EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Heritage Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Heritage
Holdings, Inc. (a Delaware corporation and wholly-owned subsidiary of U.S.
Propane, L.P.) and subsidiaries as of August 31, 2001. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit 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 balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the consolidated financial position of
Heritage Holdings, Inc. and subsidiaries as of August 31, 2001, in conformity
with accounting principles generally accepted in the United States.
Tulsa, Oklahoma /s/ Arthur Andersen LLP
October 19, 2001 -----------------------
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share amounts)
<Table>
<Caption>
August 31,
2001
----------
ASSETS
CURRENT ASSETS:
Cash $ 5,918
Marketable securities 4,256
Accounts receivable, net of allowance for doubtful accounts 40,221
Inventories 66,814
Assets from liquids marketing 6,465
Prepaid expenses and other 15,274
----------
Total current assets 138,948
PROPERTY, PLANT AND EQUIPMENT, net 394,742
ASSETS HELD IN TRUST 1,482
INVESTMENT IN AFFILIATE 6,920
INTANGIBLES AND OTHER ASSETS, net 249,004
----------
Total assets $ 791,096
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Working capital facility $ 19,900
Accounts payable 43,210
Accounts payable to affiliate 1,577
Accrued and other current liabilities 41,834
Liabilities from liquids marketing 7,130
Current maturities of long-term debt 16,394
----------
Total current liabilities 130,045
LONG-TERM DEBT, less current maturities 424,875
MINORITY INTEREST 88,951
DEFERRED TAX LIABILITY 38,479
----------
682,350
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 600,000 shares authorized,
534,788 shares issued and outstanding 5
Additional paid-in capital 121,196
Accumulated deficit (5,868)
Accumulated other comprehensive loss (6,587)
----------
Total stockholder's equity 108,746
----------
Total liabilities and stockholder's equity $ 791,096
==========
</Table>
The accompanying notes are an integral part of this consolidated balance sheet.
2
HERITAGE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share/unit amounts)
1. OPERATIONS AND ORGANIZATION:
In August 2000, TECO Energy, Inc., Atmos Energy Corporation, Piedmont Natural
Gas Co., Inc., and AGL Resources, Inc. contributed each company's propane
operations, Peoples Gas Company (Peoples Gas), United Cities Propane Gas, Inc.
(United Cities), Piedmont Propane Company (Piedmont) and AGL Propane, Inc.,
(AGL) respectively, to U.S. Propane L.P., (U.S. Propane) in exchange for equity
interests in U.S. Propane. The merger was accounted for as an acquisition using
the purchase method of accounting with Peoples Gas being the acquirer.
Accordingly, Peoples Gas' assets and liabilities were recorded at historical
cost and the assets and liabilities of United Cities, Piedmont and AGL were
recorded at fair market value, as determined based on a valuation and appraisal.
The purchase allocations were as follows:
<Table>
Purchase price of Piedmont, AGL and United Cities $112,338
Net book value of Piedmont, AGL and United Cities 82,765
--------
Step-up of net book value, allocated to property,
plant and equipment $ 29,573
========
</Table>
In August 2000, U.S. Propane acquired all of the outstanding common stock of
Heritage Holdings, Inc., (General Partner), the General Partner of Heritage
Propane Partners, L.P. for $120,000. By virtue of Heritage Holdings, Inc.'s
general partner and limited partner interests in Heritage Propane Partners,
L.P., U.S. Propane gained control of Heritage Propane Partners, L.P.
Simultaneously, U.S. Propane transferred its propane operations, consisting of
its interest in four separate limited liability companies, AGL Propane, L.L.C.,
Peoples Gas Company, L.L.C., United Cities Propane Gas, L.L.C. and Retail
Propane Company, L.L.C. (former Piedmont operations), (collectively the "Propane
LLCs"), to Heritage Propane Partners, L.P. for $181,395 plus working capital.
The $181,395 was payable $139,552 in cash, $31,843 of assumed debt, and the
issuance of 372,392 Common Units of Heritage Propane Partners, L.P. valued at
$7,348 and a 1.0101 percent limited partner interest in Heritage Propane
Partners, L.P.'s operating partnership, Heritage Operating, L.P., valued at
$2,652. The purchase price and the exchange price for the Common Units were
approved by an independent committee of the Board of Directors of Heritage
Holdings, Inc. The exchange price for the Common Units was $19.73125 per unit
under a formula based on the average closing price of Heritage Propane Partners
L.P.'s Common Units on the New York Stock Exchange for the twenty (20) day
period beginning ten (10) days prior to the public announcement of the
transaction on June 15, 2000 (the "Formula Price"). Subsequent to August 31,
2000, payments totaling approximately $12,900 were made for the working capital
adjustment, of which $5,000 was accrued at August 31, 2000.
