirements or to administrative pronouncements of the IRS. Further, our tax
return may be audited, which could result in an audit of a unitholder's
individual tax return and increased liabilities for taxes because of adjustments
resulting from the audit.
There is a possibility of loss of tax benefits relating to nonuniformity of
common units and
nonconforming depreciation conventions
Because we cannot match transferors and transferees of common units,
uniformity of the economic and tax characteristics of the common units to a
purchaser of common units of the same class must be maintained. To maintain
uniformity and for other reasons, we have adopted certain depreciation and
amortization conventions that do not conform with all aspects of certain
proposed and final Treasury Regulations. A successful challenge to those
conventions by the IRS could adversely affect the amount of tax benefits
available to a purchaser of common units and could have a negative impact on the
value of the common units.
There are state, local and other tax considerations
In addition to federal income taxes, unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which he resides or in which we do business or own property. A
unitholder will likely be required to file state and local income tax returns
and pay state and local income taxes in some or all of the various jurisdictions
in which we do business or own property and may be subject to penalties for
failure to comply with those requirements. It is the responsibility of each
unitholder to file all United States federal, state and local tax returns that
may be required of him. Our tax counsel has not rendered an opinion on the state
or local tax consequences of an investment in us.
Unitholders may have negative tax consequences if we default on our debt or
sell assets
If we default on any of our debt, the lenders will have the right to sue us
for non-payment. Such an action could cause an investment loss and negative tax
consequences for unitholders through the realization of taxable income by
unitholders without a corresponding cash distribution. Likewise, if we were to
dispose of assets and realize a taxable gain while there is substantial debt
outstanding and proceeds of the sale were applied to the debt, unitholders could
have increased taxable income without a corresponding cash distribution.
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USE OF PROCEEDS
We will use the net proceeds from the sale of the Securities for general
business purposes, including debt repayment, future acquisitions, capital
expenditures and working capital. We may change the potential uses of the net
proceeds in a prospectus supplement.
RATIO OF EARNINGS TO FIXED CHARGES
The table below sets forth the ratio of earnings to fixed charges of the
Partnership and for Heritage Holdings, Inc. (Predecessor) for the periods
indicated.
NINE MONTHS
ENDED YEAR ENDED TWO MONTHS TEN MONTHS YEAR ENDED
MAY 31, AUGUST 31, ENDED ENDED AUGUST 31,
----------- ----------- AUGUST 31, JUNE 30, -------------
1999 1998 1998 1997 1996(1) 1996 1995 1994
---- ---- ---- ---- ---------- ------------- ----- -----
(PREDECESSOR) (PREDECESSOR)
Ratio of earnings to fixed
charges....................... 2.3x 2.3x 1.5x 1.4x -- 1.4x 1.0x 1.1x
- ---------------
(1) For the two months ended August 31, 1996, earnings were inadequate to cover
fixed charges by $1.8 million.
These computations include Heritage Propane and the Operating Partnership on a
consolidated basis for the periods indicated and Heritage Holdings, Inc.
(Predecessor) and subsidiaries on a consolidated basis for the periods
indicated. For these ratios, "earnings" is the amount resulting from adding the
following items:
- pre-tax income from continuing operations, before equity in earnings of
affiliates;
- distributed income of equity investees; and
- fixed charges.
The term "fixed charges" means the sum of the following:
- interest expensed;
- amortized debt issuance costs; and
- estimated interest element of rentals.
Earnings from continuing operations for the periods presented were reduced by
certain non-cash expenses, consisting principally of depreciation and
amortization and a non-cash employee stock ownership plan charge. Such non-cash
charges, excluding amortized debt issuance costs, totaled $8.6 million for the
year ended August 31, 1994, $8.7 million for the year ended August 31, 1995,
$7.2 million for the ten months ended June 30, 1996, $1.7 million for the two
months ended August 31, 1996, $10.8 million for the year ended August 31, 1997,
$13.4 million for the year ended August 31, 1998, and $9.8 million and $10.7
million for the nine months ended May 31, 1998 and 1999, respectively.
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DESCRIPTION OF COMMON UNITS
NUMBER OF UNITS
As of September 13, 1999, we had 5,825,674 common units outstanding,
representing an approximate 66% limited partner interest in Heritage Propane,
and 2,777,207 subordinated units outstanding, representing an approximate 32%
limited partner interest in Heritage Propane. Heritage Holdings, Inc., our
general partner, owns all of the subordinated units and 1,116,243 of the common
units as well as the 2% general partner interest. The common units and the
subordinated units represent limited partner interests in Heritage Propane,
which entitle the holders thereof to participate in distributions and exercise
the rights and privileges available to limited partners under our partnership
agreement. A copy of our partnership agreement is filed as an exhibit to the
registration statement of which this prospectus is a part. A summary of the
important provisions of our partnership agreement is included in our reports
filed with the SEC.
Under our partnership agreement we may issue, without further unitholder
action, an unlimited number of additional limited partner interests and other
equity securities with such rights, preferences and privileges as shall be
established by the general partner in its sole discretion, except that, during
the subordination period, we may not issue equity securities senior to the
common units or an aggregate of more than 2,012,500 common units or other units
having rights to distributions or in liquidation ranking on a parity with the
common units without the prior approval of at least a majority of the
outstanding common units voting as a class and at least a majority of the
outstanding subordinated units voting as a class; provided that, we may issue an
unlimited number of additional common units or parity securities prior to the
end of the subordination period and without unitholder approval in connection
with certain accretive acquisitions or the repayment of up to $30 million of
certain indebtedness.
COMMON UNITS
Listing
Our outstanding common units are listed on the NYSE under the symbol "HPG."
Any additional common units we issue will also be listed on the NYSE.
Voting
Each record holder of a unit has a vote according to his percentage
interest in Heritage Propane; provided that, if at any time any person or group
(other than our general partner and its affiliates) owns beneficially 20% or
more of all common units, any common units owned by that person or group shall
not be voted on any matter and shall not be considered to be outstanding when
sending notices of a meeting of unitholders (unless otherwise required by law),
calculating required votes, determining the presence of a quorum or for other
similar purposes under our partnership agreement. Except as otherwise provided
by law or our partnership agreement, the holders of common units and
subordinated units vote as one class.
Distributions
Our partnership agreement requires us to distribute all of our "Available
Cash" to our unitholders and our general partner within 45 days following the
end of each fiscal quarter. "Available Cash" generally means, with respect to
any fiscal quarter of Heritage Propane, all of our cash on hand at the end of
each quarter, less reserves established by our general partner in its sole
discretion to provide for the proper conduct of our business, to comply with
applicable law or agreements, or to provide funds for future distributions to
partners.
Currently, the common units have the right to receive distributions of
Available Cash from our operations in an amount equal to $0.50 per unit before
any distributions of such Available Cash are made on the subordinated units.
This subordination period is scheduled to end when certain financial tests,
which are related to generating cash from operations and distributing at least
$0.50 per unit on all common units and subordinated units, are satisfied for
each of three consecutive four-quarter periods ending on or after May 31, 2001.
If these financial tests are met, the subordinated units will convert into
common units and will thereafter
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share equally with other common units in distributions of Available Cash.
Pursuant to the terms of the partnership agreement, on July 7, 1999, 925,736
subordinated units converted into common units. The conversion of the
subordinated units was dependent on meeting these financial tests for the period
commencing with our public offering in June 1996. An additional 925,736
subordinated units will convert to common units after May 31, 2000 if these
financial tests are met for the three consecutive four-quarter periods ending on
such date. We met these financial tests for the four-quarter periods ended May
31, 1997, May 31, 1998 and May 31, 1999 and expect that we will meet the
remaining financial tests in the four-quarter period ending May 31, 2000;
however, there can be no assurance that we will meet the remaining financial
tests in the three consecutive four-quarter periods ending May 31, 2000 or in
any subsequent three consecutive four-quarter periods.
During the subordination period we distribute Available Cash from our
operations as follows:
- first, 98% to the holders of common units, pro rata, and 2% to the
general partner, until the holders of common units have received $0.50
per common unit for such quarter and any prior quarter in which they
failed to receive $0.50 per common unit;
- second, 98% to the holders of subordinated units, pro rata, and 2% to the
general partner, until the holders of subordinated units have received
$0.50 per subordinated unit for such quarter;
- third, 98% to all unitholders, pro rata, and 2% to the general partner,
until all unitholders have received $0.55 per unit for such quarter;
- fourth, 85% to all unitholders, pro rata, and 15% to the general partner,
until all unitholders have received $0.635 per unit for such quarter;
- fifth, 75% to all unitholders, pro rata, and 25% to the general partner,
until all unitholders have received $0.825 per unit for such quarter; and
- sixth, thereafter 50% to all unitholders, pro rata, and 50% to the
general partner.
Following the end of the subordination period, Available Cash from our
operations will be distributed as follows:
- first, 98% to all unitholders, pro rata, and 2% to the general partner,
until all unitholders have received $0.50 per unit for such quarter;
- second, 98% to all unitholders, pro rata, and 2% to the general partner,
until all unitholders have received $0.55 per unit for such quarter;
- third, 85% to all unitholders, pro rata, and 15% to the general partner,
until all unitholders have received $0.635 per unit for such quarter;
- fourth, 75% to all unitholders, pro rata, and 25% to the general partner,
until all unitholders have received $0.825 per unit for such quarter; and
- fifth, thereafter 50% to all unitholders, pro rata, and 50% to the
general partner.
Our quarterly distribution of Available Cash is currently $.5625 per unit
per quarter.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for the common units is American Stock
Transfer & Trust Company. You may contact them at the following address:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005-2301
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DESCRIPTION OF DEBT SECURITIES
GENERAL
The debt securities will be:
- our direct secured or unsecured general obligations; and
- either senior debt securities or subordinated debt securities.
Senior debt securities will be issued under a Senior Indenture and
subordinated debt securities will be issued under a Subordinated Indenture. The
Senior Indenture and the Subordinated Indenture are each referred to as an
"Indenture" and collectively referred to as the "Indentures." We will enter into
the Indentures with a trustee that is qualified to act under the Trust Indenture
Act of 1939, as amended (the "TIA") (together with any other trustee(s) chosen
by us and appointed in a supplemental indenture with respect to a particular
series of debt securities, the "Trustee"). The Trustee for each series of debt
securities will be identified in the applicable Prospectus Supplement. Any
supplemental indentures will be filed by us from time to time by means of an
exhibit to a Current Report on Form 8-K and will be available for inspection at
the corporate trust office of the Trustee, or as described below under "Where
You Can Find More Information." The Indentures will be subject to, and governed
by, the TIA. We will execute an Indenture and supplemental indenture if and when
we issue any debt securities.
We summarized the material provisions of the Indentures in the following
order:
- those provisions that apply only to the Senior Indenture;
- those provisions that apply only to the Subordinated Indenture; and
- those provisions that apply to both Indentures.
We have not restated the Indentures in their entirety in this prospectus.
You should read the Indentures, because they, and not this description, control
your rights as holders of the debt securities. Capitalized terms used in the
summary have the meanings specified in the Indentures.
