UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to__________
COMMISSION FILE NUMBER 1-11727
HERITAGE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 73-1493906
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</Table>
8801 SOUTH YALE AVENUE, SUITE 310, TULSA, OKLAHOMA 74137
(Address of principal executive offices and zip code)
(918) 492-7272
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of each exchange on
which registered
Common Units New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value as of November 5, 2001, of the registrant's common
units held by nonaffiliates of the registrant, based on the reported closing
price of such units on the New York Stock Exchange on such date, was
approximately $254,792,338
At November 5, 2001, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 14,262,066 Common Units
1,382,514 Class B Subordinated Units
Documents Incorporated by Reference: None
EXPLANATORY NOTE
This amendment to Heritage Propane Partners, L.P.'s Annual Report on
Form 10-K (as filed by the Registrant on November 29, 2001) is being filed to
include the audit report of Grant Thornton LLP on Heritage Propane Partners,
L.P.'s consolidated financial statements for the year ended August 31, 2001. The
unqualified audit report issued by Grant Thornton LLP, dated July 11, 2002,
replaces the unqualified audit report for the same period issued by Arthur
Andersen LLP, dated October 19, 2001. The audit report of Arthur Andersen LLP
was replaced due to the uncertainty surrounding the viability and continuity of
Arthur Andersen LLP. Neither Arthur Andersen LLP's nor Grant Thornton LLP's
audit reports on Heritage Propane Partners, L.P.'s financial statements for the
year ended August 31, 2001 contained an adverse opinion or a disclaimer of
opinion, nor were the audit reports qualified or modified as to uncertainty or
audit scope. Further, the audit conducted by Grant Thornton LLP resulted in only
minor revisions that have been made primarily to update the disclosures for
events occurring subsequent to the date of Arthur Andersen LLP's report. The
revisions had no impact on the previously reported financial position or results
of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements set forth on pages F-1 to F-36 of this Report
are incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT OF FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
See "Index to Financial Statements" set forth on page F-1.
2. FINANCIAL STATEMENT SCHEDULES.
None.
3. EXHIBITS.
See "Index to Exhibits" set forth on page E-1.
(b) REPORTS ON FORM 8-K.
Form 8-K dated July 10, 2002, was filed in connection with the
dismissal of Arthur Andersen LLP as Heritage Propane Partners, L.P.'s
independent auditor and the engagement of Grant Thornton LLP as
Heritage Propane Partners, L.P.'s independent auditor.
Form 8-K dated February 4, 2002, was filed in connection with the
approval of the Amendment Proposal by the Common Unitholders and Class
B Subordinated Unitholders of Heritage Propane Partners, L.P., whereby
U.S. Propane, L.P. replaced Heritage Holdings, Inc. as the general
partner of Heritage Propane Partners, L.P. and Heritage Operating,
L.P., Heritage Propane Partners, L.P.'s operating partnership.
Heritage Propane Partners, L.P. filed five reports on Form 8-K during
the three months ended August 31, 2001. Form 8-K dated July 12, 2001,
was filed reporting the announcement that Heritage had entered into
definitive agreements to acquire the operations of ProFlame, Inc.
(ProFlame) and related propane distribution companies in California and
Nevada. Attached as an exhibit to this Form 8-K was the press release
dated July 5, 2001 making the announcement.
Form 8-K dated July 24, 2001, filed as exhibits the financial
statements and the pro forma financial information of ProFlame, Inc.
and Subsidiaries and Affiliates under Item 5. Other Events. This report
provided the (i) Unaudited ProForma Combined Financial Statements for
the Nine months Ended May 31, 2001 and the Year Ended August 31, 2000
and related notes and (ii) ProFlame, Inc. and Subsidiaries and
Affiliates Consolidated and Combined Financial Statements for the Years
Ended August 31, 2000 and 1999 and related notes and for the Nine
Months ended May 31, 2001 and 2000 (unaudited). This Form 8-K also
filed as an exhibit the consent of Arthur Andersen LLP.
1
Form 8-K dated July 27, 2001, was filed in connection with the public
offering (the "Offering") of up to 2,875,000 common units (the "Offered
Units") representing limited partner interests in the Partnership,
including common units issuable pursuant to an over-allotment option
granted to underwriters, under the Partnership's shelf registration
statement on Form S-3 (Registration No. 333-86057) (the "Registration
Statement") as supplemented by the Prospectus Supplement dated July 26,
2001 relating to the Offered Units filed with the Securities and
Exchange Commission pursuant to Rule 424(b) under the Securities Act of
1933, as amended. In connection with the Offering, the Partnership,
Heritage Holdings, Inc. and Heritage Operating, L.P. entered into an
underwriting agreement with Salomon Smith Barney Inc., A.G. Edwards &
Sons, Inc. Dain Rauscher Incorporated and First Union Securities, Inc.
on July 26, 2001, which was filed as an exhibit to the Form 8-K.
Opinions of Baker Botts L.L.P. as to the legality of the securities
registered and as to certain tax matters, along with their consent were
also included as exhibits to this Form 8-K. The opinion as to certain
tax matters replaced the opinions as to tax matters previously filed as
exhibits to the Registration Statement. The opinions of Baker Botts
L.L.P. were filed as exhibits to the Form 8-K Report in lieu of filing
them as exhibits to the Registration Statement by means of a
post-effective amendment, and incorporated by reference into the
Registration Statement.
Form 8-K/A to the August 10, 2000 Form 8-K was filed on July 27, 2001
to amend the Form 8-K of Heritage Propane Partners, L.P. dated August
10, 2000 and filed with Securities and Exchange Commission on August
23, 2000, as amended by the Form 8-K/A of Heritage dated August 10,
2000 and filed with the Commission on October 24, 3000, by filing the
consents of Deloitte and Touch LLP (two separate consents), Ernst &
Young LLP and Arthur Andersen LLP.
Form 8-K dated August 15, 2001 was filed to report the acquisition of
the propane operations of ProFlame, Inc., and subsidiaries and
affiliates in a series of mergers, stock purchases and asset purchases.
The report described the transaction and attached as exhibits the Stock
Purchase Agreement dated July 5, 2001 among the shareholders of
ProFlame Inc. and Heritage Holdings, Inc., the Stock Purchase Agreement
dated as of July 5, 2001 among the shareholders of Coast Liquid Gas,
Inc. and Heritage Holdings, Inc., the Agreement and Plan of Merger
dated as of July 5, 2001 among California Western Gas Company, the
Majority Stockholders of California Western Gas Company signatories
thereto, Heritage Holdings, Inc. and California Western Merger Corp.,
the Agreement and Plan of Merger dated as of July 5, 2001 among Growth
Properties the Majority Shareholders of Growth Properties signatories
thereto, Heritage Holdings, Inc. and Growth Properties Merger Corp.,
the Asset Purchase Agreement dated as of July 5, 2001 among L.P.G.
Associates, the Shareholders of L.P.G. Associates and Heritage
Operating, L.P., the Asset Purchase Agreement dated as of July 5, 2001
among WMJB, Inc. the Shareholders of WMJB, Inc. and Heritage Operating,
L.P., the Amendment to Asset Purchase Agreement dated as of July 5,
2001 among WMJB, Inc., the Shareholders of WMJB, Inc. and Heritage
Operating, L.P. and the Press Release dated August 31, 2001 announcing
the transaction.
2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HERITAGE PROPANE PARTNERS, L.P.
By: U.S. Propane, L.P.
(General Partner)
By: U.S. Propane, L.L.C.