Concurrent with the acquisition, Heritage Operating, L.P. borrowed $180,000 from
several institutional investors and Heritage Propane Partners, L.P. sold
1,161,814 Common Units and 1,382,514 Class B Subordinated Units in a private
placement to the former shareholders of Heritage Holdings, Inc. based on the
Formula Price resulting in net proceeds of $50,203. The total of these proceeds
were utilized to finance the transaction and retire a portion of existing debt.
The merger was accounted for as a reverse acquisition in accordance with
Accounting Principles Board Opinion No. 16. The propane operations of Heritage
Propane Partners, L.P. prior to the series of transactions with U.S. Propane are
referred to as Predecessor Heritage. Although Predecessor Heritage is the
surviving entity for legal purposes, U.S. Propane's propane operations was the
acquirer for accounting purposes. The assets and liabilities of Predecessor
Heritage have been recorded at fair value to the extent acquired by U.S.
Propane's propane operations, approximately 36 percent, in accordance with
Emerging Issues Task Force Issue No. 90-13, "Accounting for Simultaneous Common
Control Mergers." The assets and liabilities of U.S. Propane have been recorded
at historical cost, as recorded in the U.S. Propane transaction described above.
Heritage
3
Holdings, Inc. and the combined operations of Predecessor Heritage and
U.S. Propane are referred to herein as "Heritage."
The excess purchase price over Predecessor Heritage's cost was determined as
follows:
<Table>
Net book value of Predecessor Heritage at August 9, 2000 $ 35,716
Equity investment 50,203
--------
85,919
Percent of Predecessor Heritage acquired by U.S. Propane 36%
--------
Equity interest acquired $ 30,931
========
Purchase price $120,000
Equity interest acquired 30,931
--------
Excess purchase price over Predecessor Heritage cost $ 89,069
========
</Table>
The excess purchase price over Predecessor Heritage cost was allocated as
follows:
<Table>
Property, plant and equipment (25 year life) $11,180
Customer lists (15 year life) 5,935
Goodwill (30 year life) 71,954
-------
$89,069
=======
</Table>
The accompanying consolidated balance sheet has been prepared on the pushdown
method of accounting under which stockholder's equity was determined based on
the purchase price paid by U.S. Propane. Goodwill of $29,163 was recorded in
connection with U.S. Propane's acquisition of the Company, which was being
amortized over 30 years, prior to the adoption of Financial Accounting Standards
Board (FASB) Statement No. 142, as discussed further in Note 2. The fair value
of the deferred tax liability assumed was based on preliminary estimates and may
be revised at a later date.
Heritage sells propane and propane-related products to more than 600,000 active
residential, commercial, industrial and agricultural customers in 29 states.
Heritage is also a wholesale propane supplier in the southwestern and
southeastern United States and in Canada, the latter through participation in
M-P Energy Partnership. M-P Energy Partnership is a Canadian partnership
primarily engaged in lower-margin wholesale distribution in which Heritage owns
a 60 percent interest.
2. SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:
Principles of Consolidation
The accompanying consolidated balance sheet includes the accounts of Heritage
Holdings, Inc. and its subsidiaries (the "Company"), including Heritage Propane
Partners, L.P. (Heritage Propane), Heritage Operating, L.P. (the "Operating
Partnership"), Heritage Energy Resources (Resources) and M-P Energy Partnership.
The Company accounts for its 50 percent partnership interest in Bi-State
Partnership, another propane retailer, under the equity method. All significant
intercompany transactions and accounts have been eliminated in consolidation.
Accounts Receivable
Heritage grants credit to its customers for the purchase of propane and
propane-related products. Accounts receivable consisted of the following:
<Table>
<Caption>
August 31,
2001
----------
Accounts receivable $ 43,797
Less - allowance for doubtful accounts 3,576
----------
Total, net $ 40,221
==========
</Table>
4
Inventories
Inventories are valued at the lower of cost or market. The cost of fuel
inventories is determined using the average cost method, while the cost of
appliances, parts and fittings is determined by the first-in, first-out method.