In this section, references to Heritage Propane relate only to Heritage
Propane Partners, L.P., the issuer of the debt securities, and not to our
Subsidiaries. In the Indentures, the term "Subsidiary" means, with respect to
any person:
- any partnership of which more than 50% of the partners' equity interests
(considering all partners' equity interests as a single class) is at the
time owned or controlled, directly or indirectly, by such person or one
or more of the other Subsidiaries of such person or combination thereof,
or
- any corporation, association or other business entity of which more than
50% of the total voting power of the equity interests entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such person or one or more of the
other Subsidiaries of such person or combination thereof.
At present, our only Subsidiaries are the Operating Partnership and
Heritage Service Corp.
SPECIFIC TERMS OF EACH SERIES OF DEBT SECURITIES IN THE PROSPECTUS SUPPLEMENT
A prospectus supplement and a supplemental indenture relating to any series
of debt securities being offered will include specific terms relating to such
debt securities. These terms will include some or all of the following:
- whether the debt securities are senior or subordinated debt securities;
- the title of the debt securities;
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- the total principal amount of the debt securities;
- the assets, if any, that are pledged as security for the payment of the
debt securities;
- whether we will issue the debt securities in individual certificates to
each holder in registered form, or in the form of temporary or permanent
global securities held by a depository on behalf of holders;
- the prices at which we will issue the debt securities;
- the portion of the principal amount that will be payable if the maturity
of the debt securities is accelerated;
- the currency or currency unit in which the debt securities will be
payable, if not U.S. dollars;
- any right we may have to defer payments of interest by extending the
dates payments are due and whether interest on those deferred amounts
will be payable as well;
- the dates on which the principal of the debt securities will be payable;
- the interest rate that the debt securities will bear and the interest
payment dates for the debt securities;
- any conversion or exchange provisions;
- any optional redemption provisions;
- any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the debt securities;
- any changes to or additional Events of Default or covenants; and
- any other terms of the debt securities.
PROVISIONS ONLY IN THE SENIOR INDENTURE
Summary
The senior debt securities will rank equally in right of payment with all
of our other senior and unsubordinated debt and senior in right of payment to
any of our subordinated debt (including the subordinated debt securities). The
Senior Indenture will contain provisions that:
- limit our ability to put liens on our principal assets; and
- limit our ability to sell and lease back our principal assets.
The Subordinated Indenture will not contain any similar provisions. We have
described below these provisions and some of the defined terms used in them.
Limitations on Liens
The Senior Indenture will provide that Heritage Propane will not, nor will
it permit any Subsidiary to, create, assume, incur or suffer to exist any lien
upon any property or assets, whether owned or leased on the date of the Senior
Indenture or thereafter acquired, to secure any debt of Heritage Propane or any
other person (other than the senior debt securities issued thereunder), without
in any such case making effective provision whereby all of the senior debt
securities outstanding thereunder shall be secured equally and ratably with, or
prior to, such debt so long as such debt shall be so secured.
There is excluded from this restriction:
1. Permitted Liens (as defined below);
2. with respect to any series, any lien upon any property or assets of
Heritage Propane or any Subsidiary in existence on the date the senior debt
securities of such series are first issued or provided for pursuant to
agreements existing on such date;
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3. any lien upon any property or assets created at the time of
acquisition of such property or assets by Heritage Propane or any
Subsidiary or within one year after such time to secure all or a portion of
the purchase price for such property or assets or debt incurred to finance
such purchase price, whether such debt was incurred prior to, at the time
of or within one year after the date of such acquisition;
4. any lien upon any property or assets existing thereon at the time
of the acquisition thereof by Heritage Propane or any Subsidiary; provided,
however, that such lien only encumbers the property or assets so acquired;
5. any lien upon any property or assets of a person existing thereon
at the time such person becomes a Subsidiary by acquisition, merger or
otherwise; provided, however, that such lien only encumbers the property or
assets of such person at the time such person becomes a Subsidiary;
6. any lien upon any property or assets to secure all or part of the
cost of construction, development, repair or improvements thereon or to
secure debt incurred prior to, at the time of, or within one year after
completion of such construction, development, repair or improvements or the
commencement of full operations thereof (whichever is later), to provide
funds for any such purpose;
7. liens imposed by law or order as a result of any proceeding before
any court or regulatory body that is being contested in good faith, and
liens which secure a judgment or other court-ordered award or settlement as
to which Heritage Propane or the applicable Subsidiary has not exhausted
its appellate rights;
8. any lien upon any additions, improvements, replacements, repairs,
fixtures, appurtenances or component parts thereof attaching to or required
to be attached to property or assets pursuant to the terms of any mortgage,
pledge agreement, security agreement or other similar instrument, creating
a lien upon such property or assets permitted by clauses (1) through (7)
above; or
9. any extension, renewal, refinancing, refunding or replacement (or
successive extensions, renewals, refinancing, refunding or replacements) of
liens, in whole or in part, referred to in clauses (1) through (8) above;
provided, however, that any such extension, renewal, refinancing, refunding
or replacement lien shall be limited to the property or assets covered by
the lien extended, renewed, refinanced, refunded or replaced and that the
obligations secured by any such extension, renewal, refinancing, refunding
or replacement lien shall be in an amount not greater than the amount of
the obligations secured by the lien extended, renewed, refinanced, refunded
or replaced and any expenses of Heritage Propane and its subsidiaries
(including any premium) incurred in connection with such extension,
renewal, refinancing, refunding replacement; or
10. any lien resulting from the deposit of moneys or evidence of
indebtedness in trust for the purpose of defeasing debt of Heritage Propane
or any Subsidiary.
Notwithstanding the foregoing, under the Senior Indenture, Heritage Propane
may, and may permit any Subsidiary to, create, assume, incur, or suffer to exist
any lien upon any property or assets to secure debt of Heritage Propane or any
person (other than the senior debt securities) that is not excepted by clauses
(1) through (10), inclusive, above without securing the senior debt securities
issued under the Senior Indenture, provided that the aggregate principal amount
of all debt then outstanding secured by such lien and all similar liens,
together with all Attributable Indebtedness (as defined below) from
Sale-Leaseback Transactions (excluding Sale-Leaseback Transactions permitted by
clauses (1) through (4), inclusive, of the first paragraph of the restriction on
sale-leasebacks covenant described below) does not exceed 10% of Consolidated
Net Tangible Assets (as defined below).
"Permitted Liens" means:
(1) zoning restrictions, easements, licenses, covenants, reservations,
restrictions on the use of real property or minor irregularities of
title incident thereto that do not, in the aggregate, materially
detract from the value of the property or the assets of Heritage
Propane or any of its Subsidiaries or
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impair the use of such property in the operation of the business of
Heritage Propane or any of its Subsidiaries;
(2) any statutory or governmental lien or lien arising by operation of law,
or any mechanics', repairmen's, materialmen's, suppliers', vendors',
carriers', landlords', warehousemen's or similar lien incurred in the
ordinary course of business which is not yet due or which is being
contested in good faith by appropriate proceedings and any undetermined
lien which is incidental to construction, development, improvement or
repair;
(3) the right reserved to, or vested in, any municipality or public
authority by the terms of any right, power, franchise, grant, license,
permit or by any provision of law, to purchase or recapture or to
designate a purchaser of, any property;
(4) liens of taxes and assessments which are (A) for the then current year,
(B) not at the time delinquent, or (C) delinquent but the validity of
which is being contested at the time by Heritage Propane or any
Subsidiary in good faith;
(5) liens of, or to secure performance of, leases, other than capital
leases;
(6) any lien upon, or deposits of, any assets in favor of any surety
company or clerk of court for the purpose of obtaining indemnity or
stay of judicial proceedings;
(7) any lien upon property or assets acquired or sold by Heritage Propane
or any Subsidiary resulting from the exercise of any rights arising out
of defaults on receivables;
(8) any lien incurred in the ordinary course of business in connection with
workmen's compensation, unemployment insurance, temporary disability,
social security, retiree health or similar laws or regulations or to
secure obligations imposed by statute or governmental regulations;
(9) any lien in favor of Heritage Propane or any Subsidiary;
(10) any lien in favor of the United States of America or any state
thereof, or any department, agency or instrumentality or political
subdivision of the United States of America or any state thereof, to
secure partial, progress, advance, or other payments pursuant to any
contract or statute, or any debt incurred by Heritage Propane or any
Subsidiary for the purpose of financing all or any part of the
purchase price of, or the cost of constructing, developing, repairing
or improving, the property or assets subject to such lien;
(11) any lien securing industrial development, pollution control or similar
revenue bonds;
(12) any lien securing debt of Heritage Propane or any Subsidiary, all or a
portion of the net proceeds of which are used, substantially
concurrent with the funding thereof (and for purposes of determining
such "substantial concurrence," taking into consideration, among other
things, required notices to be given to holders of outstanding
securities under the Indenture (including the debt securities) in
connection with such refunding, refinancing or repurchase, and the
required corresponding durations thereof), to refinance, refund or
repurchase all outstanding securities under the Indenture (including
the debt securities), including the amount of all accrued interest
thereon and reasonable fees and expenses and premium, if any, incurred
by Heritage Propane or any Subsidiary in connection therewith;
(13) liens in favor of any person to secure obligations under the
provisions of any letters of credit, bank guarantees, bonds or surety
obligations required or requested by any governmental authority in
connection with any contract or statute; or
(14) any lien upon or deposits of any assets to secure performance of bids,
trade contracts, leases or statutory obligations.
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"Consolidated Net Tangible Assets" means, at any date of determination, the
total amount of assets after deducting therefrom:
(1) all current liabilities (excluding (A) any current liabilities that by
their terms are extendable or renewable at the option of the obligor
thereon to a time more than 12 months after the time as of which the
amount thereof is being computed, and (B) current maturities of debt),
and
(2) the value (net of any applicable reserves) of all goodwill, trade
names, trademarks, patents and other like intangible assets, all as set
forth, or on a pro forma basis would be set forth, on the consolidated
balance sheet of Heritage Propane and its consolidated subsidiaries for
Heritage Propane's most recently completed fiscal quarter, prepared in
accordance with generally accepted accounting principles.
Restriction on Sale-Leasebacks
The Senior Indenture will provide that Heritage Propane will not, and will
not permit any Subsidiary to, engage in the sale or transfer by Heritage Propane
or any Subsidiary of any property or assets to a person (other than Heritage
Propane or a Subsidiary) and the taking back by Heritage Propane or any
Subsidiary, as the case may be, of a lease of such property or assets (a
"Sale-Leaseback Transaction"), unless:
(1) such Sale-Leaseback Transaction occurs within one year from the date of
completion of the acquisition of the property or assets subject thereto
or the date of the completion of construction, development or
substantial repair or improvement, or commencement of full operations
on such property or assets, whichever is later;
(2) the Sale-Leaseback Transaction involves a lease for a period, including
renewals, of not more than the lesser of (A) three years and (B) 60% of
the useful remaining life of such property;
(3) Heritage Propane or such Subsidiary would be entitled to incur debt
secured by a lien on the property or assets subject thereto in a
principal amount equal to or exceeding the Attributable Indebtedness
from such Sale-Leaseback Transaction without equally and ratably
securing the senior debt securities; or
(4) Heritage Propane or such Subsidiary, within a one-year period after
such Sale-Leaseback Transaction, applies or causes to be applied an
amount not less than the Attributable Indebtedness from such
Sale-Leaseback Transaction to (A) the prepayment, repayment,
redemption, reduction or retirement of any debt of Heritage Propane or
any Subsidiary that is not subordinated to the senior debt securities,
or (B) the expenditure or expenditures for property or assets used or
to be used in the ordinary course of business of Heritage Propane or
its Subsidiaries.