(General Partner)
By: /s/ H. Michael Krimbill
-------------------------------------
H. Michael Krimbill
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
<Table>
<Caption>
Signature Title Date
/s/ H. Michael Krimbill President and Chief July 12, 2002
- --------------------------------------- Executive Officer and Director
H. Michael Krimbill (Principal Executive Officer)
/s/ James E. Bertelsmeyer Chairman of the Board and July 12, 2002
- --------------------------------------- Director
James E. Bertelsmeyer
/s/ Michael L. Greenwood Vice President and Chief July 12, 2002
- --------------------------------------- Financial Officer (Principal Financial
Michael L. Greenwood and Accounting Officer)
/s/ Bill W. Byrne Director July 12, 2002
- ---------------------------------------
Bill W. Byrne
/s/ J. Charles Sawyer Director July 12, 2002
- ---------------------------------------
J. Charles Sawyer
/s/ Stephen L. Cropper Director July 12, 2002
- ---------------------------------------
Stephen L. Cropper
/s/ J. Patrick Reddy Director July 12, 2002
- ---------------------------------------
J. Patrick Reddy
/s/ Royston K. Eustace Director July 12, 2002
- ---------------------------------------
Royston K. Eustace
/s/ William N. Cantrell Director July 12, 2002
- ---------------------------------------
William N. Cantrell
/s/ Ware F. Schiefer Director July 12, 2002
- ---------------------------------------
Ware F. Schiefer
</Table>
3
<Table>
<Caption>
Signature Title Date
/s/ David J. Dzuricky Director July 12, 2002
- ---------------------------------------
David J. Dzuricky
/s/ Clayton H. Preble Director July 12, 2002
- ---------------------------------------
Clayton H. Preble
/s/ J.D. Woodward Director July 12, 2002
- ---------------------------------------
J.D. Woodward
/s/ Richard T. O'Brien Director July 12, 2002
- ---------------------------------------
Richard T. O'Brien
</Table>
4
INDEX TO FINANCIAL STATEMENTS
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY AND SURVIVING LEGAL ENTITY
IN THE SERIES OF TRANSACTIONS WITH U.S. PROPANE, L.P.)
<Table>
<Caption>
PAGE
----
Report of Independent Certified Public Accountants......................................................F-2
Report of Independent Public Accountants................................................................F-3
Consolidated Balance Sheets -
August 31, 2001 and August 31, 2000....................................................................F-4
Consolidated Statements of Operations -
Year Ended August 31, 2001,
Eight Months Ended August 31, 2000 and 1999 (unaudited) and
Years Ended December 31, 1999 and 1998 ................................................................F-5
Consolidated Statements of Comprehensive Income (Loss) -
Year Ended August 31, 2001,
Eight Months Ended August 31, 2000 and 1999 (unaudited) and
Years Ended December 31, 1999 and 1998 ................................................................F-6
Consolidated Statements of Partners' Capital -
Year Ended August 31, 2001,
Eight Months Ended August 31, 2000 and
Years Ended December 31, 1999 and 1998 ................................................................F-7
Consolidated Statements of Cash Flows -
Year Ended August 31, 2001,
Eight Months Ended August 31, 2000 and
Years Ended December 31, 1999 and 1998.................................................................F-8
Notes to Consolidated Financial Statements..............................................................F-9
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES (PREDECESSOR HERITAGE)
(THE PROPANE OPERATIONS OF HERITAGE PROPANE PARTNERS, L.P.,
PRIOR TO THE SERIES OF TRANSACTIONS WITH U.S. PROPANE, L.P.)
Report of Independent Certified Public Accountants.....................................................F-27
Consolidated Statements of Operations -
Period Ended August 9, 2000 and
Year Ended August 31, 1999............................................................................F-28
Consolidated Statements of Partners' Capital -
Period Ended August 9, 2000 and
Year Ended August 31, 1999............................................................................F-29
Consolidated Statements of Cash Flows -
Period Ended August 9, 2000 and
Year Ended August 31, 1999............................................................................F-30
Notes to Consolidated Financial Statements.............................................................F-31
</Table>
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of
Heritage Propane Partners, L.P.:
We have audited the accompanying consolidated balance sheet of Heritage Propane
Partners, L.P. (a Delaware limited partnership) and subsidiaries, formerly
Peoples Gas Company, as of August 31, 2001 and the related consolidated
statements of operations, comprehensive income (loss), partners' capital and
cash flows for the year 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 audit
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Heritage Propane
Partners, L.P. and subsidiaries as of August 31, 2001, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
As explained in Note 2 to the consolidated financial statements, effective
September 1, 2001, the Company changed its method of accounting for derivatives
to adopt the requirements of Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities.
/s/ Grant Thornton LLP
Tulsa, Oklahoma
July 11, 2002
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Heritage Propane Partners, L.P.:
We have audited the accompanying consolidated balance sheets of
Heritage Propane Partners, L.P. (a Delaware limited partnership) and
subsidiaries, formerly Peoples Gas Company, as of August 31, 2001 and
2000 and the related consolidated statements of operations,
comprehensive income (loss), partners' capital and cash flows for the
year ended August 31, 2001, the eight month period ended August 31,
2000, and for each of the two years in the period ended December 31,
1999. These financial statements are the responsibility of the
Partnership'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 Heritage
Propane Partners, L.P. and subsidiaries, formerly Peoples Gas Company,
as of August 31, 2001 and 2000, and the results of their operations and
their cash flows for the year ended August 31, 2001, the eight month
period ended August 31, 2000, and for each of the two years in the
period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
--------------------------------
Tulsa, Oklahoma
October 19, 2001
The report of Arthur Andersen LLP shown above is a copy of a previously issued
report; Arthur Andersen LLP has not reissued this report.
F-3
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
<Table>
<Caption>
August 31, August 31,
2001 2000
---------- ----------
ASSETS
CURRENT ASSETS:
Cash $ 5,620 $ 4,845
Marketable securities 4,245 --
Accounts receivable, net of allowance for doubtful accounts 40,221 31,855
Inventories 66,814 39,045
Assets from liquids marketing 6,465 4,133
Prepaid expenses and other 14,898 4,991
--------- ---------
Total current assets 138,263 84,869
PROPERTY, PLANT AND EQUIPMENT, net 394,742 339,366
INVESTMENT IN AFFILIATES 6,920 5,795
INTANGIBLES AND OTHER ASSETS, net 218,242 185,749
--------- ---------
Total assets $ 758,167 $ 615,779
========= =========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Working capital facility $ 19,900 $ 24,200
Accounts payable 43,164 43,244
Accounts payable to related companies 7,937 3,814
Accrued and other current liabilities 33,404 24,682
Liabilities from liquids marketing 7,130 3,684
Current maturities of long-term debt 16,120 2,588
--------- ---------
Total current liabilities 127,655 102,212
LONG-TERM DEBT, less current maturities 423,748 361,990
MINORITY INTERESTS 5,350 4,821
COMMITMENTS AND CONTINGENCIES
--------- ---------
Total liabilities 556,753 469,023
--------- ---------
PARTNERS' CAPITAL:
Common unitholders (14,260,316 and 9,674,146 units issued
and outstanding, respectively) 190,548 106,221
Subordinated unitholders (1,851,471 issued and
outstanding at August 31, 2000) -- 23,130
Class B subordinated unitholders (1,382,514 units issued and
outstanding) 15,532 16,466
Class C unitholders (1,000,000 units issued and
outstanding) -- --
General partner 1,875 939
Accumulated other comprehensive loss (6,541) --
--------- ---------
Total partners' capital 201,414 146,756
--------- ---------
Total liabilities and partners' capital $ 758,167 $ 615,779
========= =========
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)
<Table>
<Caption>
For the Year For the Eight Months Ended For the Years Ended
Ended August 31, December 31,
August 31, ------------------------------ -----------------------------
2001 2000 1999 1999 1998
------------ ------------ ------------ ------------ ------------
(Unaudited)
REVENUES:
Retail fuel $ 440,527 $ 43,815 $ 21,766 $ 34,045 $ 30,187
Wholesale fuel 59,879 3,807 -- -- --
Liquids marketing 172,875 12,262 -- -- --
Other 42,172 3,188 -- -- --
------------ ------------ ------------ ------------ ------------
Total revenues 715,453 63,072 21,766 34,045 30,187
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of products sold 306,556 29,962 8,467 14,849 12,283
Liquids marketing 171,478 11,538 -- -- --
Operating expenses 126,849 16,581 8,596 13,223 11,088
Depreciation and amortization 40,431 4,686 2,037 3,088 2,855