Inventories consist of the following:
<Table>
<Caption>
August 31,
2001
----------
Fuel $ 56,975
Appliances, parts and fittings 9,839
----------
$ 66,814
==========
</Table>
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. Additionally, the Company capitalizes certain costs
directly related to the installation of Company owned tanks, including internal
labor costs. Components and useful lives of property, plant and equipment are as
follows:
<Table>
<Caption>
August 31,
2001
----------
Land and improvements $ 21,244
Buildings and improvements (10 to 30 years) 27,871
Bulk storage, equipment and facilities (3 to 30 years) 34,431
Tanks and other equipment (5 to 30 years) 287,155
Vehicles (5 to 10 years) 52,177
Furniture and fixtures (5 to 10 years) 6,852
Other 3,242
----------
432,972
Less- Accumulated depreciation (47,036)
----------
385,936
Plus- Construction work-in-process 8,806
----------
$ 394,742
==========
</Table>
Intangibles and Other Assets
Intangibles and other assets are stated at cost net of amortization computed on
the straight-line method. The Company eliminates from its balance sheet any
fully amortized intangibles and the related accumulated amortization. Components
and useful lives of intangibles and other assets are as follows:
<Table>
<Caption>
August 31,
2001
----------
Goodwill (30 years) $ 190,432
Noncompete agreements (10 to 15 years) 45,764
Customer lists (15 years) 26,903
Other 6,055
----------
269,154
Less- Accumulated amortization (20,150)
----------
$ 249,004
==========
</Table>
Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the
5
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
was required as of August 31, 2001.
Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following:
<Table>
<Caption>
August 31,
2001
----------
Interest payable $ 4,614
Wages and benefits 12,909
Deferred tank rent 5,694
Advanced budget payments 5,883
Customer deposits 2,425
Taxes other than income 2,430
Derivative instruments 4,556
Income taxes payable 566
Other 2,757
----------
$ 41,834
==========
</Table>
Income Taxes
Concurrent with the series of transactions with U.S. Propane, the Company
converted to a taxable corporation from a subchapter "S" corporation for tax
reporting purposes. The Company follows the liability method of accounting for
income taxes in accordance with Statement of Financial Accounting Standards
(Statement) No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109,
deferred income taxes are recorded based upon differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the underlying assets are
received and liabilities settled.
Use of Estimates
The preparation of consolidated balance sheet in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the balance sheet. 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
fair value and carrying amount of long-term debt at August 31, 2001, was
approximately $465,690 and $441,269, respectively. The fair value is determined
using estimated borrowing rates currently available to the Company for loans
with similar terms and maturities.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (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 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 the provisions of SFAS 133
6
effective September 1, 2000. The cumulative effect of adopting SFAS 133 was an
adjustment to beginning other comprehensive income of $5,429.
The Company had certain financial swap instruments outstanding at August 31,
2001 that have been designated as cash flow hedging instruments in accordance
with SFAS 133. A financial swap is a contractual agreement to exchange
obligations of money between the buyer and seller of the instruments as propane
volumes during the pricing period are purchased. The swaps are tied to a set
fixed price for the buyer and floating price determinants for the seller priced
on certain indices. Heritage entered into these instruments to hedge the
forecasted propane volumes to be purchased during each of the one-month periods
ending October 2001 through March 2002. The Company utilizes hedging
transactions to provide price protection against significant fluctuations in
propane prices. These instruments had a fair value of ($4,556) as of August 31,
2001, which was recorded as accrued and other liabilities on the balance sheet
through other comprehensive income, exclusive of ($46) of minority interest.
Also at August 31, 2001, the Company had outstanding options to purchase 14.7
million gallons of propane during December 2001 and January 2002 at a weighted
average price of $.48 per gallon. The fair value of $.2 million of the option
contracts was recorded as current assets on the balance sheet.
Marketable Securities
Heritage's marketable securities are classified as available for sale securities
and are reflected as a current asset on the consolidated balance sheet at their
fair value. As of August 31, 2001, unrealized holding losses of $2,077 were
recorded in accumulated other comprehensive income based on the market value of
the securities.
Liquids Marketing Activities
Heritage trades financial instruments for its own account through Resources.
Financial instruments utilized in connection with liquids marketing activities
are accounted for using the mark-to-market method. Under the mark-to-market
method of accounting, forwards, swaps, options and storage contracts are
reflected at fair value, and are shown in the consolidated balance sheet as
assets and liabilities from liquids marketing activities. Changes in the assets
and liabilities from liquids marketing activities result primarily from changes
in the market prices, newly originated transactions and the timing of
settlement. Resources attempts to balance its contractual portfolio in terms of
notional amounts and timing of performance and delivery obligations. However,
net unbalanced positions can exist or are established based on assessment of
anticipated market movements.