"Attributable Indebtedness," when used with respect to any Sale-Leaseback
Transaction, means, as at the time of determination, the present value
(discounted at the rate set forth or implicit in the terms of the lease included
in such transaction) of the total obligations of the lessee for rental payments
(other than amounts required to be paid on account of property taxes, repairs,
maintenance, insurance, assessments, utilities, operating and labor costs and
other items that do not constitute payments for property rights) during the
remaining term of the lease included in such Sale-Leaseback Transaction
(including any period for which such lease has been extended). In the case of
any lease that is terminable by the lessee upon the payment of a penalty or
other termination payment, such amount shall be the lesser of the amount
determined assuming termination upon the first date such lease may be terminated
(in which case the amount shall also include the amount of the penalty or
termination payment, but no rent shall be considered as required to be paid
under such lease subsequent to the first date upon which it may be so
terminated) or the amount determined assuming no such termination.
Notwithstanding the foregoing, under the Senior Indenture Heritage Propane
may, and may permit any Subsidiary to, effect any Sale-Leaseback Transaction
that is not excepted by clauses (1) through (4), inclusive, of the above
paragraph, provided that the Attributable Indebtedness from such Sale-Leaseback
together with the aggregate principal amount of outstanding debt (other than the
senior debt securities)
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secured by liens upon property and assets not excepted by clauses (1) through
(10), inclusive, of the second paragraph of the limitation on liens covenant
described above, do not exceed 10% of Consolidated Net Tangible Assets.
PROVISIONS ONLY IN THE SUBORDINATED INDENTURE
Subordinated Debt Securities Subordinated to Senior Debt
The subordinated debt securities will rank junior in right of payment to
all of our Senior Debt. "Senior Debt" is defined to include all notes or other
evidences of indebtedness, including guarantees of Heritage Propane for money
borrowed by Heritage Propane, not expressed to be subordinate or junior in right
of payment to any other indebtedness of Heritage Propane.
Payment Blockages
The Subordinated Indenture will provide that no payment of principal,
interest and any premium on the subordinated debt securities may be made in the
event:
- we or our property are involved in any voluntary or involuntary
liquidation or bankruptcy;
- we fail to pay the principal, interest, any premium or any other amounts
on any Senior Debt when due; or
- we have a nonpayment default on any Senior Debt that imposes a payment
blockage on the subordinated debt securities for a maximum of 179 days at
any one time.
No Limitation on Amount of Senior Debt
The Subordinated Indenture will not limit the amount of Senior Debt that we
incur.
CONSOLIDATION, MERGER OR ASSET SALE
Each Indenture will, in general, allow us to consolidate or merge with
another domestic entity. They will also allow us to sell, lease or transfer all
or substantially all of our property and assets to another domestic entity. If
this happens, the remaining or acquiring entity must assume all of our
responsibilities and liabilities under the Indentures including the payment of
all amounts due on the debt securities and performance of the covenants in the
Indentures.
However, we will only consolidate or merge with or into an entity or sell,
lease or transfer all or substantially all of our assets according to the terms
and conditions of the Indentures, which will include the following requirements:
- the remaining or acquiring entity is organized under the laws of the
United States, any state or the District of Columbia;
- the remaining or acquiring entity assumes Heritage Propane's obligations
under the Indentures; and
- immediately after giving effect to the transaction no Default or Event of
Default (as defined below) exists.
The remaining or acquiring entity will be substituted for us in the
Indentures with the same effect as if it had been an original party to the
Indentures. Thereafter, the successor may exercise our rights and powers under
the Indentures, in our name or in its own name. If we sell or transfer all or
substantially all of our assets, we will be released from all our liabilities
and obligations under the Indentures and under the debt securities. If we lease
all or substantially all of our assets, we will not be released from our
obligations under the Indentures.
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MODIFICATION OF INDENTURES
We may modify or amend each Indenture if the holders of a majority in
principal amount of the outstanding debt securities of all series issued under
the Indenture affected by the modification or amendment consent to it. Without
the consent of each outstanding debt security affected, however, no modification
may:
- change the stated maturity of the principal of or any installment of
principal of or interest on any debt security
- reduce the principal amount of, the interest rate on or the premium
payable upon redemption of any debt security
- change the redemption date for any debt security
- change our obligation, if any, to pay additional amounts
- reduce the principal amount of an original discount debt security payable
upon acceleration of maturity
- change the coin or currency in which any debt security or any premium or
interest on any debt security is payable
- change the redemption right of any holder
- impair the right to institute suit for the enforcement of any payment on
any debt security
- reduce the percentage in principal amount of outstanding debt securities
of any series necessary to modify the Indenture, to waive compliance with
certain provisions of the Indenture or to waive certain defaults
- reduce quorum or voting requirements
- change our obligation to maintain an office or agency in the places and
for the purposes required by the Indenture
- modify any of the above provisions
We may modify or amend the Indenture without the consent of any holders of
the debt securities in certain circumstances, including:
- to provide for the assumption of our obligations under the Indenture and
the debt securities by a successor upon any merger, consolidation or
asset transfer
- to add covenants and events of default or to surrender any rights we have
under the Indenture
- to make any change that does not adversely affect any outstanding debt
securities of a series in any material respect
- to secure the senior debt securities as described above under "Provisions
Only in the Senior Indenture -- Limitations on Liens'
- to provide for successor trustees
- to cure any ambiguity, omission, defect or inconsistency
The holders of a majority in principal amount of the outstanding debt
securities of any series may waive past defaults under the Indenture and
compliance by us with our covenants with respect to the debt securities of that
series only. Those holders may not, however, waive any default in any payment on
any debt security of that series or compliance with a provision that cannot be
modified or amended without the consent of each holder affected.
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EVENTS OF DEFAULT AND REMEDIES
"Event of Default" when used in an Indenture, will mean any of the
following:
- failure to pay the principal of or any premium on any debt security when
due;
- failure to pay interest on any debt security for 30 days;
- failure to perform any other covenant in the Indenture that continues for
60 days after being given written notice;
- certain events of bankruptcy, insolvency or reorganization of Heritage
Propane; or
- any other Event of Default included in any Indenture or supplemental
indenture.
The subordination does not affect our obligation, which is absolute and
unconditional, to pay, when due, the principal of and any premium and interest
on the subordinated debt securities. In addition, the subordination does not
prevent the occurrence of any default under the subordinated indenture.
An Event of Default for a particular series of debt securities does not
necessarily constitute an Event of Default for any other series of debt
securities issued under an Indenture. The Trustee may withhold notice to the
holders of debt securities of any default (except in the payment of principal or
interest) if it considers such withholding of notice to be in the best interests
of the holders.
If an Event of Default for any series of debt securities occurs and
continues, the Trustee or the holders of at least 25% in aggregate principal
amount of the debt securities of the series may declare the entire principal of
all the debt securities of that series to be due and payable immediately. If
this happens, subject to certain conditions, the holders of a majority of the
aggregate principal amount of the debt securities of that series can void the
declaration.
Other than its duties in case of a default, a Trustee is not obligated to
exercise any of its rights or powers under any Indenture at the request, order
or direction of any holders, unless the holders offer the Trustee reasonable
indemnity. If they provide this reasonable indemnification, the holders of a
majority in principal amount of any series of debt securities may direct the
time, method and place of conducting any proceeding or any remedy available to
the Trustee, or exercising any power conferred upon the Trustee, for any series
of debt securities.
NO LIMIT ON AMOUNT OF DEBT SECURITIES
Neither of the Indentures will limit the amount of debt securities that we
may issue. Each Indenture allows us to issue debt securities up to the principal
amount that we authorize.
REGISTRATION OF NOTES
We may issue debt securities of a series in registered, bearer, coupon or
form.
MINIMUM DENOMINATIONS
Unless the prospectus supplement for each issuance of debt securities
states otherwise the securities will be issued in registered form in amounts of
$1,000 each or multiples of $1,000.
NO PERSONAL LIABILITY OF GENERAL PARTNER
Unless otherwise stated in a prospectus supplement and supplemental
indenture relating to a series of debt securities being offered, the general
partner and its directors, officers, employees and stockholders will not have
any liability for our obligations under the Indentures or the debt securities.
Each holder of debt securities by accepting a debt security waives and releases
all such liability. The waiver and release are part of the consideration for the
issuance of the debt securities.
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PAYMENT AND TRANSFER
Principal, interest and any premium on fully registered securities will be
paid at designated places. Payment will be made by check mailed to the persons
in whose names the debt securities are registered on days specified in the
Indentures or any prospectus supplement. Debt securities payments in other forms
will be paid at a place designated by us and specified in a prospectus
supplement.
Fully registered securities may be transferred or exchanged at the
corporate trust office of the Trustee or at any other office or agency
maintained by us for such purposes, without the payment of any service charge
except for any tax or governmental charge.
FORM, EXCHANGE, REGISTRATION AND TRANSFER
Debt securities of any series will be exchangeable for other debt
securities of the same series, the same total principal amount and the same
terms but in different authorized denominations in accordance with the
Indenture. Holders may present debt securities for registration of transfer at
the office of the security registrar or any transfer agent we designate. The
security registrar or transfer agent will effect the transfer or exchange when
it is satisfied with the documents of title and identity of the person making
the request. We will not charge a service charge for any registration of
transfer or exchange of the debt securities. We may, however, require the
payment of any tax or other governmental charge payable for that registration.
We will appoint the trustee under each Indenture as security registrar for
the debt securities issued under that Indenture. We are required to maintain an
office or agency for transfers and exchanges in each place of payment. We may at
any time designate additional transfer agents for any series of debt securities.
In the case of any redemption in part, we will not be required:
- to issue, register the transfer of or exchange debt securities of a
series either during a period beginning 15 business days prior to the
selection of debt securities of that series for redemption and ending on
the close of business on the day of mailing of the relevant notice of
redemption or
- to register the transfer of or exchange any debt security, or portion of
any debt security, called for redemption, except the unredeemed portion
of any debt security we are redeeming in part.
DISCHARGING OUR OBLIGATIONS
We may choose to either discharge our obligations on the debt securities of
any series in a legal defeasance, or to release ourselves from our covenant
restrictions on the debt securities of any series in a covenant defeasance. We
may do so at any time on the 91st day after we deposit with the Trustee
sufficient cash or government securities to pay the principal, interest, any
premium and any other sums due to the stated maturity date or a redemption date
of the debt securities of the series. If we choose the legal defeasance option,
the holders of the debt securities of the series will not be entitled to the
benefits of the Indenture except for registration of transfer and exchange of
debt securities, replacement of lost, stolen or mutilated debt securities,
conversion or exchange of debt securities, sinking fund payments and receipt of
principal and interest on the original stated due dates or specified redemption
dates.