Selling, general and administrative 15,716 1,019 -- -- --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 661,030 63,786 19,100 31,160 26,226
------------ ------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 54,423 (714) 2,666 2,885 3,961
OTHER INCOME (EXPENSE):
Interest expense (35,567) (2,409) -- -- --
Equity in earnings (losses) of affiliates 1,250 (67) -- -- --
Gain on disposal of assets 812 121 -- -- --
Other (394) (478) 11 10 (478)
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS AND
INCOME TAXES 20,524 (3,547) 2,677 2,895 3,483
Minority interests (814) 80 -- -- --
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 19,710 (3,467) 2,677 2,895 3,483
Income taxes -- 379 1,035 1,127 1,412
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) 19,710 (3,846) 1,642 1,768 2,071
GENERAL PARTNER'S INTEREST IN NET INCOME
(LOSS) 831 (46) 4 4 5
------------ ------------ ------------ ------------ ------------
LIMITED PARTNERS' INTEREST IN NET INCOME
(LOSS) $ 18,879 $ (3,800) $ 1,638 $ 1,764 $ 2,066
============ ============ ============ ============ ============
BASIC NET INCOME (LOSS) PER LIMITED
PARTNER UNIT $ 1.43 $ (.37) $ .94 $ 1.02 $ 1.19
============ ============ ============ ============ ============
BASIC AVERAGE NUMBER OF UNITS OUTSTANDING 13,223,184 10,225,387 1,732,271 1,732,271 1,732,271
============ ============ ============ ============ ============
DILUTED NET INCOME (LOSS) PER LIMITED
PARTNER UNIT $ 1.42 $ (.37) $ .94 $ 1.02 $ 1.19
============ ============ ============ ============ ============
DILUTED AVERAGE NUMBER OF UNITS OUTSTANDING 13,254,908 10,225,387 1,732,271 1,732,271 1,732,271
============ ============ ============ ============ ============
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
<Table>
<Caption>
For the Eight Months For the Years Ended
Year ended Ended August 31, December 31,
August 31, ---------------------- ---------------------
2001 2000 1999 1999 1998
---------- -------- -------- -------- --------
(Unaudited)
Net income (loss) $ 19,710 $ (3,846) $ 1,642 $ 1,768 $ 2,071
Other comprehensive income:
Transition adjustment for
adoption of SFAS No. 133 5,429
Change in value of derivative
instruments (9,893) -- -- -- --
Change in value of
available-for-sale securities (2,077) -- -- -- --
-------- -------- -------- -------- --------
Comprehensive income (loss) $ 13,169 $ (3,846) $ 1,642 $ 1,768 $ 2,071
======== ======== ======== ======== ========
RECONCILIATION OF ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
Balance, beginning of period $ -- $ -- $ -- $ -- $ --
Transition adjustment for adoption
of SFAS No. 133 5,429 -- -- -- --
Current period reclassification to
earnings (3,844) -- -- -- --
Current period change (8,126) -- -- -- --
-------- -------- -------- -------- --------
Balance, end of period $ (6,541) $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit data)
<Table>
<Caption>
Number of Units
-----------------------------------------------------------
Class B
Common Subordinated Subordinated Class C Common Subordinated
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 1,294,873 437,398 -- -- $ 11,585 $ 3,872
Net income -- -- -- -- 1,549 517
Dividends paid to parent -- -- -- -- (1,475) (491)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 1,294,873 437,398 -- -- 11,659 3,898
Net income -- -- -- -- 1,323 441
Dividends paid to parent -- -- -- -- (1,688) (563)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 1,294,873 437,398 -- -- 11,294 3,776
Dividends paid to parent -- -- -- -- (1,132) (377)
Liabilities retained by parent -- -- -- -- 21,080 7,051
Merger with AGL, Atmos, and Piedmont -- -- -- -- 83,410 28,085
Merger with Predecessor Heritage 8,379,273 1,414,073 1,382,514 1,000,000 (4,080) (14,657)
General partner capital contribution -- -- -- -- -- --
Other -- -- -- -- (1,502) (285)
Net loss -- -- -- -- (2,849) (463)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, AUGUST 31, 2000 9,674,146 1,851,471 1,382,514 1,000,000 106,221 23,130
Unit distribution -- -- -- -- (23,183) (4,397)
Issuance of common units 2,500,000 -- -- -- 66,046 --
Conversion of phantom units 72,050 -- -- -- 323 --
Issuance of restricted common units 216,917 -- -- -- 6,050 --
General partner capital contribution (54,268) -- -- -- (1,520) --
Conversion of subordinated units 1,851,471 (1,851,471) -- -- 24,214 (24,214)
Other comprehensive loss -- -- -- -- -- --
Other -- -- -- -- 1,349 --
Net income -- -- -- -- 11,048 5,481
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, AUGUST 31, 2001 14,260,316 -- 1,382,514 1,000,000 $ 190,548 $ --
=========== =========== =========== =========== =========== ===========
<Caption>
Accumulated
Other
Class B General Comprehensive
Subordinated Class C Partner Income Total
------------ ---------- ----------- ------------- -----------
BALANCE, DECEMBER 31, 1997 $ -- $ -- $ 39 $ -- $ 15,496
Net income -- -- 5 -- 2,071
Dividends paid to parent -- -- (5) -- (1,971)
----------- ---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 -- -- 39 -- 15,596
Net income -- -- 4 -- 1,768
Dividends paid to parent -- -- (6) -- (2,257)
----------- ---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 -- -- 37 -- 15,107
Dividends paid to parent -- -- (4) -- (1,513)
Liabilities retained by parent -- -- 71 -- 28,202
Merger with AGL, Atmos, and Piedmont -- -- 843 -- 112,338
Merger with Predecessor Heritage 17,167 -- (523) -- (2,093)
General partner capital contribution -- -- 581 -- 581
Other (213) -- (20) -- (2,020)
Net loss (488) -- (46) -- (3,846)
----------- ---------- ----------- ----------- -----------
BALANCE, AUGUST 31, 2000 16,466 -- 939 -- 146,756
Unit distribution (3,284) -- (663) -- (31,527)
Issuance of common units -- -- -- -- 66,046
Conversion of phantom units -- -- -- -- 323
Issuance of restricted common units -- -- -- -- 6,050
General partner capital contribution -- -- 768 -- (752)
Conversion of subordinated units -- -- -- -- --
Other comprehensive loss -- -- -- (6,541) (6,541)
Other -- -- -- -- 1,349
Net income 2,350 -- 831 -- 19,710
----------- ---------- ----------- ----------- -----------
BALANCE, AUGUST 31, 2001 $ 15,532 $ -- $ 1,875 $ (6,541) $ 201,414
=========== ========== =========== =========== ===========
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-7
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<Table>
<Caption>
For the Eight
For the Year Months For the Years Ended
Ended Ended December 31,
August 31, August 31, ------------------------
2001 2000 1999 1998
------------ ------------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 19,710 $ (3,846) $ 1,768 $ 2,071
Reconciliation of net income (loss) to net cash provided
by operating activities-
Depreciation and amortization 40,431 4,686 3,088 2,855
Provision for loss on accounts receivable 4,055 -- -- --
Gain on disposal of assets (812) (121) -- --
Deferred compensation on restricted units and long term 1,079 509 -- --
incentive plan
Undistributed earnings of affiliates (1,125) 67 -- --
Minority interests 463 700 -- --
Deferred income taxes -- -- 517 444
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (4,533) (5,109) (2,051) 698
Inventories (24,158) (7,274) (413) 255
Assets from liquids marketing (2,332) (3,909) -- --
Prepaid and other expenses (12,331) 142 51 22
Intangibles and other assets 1,730 -- (97) --
Accounts payable (3,166) 17,976 511 (300)
Accounts payable to related companies 4,123 5,057 6,064 4,226
Accrued and other current liabilities 1,476 5,630 (85) (1,052)
Liabilities from liquids marketing 3,446 -- -- --
--------- --------- --------- ---------
Net cash provided by operating activities 28,056 14,508 9,353 9,219
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (94,860) (177,067) (1,015) (1,719)
Capital expenditures (23,854) (3,559) (6,176) (5,328)
Proceeds from the sale of assets 2,620 -- -- --
Investment in marketable securities (6,225) -- -- --
Other -- (2,411) -- --
--------- --------- --------- ---------
Net cash used in investing activities (122,319) (183,037) (7,191) (7,047)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 356,748 193,032 -- --
Principal payments on debt (295,788) (67,898) -- (346)
Net proceeds from issuance of common units 66,046 22,924 -- --
Net proceeds from issuance of subordinated units -- 27,279 -- --
Debt issuance costs (441) (1,052) -- --
Capital contributions -- 581 -- --
Unit distributions (31,527) -- -- --
Dividends paid to parent -- (1,513) (2,257) (1,971)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 95,038 173,353 (2,257) (2,317)
--------- --------- --------- ---------
INCREASE (DECREASE) IN CASH 775 4,824 (95) (145)
CASH, beginning of period 4,845 21 116 261
--------- --------- --------- ---------
CASH, end of period $ 5,620 $ 4,845 $ 21 $ 116
========= ========= ========= =========
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 10,030 $ 809 $ 200 $ 253
========= ========= ========= =========
General partner capital contribution $ (752) $ -- $ -- $ --
========= ========= ========= =========
Issuance of restricted common units $ 6,050 $ -- $ -- $ --
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 35,541 $ 581 $ -- $ --
========= ========= ========= =========
Cash paid to parent for income taxes under tax sharing
agreement, net $ -- $ 1,028 $ 851 $ 582
========= ========= ========= =========
</Table>
The accompanying notes are an integral part of
these financial statements.