The Company has recorded its liquids marketing activities at fair value in
accordance with Emerging Issues Task Force Issue No. 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities" ("EITF
98-10"). EITF 98-10 requires energy trading contracts to be recorded at fair
value on the balance sheet.
Notional Amounts and Terms -
The notional amounts and terms of these financial instruments as of August 31,
2001 include fixed price payor for 2,130,000 barrels of propane and butane, and
fixed price receiver of 1,820,000 barrels of propane and butane. Notional
amounts reflect the volume of the transactions, but do not represent the amounts
exchanged by the parties to the financial instruments. Accordingly, notional
amounts do not accurately measure the Company's exposure to market or credit
risks.
Fair Value -
The fair value of the financial instruments related to liquids marketing
activities as of August 31, 2001, was assets of $6,465 and liabilities of
$7,130. Resources also entered into an option contract in which the counter
party had the option to purchase 6.3 million gallons of propane from October 1,
2001 through December 31, 2001 at $.62 per gallon.
Market and Credit Risk -
Inherent in the resulting contractual portfolio is certain business risks,
including market risk and credit risk. Market risk is the risk that the value of
the portfolio will change, either favorably or unfavorably, in response to
7
changing market conditions. Credit risk is the risk of loss from nonperformance
by suppliers, customers, or financial counterparties to a contract. Heritage and
Resources take active roles in managing and controlling market and credit risk
and have established control procedures, which are reviewed on an ongoing basis.
Heritage monitors market risk through a variety of techniques, including routine
reporting to senior management. Heritage attempts to minimize credit risk
exposure through credit policies and periodic monitoring procedures.
The market prices used to value these transactions reflect management's best
estimate considering various factors including closing average spot prices for
the current and outer months plus a differential to consider time value and
storage costs.
Recently Issued Accounting Standard Not Yet Adopted
In June 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 No. 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.
Heritage adopted Statement No. 142 on September 1, 2001 and accordingly has
discontinued the amortization of goodwill existing at the time of adoption.
Management has engaged an independent appraisal firm to perform an assessment of
the fair value of each of the Company's operating segments, which will be
compared with the carrying value of each segment to determine whether any
impairment exists on the date of adoption. Under the provisions of Statement No.
142, Heritage has six months from the time of adoption to have its appraisals
completed. However, management does not believe that any impairment exists upon
adoption.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations". Statement No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This Statement amends FASB Statement
No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies".
Heritage will adopt the provisions of Statement No. 143 effective September 1,
2002. Management has not determined the impact of adopting Statement No. 143.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". This statement
retains the fundamental provisions of Statement No. 121 for recognition and
measurement of the impairment of long-lived assets to be held and used, and
measurement of long-lived assets to be disposed of by sale. This statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years, with early
application encouraged. Management has not determined the method, timing or
impact of adopting Statement No. 144.
8
3. ASSETS HELD IN TRUST:
In connection with the initial public offering (IPO) by Predecessor Heritage in
June 1996, the Company retained proceeds, which were placed in various trusts to
be paid to the noteholders of noncompete agreements entered into by the Company
prior to the IPO. The proceeds are disbursed monthly from the trust in
accordance with the noncompete agreements. The Company retains all earnings from
the trust assets.
4. ACQUISITIONS:
On July 31, 2001, Heritage purchased the propane operations of ProFlame, Inc.
and subsidiaries and affiliates (ProFlame) located in California and Nevada, in
a series of mergers, stock purchases and asset purchases. This acquisition was
accounted for using the purchase method of accounting under FASB Statement No.
141. The acquisition of ProFlame enhanced Heritage's operations in the Western
United States and is expected to reduce costs through blend-ins to existing
operations.
The aggregate purchase price was $56,201 net of cash acquired of $6,518. The
purchase price included $42,695 paid in cash of which $2,958 related to
preliminary working capital, 129,901 common units valued at $4,450 and
liabilities assumed of $9,056. The 129,901 common units were issued to the
General Partner in connection with the assumption of certain liabilities by the
General Partner. The value of the units was determined based on the market price
at the date of acquisition. Management is in the process of obtaining valuations
of certain intangible assets; thus, the allocation of the purchase price is
preliminary. The working capital adjustment is expected to settle in January
2002.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.