We may discharge our obligations under the Indentures or release ourselves
from covenant restrictions only if we meet certain requirements. Among other
things, we must deliver an opinion of our legal counsel that the discharge will
not result in holders of debt securities having to recognize taxable income or
loss or subject then to different tax treatment. In the case of legal
defeasance, this opinion must be based on either an IRS letter ruling or change
in federal tax law. We may not have a default on the debt securities discharged
on the date of deposit. The discharge may not violate any of our agreements. The
discharge may not result in our becoming an investment company in violation of
the Investment Company Act of 1940.
BOOK ENTRY, DELIVERY AND FORM
The debt securities of a series may be issued in whole or in part in the
form of one or more global certificates that will be deposited with a depositary
identified in a prospectus supplement.
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Unless otherwise stated in any prospectus supplement, The Depository Trust
Company, New York, New York ("DTC") will act as depositary. Book-entry notes of
a series will be issued in the form of a global note that will be deposited with
DTC. This means that we will not issue certificates to each holder. One global
note will be issued to DTC who will keep a computerized record of its
participants (for example, your broker) whose clients have purchased the notes.
The participant will then keep a record of its clients who purchased the notes.
Unless it is exchanged in whole or in part for a certificated note, a global
note may not be transferred, except that DTC, its nominees and their successors
may transfer a global note as a whole to one another.
Beneficial interests in global notes will be shown on, and transfers of
global notes will be made only through, records maintained by DTC and its
participants.
DTC has provided us the following information: DTC is a limited-purpose
trust company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the United States
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds
securities that its participants ("Direct Participants") deposit with DTC. DTC
also records the settlement among Direct Participants of securities
transactions, such as transfers and pledges, in deposited securities through
computerized records for Direct Participant's accounts. This eliminates the need
to exchange certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
Direct Participant. The rules that apply to DTC and its participants are on file
with the SEC.
DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., The American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
We will wire principal and interest payments to DTC's nominee. We and the
Trustee will treat DTC's nominee as the owner of the global notes for all
purposes. Accordingly, we, the Trustee and any paying agent will have no direct
responsibility or liability to pay amounts due on the global notes to owners of
beneficial interests in the global notes.
It is DTC's current practice, upon receipt of any payment of principal or
interest, to credit Direct Participants' accounts on the payment date according
to their respective holdings of beneficial interests in the global notes as
shown on DTC's records. In addition, it is DTC's current practice to assign any
consenting or voting rights to Direct Participants whose accounts are credited
with notes on a record date, by using an omnibus proxy. Payments by participants
to owners of beneficial interests in the global notes, and voting by
participants, will be governed by the customary practices between the
participants and owners of beneficial interests, as is the case with notes held
for the account of customers registered in "street name." However, payments will
be the responsibility of the participants and not of DTC, the Trustee or us.
Notes represented by a global note will be exchangeable for certificated
notes with the same terms in authorized denominations only if:
- DTC notifies us that it is unwilling or unable to continue as depositary
or if DTC ceases to be a clearing agency registered under applicable law
and a successor depositary is not appointed by us within 90 days; or
- we determine not to require all of the notes of a series to be
represented by a global note and notify the Trustee of our decision.
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THE TRUSTEE
Resignation or Removal of Trustee
Under provisions of the Indentures and the Trust Indenture Act of 1939, as
amended, governing trustee conflicts of interest, any uncured Event of Default
with respect to any series of senior debt securities will force the trustee to
resign as trustee under either the Subordinated Indenture or the Senior
Indenture. Also, any uncured Event of Default with respect to any series of
subordinated debt securities will force the trustee to resign as trustee under
either the Senior Indenture or the Subordinated Indenture. Any resignation will
require the appointment of a successor trustee under the applicable Indenture in
accordance with the terms and conditions of such Indenture.
The Trustee may resign or be removed by us with respect to one or more
series of debt securities and a successor trustee may be appointed to act with
respect to any such series. The holders of a majority in aggregate principal
amount of the debt securities of any series may remove the Trustee with respect
to the debt securities of such series.
Limitations on Trustee if it is a Creditor of Heritage Propane
Each Indenture will contain certain limitations on the right of the Trustee
thereunder, in the event that it becomes a creditor of Heritage Propane, to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise.
Annual Trustee Report to Holders of Debt Securities
The Trustee is required to submit an annual report to the holders of the
debt securities regarding, among other things, the Trustee's eligibility to
serve as such, the priority of the Trustee's claims regarding certain advances
made by it, and any action taken by the Trustee materially affecting the debt
securities.
Certificates and Opinions to be Furnished to Trustee
Each Indenture will provide that, in addition to other certificates or
opinions that may be specifically required by other provisions of an Indenture,
every application by us for action by the Trustee shall be accompanied by a
certificate of certain of our officers and an opinion of counsel (who may be our
counsel) stating that, in the opinion of the signers, all conditions precedent
to such action have been complied with by us.
TAX CONSIDERATIONS
This section is a summary of material tax considerations that may be
relevant to prospective unitholders and, to the extent set forth below under
"-- Legal Opinions and Advice," expresses the opinion of Baker & Botts, L.L.P.,
special counsel to Heritage Propane, insofar as it relates to matters of law and
legal conclusions. This section is based upon current provisions of the Internal
Revenue Code, existing and proposed regulations thereunder and current
administrative rulings and court decisions as of September 13, 1999, all of
which are subject to change. Subsequent changes in such authorities may cause
the tax consequences to vary substantially from the consequences described
below. Unless the context otherwise requires, references in this section to "us"
are references to Heritage Propane and the Operating Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or residents of
the United States and has only limited application to corporations, estates,
trusts, non-resident aliens or other unitholders subject to specialized tax
treatment, such as tax-exempt institutions, foreign persons, individual
retirement accounts, REITs or mutual funds. Accordingly, each prospective
unitholder should consult, and should depend on, his own tax advisor in
analyzing the federal, state, local and foreign tax consequences peculiar to him
of the ownership or disposition of common units.
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LEGAL OPINIONS AND ADVICE
Counsel is of the opinion that, as of September 13, 1999 and based on the
accuracy of the representations and subject to the qualifications set forth in
the detailed discussion that follows, for federal income tax purposes (i)
Heritage Propane and the Operating Partnership will each be treated as a
partnership, and (ii) owners of common units, with certain exceptions, as
described in "-- Limited Partner Status" below, will be treated as partners of
Heritage Propane, but not the Operating Partnership. In addition, all statements
as to matters of law and legal conclusions contained in this section, unless
otherwise noted, reflect the opinion of counsel as of September 13, 1999. All
references to "us," "we" or "our" are to Heritage Propane and not Baker & Botts,
L.L.P.
We have not requested, and do not expect to request, a ruling from the IRS
with respect to our classification as a partnership for federal income tax
purposes, whether our propane operations generate "qualifying income" under
Section 7704 of the Internal Revenue Code or any other matter affecting us or
prospective unitholders. Instead, we have relied, and will rely, on the opinions
of counsel as to these matters. An opinion of counsel represents only that
counsel's best legal judgment and does not bind the IRS or the courts. No
assurance can be provided that the opinions and statements set forth herein
would be sustained by a court if contested by the IRS. Any such contest with the
IRS may materially and adversely impact the market for the common units and the
prices at which common units trade even if we prevail. In addition, the costs of
any contest with the IRS will be borne directly or indirectly by the unitholders
and the general partner. Furthermore, no assurance can be given that our
treatment, or an investment in Heritage Propane, will not be significantly
modified by future legislative or administrative changes or court decisions. Any
such modification may or may not be retroactively applied.
For the reasons hereinafter described, counsel has not rendered an opinion
with respect to the following specific federal income tax issues:
(1) the treatment of a unitholder whose common units are loaned to a short
seller to cover a short sale of common units (see "-- Tax Treatment of
Unitholders -- Treatment of Short Sales");
(2) whether a unitholder acquiring common units in separate transactions
must maintain a single aggregate adjusted tax basis in his common units
(see "-- Disposition of Common Units -- Recognition of Gain or Loss");
(3) whether our monthly convention for allocating taxable income and losses
is permitted by existing Treasury Regulations (see "-- Disposition of
Common Units -- Allocations Between Transferors and Transferees"); and
(4) whether our method for depreciating Section 743 adjustments is
sustainable (see "-- Tax Treatment of Operations -- Section 754
Election").
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his allocable
share of items of income, gain, loss and deduction of the partnership in
computing his federal income tax liability, regardless of whether cash
distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the amount of cash distributed to a partner is in
excess of the partner's adjusted basis in his partnership interest.
We have not requested, and do not expect to request any ruling from the IRS
as to the status of Heritage Propane or the Operating Partnership as a
partnership for federal income tax purposes. Instead we have relied on the
opinion of counsel that, based upon the Internal Revenue Code, Treasury
Regulations, published revenue rulings and court decisions and representations
described below, Heritage Propane and the Operating Partnership will each be
classified as a partnership for federal income tax purposes. In rendering its
opinion,
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counsel has relied on certain factual representations made by Heritage Propane
and the general partner. Such factual matters are as follows:
(a) Neither Heritage Propane nor the Operating Partnership has elected or
will elect to be treated as an association or corporation;
(b) Heritage Propane and the Operating Partnership have been and will be
operated in accordance with:
(1) all applicable partnership statutes;
(2) the partnership agreement or operating partnership agreement
(whichever is applicable); and
(3) the description of the applicable agreement in this Prospectus;
and
(c) For each taxable year, more than 90% of our gross income will be
derived from:
(1) the exploration, development, production, processing, refining,
transportation or marketing of any mineral or natural resource,
including oil, gas or products thereof; or
(2) other items as to which counsel has or will opine are "qualifying
income" within the meaning of Section 7704(d) of the Internal
Revenue Code.
Section 7704 of the Internal Revenue Code provides that publicly-traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "Qualifying Income Exception," exists with respect
to publicly-traded partnerships of which 90% or more of the gross income for
every taxable year consists of "qualifying income." Qualifying income includes
interest from other than a financial business, dividends and income and gains
from the processing, transportation and marketing of crude oil, natural gas, and
products thereof, including the retail and wholesale marketing of propane,
certain hedging activities and the transportation of propane and natural gas
liquids. Based upon the representations of Heritage Propane and the general
partner and a review of the applicable legal authorities, counsel is of the
opinion that at least 90% of our gross income constitutes qualifying income.
If we fail to meet the Qualifying Income Exception, other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery, we will be treated as if we transferred all of
our assets, subject to liabilities, to a newly formed corporation, on the first
day of the year in which we fail to meet the Qualifying Income Exception, in
return for stock in that corporation, and then distributed that stock to the
partners in liquidation of their interests in us. This contribution and
liquidation should be tax-free to unitholders and Heritage Propane, so long as
we, at that time, do not have liabilities in excess of the tax basis of our
assets. Thereafter, we would be treated as a corporation for federal income tax
purposes.