F-8
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except unit and per unit data)
(Unaudited as to August 31, 1999 data)
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., (the "General Partner" or "Heritage Holdings"), 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 is 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.
The combined operations of Predecessor Heritage and U.S. Propane are referred to
herein as "Heritage." Although the equity accounts of Peoples Gas survive the
merger, Predecessor Heritage's partnership structure and partnership units
survive.
F-9
Accordingly, the equity accounts of Peoples Gas have been restated based on the
general partner interest and common units received by Peoples Gas in the merger.
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 financial statements for the eight month period ended August
31, 2000 include the results of operations for Peoples Gas and the results of
operations of Predecessor Heritage, Piedmont, AGL and United Cities beginning
August 10, 2000. The financial statements of Peoples Gas are the financial
statements of the registrant as Peoples Gas was the acquirer in the transaction
in which U.S. Propane was formed. The accompanying financial statements for the
periods ended December 31, 1999 and 1998 have been presented on a carve-out
basis and reflect the historical results of operations, financial position and
cash flows of Peoples Gas. As discussed further in Note 8, certain expenses in
the financial statements include allocations from TECO Energy, Inc. (TECO) and
other wholly-owned subsidiaries of TECO. Management believes that the
allocations were made on a reasonable basis; however, the allocations of costs
and expenses do not necessarily indicate the costs that would have been incurred
by Peoples Gas on a stand-alone basis. Also, the financial statements may not
necessarily reflect what the financial position, results of operations and cash
flows of Peoples Gas would have been if Peoples Gas had been a separate,
stand-alone company during the periods presented.
The following unaudited pro forma consolidated results of operations are
presented as if the series of transactions with U.S. Propane and Predecessor
Heritage had been made at the beginning of the periods presented.
<Table>
<Caption>
8-months 12-months
Ended Ended
August 31, 2000 December 31, 1999
--------------- -----------------
Net revenues $ 316,555 $ 299,600
Net income (loss) $ 4,712 $ (1,662)
Basic and diluted earnings (loss) per common unit $ .36 $ (.14)
</Table>
The pro forma consolidated results of operations include adjustments to give
effect to amortization of goodwill, 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.
Peoples Gas had a fiscal year-end of December 31, however, Heritage will
continue to have Predecessor Heritage's August 31 year-end. Accordingly, the
eight-month period ended August 31, 2000 is a transition period under the rules
of the Securities and Exchange Commission.
In order to simplify Heritage's obligation under the laws of several
jurisdictions in which Heritage conducts business, Heritage's activities are
conducted through a subsidiary operating partnership, Heritage Operating, L.P.
(the "Operating Partnership"). Heritage holds a 97.9798 percent limited partner
interest in the Operating
F-10
Partnership. In addition, the General Partner holds a 1.0101 percent general
partner interest and U.S. Propane holds a 1.0101 percent limited partner
interest in the Operating Partnership.
The Operating Partnership 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, in which Heritage owns a 60 percent
interest. M-P Energy Partnership is a Canadian partnership engaged in supplying
Heritage's northern U.S. locations and lower-margin wholesale distribution.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Heritage include the accounts of its
subsidiaries, including the Operating Partnership, M-P Energy Partnership,
Heritage Energy Resources, L.L.C. ("Resources") and the Propane LLCs. Heritage
accounts for its 50 percent partnership interest in Bi-State Partnership,
another propane retailer, under the equity method. All significant intercompany
transactions and accounts have been eliminated in consolidation. The General
Partner's 1.0101 percent general partner interest and U.S. Propane's 1.0101
percent limited partner interest in the Operating Partnership are accounted for
in the consolidated financial statements as minority interests.
REVENUE RECOGNITION
Sales of propane, propane appliances, parts and fittings are recognized at the
later of the time of delivery of the product to the customer or the time of sale
or installation. Revenue from service labor is recognized upon completion of the
service, and tank rent is recognized ratably over the period it is earned.
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, August 31,
2001 2000
---------- ----------
Accounts receivable $ 43,797 $ 31,855
Less - allowance for doubtful accounts 3,576 --
-------- --------
Total, net $ 40,221 $ 31,855
======== ========
Allowance for doubtful accounts:
Balance, beginning of the year --
Provision for loss on accounts receivable 4,055
Accounts receivable written off, net of
recoveries (479)
--------
Balance, end of period $ 3,576
========
</Table>
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 first-in, first-out method.
Inventories consisted of the following:
<Table>
<Caption>
August 31, August 31,
2001 2000
---------- ----------
Fuel $56,975 $30,882
Appliances, parts and fittings 9,839 8,163
------- -------
$66,814 $39,045
======= =======
</Table>
F-11
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, Heritage 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 were
as follows:
<Table>
<Caption>
August 31, August 31,
2001 2000
---------- ----------
Land and improvements $ 21,244 $ 16,648
Buildings and improvements (10 to 30 years) 27,871 22,483
Bulk storage, equipment and facilities (3 to 30 years) 34,431 28,210
Tanks and other equipment (5 to 30 years) 287,155 241,934
Vehicles (5 to 10 years) 52,177 41,125
Furniture and fixtures (5 to 10 years) 6,852 5,262
Other 3,242 2,995
--------- ---------
432,972 358,657
Less - Accumulated depreciation (47,036) (23,948)
--------- ---------
385,936 334,709
Plus - Construction work-in-process 8,806 4,657
--------- ---------
Property, plant and equipment, net $ 394,742 $ 339,366
========= =========
</Table>
INTANGIBLES AND OTHER ASSETS
Intangibles and other assets are stated at cost net of amortization computed on
the straight-line method. Heritage eliminates from its balance sheet any fully
amortized intangibles and the related accumulated amortization. Components and
useful lives of intangibles and other assets were as follows:
<Table>
<Caption>
August 31, August 31,
2001 2000
---------- ----------
Goodwill (30 years) $ 158,622 $ 133,569
Noncompete agreements (10 to 15 years) 40,764 30,649
Customer lists (15 years) 26,903 18,713
Other 6,055 4,808
--------- ---------
232,344 187,739
Less - Accumulated amortization (14,102) (1,990)
--------- ---------
Intangibles and other assets, net $ 218,242 $ 185,749
========= =========
</Table>
LONG-LIVED ASSETS
Heritage 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, Heritage reduces the carrying amount of
such assets to fair value. No impairment of long-lived assets was required
during the year ended August 31, 2001, the period ended August 31, 2000 or the
years ended December 31, 1999 and 1998.