<Table>
Current assets, net of cash acquired $ 4,995
Property, plant and equipment 25,231
Goodwill 15,521
Other intangible assets 10,454
-------
Total assets acquired 56,201
-------
Current liabilities 2,036
Long-term debt 7,020
-------
Total liabilities assumed 9,056
-------
Net assets acquired $47,145
=======
</Table>
Of the $10,454 of acquired intangible assets, $7,040 was assigned to
non-competes, which are being amortized over a 10 year weighted-average useful
life and $3,414 was assigned to customer lists, which are being amortized over
15 year weighted average useful life. Of the $15,521 assigned to goodwill, none
is expected to be deductible for tax purposes.
The results of operations of ProFlame from August 1, 2001 through August 31,
2001 are included in the consolidated statement of operations of Heritage for
the fiscal year ended August 31, 2001.
The following unaudited pro forma consolidated results of operations are
presented as if the series of transactions with ProFlame and Heritage had been
made at the beginning of the periods presented
<Table>
<Caption>
Year Eight Months
Ended Ended
August 31, 2001 August 31, 2001
--------------- ---------------
Total revenues $ 766,795 $ 110,698
Net income (loss) $ 19,492 $ (5,938)
Basic and diluted earnings (loss) per common unit $ 1.47 $ (.55)
</Table>
9
The pro forma consolidated results of operations include adjustments to give
effect to amortization of non-competes and customer lists, interest expense on
acquisition and assumed debt and certain other adjustments, including the
elimination of income taxes. The unaudited pro forma information is not
necessarily indicative of the results of operations that would have occurred had
the transactions been made at the beginning of the periods presented or the
future results of the combined operations.
Heritage also purchased all of the common stock of EnergyNorth Propane, Inc. and
its VGS Propane, LLC subsidiary in northern New England, and all of the stock of
one other small company. Heritage acquired substantially all of the assets of
seven other companies during the fiscal year ended August 31, 2001. These
acquisitions totaled $60,473, which included liabilities assumed and noncompete
agreements of $3,010 for periods ranging up to ten years. These acquisitions
were financed primarily with the acquisition facility and the issuance of $1,600
of common units.
5. WORKING CAPITAL FACILITY AND LONG-TERM DEBT:
Long-term debt consists of the following:
<Table>
<Caption>
August 31,
2001
----------
1996 8.55% Senior Secured Notes $ 120,000
1997 Medium Term Note Program:
7.17% Series A Senior Secured Notes 12,000
7.26% Series B Senior Secured Notes 20,000
6.50% Series C Senior Secured Notes 3,571
6.59% Series D Senior Secured Notes 5,000
6.67% Series E Senior Secured Notes 5,000
2000 and 2001 Senior Secured Promissory Notes:
8.47% Series A Senior Secured Notes 16,000
8.55% Series B Senior Secured Notes 32,000
8.59% Series C Senior Secured Notes 27,000
8.67% Series D Senior Secured Notes 58,000
8.75% Series E Senior Secured Notes 7,000
8.87% Series F Senior Secured Notes 40,000
7.21% Series G Senior Secured Notes 26,500
7.89% Series H Senior Secured Notes 27,500
7.99% Series I Senior Secured Notes 16,000
Senior Revolving Acquisition Facility --
Notes Payable on noncompete agreements with interest
imputed at rates averaging 7.5%, due in installments
through 2010, collateralized by a first security lien on
certain assets of Heritage 22,579
Other 3,119
Current maturities of long-term debt (16,394)
----------
$ 424,875
==========
</Table>
Maturities of the Senior Secured Notes, the Medium Term Note Program and the
Senior Secured Promissory Notes are as follows:
10
1996 8.55% Senior Notes: mature at the rate of $12,000 on June 30 in
each of the years 2002 to and including
2011. Interest is paid semi-annually.
1997 Medium Term Note Program:
Series A Notes: mature at the rate of $2,400 on November 19
in each of the years 2005 to and including
2009. Interest is paid semi-annually.
Series B Notes: mature at the rate of $2,000 on November 19
in each of the years 2003 to and including
2012. Interest is paid semi-annually.
Series C Notes: mature at the rate of $714 on March 13 in
each of the years 2000 to and including
2003, $357 on March 13, 2004, $1,073 on
March 13, 2005, and $357 in each of the
years 2006 and 2007. Interest is paid
semi-annually.