If Heritage Propane or the Operating Partnership were treated as an
association taxable as a corporation in any taxable year, either as a result of
a failure to meet the Qualifying Income Exception or otherwise, its items of
income, gain, loss and deduction would be reflected only on its tax return
rather than being passed through to the unitholders, and our net income would be
taxed to Heritage Propane or the Operating Partnership at corporate rates. In
addition, any distributions we made to a unitholder would be treated as either
taxable dividend income, to the extent of Heritage Propane's current or
accumulated earnings and profits, or, in the absence of earnings and profits, a
nontaxable return of capital, to the extent of the unitholder's tax basis in his
common units, or taxable capital gain, after the unitholder's tax basis in the
common units is reduced to zero. Accordingly, treatment of either Heritage
Propane or the Operating Partnership as an association taxable as a corporation
would result in a material reduction in a unitholder's cash flow and after-tax
return and thus would likely result in a substantial reduction of the value of
the common units.
The discussion below is based on the assumption that we will be classified
as a partnership for federal income tax purposes.
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TAX TREATMENT OF UNITHOLDERS
Limited Partner Status
Unitholders who have become our limited partners will be treated as our
partners for federal income tax purposes. Counsel is of the opinion that
assignees who have executed and delivered Transfer Applications, and are
awaiting admission as limited partners, and unitholders whose common units are
held in street name or by a nominee and who have the right to direct the nominee
in the exercise of all substantive rights attendant to the ownership of their
common units will be treated as our partners for federal income tax purposes.
Because there is no direct authority addressing assignees of common units who
are entitled to execute and deliver Transfer Applications and thereby become
entitled to direct the exercise of attendant rights, but who fail to execute and
deliver Transfer Applications, it is not clear whether such assignees will be
treated as partners of Heritage Propane for federal income tax purposes.
Furthermore, a purchaser or other transferee of common units who does not
execute and deliver a Transfer Application may not receive certain federal
income tax information or reports furnished to record holders of common units
unless the common units are held in a nominee or street name account and the
nominee or broker has executed and delivered a Transfer Application with respect
to such common units.
A beneficial owner of common units whose common units have been transferred
to a short seller to complete a short sale would appear to lose his status as a
partner with respect to such common units for federal income tax purposes. See
"-- Tax Treatment of Unitholders -- Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by such a unitholder would therefore be fully taxable as
ordinary income. These holders should consult their own tax advisors with
respect to their status as our partners for federal income tax purposes.
Flow-through of Taxable Income
We will not pay any federal income tax. Instead, each unitholder must
report on his income tax return his allocable share of our income, gains, losses
and deductions without regard to whether corresponding cash distributions are
received by that unitholder. Consequently, a unitholder may be allocated a share
of our income even if he has not received a cash distribution. Each unitholder
must include in income his allocable share of our income, gain, loss and
deduction for our taxable year ending with or within his taxable year.
Treatment of Partnership Distributions
Distributions by us to a unitholder generally will not be taxable to him
for federal income tax purposes to the extent of the tax basis he has in his
common units immediately before the distribution. Our cash distributions in
excess of a unitholder's tax basis generally will be considered to be gain from
the sale or exchange of the common units, taxable in accordance with the rules
described under "-- Disposition of Common Units" below. Any reduction in a
unitholder's share of our liabilities for which no partner, including the
general partner, bears the economic risk of loss, known as "nonrecourse
liabilities," will be treated as a distribution of cash to that unitholder. To
the extent that our distributions cause a unitholder's "at risk" amount to be
less than zero at the end of any taxable year, he must recapture any losses
deducted in previous years. See "-- Tax Treatment of Unitholders -- Limitations
on Deductibility of Partnership Losses."
A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease such unitholder's share of
nonrecourse liabilities, and thus will result in a corresponding deemed
distribution of cash. A non-pro rata distribution of money or property may
result in ordinary income to a unitholder, regardless of his tax basis in his
common units, if such distribution reduces the unitholder's share of our
"unrealized receivables," including depreciation recapture, and/or substantially
appreciated "inventory items," both as defined in Section 751 of the Internal
Revenue Code, and collectively, "Section 751 Assets". To that extent, the
unitholder will be treated as having been distributed his proportionate share of
the Section 751 Assets and having exchanged such assets with us in return for
the non-pro rata portion of the actual distribution made to him. This latter
deemed exchange will generally result in the unitholder's
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realization of ordinary income under Section 751(b) of the Internal Revenue
Code. Such income will equal the excess of (1) the non-pro rata portion of such
distribution over (2) the unitholder's tax basis for the share of such Section
751 Assets deemed relinquished in the exchange.
Alternative Minimum Tax
Each unitholder will be required to take into account his distributive
share of any of our items of income, gain, deduction or loss for purposes of the
alternative minimum tax. A portion of our depreciation deductions may be treated
as an item of tax preference for this purpose. A unitholder's alternative
minimum taxable income derived from us may be higher than his share of our net
income because we may use accelerated methods of depreciation for purposes of
computing federal taxable income or loss. The minimum tax rate for noncorporate
taxpayers is 26% on the first $175,000 of alternative minimum taxable income in
excess of the exemption amount and 28% on any additional alternative minimum
taxable income. Prospective unitholders should consult with their tax advisors
as to the impact of an investment in common units on their liability for the
alternative minimum tax.
Basis of Common Units
A unitholder will have an initial tax basis for his common units equal to
the amount he paid for the common units plus his share of our nonrecourse
liabilities. That basis will be increased by his share of our income and by any
increases in his share of our nonrecourse liabilities. That basis will be
decreased, but not below zero, by distributions from us, by his share of our
losses, by any decrease in his share of our nonrecourse liabilities and by his
share of our expenditures that are not deductible in computing our taxable
income and are not required to be capitalized. A limited partner will have no
share of our debt which is recourse to the general partner, but will have a
share, generally based on his share of profits, of our nonrecourse liabilities.
See "-- Disposition of Common Units -- Recognition of Gain or Loss."
Limitations on Deductibility of Partnership Losses
The deduction by a unitholder of his share of our losses will be limited to
his tax basis in his common units and, in the case of an individual unitholder
or a corporate unitholder, if more than 50% of the value of its stock is owned
directly or indirectly by five or fewer individuals or certain tax-exempt
organizations, to the amount for which the unitholder is considered to be "at
risk" with respect to our activities, if that is less than the unitholder's tax
basis. A unitholder must recapture losses deducted in previous years to the
extent that our distributions cause the unitholder's at risk amount to be less
than zero at the end of any taxable year. Losses disallowed to a unitholder or
recaptured as a result of these limitations will carry forward and will be
allowable to the extent that the unitholder's tax basis or at risk amount,
whichever is the limiting factor, subsequently increases. Upon the taxable
disposition of a common unit, any gain recognized by a unitholder can be offset
by losses that were previously suspended by the at risk limitation but may not
be offset by losses suspended by the basis limitation. Any excess loss above
such gain previously suspended by the at risk or basis limitations is no longer
utilizable.
In general, a unitholder will be at risk to the extent of his tax basis in
his common units, excluding any portion of that basis attributable to his share
of our nonrecourse liabilities, reduced by any amount of money the unitholder
borrows to acquire or hold his common units if the lender of such borrowed funds
owns an interest in us, is related to the unitholder or can look only to common
units for repayment. A unitholder's at risk amount will increase or decrease as
the tax basis of the unitholder's common units increases or decreases, other
than tax basis increases or decreases attributable to increases or decreases in
his share of our nonrecourse liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely-held corporations and personal service corporations
can deduct losses from passive activities, generally, activities in which the
taxpayer does not materially participate, only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses we generate will only be available to offset future income
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generated by us and will not be available to offset income from other passive
activities or investments, including other publicly-traded partnerships, or
salary or active business income. Passive losses which are not deductible
because they exceed a unitholder's share of our income may be deducted in full
when he disposes of his entire investment in us in a fully taxable transaction
to an unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions such as the at risk rules and the basis
limitation.
A unitholder's share of our net income may be offset by any suspended
passive losses from us, but it may not be offset by any other current or
carryover losses from other passive activities, including those attributable to
other publicly-traded partnerships. The IRS has announced that Treasury
Regulations will be issued which characterize net passive income from a
publicly-traded partnership as investment income for purposes of the limitations
on the deductibility of investment interest.
Limitations on Interest Deductions
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a unitholder's net passive income from us will be treated as
investment income for this purpose. In addition, the unitholder's share of our
portfolio income will be treated as investment income. Investment interest
expense includes:
(1) interest on indebtedness properly allocable to property held for
investment;
(2) our interest expense attributed to portfolio income; and
(3) the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to portfolio
income.
The computation of a unitholder's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a common unit. Net investment income includes gross income
from property held for investment and amounts treated as portfolio income
pursuant to the passive loss rules less deductible expenses, other than
interest, directly connected with the production of investment income, but
generally does not include gains attributable to the disposition of property
held for investment.
Allocation of Partnership Income, Gain, Loss and Deduction
In general, if we have a net profit, our items of income, gain, loss and
deduction are allocated among the general partner and the unitholders in
accordance with their respective percentage interests in us. At any time that
distributions are made to the common units and not to the subordinated units, or
that incentive distributions are made to the general partner, gross income is
allocated to the recipients to the extent of such distributions. If we have a
net loss, our items of income, gain, loss and deduction are generally allocated
first, to the general partner and the unitholders in accordance with their
respective percentage interests to the extent of their positive capital
accounts, as maintained under the partnership agreement, and, second, to the
general partner.
As required by Section 704(c) of the Internal Revenue Code and as permitted
by its Regulations, certain items of our income, deduction, gain and loss are
allocated to account for the difference between the tax basis and fair market
value of property contributed or deemed contributed to us by each of our
partners, referred to in this discussion as "Contributed Property," and to
account for the difference between the fair market value of our assets and their
carrying value on our books at the time of any offering made pursuant to this
prospectus. The effect of these allocations to a unitholder purchasing common
units pursuant to this prospectus will be essentially the same as if the tax
basis of our assets were equal to their fair market value at the time of
purchase. In addition, certain items of recapture income are allocated to the
extent possible to the partner allocated the deduction or curative allocation
giving rise to the treatment of such gain as recapture income in order to
minimize the recognition of ordinary income by some unitholders. Finally,
although we do not expect that our operations will result in the creation of
negative capital accounts, if negative capital
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accounts nevertheless result, items of our income and gain will be allocated in
an amount and manner sufficient to eliminate the negative balance as quickly as
possible.
Regulations provide that an allocation of items of partnership income,
gain, loss or deduction, other than an allocation required by Section 704(c) of
the Internal Revenue Code to eliminate the difference between a partner's "book"
capital account, credited with the fair market value of Contributed Property,
and "tax" capital account, credited with the tax basis of Contributed Property
(the "Book-Tax Disparity"), will generally be given effect for federal income
tax purposes in determining a partner's distributive share of an item of income,
gain, loss or deduction only if the allocation has substantial economic effect.
In any other case, a partner's distributive share of an item will be determined
on the basis of the partner's interest in the partnership, which will be
determined by taking into account all the facts and circumstances, including the
partners' relative contributions to the partnership, the interests of the
partners in economic profits and losses, the interest of the partners in cash
flow and other nonliquidating distributions and rights of the partners to
distributions of capital upon liquidation.
Counsel is of the opinion that, with the exception of the issues described
in "Tax Treatment of Operations -- Section 754 Election" and "Disposition of
Common Units -- Allocations Between Transferors and Transferees," allocations
under our partnership agreement will be given effect for federal income tax
purposes in determining a partner's distributive share of an item of income,
gain, loss or deduction.