F-12
ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consisted of the following:
<Table>
<Caption>
August 31, August 31,
2001 2000
---------- ----------
Interest payable $ 4,542 $ 4,647
Wages and payroll taxes 5,117 3,337
Deferred tank rent 5,694 2,568
Advanced budget payments 5,883 160
Customer deposits 2,425 2,220
Taxes other than income 2,430 2,523
U.S. Propane working capital payable -- 5,000
Derivative instruments 4,556 --
Other 2,757 4,227
------- -------
Accrued and other current liabilities $33,404 $24,682
======= =======
</Table>
INCOME TAXES
Prior to the series of transactions that formed U.S. Propane, Peoples Gas
followed 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 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. TECO retained all tax liabilities related to Peoples Gas that may have
existed as of August 9, 2000.
Heritage is a limited partnership. As a result, Heritage's earnings or losses
for federal income tax purposes are included in the tax returns of the
individual partners. Accordingly, because of the merger, no recognition has been
given to income taxes in the accompanying financial statements of Heritage for
the year ended August 31, 2001 or the period ended August 31, 2000, except those
incurred by Peoples Gas prior to the series of transactions with U.S. Propane
and Predecessor Heritage. Net earnings for financial statement purposes may
differ significantly from taxable income reportable to unit holders as a result
of differences between the tax basis and financial reporting basis of assets and
liabilities and the taxable income allocation requirements under the partnership
agreement.
INCOME (LOSS) PER LIMITED PARTNER UNIT
Basic net income (loss) per limited partner unit is computed by dividing net
income (loss), after considering the General Partner's interest, by the weighted
average number of Common and Subordinated Units outstanding. Diluted net income
(loss) per limited partner unit is computed by dividing net income, after
considering the General Partner's interest, by the weighted average number of
Common and Subordinated Units outstanding and the weighted average number of
Restricted Units (Phantom Units) granted under the Restricted Unit Plan. A
reconciliation of net income (loss) and weighted average units used in computing
basic and diluted earnings (loss) per unit is as follows:
<Table>
<Caption>
Eight Months Ended Year Ended
Year Ended August 31, December 31,
August 31, ---------------------------- --------------------------
2001 2000 1999 1999 1998
------------ ------------ ------------ ------------ ----------
BASIC NET INCOME (LOSS) PER LIMITED
PARTNER UNIT:
Limited Partners' interest in net income (loss) $ 18,879 $ (3,800) $ 1,638 $ 1,764 $ 2,066
============ ============ ============ ============ ==========
Weighted average limited partner units 13,223,184 10,225,387 1,732,271 1,732,271 1,732,271
============ ============ ============ ============ ==========
Basic net income (loss) per limited partner unit $ 1.43 $ (.37) $ .94 $ 1.02 $ 1.19
============ ============ ============ ============ ==========
DILUTED NET INCOME (LOSS) PER LIMITED
PARTNER UNIT:
Limited partners' interest in net income (loss) $ 18,879 $ (3,800) $ 1,638 $ 1,764 $ 2,066
============ ============ ============ ============ ==========
</Table>
F-13
<Table>
<Caption>
Eight Months Ended Year Ended
Year Ended August 31, December 31,
August 31, --------------------------- --------------------------
2001 2000 1999 1999 1998
----------- ----------- ----------- ----------- -----------
Weighted average limited partner units 13,223,184 10,225,387 1,732,271 1,732,271 1,732,271
Dilutive effect of Phantom Units 31,724 -- -- -- --
----------- ----------- ----------- ----------- -----------
Weighted average limited partner units,
assuming dilutive effect of Phantom Units 13,254,908 10,225,387 1,732,271 1,732,271 1,732,271
=========== =========== =========== =========== ===========
Diluted net income (loss) per limited partner unit $ 1.42 $ (.37) $ .94 $ 1.02 $ 1.19
=========== =========== =========== =========== ===========
</Table>
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. Some of the more significant estimates include allowances for
doubtful accounts, derivative hedging instruments and liquids marketing assets
and liabilities. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the 2001
presentation. These reclassifications have no impact on net income or net
assets.
FAIR VALUE
The carrying amounts of accounts receivable and accounts payable approximate
their fair value. Based on the estimated borrowing rates currently available to
Heritage for long-term loans with similar terms and average maturities, the
aggregate fair value at August 31, 2000 of long-term debt approximated the
aggregate carrying amount. The fair value and carrying amount of long-term debt
at August 31, 2001 was approximately $465,690 and $439,868, respectively. The
fair value is determined using estimated borrowing rates currently available to
the Company for loans with similar terms and maturities.
SFAS 133 ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
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. Heritage adopted the provisions of SFAS 133
effective September 1, 2000. The transition adjustment for adopting SFAS 133 was
recorded as an adjustment to accumulated other comprehensive income of $5,429.
Heritage 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 fixed price bid by the
buyer and floating price determination for the seller based on certain indices
at the end of the relevant trading period. 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. Heritage
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 ($92) of
minority interest. Also at August 31, 2001, Heritage 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. During
the year ended
F-14
August 31, 2001, Heritage reclassified into earnings a gain of $3,844 that was
reported in accumulated other comprehensive income. There were no ineffective
hedges or discontinued hedges as of August 31, 2001.
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. Unrealized holding losses of $2,077 for the year ended August 31,
2001 was recorded through accumulated other comprehensive income based on the
market value of the securities.
LIQUIDS MARKETING ACTIVITIES
Heritage buys and sells 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
sheets as assets and liabilities from liquids marketing activities. Unrealized
gains and losses from the financial contracts and the impact of price movements
are recognized in the income statement as other income (expense). 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.
Heritage 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, with the changes in fair value included in earnings.
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 Heritage'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. The unrealized loss related to liquids marketing activities for the year
ended August 31, 2001, was $665 and is recorded through the income statement as
other income (loss). Resources also entered an option contract in which the
counter party has 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 are certain business risks,
including market risk and credit risk. Market risk is the risk that the value of
the portfolio will change, either favorably or unfavorably, in response to
changing market conditions. Credit risk is the risk of loss from nonperformance
by suppliers, customers, or financial counterparties to a contract. Heritage 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 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
F-15
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.
Heritage adopted Statement No. 142 on September 1, 2001 and accordingly has
discontinued the amortization of goodwill existing at the time of adoption.
Management engaged an independent appraisal firm to perform an assessment of the
fair value of each of Heritage's operating segments, which compared the carrying
value of each segment to determine whether any impairment existed on the date of
adoption. According to the independent assessment, no impairment existed at
adoption. The adoption of Statement No. 142 will eliminate goodwill amortization
that would have totaled approximately $5,704 in fiscal 2002, based on the
balances of August 31, 2001, and totaled approximately $5,051 in fiscal 2001.
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 does
not believe that the adoption of Statement No. 143 will have a material impact,
if any, on its consolidated financial condition or results of operations.
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 does not believe that the adoption of Statement No. 144
will have a material impact, if any, on its consolidated financial position or
results of operations.
3. 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 settled in March 2002 without a
significant adjustment to the purchase price.
F-16
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, 2000
--------------- ---------------
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>
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.
In August 2000, Heritage purchased substantially all of the assets of two
companies for $1,887 in cash and noncompete agreements with the prior owners for
$309. In January 2000, Peoples Gas purchased substantially all of the fixed
assets of a company for approximately $3,300 in cash and noncompete agreements
with the prior owners for $500. In July 1999, Peoples Gas purchased
substantially all of the inventory and fixed assets of a company for
approximately $1,015 in cash and noncompete agreements with the prior owners for
$200. The results of operations of the acquired entities have been included in
Heritage's or Peoples Gas' financial statements from the date of acquisition.