Series D Notes: mature at the rate of $556 on March 13 in
each of the years 2002 to and including
2010. Interest is paid semi-annually.
Series E Notes: mature at the rate of $714 on March 13 in
each of the years 2007 to and including
2013. Interest is paid semi-annually.
2000 and 2001 Senior Secured Promissory Notes:
Series A Notes: mature at the rate of $3,200 on August 15 in
each of the years 2003 to and including
2007. Interest is paid quarterly.
Series B Notes: mature at the rate of $4,571 on August 15 in
each of the years 2004 to and including
2010. Interest is paid quarterly.
Series C Notes: mature at the rate of $5,750 on August 15 in
each of the years 2006 to and including
2007, $4,000 on August 15, 2008 and $5,750
on August 15, 2009 to and including 2010.
Interest is paid quarterly.
Series D Notes: mature at the rate of $12,450 on August 15
in each of the years 2008 and 2009, $7,700
on August 15, 2010, $12,450 on August 15,
2011 and $12,950 on August 15, 2012.
Interest is paid quarterly.
Series E Notes: mature at the rate of $1,000 on August 15 in
each of the years 2009 to and including
2015. Interest is paid quarterly.
Series F Notes: mature at the rate of $3,636 on August 15 in
each of the years 2010 to and including
2020. Interest is paid quarterly.
Series G Notes: mature at the rate of $5,300 on May 15 in
each of the years 2004 to and including
2008. Interest is paid quarterly.
Series H Notes: mature at the rate of $2,500 on May 15 in
each of the years 2006 to and including
2016. Interest is paid quarterly.
Series I Notes: mature in one payment of $16,000 on May 15,
2013. Interest is paid quarterly.
The Note Purchase Agreement, the Medium Term Note Program and the Senior Secured
Promissory Notes contain restrictive covenants including limitations on
substantial disposition of assets, changes in ownership of Heritage and
additional indebtedness and require the maintenance of certain financial ratios.
At August 31, 2001, Heritage was in compliance with all covenants. All
receivables, contracts, equipment, inventory, general intangibles, cash
concentration accounts, and the common stock of Heritage's subsidiaries secure
the notes.
Effective December 28, 2000, Heritage entered into the Fourth Amendment to the
First Amended and Restated Credit Agreement, and effective July 16, 2001,
Heritage entered into the Fifth Amendment to First Amended and Restated Credit
Agreement, with various financial institutions that amended existing credit
agreements. The terms of the Agreement as amended are as follows:
A $65,000 Senior Revolving Working Capital Facility, expiring June 30,
2004, with $19,900 outstanding at August 31, 2001. The interest rate
and interest payment dates vary depending
11
on the terms Heritage agrees to when the money is borrowed. The
weighted average interest rate was 5.295 percent for the amount
outstanding at August 31, 2001. Heritage must be free of all working
capital borrowings for 30 consecutive days each fiscal year. The
maximum commitment fee payable on the unused portion of the facility is
.50 percent.
A $50,000 Senior Revolving Acquisition Facility is available through
December 31, 2003, at which time the outstanding amount must be paid in
ten equal quarterly installments, beginning March 31, 2004. There were
no amounts outstanding as of August 31, 2001. The interest rate and
interest payment dates vary depending on the terms Heritage agrees to
when the money is borrowed. The maximum commitment fee payable on the
unused portion of the facility is .50 percent.
Future maturities of long-term debt for each of the next five fiscal years and
thereafter are $16,394 in 2002; $19,872 in 2003; $31,928 in 2004; $32,250 in
2005; $42,254 in 2006 and $298,571 thereafter.
6. INCOME TAXES:
The components of the deferred tax liability are as follows:
<Table>
Deferred tax assets-
Net operating loss carryforwards (NOLs) $ 4,134
Reserves 4,441
Alternative minimum tax carryforwards 855
-------
$ 9,430
Deferred tax liabilities-
Property basis $47,909
=======
Net deferred tax liabilities $38,479
=======
</Table>
The Company's NOLs generally begin to expire in 2011 through 2015.
7. COMMITMENTS AND CONTINGENCIES:
Certain property and equipment is leased under noncancelable leases which
require fixed monthly rental payments and expire at various dates through 2008.
Fiscal year future minimum lease commitments for such leases are $2,680 in 2002;
$1,830 in 2003; $1,365 in 2004; $1,126 in 2005; $488 in 2006 and $1,052
thereafter.
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 of the Company.
Petroleum-based contamination or environmental wastes are known to be located on
or adjacent to six sites, which Heritage presently or formerly had operations.