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year
We currently use the year ending December 31 as our taxable year and we
have adopted the accrual method of accounting for federal income tax purposes.
Each unitholder will be required to include in income his allocable share of our
income, gain, loss and deduction for our taxable year ending within or with his
taxable year.
Initial Tax Basis, Depreciation and Amortization
We use the tax basis of our various assets for purposes of computing
depreciation and cost recovery deductions and, ultimately, gain or loss on the
disposition of such assets. Our assets initially had an aggregate tax basis
equal to the tax basis of the assets in the possession of the general partner
immediately prior to our formation. The federal income tax burden associated
with the difference between the fair market value of our property and its tax
basis immediately prior to this offering will be borne by partners holding
interests in us prior to this offering. See "-- Tax Treatment of
Unitholders -- Allocation of Partnership Income, Gain, Loss and Deduction."
If we dispose of depreciable property by sale, foreclosure, or otherwise,
all or a portion of any gain, determined by reference to the amount of
depreciation previously deducted and the nature of the property, may be subject
to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions with
respect to property owned by us may be required to recapture such deductions as
ordinary income upon a sale of his interest in us. See "-- Tax Treatment of
Unitholders -- Allocation of Partnership Income, Gain, Loss and Deduction" and
"-- Disposition of Common Units -- Recognition of Gain or Loss."
Costs incurred in our organization are being amortized over a period of 60
months. The costs incurred in promoting the issuance of common units (i.e.
syndication expenses) must be capitalized and cannot be deducted currently,
ratably or upon our termination. Uncertainties exist regarding the
classification of costs as organization expenses, which may be amortized, and as
syndication expenses, which may not be amortized. Under recently adopted
regulations, underwriting discounts and commissions are treated as a syndication
cost.
Section 754 Election
We have made the election permitted by Section 754 of the Internal Revenue
Code. The election is irrevocable without the consent of the IRS. The election
generally permits us to adjust a common unit
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purchaser's tax basis in our assets ("inside basis") pursuant to Section 743(b)
of the Internal Revenue Code to reflect his purchase price. This election does
not apply to a person who purchases units directly from us. The Section 743(b)
adjustment belongs to the purchaser and not to other partners. For purposes of
this discussion, a partner's inside basis in our assets will be considered to
have two components: (1) his share of our tax basis in such assets ("common
basis") and (2) his Section 743(b) adjustment to that basis.
Proposed Treasury Regulations under Section 743 of the Internal Revenue
Code require a partnership that adopts the remedial allocation method (which we
have done) to depreciate a portion of the Section 743(b) adjustment attributable
to recovery property over the remaining cost recovery period for the Section
704(c) built-in gain. Nevertheless, the proposed regulations under Section 197
indicate that the Section 743(b) adjustment attributable to an amortizable
Section 197 intangible should be treated as a newly-acquired asset placed in
service in the month when the purchaser acquires the common unit. Under Treasury
Regulation Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to
property subject to depreciation under Section 167 of the Internal Revenue Code
rather than cost recovery deductions under Section 168 of the Internal Revenue
Code is generally required to be depreciated using either the straight-line
method or the 150% declining balance method. Although the proposed regulations
under Section 743 will likely eliminate many of the inconsistencies if finalized
in their current form, the depreciation and amortization methods and useful
lives associated with the Section 743(b) adjustment may differ from the methods
and useful lives generally used to depreciate the common basis in such
properties. Pursuant to our partnership agreement, we have adopted a convention
to preserve the uniformity of common units even if such convention is not
consistent with certain Treasury Regulations. See "-- Uniformity of Common
Units."
Although counsel is unable to opine as to the validity of this method, we
intend to depreciate the portion of a Section 743(b) adjustment attributable to
unrealized appreciation in the value of contributed property, to the extent of
any unamortized Book-Tax Disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful life applied to
the common basis of such property, or treat that portion as non-amortizable to
the extent attributable to property the common basis of which is not
amortizable. This method is consistent with the proposed regulations under
Section 743 but is arguably inconsistent with Treasury Regulation Section
1.167(c)-1(a)(6), which is not expected to directly apply to a material portion
of our assets, and Proposed Treasury Regulation Section 1.197-2(g)(3). To the
extent such Section 743(b) adjustment is attributable to appreciation in value
in excess of the unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury Regulations and legislative history. If we determine
that this position cannot reasonably be taken, we may adopt a depreciation or
amortization convention under which all purchasers acquiring common units in the
same month would receive depreciation or amortization, whether attributable to
common basis or Section 743(b) adjustment, based upon the same applicable rate
as if they had purchased a direct interest in our assets. Such an aggregate
approach may result in lower annual depreciation or amortization deductions than
would otherwise be allowable to certain unitholders. See "-- Uniformity of
Common Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Internal Revenue Code. The IRS may seek to reallocate some or all of
any Section 743(b) adjustment not so allocated by us to goodwill. Goodwill, as
an intangible asset, would be amortizable over a longer period of time than our
tangible assets.
A Section 754 election is advantageous if the transferee's tax basis in his
common units is higher than such common units' share of the aggregate tax basis
of our assets immediately prior to the transfer. In such a case, as a result of
the election, the transferee would have a higher tax basis in his share of our
assets for purposes of calculating, among other items, his depreciation and
depletion deductions and his share of any gain or loss on a sale of our assets.
Conversely, a Section 754 election is disadvantageous if the transferee's tax
basis in his common units is lower than such common units' share of the
aggregate tax basis of our assets immediately prior to the transfer. Thus, the
fair market value of the common units may be affected either favorably or
adversely by the election.
The calculations involved in the Section 754 election are complex and are
made by us on the basis of certain assumptions as to the value of our assets and
other matters. There is no assurance that the
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determinations made by us will not be successfully challenged by the IRS and
that the deductions resulting from them will not be reduced or disallowed
altogether. Should the IRS require a different basis adjustment to be made, and
should, in our opinion, the expense of compliance exceed the benefit of the
election, we may seek permission from the IRS to revoke our Section 754
election. If such permission is granted, a subsequent purchaser of common units
may be allocated more income than he would have been allocated had the election
not been revoked.
Valuation of Partnership Property and Basis of Properties
The federal income tax consequences of the ownership and disposition of
common units will depend in part on our estimates as to the relative fair market
values, and determinations of the initial tax bases, of our assets. Although we
may from time to time consult with professional appraisers with respect to
valuation matters, we will make many of the relative fair market value
estimates. These estimates and determinations of basis are subject to challenge
and will not be binding on the IRS or the courts. If the estimates of fair
market value or determinations of basis are subsequently found to be incorrect,
the character and amount of items of income, gain, loss or deductions previously
reported by unitholders might change, and unitholders might be required to
adjust their tax liability for prior years.
Entity-Level Collections
If we are required or elect under applicable law to pay any federal, state
or local income tax on behalf of any unitholder or the general partner or any
former unitholder, we are authorized to pay those taxes from our funds. Such
payment, if made, will be treated as a distribution of cash to the partner on
whose behalf the payment was made. If the payment is made on behalf of a person
whose identity cannot be determined, we are authorized to treat the payment as a
distribution to current unitholders. We are authorized to amend our partnership
agreement in the manner necessary to maintain uniformity of intrinsic tax
characteristics of common units and to adjust subsequent distributions, so that
after giving effect to such distributions, the priority and characterization of
distributions otherwise applicable under our partnership agreement is maintained
as nearly as is practicable. Payments by us as described above could give rise
to an overpayment of tax on behalf of an individual partner in which event the
partner could file a claim for credit or refund.
Treatment of Short Sales
A unitholder whose common units are loaned to a "short seller" to cover a
short sale of common units may be considered as having disposed of ownership of
those common units. If so, he would no longer be a partner with respect to those
common units during the period of the loan and may recognize gain or loss from
the disposition. As a result, during this period, any of our income, gain,
deduction or loss with respect to those common units would not be reportable by
the unitholder, any cash distributions received by the unitholder with respect
to those common units would be fully taxable and all of such distributions would
appear to be treated as ordinary income. Unitholders desiring to assure their
status as partners and avoid the risk of gain recognition should modify any
applicable brokerage account agreements to prohibit their brokers from borrowing
their common units. The IRS has announced that it is actively studying issues
relating to the tax treatment of short sales of partnership interests. See also
"-- Disposition of Common Units -- Recognition of Gain or Loss."
DISPOSITION OF COMMON UNITS
Recognition of Gain or Loss
A unitholder will recognize gain or loss on a sale of common units equal to
the difference between the amount realized and the unitholder's tax basis for
the common units sold. A unitholder's amount realized will be measured by the
sum of the cash or the fair market value of other property received plus his
share of our nonrecourse liabilities. Because the amount realized includes a
unitholder's share of our nonrecourse liabilities, the gain recognized on the
sale of common units could result in a tax liability in excess of any cash
received from such sale.
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Prior distributions from us in excess of cumulative net taxable income
allocated for a common unit which decreased a unitholder's tax basis in such
common unit will, in effect, become taxable income if the common unit is sold at
a price greater than the unitholder's tax basis in such common unit, even if the
price is less than his original cost.
Should the IRS successfully contest our convention to amortize only a
portion of the Section 743(b) adjustment, described under "-- Tax Treatment of
Operations -- Section 754 Election," attributable to an amortizable Section 197
intangible after a sale of common units, a unitholder could realize additional
gain from the sale of common units than had such convention been respected. In
that case, the unitholder may have been entitled to additional deductions
against income in prior years but may be unable to claim them, with the result
to him of greater overall taxable income than appropriate. Counsel is unable to
opine as to the validity of the convention because of the lack of specific
regulatory authority for its use.
Gain or loss recognized by a unitholder, other than a "dealer" in common
units, on the sale or exchange of a common unit will generally be taxable as
capital gain or loss. Capital gain recognized on the sale of common units held
for more than 12 months will generally be taxed at a maximum rate of 20%. A
portion of this gain or loss, which could be substantial, however, will be
separately computed and taxed as ordinary income or loss under Section 751 of
the Internal Revenue Code to the extent attributable to assets giving rise to
depreciation recapture or other "unrealized receivables" or to "inventory items"
owned by us. The term "unrealized receivables" includes potential recapture
items, including depreciation recapture. Ordinary income attributable to
unrealized receivables, inventory items and depreciation recapture may exceed
net taxable gain realized upon the sale of the common unit and may be recognized
even if there is a net taxable loss realized on the sale of the common unit.
Thus, a unitholder may recognize both ordinary income and a capital loss upon a
disposition of common units. Net capital loss may offset no more than $3,000 of
ordinary income in the case of individuals and may only be used to offset
capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If this
ruling is applicable to the holders of common units, a unitholder will be unable
to select high or low basis common units to sell as would be the case with
corporate stock. It is not clear whether the ruling applies to us because,
similar to corporate stock, our interests are evidenced by separate
certificates. Accordingly, counsel is unable to opine as to the effect such
ruling will have on the unitholders. A unitholder considering the purchase of
additional common units or a sale of common units purchased in separate
transactions should consult his tax advisor as to the possible consequences of
such ruling.