F-17
4. WORKING CAPITAL FACILITY AND LONG-TERM DEBT:
<Table>
<Caption>
Long-term debt consists of the following: August 31, August 31,
2001 2000
---------- ----------
1996 8.55% Senior Secured Notes $ 120,000 $ 120,000
1997 Medium Term Note Program:
7.17% Series A Senior Secured Notes 12,000 12,000
7.26% Series B Senior Secured Notes 20,000 20,000
6.50% Series C Senior Secured Notes 3,571 4,286
6.59% Series D Senior Secured Notes 5,000 5,000
6.67% Series E Senior Secured Notes 5,000 5,000
2000 and 2001 Senior Secured Promissory Notes:
8.47% Series A Senior Secured Notes 16,000 16,000
8.55% Series B Senior Secured Notes 32,000 32,000
8.59% Series C Senior Secured Notes 27,000 27,000
8.67% Series D Senior Secured Notes 58,000 58,000
8.75% Series E Senior Secured Notes 7,000 7,000
8.87% Series F Senior Secured Notes 40,000 40,000
7.21% Series G Senior Secured Notes 26,500 --
7.89% Series H Senior Secured Notes 27,500 --
7.99% Series I Senior Secured Notes 16,000 --
Senior Revolving Acquisition Facility -- 1,900
Notes Payable on noncompete agreements with interest
imputed at rates averaging 8%, due in installments
through 2010, collateralized by a first security lien
on certain assets of Heritage 22,579 15,107
Other 1,718 1,285
Current maturities of long-term debt (16,120) (2,588)
--------- ---------
$ 423,748 $ 361,990
========= =========
</Table>
Maturities of the Senior Secured Notes, the Medium Term Note Program and the
Senior Secured Promissory Notes are as follows:
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.
F-18
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 Senior Secured Notes, 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 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 $16,120 in 2002; $19,605 in 2003; $31,697 in 2004; $31,998 in
2005; $41,877 in 2006 and $298,571 thereafter.
5. COMMITMENTS AND CONTINGENCIES:
Certain property and equipment is leased under noncancelable leases, which
require fixed monthly rental payments and expire at various dates through 2020.
Rental expense under these leases totaled approximately $2,708 for the year
ended August 31, 2001, $245 for the eight months ended August 31, 2000, and $184
for fiscal 1999 and $119 for fiscal 1998, and has been included in operating
expenses in the accompanying statements of operations. Fiscal
F-19
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.
Heritage 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 Heritage. 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 Heritage.
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.
6. PARTNERS' CAPITAL:
The Agreement of Limited Partnership of Heritage Propane Partners, L.P.
("Partnership Agreement") contains specific provisions for the allocation of net
earnings and losses to each of the partners for purposes of maintaining the
partner capital accounts.
All of the subordinated units were held by Heritage Holdings, a wholly owned
subsidiary of U.S. Propane and the general partner of the Operating Partnership.
The subordinated units were a separate class of 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 the 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 Heritage
met specified cash performance and distribution requirements during successive
four-quarter periods commencing with the 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.
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 the
subordinated 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,
Heritage agreed to submit to a vote or consent of the 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. On February
4, 2002, the common unitholders approved the proposal to convert 1,382,574
issued and outstanding class B subordinated units were converted to 1,382,574
common units.
In conjunction with the transaction with U.S. Propane and the change of control
of the General Partner, Heritage 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 Heritage
attributable to the net amount received by Heritage in connection with the
settlement, judgment, award or other final nonappealable resolution of specified
litigation filed by Heritage prior to the transaction with U.S. Propane, which
is referred to as the "litigation". The class C units have zero initial capital
account balance and were distributed by Heritage Holdings to its former
stockholders in connection with the transaction with U.S. Propane. Thus, U.S.
Propane will not receive any distributions made with respect to the litigation.
F-20
On July 31, 2001, Heritage sold 2,500,000 common units in an underwritten public
offering at a public offering price of $28.00 per unit. Heritage used $41
million of the approximate net proceeds of $66 million to reduce indebtedness
under the Senior Revolving Acquisition Facility, which was incurred in the
acquisition of ProFlame. The remainder of the proceeds was used for general
partnership purposes, including additional acquisitions and repayment of debt.
To effect the transfer of the contribution required by the general partner to
maintain its 1% general partner interest in, the General Partner contributed
common units to Heritage and those units were cancelled.
On August 1, 2001, Heritage issued 129,901 common units to the General Partner
in connection with the assumption of certain liabilities by the general partner
from Heritage's acquisition of certain assets of ProFlame. The general partner
was entitled to 158,917 common units as a result of this transaction but forwent
1,638 units and 1,605 units, which represented its capital contributions to
maintain its 1% interest in Heritage and its 1.0101% interest in the Operating
Partnership, respectively, in relation to this transaction. Heritage Holdings
also forwent an additional 25,773 common units to which it was entitled in the
ProFlame acquisition to maintain its 1.0101% interest in the Operating
Partnership. These units were not registered with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, by virtue of an
exemption under Section 4(2) thereof. These units carry a restrictive legend
with regard to transfer of the units.
During fiscal 2001, Heritage issued 58,000 common units in exchange for certain
assets in connection with the acquisitions of certain propane businesses, for a
total value of $1.6 million. These units were issued utilizing Heritage's
Registration Statement No. 333-40407 on Form S-4.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The partnership agreement requires that Heritage 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'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, respectively, 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 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 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;
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 the general
partner, 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 the
general partner, until all common unitholders have received at
least $0.55 per unit for such quarter;
F-21
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 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;
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
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
o 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.
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 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 the general partner, 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 the general partner, 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 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;
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 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;
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 the holders of incentive
distribution rights, pro rata, and 2% to the general partner.
RESTRICTED UNIT PLAN
The General Partner has adopted the Amended and Restated Restricted Unit Plan
dated August 10, 2000 (the "Restricted Unit Plan"), for certain directors and
key employees of the general partner and its affiliates. The Restricted Unit
Plan covers rights to acquire 146,000 common units. The right to acquire the
common units under the Restricted Unit Plan, including any forfeiture or lapse
of rights is available for grant to key employees on such terms and conditions
(including vesting conditions) as the Compensation Committee of the general
partner shall determine. Each director shall automatically receive a Director's
grant with respect to 500 common units on each September 1 that such person
continues as a director. Newly elected directors are also entitled to receive a
grant with respect to 2,000 common units upon election or appointment to the
Board. Directors who are employees of TECO, Atmos, Piedmont or AGL 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
F-22
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 General
Partner. Compensation expense of $323 and $549 was recognized for fiscal year
2001 and the eight months ended August 31, 2000, respectively on the units,
which vested due to the change in control of the General Partner. Individuals
holding the remaining 5,000 grants waived their rights to vesting under the
change of control and compensation cost related to such units will be recognized
over the vesting period of the related awards. During fiscal 2001, 750
additional Phantom Units vested pursuant to the vesting rights of the Restricted
Unit Plan and Common Units were issued. Heritage applies APB Opinion No. 25
"Accounting for Stock Issued to Employees". Heritage follows the disclosure only
provision of Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-based Compensation". Pro forma net income and net income
per limited partner unit under the fair value method of accounting for equity
instruments under SFAS No. 123 would be the same as reported net income and net
income per limited partner unit.
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. Compensation
expense of $756 was recognized for the year ended August 31, 2001.
7. PROFIT SHARING AND 401(K) SAVINGS PLAN:
Heritage sponsors a defined contribution profit sharing and 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
and are allocated to eligible employees as of the last day of the plan year
based on their pro rata share of total contributions. Employer matching
contributions are calculated using a discretionary formula based on employee
contributions. Prior to 2001, employer matching contributions were entirely
discretionary. Heritage did not recognize any expense under the profit sharing
provision of the Plan during the year ended August 31, 2001 or the period ended
August 31, 2000. The company made matching contributions of $2,260 and $0 to the
401(k) savings plan for the year ended August 31, 2001 and the period ended
August 31, 2000, respectively.
8. RELATED PARTY TRANSACTIONS:
Heritage has no employees and is managed by the General Partner. Pursuant to the
Partnership Agreement, the General Partner is entitled to reimbursement for all
direct and indirect expenses incurred or payments it makes on behalf of
Heritage, and all other necessary or appropriate expenses allocable to Heritage
or otherwise reasonably incurred by the General Partner in connection with
operating Heritage's business. These costs, which totaled approximately $93,442
for the year ended August 31, 2001 and $5,977 for the period ended August 31,
2000, include compensation and benefits paid to officers and employees of the
General Partner.
TECO performed certain services for Peoples Gas, which were billed at actual
cost. In addition, common general and administrative salary and other operating
costs and expenses were allocated to Peoples Gas based upon methods considered
reasonable by management. Such charges for employee services amounted to $1,836
and $1,697 for the eight months ended August 31, 2000 and 1999, respectively,
and $2,906 and $2,160 for the years ended 1999 and 1998 respectively.