These sites were evaluated at the time of their acquisition. In all cases,
remediation operations have been or will be undertaken by others, and in all six
cases, Heritage obtained indemnification for expenses associated with any
remediation from the former owners or related entities. Additionally, Heritage
has been named as a large deminimis generator at one superfund site, but it
believes that its exposure will not be material. In the opinion of management
and based on information currently available to Heritage, such projects are not
expected to have a material adverse effect on Heritage's financial condition or
results of operation.
Heritage has entered into several purchase and supply commitments with varying
terms as to quantities and prices, which expire at various dates through March
2002.
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8. PARTNERSHIP UNITS:
The partnership agreement of Heritage Propane requires that Heritage Propane
will distribute all of its "available cash" to its unitholders and its general
partner within 45 days following the end of each fiscal quarter, subject to the
payment of incentive distributions to the holders of Incentive Distribution
Rights to the extent that certain target levels of cash distributions are
achieved. The term "available cash" generally means, with respect to any fiscal
quarter of the partnership, all cash on hand at the end of such quarter, plus
working capital borrowings after the end of the quarter, less reserves
established by the General Partner in its sole discretion to provide for the
proper conduct of Heritage Propane's business, comply with applicable laws or
any Heritage debt instrument or other agreement, or to provide funds for future
distributions to partners with respect to any one or more of the next four
quarters. Available cash is more fully defined in the Amended and Restated
Agreement of Limited Partnership of Heritage Propane Partners, L.P.
The Minimum Quarterly Distribution was made to the Common and Subordinated
Unitholders for the quarters ended November 30, 1996 through August 31, 1998.
For the quarter ended November 30, 1998, a quarterly distribution of $.5125 was
paid to the Common and Subordinated Unitholders. For each of the quarters ended
February 28, 1999 through and including May 31, 2000, quarterly distributions of
$.5625 were paid to the Common and Subordinated Unitholders. Heritage raised the
quarterly distribution $0.0125 per unit each quarter beginning with the quarter
ended August 31, 2000, to the current level of $0.625 per unit (or $2.50
annually) for the quarter ended August 31, 2001. The quarterly distributions for
the quarters ended February 28, 1999 through August 31, 2001 included incentive
distributions payable to the General Partner to the extent the quarterly
distribution exceeded $.55 per unit.
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 the fiscal quarter ended August 31,
2001, and as long as class B subordinated units are outstanding, Heritage
Propane will distribute available cash, excluding any available cash to be
distributed to the class C unitholders, as follows:
o 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 Heritage in respect of its
general partner interests in Heritage Propane and the
Operating Partnership, 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;
o 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 Heritage in
respect of its general partner interests in Heritage Propane
and the Operating Partnership, until the holders of class B
subordinated units have received $0.50 per unit for such
quarter;
o Third, 97% to all common unitholders and 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
Heritage in respect of its general partner interests in
Heritage Propane and the Operating Partnership, until all
common unitholders have received at least $0.55 per unit for
such quarter;
o Fourth, 84% to all common unitholders and class B subordinated
unitholders, 1% to U.S. Propane in respect of its limited
partner interest in the Operating Partnership and 13% to
Heritage in respect of its incentive distribution rights, pro
rata and 2% to Heritage in respect of its general partner
interests in Heritage Propane and the Operating Partnership,
until all common unitholders have received at least $0.635 per
unit for such quarter;
o 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
Heritage in respect of its incentive distribution rights, pro
rata, and 2% to Heritage in respect of its general partner
interests in Heritage Propane and the Operating Partnership,
until all common unitholders have received at least $0.825 per
unit for such quarter; and
13
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 Heritage in respect of its
incentive distribution rights, pro rata, and 2% to Heritage in respect of its
general partner interests in Heritage Propane and the Operating Partnership.
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,
Heritage Propane will distribute available cash, excluding any available cash to
be distributed to the class C unitholders as follows:
o 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 Heritage in respect of its general
partner interests in Heritage Propane and the Operating
Partnership, until all unitholders have received $0.50 per
unit for such quarter and any prior quarter;
o 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 Heritage in respect of its general
partner interests in Heritage Propane and the Operating
Partnership, until all unitholders have received $0.55 per
unit for such quarter;
o 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 Heritage in respect of its incentive
distribution rights, pro rata, and 2% to Heritage in respect
of its general partner interests in Heritage Propane and the
Operating Partnership, until all common unitholders have
received at least $0.635 per unit for such quarter;
o Fourth, 74% to unitholders, pro rata, 1% to U.S. Propane in
respect of its limited partner interest in the Operating
Partnership, 23% to Heritage in respect of its incentive
distribution rights, pro rata and 2% to Heritage in respect of
its general partner interests in Heritage Propane and the
Operating Partnership, until all common unitholders have
received at least $0.825 per unit for such quarter;
o 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 Heritage in respect of its
incentive distribution rights, pro rata, and 2% to Heritage in
respect of its general partner interests in Heritage Propane
and the Operating Partnership.