Certain provisions of the Internal Revenue Code affect the taxation of
certain financial products and securities, including partnership interests by
treating a taxpayer as having sold an "appreciated" partnership interest, one in
which gain would be recognized if it were sold, assigned or otherwise terminated
at its fair market value, if the taxpayer or a related person enters into,
(1) a short sale;
(2) an offsetting notional principal contract; or
(3) a futures or forward contract with respect to the partnership interest
or substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to a partnership interest, the taxpayer will be treated as having sold
such position if the taxpayer or a related person then acquires the partnership
interest or substantially similar property. The Secretary of the Treasury is
also authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
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Allocations Between Transferors and Transferees
In general, our taxable income and losses are determined annually, are
prorated on a monthly basis and are subsequently apportioned among the
unitholders in proportion to the number of common units owned by each of them as
of the opening of the principal national securities exchange on which the common
units are then traded on the first business day of the month (the "Allocation
Date"). However, gain or loss realized on a sale or other disposition of our
assets other than in the ordinary course of business is allocated among the
unitholders on the Allocation Date in the month in which that gain or loss is
recognized. As a result, a unitholder transferring common units in the open
market may be allocated income, gain, loss and deduction accrued after the date
of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of common units. If this method is not allowed under the Treasury
Regulations, or only applies to transfers of less than all of the unitholder's
interest, our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of allocation between
transferors and transferees, as well as among partners whose interests otherwise
vary during a taxable period, to conform to a method permitted under future
Treasury Regulations.
Any unitholder who owns common units at any time during a quarter and who
disposes of such common units prior to the record date set for a cash
distribution with respect to such quarter will be allocated items of our income,
gain, loss and deductions attributable to such quarter but will not be entitled
to receive that cash distribution.
Notification Requirements
A unitholder who sells or exchanges common units is required to notify us
in writing of that sale or exchange within 30 days after the sale or exchange
and in any event by no later than January 15 of the year following the calendar
year in which the sale or exchange occurred. We are required to notify the IRS
of that transaction and to furnish certain information to the transferor and
transferee. However, these reporting requirements do not apply with respect to a
sale by an individual who is a citizen of the United States and who effects the
sale or exchange through a broker. Additionally, a transferee of a common unit
will be required to furnish a statement to the IRS, filed with its income tax
return for the taxable year in which the sale or exchange occurred, that sets
forth the amount of the consideration paid for the common unit. Failure to
satisfy these reporting obligations may lead to the imposition of substantial
penalties.
Constructive Termination
We will be considered to have been terminated if there is a sale or
exchange of 50% or more of the total interests in our capital and profits within
a 12-month period. If we elect to be treated as a large partnership, which we
currently do not intend to do, we will not terminate by reason of the sale or
exchange of interests in us. A termination of Heritage Propane will cause a
termination of the Operating Partnership. Any such termination would result in
the closing of our taxable year for all unitholders. New tax elections required
to be made by us, including a new election under Section 754 of the Internal
Revenue Code, must be made subsequent to a termination, and a termination could
result in a deferral of our deductions for depreciation. A termination could
also result in penalties if we were unable to determine that the termination had
occurred. Moreover, a termination might either accelerate the application of, or
subject us to, any tax legislation enacted prior to the termination.
UNIFORMITY OF COMMON UNITS
Because we cannot match transferors and transferees of common units,
uniformity of the economic and tax characteristics of the common units to a
purchaser of such common units must be maintained. In the absence of uniformity,
compliance with a number of federal income tax requirements, both statutory and
regulatory, could be substantially diminished. A lack of uniformity can result
from a literal application of Treasury Regulation Section 1.167(c)-1(a)(6) and
Proposed Treasury Regulation Section 1.197-2(g)(3).
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Any non-uniformity could have a negative impact on the value of the common
units. See "-- Tax Treatment of Operations -- Section 754 Election."
Although counsel is unable to opine on the validity of this method, we
depreciate the portion of a Section 743(b) adjustment attributable to unrealized
appreciation in the value of contributed property or adjusted property, to the
extent of any unamortized Book-Tax Disparity, using a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the common basis of such property, or treat that portion as
nonamortizable, to the extent attributable to property the common basis of which
is not amortizable. This method is consistent with the proposed regulations
under Section 743, but is arguably inconsistent with Treasury Regulation Section
1.167(c)-1(a)(6), which is not expected to directly apply to a material portion
of our assets, and Proposed Treasury Regulation Section 1.197-2(g)(3). See
"-- Tax Treatment of Operations -- Section 754 Election." To the extent such
Section 743(b) adjustment is attributable to appreciation in value in excess of
the unamortized Book-Tax Disparity, we apply the rules described in the Treasury
Regulations and legislative history. If we determine that this position cannot
reasonably be taken, we may adopt a depreciation and amortization convention
under which all purchasers acquiring common units in the same month would
receive depreciation and amortization deductions, whether attributable to common
basis or Section 743(b) basis, based upon the same applicable rate as if they
had purchased a direct interest in our property. If such an aggregate approach
is adopted, it may result in lower annual depreciation and amortization
deductions than would otherwise be allowable to certain unitholders and risk the
loss of depreciation and amortization deductions not taken in the year that such
deductions are otherwise allowable. This convention will not be adopted if we
determine that the loss of depreciation and amortization deductions will have a
material adverse effect on the unitholders. If we choose not to utilize this
aggregate method, we may use any other reasonable depreciation and amortization
convention to preserve the uniformity of the intrinsic tax characteristics of
any common units that would not have a material adverse effect on the
unitholders. The IRS may challenge any method of depreciating the Section 743(b)
adjustment described in this paragraph. If such a challenge were sustained, the
uniformity of common units might be affected, and the gain from the sale of
common units might be increased without the benefit of additional deductions.
See "-- Disposition of Common Units -- Recognition of Gain or Loss."
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of common units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and, as
described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax,
including individual retirement accounts and other retirement plans, are subject
to federal income tax on unrelated business taxable income. Virtually all of our
taxable income allocated to such an organization will be unrelated business
taxable income and thus will be taxable to such a unitholder.
A regulated investment company or "mutual fund" is required to derive 90%
or more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.
Non-resident aliens and foreign corporations, trusts or estates which hold
common units will be considered to be engaged in business in the United States
on account of ownership of common units. As a consequence they will be required
to file federal tax returns in respect of their share of our income, gain, loss
or deduction and pay federal income tax at regular rates on any net income or
gain. Generally, a partnership is required to pay a withholding tax on the
portion of the partnership's income which is effectively connected with the
conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been made
to such partners. However, under rules applicable to publicly-traded
partnerships, we will withhold taxes (currently at the rate of 39.6%) on actual
cash distributions made quarterly to foreign unitholders. Each foreign
unitholder must obtain a taxpayer identification number from the IRS and submit
that number to our Transfer Agent on a Form W-8 in order to obtain credit for
the taxes withheld. A change in applicable law may require us to change these
procedures.
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Because a foreign corporation which owns common units will be treated as
engaged in a United States trade or business, such a corporation may be subject
to United States branch profits tax at a rate of 30%, in addition to regular
federal income tax, on its allocable share of our income and gain, as adjusted
for changes in the foreign corporation's "U.S. net equity," which are
effectively connected with the conduct of a United States trade or business. An
income tax treaty between the United States and the country in which the foreign
corporate unitholder is a "qualified resident" may reduce or eliminate this tax.
In addition, such a unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a common unit will be subject to federal income tax on gain realized
on the disposition of such common unit to the extent that such gain is
effectively connected with a United States trade or business of the foreign
unitholder. Apart from the ruling, a foreign unitholder will not be taxed upon
the disposition of a common unit if that foreign unitholder has held less than
5% in value of the common units during the five-year period ending on the date
of the disposition and if the common units are regularly traded on an
established securities market at the time of the disposition.
ADMINISTRATIVE MATTERS
Information Returns and Audit Procedures
We intend to furnish to each unitholder, within 90 days after the close of
each calendar year, certain tax information, including a Substitute Schedule
K-1, which sets forth such unitholder's share of our income, gain, loss and
deduction for our preceding taxable year. In preparing this information, which
will generally not be reviewed by counsel, we will use various accounting and
reporting conventions, some of which have been mentioned in the previous
discussion, to determine the unitholder's share of income, gain, loss and
deduction. There is no assurance that any of those conventions will yield a
result which conforms to the requirements of the Internal Revenue Code, Treasury
Regulations or administrative interpretations of the IRS. We cannot assure
prospective unitholders that the IRS will not successfully contend in court that
such accounting and reporting conventions are impermissible. Any such challenge
by the IRS could negatively affect the value of the common units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from any such audit may require each unitholder to adjust a prior
year's tax liability, and possibly may result in an audit of the unitholder's
own return. Any audit of a unitholder's return could result in adjustments not
related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Internal Revenue Code provides
for one partner to be designated as the "Tax Matters Partner" for these
purposes. Our partnership agreement appoints the general partner as our Tax
Matters Partner.
The Tax Matters Partner will make certain elections on our behalf and on
behalf of the unitholders and can extend the statute of limitations for
assessment of tax deficiencies against unitholders with respect to items in our
returns. The Tax Matters Partner may bind a unitholder with less than a 1%
profits interest in us to a settlement with the IRS unless that unitholder
elects, by filing a statement with the IRS, not to give such authority to the
Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which
all the unitholders are bound, of a final partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, such review may
be sought by any unitholder having at least a 1% interest in our profits and by
the unitholders having in the aggregate at least a 5% profits interest. However,
only one action for judicial review will go forward, and each unitholder with an
interest in the outcome may participate. However, if we elect to be treated as a
large partnership, which we do not intend to do because of the costs of
application, a unitholder will not have a right to participate in settlement
conferences with the IRS or to seek a refund.
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A unitholder must file a statement with the IRS identifying the treatment
of any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of the
consistency requirement may subject a unitholder to substantial penalties.
Partners in electing large partnerships are required to treat all items from the
partnership's return in a manner consistent with such return. If we elect to be
treated as a large partnership, each partner would take into account separately
his share of the following items, determined at the partnership level: (1)
taxable income or loss from passive loss limitation activities; (2) taxable
income or loss from other activities, such as portfolio income or loss; (3) net
capital gains to the extent allocable to passive loss limitation activities and
other activities; (4) tax exempt interest; (5) a net alternative minimum tax
adjustment separately computed for passive loss limitation activities and other
activities; (6) general credits; (7) low-income housing credit; (8)
rehabilitation credit; (9) foreign income taxes; (10) credit for producing fuel
from a nonconventional source; and (11) any other items the Secretary of
Treasury deems appropriate. Moreover, miscellaneous itemized deductions would
not be passed through to the partners and 30% of those deductions would be used
at the partnership level.
Adjustments relating to partnership items for a previous taxable year are
generally taken into account by those persons who were partners in the previous
taxable year. Each partner in an electing large partnership, however, must take
into account his share of any adjustments to partnership items in the year such
adjustments are made. Alternatively, a large partnership could elect to or, in
some circumstances, could be required to directly pay the tax resulting from any
such adjustments. In either case, therefore, unitholders of an electing large
partnership could bear significant costs associated with tax adjustments
relating to periods predating their acquisition of units. We do not expect to
elect to have the large partnership provisions apply to us because of the cost
of their application.