F-23
Accounts payable to related companies are non-interest bearing. Accounts payable
to related companies include amounts payable from Heritage to the General
Partner of $6,360 and $2,675 as of August 31, 2001 and 2000 respectively and
$1,577 and $1,139 payable to Bi-State Partnership as of August 31, 2001 and
2000, respectively.
9. REPORTABLE SEGMENTS:
Heritage's financial statements reflect four reportable segments: the domestic
retail operations of Heritage, the domestic wholesale operations of Heritage,
the foreign wholesale operations of M-P Energy Partnership, and the trading
activities of Resources. Heritage's reportable domestic and wholesale fuel
segments are strategic business units that sell products and services to
different types of users: retail and wholesale customers. Intersegment sales by
the foreign wholesale segment to the domestic segment are priced in accordance
with the partnership agreement. Resources is a trading company that buys and
sells financial instruments for its own account. Heritage manages these segments
separately as each segment involves different distribution, sale and marketing
strategies. Heritage evaluates the performance of its operating segments based
on operating income. The operating income below does not reflect domestic and
foreign selling, general, and administrative expenses of $15,716 and $1,019 for
the year ended August 31, 2001 and the period ended August 31, 2000,
respectively. The following table presents financial information by segment for
the following periods:
<Table>
<Caption>
For the Year For the Eight Months Ended For Years Ended
Ended August 31, December 31,
August 31, -------------------------- ------------------------
2001 2000 1999 1999 1998
------------ -------- --------- -------- --------
(Unaudited)
Gallons:
Domestic retail fuel 330,242 38,268 22,118 33,608 30,921
Domestic wholesale fuel 12,741 562 -- -- --
Foreign wholesale fuel
Affiliated 86,166 5,118 -- -- --
Unaffiliated 88,882 6,245 -- -- --
Elimination (86,166) (5,118) -- -- --
-------- -------- -------- -------- --------
Total 431,865 45,075 22,118 33,608 30,921
======== ======== ======== ======== ========
</Table>
<Table>
<Caption>
For the For the Eight Months Ended For the Years ended
Year Ended August 31, December 31,
August 31, -------------------------- ------------------------
2001 2000 1999 1999 1998
----------- ---------- --------- --------- ---------
(Unaudited)
Revenues:
Domestic retail fuel $ 440,527 $ 43,815 $ 21,766 $ 34,045 $ 30,187
Domestic wholesale fuel 9,902 415 -- -- --
Foreign wholesale fuel
Affiliated 55,798 3,132 -- -- --
Unaffiliated 49,977 3,392 -- -- --
Elimination (55,798) (3,132) -- -- --
Liquids marketing 172,875 12,262 -- -- --
Other domestic revenues 42,172 3,188 -- -- --
--------- --------- --------- --------- ---------
Total $ 715,453 $ 63,072 $ 21,766 $ 34,045 $ 30,187
========= ========= ========= ========= =========
</Table>
<Table>
<Caption>
For the
For the Year Eight Months Ended For Years Ended
Ended August 31, December 31,
August 31, ----------------------- ---------------------
2001 2000 1999 1999 1998
------------ -------- -------- -------- --------
(Unaudited)
Operating Income:
Domestic retail fuel $ 69,416 $ (578) $ 2,666 $ 2,885 $ 3,961
Domestic wholesale fuel (1,163) 17 -- -- --
Foreign wholesale fuel -- -- -- -- --
Affiliated 578 -- -- -- --
Unaffiliated 1,996 142 -- -- --
Elimination (578) -- -- -- --
Liquids marketing (110) 724 -- -- --
-------- -------- -------- -------- --------
Total $ 70,139 $ 305 $ 2,666 $ 2,885 $ 3,961
======== ======== ======== ======== ========
</Table>
<Table>
<Caption>
December 31, December 31,
August 31, 2001 August 31, 2000 August 31, 1999 1999 1998
--------------- --------------- --------------- ------------ ------------
(Unaudited)
Total Assets:
Domestic retail $682,906 $577,816 $ 39,481 $ 43,724 $ 37,206
Domestic wholesale 19,533 12,790 -- -- --
Foreign wholesale 8,467 7,918 -- -- --
Liquids marketing 35,127 7,747 -- -- --
Corporate 12,134 9,508 -- -- --
-------- -------- -------- -------- --------
Total $758,167 $615,779 $ 39,481 $ 43,724 $ 37,206
======== ======== ======== ======== ========
</Table>
F-24
<Table>
<Caption>
For the Year For the Eight Months For the Years Ended
Ended Ended August 31, December 31,
August 31, ---------------------- ----------------------
2001 2000 1999 1999 1998
------------ ------- ------- ------- -------
Depreciation and amortization:
Domestic retail fuel $40,135 $ 4,673 $ 2,037 $ 3,088 $ 2,855
Domestic wholesale 277 8 -- -- --
Foreign wholesale 19 5 -- -- --
Liquids marketing -- -- -- -- --
------- ------- ------- ------- -------
Total $40,431 $ 4,686 $ 2,037 $ 3,088 $ 2,855
======= ======= ======= ======= =======
</Table>
10. SIGNIFICANT INVESTEE:
At August 31, 2001, Heritage held a 50 percent interest in Bi-State Partnership.
Heritage accounts for its 50 percent interest in Bi-State Partnership under the
equity method. Heritage's investment in Bi-State Partnership totaled $6,610 and
$5,550 at August 31, 2001 and 2000, respectively. Heritage received
distributions from Bi-State Partnership in the amount of $125 and $0 for the
year ended August 31, 2001, and for the one month period ended August 31, 2000,
respectively.
Bi-State Partnership's financial position is summarized below:
<Table>
<Caption>
August 31, August 31,
2001 2000
----------- -----------
Current assets $ 2,783 $ 2,290
Noncurrent assets 13,899 14,071
----------- -----------
$ 16,682 $ 16,361
=========== ===========
Current liabilities $ 1,722 $ 3,296
Long-term debt 3,131 3,525
Partners' capital:
Heritage 6,610 5,550
Other partner 5,219 3,990
----------- -----------
$ 16,682 $ 16,361
=========== ===========
</Table>
Bi-State Partnership's results of operations for the year ended August 31, 2001
are summarized below. The results of operations for the eight month period ended
August 31, 2000 includes only one month of operations of Bi-State Partnership
due to the U.S. Propane merger and it is not presented due to insignificance.
<Table>
<Caption>
2001
-------
Revenues $19,172
Gross profit 8,012
Net income:
Heritage 1,186
Other partner 1,353
</Table>
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized unaudited quarterly financial data is presented below. The sum of net
income (loss) per limited partner unit by quarter may not equal the net income
(loss) per limited partner unit for the year due to variations in the weighted
average units outstanding used in computing such amounts. Heritage's business is
seasonal due to weather conditions in its service areas. Propane sales to
residential and commercial customers are affected by winter heating season
requirements, which generally results in higher operating revenues and net
income during the period from October through March of each year and lower
operating revenues and either net losses or lower net income during the period
from April through September of each year. Sales to industrial and agricultural
customers are much less weather sensitive.
F-25
<Table>
<Caption>
Quarter Ended
--------------------------------------------------------------
November 30 February 28 May 31 August 31
----------- ----------- --------- ----------
Fiscal 2001:
Revenues $ 165,845 $ 326,760 $ 132,153 $ 90,695
Operating income (loss) 10,573 52,630 2,476 (11,256)
Net income (loss) 1,963 43,330 (5,845) (19,738)
Basic and diluted net income
(loss) per limited partner
unit $ .15 $ 3.30 $ (.48) $ (1.54)
</Table>
<Table>
<Caption>
Quarter Ended Two-months
------------------------ Ended
March 31 June 30 August 31
-------- -------- ----------
Eight Months ended
August 31, 2000:
Revenues $ 14,377 $ 9,287 $ 39,408
Operating income (loss) 2,413 (443) (2,684)
Net income (loss) 1,457 (335) (4,968)
Basic and diluted net income
(loss) per limited partner
unit $ .84 $ (.19) $ (.87)
</Table>
F-26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Heritage Propane Partners, L.P.:
We have audited the accompanying consolidated statements of operations,
partners' capital and cash flows of Heritage Propane Partners, L.P.