14
Restricted Unit Plan
The Company adopted the Amended and Restated Restricted Unit Plan dated August
10, 2000 (the "Restricted Unit Plan"), for certain directors and key employees
of Heritage and its affiliates. The Restricted Unit Plan covers rights to
acquire 146,000 common units. The right to acquire the common units under the
Restricted Unit Plan, including any forfeiture or lapse of rights are available
for grant to key employees on such terms and conditions (including vesting
conditions) as the Compensation Committee of Heritage shall determine. Each
director shall automatically receive a Director's grant with respect to 500
common units on each September 1 that such person continues as a director. Newly
elected directors are also entitled to receive a grant with respect to 2,000
common units upon election or appointment to the Board. Directors who are
employees of TECO Energy, Inc., Atmos Resources, Inc., Piedmont Natural Gas
Company, Inc. or AGL Resources, Inc. or their affiliates are not entitled to
receive a Director's grant of common units. Generally, the rights to acquire the
common units will vest upon the later to occur of (i) the three-year anniversary
of the grant date, or (ii) the conversion of the Subordinated units to common
units. Grants made after the conversion of all of the Subordinated units to
common units shall vest on such terms as the Committee may establish, which may
include the achievement of performance objectives. In the event of a "change of
control" (as defined in the Restricted Unit Plan), all rights to acquire common
units pursuant to the Restricted Unit Plan will immediately vest.
The issuance of the common units pursuant to the Restricted Unit Plan is
intended to serve as a means of incentive compensation for performance and not
primarily as an opportunity to participate in the equity appreciation in respect
of the common units. Therefore, no consideration will be payable by the plan
participants upon vesting and issuance of the common units. As of August 31,
2001, 34,050 restricted units are outstanding and 31,150 are available for
grants to non-employee directors and key employees.
Subsequent to August 31, 2001, 1,750 additional Phantom Units vested pursuant to
the vesting rights of the Restricted Unit Plan and common units were issued.
During fiscal 2000, 21,300 of these Phantom Units were granted by Predecessor
Heritage to non-employee directors and key employees of Predecessor Heritage. As
of August 31, 2000, 80,800 Phantom Units were awarded of which 4,500 grants
vested pursuant to the vesting rights of the Restricted Unit Plan and 71,300
vested in accordance with the change of control that occurred with the Company.
Individuals holding the remaining 5,000 grants waived their rights to vesting
under the change of control. During fiscal 2001, 750 additional Phantom Units
vested pursuant to the vesting rights of the Restricted Unit Plan and common
units were issued.
Long-Term Incentive Plan
Effective September 1, 2000, Heritage adopted a long-term incentive plan whereby
units will be awarded based on achieving certain targeted levels of Distributed
Cash per unit. Awards under the program will be made starting in 2003 based upon
the average of the prior three years Distributed Cash per unit. A minimum of
250,000 units and a maximum of 500,000 units will be awarded.
15
9. SUPPLEMENTAL INFORMATION:
The following balance sheet of the Company includes its investment in Heritage
on an equity basis. Such presentation is included to provide additional
information with respect to the Company's financial position on a stand-alone
basis:
<Table>
<Caption>
August 31,
2001
----------
ASSETS
CURRENT ASSETS:
Cash $ 309
Receivable from Heritage Propane 6,360
Prepaid expenses and other 10
Current portion of assets held in trust 366
----------
Total current assets 7,045
ASSETS HELD IN TRUST 1,482
INVESTMENT IN HERITAGE 122,623
INTANGIBLES AND OTHER ASSETS, net 30,762
----------
Total assets $ 161,912
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 8,476
Current maturities of long-term debt 274
----------
Total current liabilities 8,750
LONG-TERM DEBT, less current maturities 1,127
MINORITY INTEREST (1,731)
DEFERRED TAX LIABILITY 38,479
----------
46,625
STOCKHOLDER'S EQUITY:
Common stock $.01 par value, 600,000 shares authorized, 534,788
shares issued and outstanding 5
Additional paid-in capital 121,196
Accumulated other comprehensive income (46)
Accumulated deficit (5,868)
----------
Total stockholder's equity 115,287
----------
Total liabilities and stockholder's equity $ 161,912
==========
</Table>
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