Nominee Reporting
Persons who hold an interest in us as a nominee for another person are
required to furnish to us (a) the name, address and taxpayer identification
number of the beneficial owner and the nominee; (b) whether the beneficial owner
is (i) a person that is not a United States person, (ii) a foreign government,
an international organization or any wholly-owned agency or instrumentality of
either of the foregoing, or (iii) a tax-exempt entity; (c) the amount and
description of common units held, acquired or transferred for the beneficial
owner; and (d) certain information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition cost for
purchases, as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and certain
information on common units they acquire, hold or transfer for their own
account. A penalty of $50 per failure, up to a maximum of $100,000 per calendar
year, is imposed by the Internal Revenue Code for failure to report such
information to us. The nominee is required to supply the beneficial owner of the
common units with the information furnished to us.
Registration as a Tax Shelter
The Internal Revenue Code requires that "tax shelters" be registered with
the Secretary of the Treasury. The temporary Treasury Regulations interpreting
the tax shelter registration provisions of the Internal Revenue Code are
extremely broad. It is arguable that we are not subject to the registration
requirement on the basis that we do not constitute a tax shelter. However, the
general partner, as our principal organizer, has registered us as a tax shelter
with the Secretary of the Treasury in the absence of assurance that we are not
subject to tax shelter registration and in light of the substantial penalties
which might be imposed if registration is required and not undertaken. The IRS
has issued us the following tax shelter registration number: 96234000014.
ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN
US OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
IRS.
We must furnish the registration number to the unitholders, and a
unitholder who sells or otherwise transfers a common unit in a subsequent
transaction must furnish the registration number to the transferee.
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The penalty for failure of the transferor of a common unit to furnish the
registration number to the transferee is $100 for each such failure. The
unitholders must disclose our tax shelter registration number on Form 8271 to be
attached to the tax return on which any deduction, loss or other benefit
generated by us is claimed or our income is included. A unitholder who fails to
disclose the tax shelter registration number on his return, without reasonable
cause for that failure, will be subject to a $250 penalty for each failure. Any
penalties discussed herein are not deductible for federal income tax purposes.
Registration as a tax shelter may increase the risk of an audit.
Accuracy-Related Penalties
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more specified causes,
including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Internal Revenue Code. No penalty will be imposed, however, with
respect to any portion of an underpayment if it is shown that there was a
reasonable cause for that portion and that the taxpayer acted in good faith with
respect to that portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return (i)
with respect to which there is, or was, "substantial authority" or (ii) as to
which there is a reasonable basis and the pertinent facts of such position are
disclosed on the return. More stringent rules apply to "tax shelters," a term
that in this context does not appear to include us. If any item of our income,
gain, loss or deduction included in the distributive shares of unitholders might
result in such an "understatement" of income for which no "substantial
authority" exists, we must disclose the pertinent facts on our return. In
addition, we will make a reasonable effort to furnish sufficient information for
unitholders to make adequate disclosure on their returns to avoid liability for
this penalty.
A substantial valuation misstatement exists if the value of any property,
or the adjusted basis of any property, claimed on a tax return is 200% or more
of the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, a unitholder will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which he resides or in which we do business or own property.
Although an analysis of those various taxes is not presented here, each
prospective unitholder should consider their potential impact on his investment
in us. We currently conduct business in 26 states. Many of these states
currently impose a state income tax. A unitholder will be required to file state
income tax returns and to pay state income taxes in some or all of these states
and may be subject to penalties for failure to comply with those requirements.
In some states, tax losses may not produce a tax benefit in the year incurred
and also may not be available to offset income in subsequent taxable years. Some
of the states may require us, or we may elect, to withhold a percentage of
income from amounts to be distributed to a unitholder who is not a resident of
the state. Withholding, the amount of which may be greater or less than a
particular unitholder's income tax liability to the state, generally does not
relieve the non-resident unitholder from the obligation to file an income tax
return. Amounts withheld may be treated as if distributed to unitholders for
purposes of determining the amounts distributed by us. See "-- Tax Treatment of
Unitholders -- Entity-Level Collections." Based on current law and our estimate
of future operations, we anticipate that any amounts required to be withheld
will not be material.
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IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO INVESTIGATE THE LEGAL AND
TAX CONSEQUENCES, UNDER THE LAWS OF PERTINENT STATES AND LOCALITIES OF HIS
INVESTMENT IN US. ACCORDINGLY, EACH PROSPECTIVE UNITHOLDER SHOULD CONSULT, AND
MUST DEPEND UPON, HIS OWN TAX COUNSEL OR OTHER ADVISOR WITH REGARD TO THOSE
MATTERS. FURTHER, IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO FILE ALL STATE
AND LOCAL, AS WELL AS U.S. FEDERAL, TAX RETURNS THAT MAY BE REQUIRED OF SUCH
UNITHOLDER. COUNSEL HAS NOT RENDERED AN OPINION ON THE STATE OR LOCAL TAX
CONSEQUENCES OF AN INVESTMENT IN US.
PLAN OF DISTRIBUTION
We may sell the Securities covered by this prospectus, directly, through
agents, or to or through underwriters or dealers (possibly including our
affiliates). Read the prospectus supplement to find the terms of the Securities
offering, including:
- the names of any underwriters, dealers or agents;
- the offering price;
- underwriting discounts;
- sales agents' commissions;
- other forms of underwriter or agent compensation;
- discounts, concessions or commissions that underwriters may pass on to
other dealers;
- any exchange on which the Securities are listed.
If we use underwriters or dealers in the sale, they will acquire the
Securities for their own account and they may resell these Securities from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of the
sale. The Securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more of such firms. Unless otherwise disclosed in the prospectus supplement,
the obligations of the underwriters to purchase Securities will be subject to
certain conditions precedent, and the underwriters will be obligated to purchase
all of the Securities offered by the prospectus supplement if any are purchased.
Any initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
During and after an offering through underwriters, the underwriters may
purchase and sell the Securities in the open market. These transactions may
include overallotment and stabilizing transactions and purchases to cover
syndicate short positions created in connection with the offering. The
underwriters also may impose a penalty bid, which means that selling concessions
allowed to syndicate members or other broker-dealers for the offered securities
sold for their account may be reclaimed by the syndicate if the offered
securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the offered securities, which may be higher than the price that
might otherwise prevail in the open market. If commenced, the underwriters may
discontinue these activities at any time.
We may sell the Securities directly or through agents designated by us from
time to time. We will name any agent involved in the offering and sale of the
Securities and disclose any commissions payable by us to the agent or the method
by which the commissions can be determined, in the prospectus supplement. Unless
otherwise indicated in the prospectus supplement, any agent will be acting on a
best efforts basis for the period of its appointment.
Any brokers or dealers that participate in the distribution of the
Securities may be "underwriters" within the meaning of the Securities Act for
such sales. Profits, commissions, discounts or concessions received by any such
broker or dealer may be underwriting discounts and commissions under the
Securities Act.
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We may, through agreements, indemnify underwriters, dealers or agents who
participate in the distribution of the Securities against certain liabilities
including liabilities under the Securities Act. We may also provide funds for
payments such underwriters, dealers or agents may be required to make.
Underwriters, dealers and agents, and their affiliates may conduct business with
us and our affiliates in the ordinary course of their businesses.
FORWARD LOOKING STATEMENTS
Some information in this prospectus or any prospectus supplement may
contain forward-looking statements. Such statements use forward-looking words
such as "anticipate," "continue," "estimate," "expect," "may," "will," or other
similar words. These statements discuss future expectations or contain
projections. Specific factors which could cause actual results to differ from
those in the forward-looking statements, include:
- the effect of weather conditions on demand for propane;
- price and availability of propane supplies;
- the availability of capacity to transport propane to market areas;
- competition from other energy sources and within the propane industry;
- operating risks incidental to transporting, sorting, and distributing
propane;
- changes in interest rates;
- governmental legislation and regulations;
- energy efficiency and technology trends;
- our ability to acquire other retail propane distributors and successfully
integrate them into our existing operations and make cost saving changes;
- our ability to obtain new customers and retain existing customers;
- the condition of the capital markets in the United States; and
- the political and economic stability of the oil producing nations of the
world.
When considering forward-looking statements, you should keep in mind the
risk factors described in "Risk Factors" above. The risk factors could cause our
actual results to differ materially from those contained in any forward-looking
statement. We disclaim any obligation to update the above list or to announce
publicly the result of any revisions to any of the forward looking statements to
reflect future events or developments.
You should consider the above information when reading any forward looking
statements in:
- this prospectus;
- documents incorporated in this prospectus by reference;
- reports filed with the SEC;
- press releases; or
- oral statements made by us or any of our officers or other persons acting
on our behalf.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read our SEC filings over the Internet at the
SEC's website at http://www.sec.gov. You may also read and copy documents at the
public reference room maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room.
We also provide information to the NYSE because the common units are traded
on the NYSE. You may obtain reports and other information at the offices of the
NYSE at 20 Broad Street, New York, New York 10002.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose to you important information
contained in other documents filed with the SEC by referring you to those
documents. The information incorporated by reference is an important part of
this prospectus. Information we later file with the SEC will automatically
update and supersede this information. We incorporate by reference the documents
listed below:
- our annual report on Form 10-K for the year ended August 31, 1998;
- our quarterly reports on Form 10-Q for the quarters ended November 30,
1998, February 28, 1999 and May 31, 1999;
- the description of the common units in our registration statement on Form
8-A (File No. 1-11727) filed pursuant to the Securities Exchange Act of
1934 on May 14, 1996 and any amendments or reports filed to update the
description; and
- all documents filed by us under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 between the date of this prospectus and
the termination of the registration statement.
If information in incorporated documents conflicts with information in this
prospectus you should rely on the most recent information. If information in an
incorporated document conflicts with information in another incorporated
document, you should rely on the most recent incorporated document.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Heritage Propane Partners, L.P.
8801 S. Yale Avenue, Suite 310
Tulsa, Oklahoma 74137
Attention: H. Michael Krimbill
Telephone: (918) 492-7272
You should only rely on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. We are making offers of
the securities only in states where the offer is permitted. You should not
assume that the information in this prospectus or any prospectus supplement is
accurate as of any date other than the date on the front of those documents.
LEGAL OPINIONS
Certain legal matters relating to the Securities being offered will be
passed upon for us by Baker & Botts, L.L.P., Houston, Texas. If certain legal
matters in connection with an offering of Securities made by this prospectus and
a related prospectus supplement are passed on by counsel for the underwriters of
such offering, that counsel will be named in the applicable prospectus
supplement relating to that offering.
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EXPERTS
The consolidated financial statements of Heritage Propane Partners, L.P.
incorporated by reference and the consolidated balance sheet of Heritage
Holdings, Inc. included as an exhibit to this registration statement to the
extent and for the periods indicated in their reports have been audited by
Arthur Andersen LLP, independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
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2,500,000 COMMON UNITS
HERITAGE PROPANE PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
[HERITAGE PROPANE PARTNERS, L.P. LOGO]
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PROSPECTUS SUPPLEMENT
JULY , 2001
(INCLUDING PROSPECTUS DATED SEPTEMBER 13, 1999)
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SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
DAIN RAUSCHER WESSELS
FIRST UNION SECURITIES, INC.
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