("Predecessor Heritage" a Delaware limited partnership) and
subsidiaries for the period ended August 9, 2000, and the year ended
August 31, 1999. These financial statements are the responsibility of
Predecessor Heritage'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 results of operations and cash
flows of Heritage Propane Partners, L.P. ("Predecessor Heritage") and
subsidiaries for the period ended August 9, 2000, and the year ended
August 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
----------------------------------
Tulsa, Oklahoma
October 26, 2000
(except with respect to
the matter discussed in Note
12, as to which the date is
October 19, 2001)
The report of Arthur Andersen LLP shown above is a copy of a previously issued
report; Arthur Andersen LLP has not reissued this report.
F-27
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)
<Table>
<Caption>
For the Year
For the Period Ended
Ended August 9, August 31,
2000 1999
--------------- ------------
REVENUES:
Retail fuel $ 178,906 $ 137,403
Wholesale fuel 35,145 24,018
Liquids marketing 4,300 --
Other 24,140 22,599
----------- -----------
Total revenues 242,491 184,020
----------- -----------
COSTS AND EXPENSES:
Cost of products sold 136,462 87,267
Cost of liquids marketing 4,283 --
Operating expenses 55,154 51,201
Depreciation and amortization 17,143 14,749
Selling, general and administrative 5,974 6,236
----------- -----------
Total costs and expenses 219,016 159,453
----------- -----------
OPERATING INCOME 23,475 24,567
OTHER INCOME (EXPENSE):
Interest expense (17,664) (15,915)
Equity in earnings of affiliates 614 1,005
Gain on disposal of assets 514 722
Other (3) (263)
----------- -----------
INCOME BEFORE MINORITY INTERESTS 6,936 10,116
Minority interests (432) (454)
----------- -----------
NET INCOME 6,504 9,662
GENERAL PARTNER'S INTEREST IN
NET INCOME 65 97
----------- -----------
LIMITED PARTNERS' INTEREST IN
NET INCOME $ 6,439 $ 9,565
=========== ===========
BASIC NET INCOME PER LIMITED
PARTNER UNIT $ .66 $ 1.11
=========== ===========
BASIC WEIGHTED AVERAGE NUMBER OF
UNITS OUTSTANDING 9,712,927 8,589,335
=========== ===========
DILUTED NET INCOME PER LIMITED
PARTNER UNIT $ .66 $ 1.11
=========== ===========
DILUTED WEIGHTED AVERAGE NUMBER OF UNITS
OUTSTANDING 9,788,093 8,645,958
=========== ===========
</Table>
F-28
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit data)
<Table>
<Caption>
Accumulated
Number of Units Other Total
--------------------------- Common Subordinated General Comprehensive Partners'
Common Subordinated Unitholders Unitholders Partner Income Capital
---------- ------------ ----------- ------------ ---------- ------------- ----------
BALANCE, AUGUST 31, 1998 4,876,725 3,702,943 $ 20,775 $ 6,041 $ 273 $ -- $ 27,089
Unit distribution -- -- (12,428) (5,924) (202) -- (18,554)
Issuance of restricted Common
Units 23,213 -- 502 -- -- -- 502
General Partner contribution -- -- -- -- 5 -- 5
Conversion of Subordinated Units 925,736 (925,736) 1,510 (1,510) -- -- --
Other -- -- 240 115 3 -- 358
Net income -- -- 6,478 3,087 97 -- 9,662
---------- ---------- ---------- ---------- ---------- -------- ----------
BALANCE, AUGUST 31, 1999 5,825,674 2,777,207 17,077 1,809 176 -- 19,062
Unit distribution -- -- (15,393) (6,248) (256) -- (21,897)
Issuance of restricted Common
Units 184,030 -- 4,064 -- -- -- 4,064
Issuance of Common Units 1,200,000 -- 24,054 -- -- -- 24,054
General Partner contribution -- -- -- -- 278 -- 278
Conversion of Subordinated Units 925,736 (925,736) (1,480) 1,480 -- -- --
Conversion of Phantom Units 4,500 -- 29 (28) (1) -- --
Other -- -- 283 75 4 -- 362
Other comprehensive income -
net gain on hedging
instruments -- -- -- -- -- 3,289 3,289
Net income -- -- 5,246 1,193 65 -- 6,504
---------- ---------- ---------- ---------- ---------- -------- ----------
BALANCE, AUGUST 9, 2000 8,139,940 1,851,471 $ 33,880 $ (1,719) $ 266 $ 3,289 $ 35,716
========== ========== ========== ========== ========== ======== ==========
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-29
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<Table>
<Caption>
For the For the Year
Period Ended Ended
August 9, August 31,
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,504 $ 9,662
Reconciliation of net income to net cash provided by
operating activities-
Depreciation and amortization 17,143 14,749
Provision for losses on accounts receivable 328 338
Gain on disposal of assets (514) (722)
Deferred compensation on restricted units 362 358
Undistributed earnings of affiliates (654) (534)
Minority interests 91 (92)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (7,138) (848)
Inventories (5,627) (1,718)
Prepaid expenses (541) 310
Intangibles and other assets (851) 883
Accounts payable 5,901 2,947
Accrued and other current liabilities (860) (1,720)
--------- ---------
Net cash provided by operating activities 14,144 23,613
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (46,801) (17,931)
Capital expenditures (12,931) (14,974)
Proceeds from asset sales 1,449 2,106
--------- ---------
Net cash used in investing activities (58,283) (30,799)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 159,070 85,250
Principal payments on debt (116,918) (59,673)
Unit distribution (21,897) (18,554)
Net proceeds from issuance of common units 24,054 --
Capital contribution from General Partner 278 5
--------- ---------
Net cash provided by financing activities 44,587 7,028
--------- ---------
INCREASE (DECREASE) IN CASH 448 (158)
CASH, beginning of period 1,679 1,837
--------- ---------
CASH, end of period $ 2,127 $ 1,679
========= =========
NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 3,575 $ 3,332
========= =========
Issuance of restricted common units in connection with certain
acquisitions $ 4,064 $ 502
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 18,377 $ 15,655
========= =========
Other comprehensive income $ 3,289 $ --
========= =========
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
F-30
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except unit and per unit data)
1. OPERATIONS AND ORGANIZATION:
Heritage Propane Partners, L.P. ("Predecessor Heritage") was formed April 24,
1996, as a Delaware limited partnership, to acquire, own and operate the propane
business of Heritage Holdings, Inc. ("General Partner") In order to simplify
Predecessor Heritage's obligation under the laws of several jurisdictions in
which Heritage conducts business, Predecessor Heritage's activities are
conducted through a subsidiary operating partnership, Heritage Operating, L.P.
(the "Operating Partnership"). Predecessor Heritage holds a 98.9899 percent
limited partner interest and the General Partner holds a 1.0101 percent general
partner interest in the Operating Partnership.
The Operating Partnership sells propane and propane-related products to
approximately 286,000 retail customers in 27 states throughout the United
States. Predecessor Heritage is also a wholesale propane supplier in the
southwestern United States and in Canada, the latter through participation in
M-P Energy Partnership. M-P Energy Partnership is a Canadian partnership
primarily engaged in lower-margin wholesale distribution in which Predecessor
Heritage owns a 60 percent interest. Predecessor Heritage grants credit to its
customers for the purchase of propane and propane-related products.
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. 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) 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 the
Operating Partnership 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 the 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").
The working capital adjustment is estimated at $5,000 and is anticipated to be
settled in December 2000.
Concurrent with the acquisition, Heritage Propane Partners, L.P. borrowed
$180,000 from several institutional investors and 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. Although Heritage Propane Partners,
L.P. is the surviving entity for legal purposes, U.S. Propane's propane
operations will be the acquirer for accounting purposes. U.S. Propane retained
the name Heritage Propane Partners, L.P. subsequent to the transactions
("Successor Heritage"). The assets and liabilities and results of operations of
Predecessor Heritage are included in the financial statements of Successor
Heritage as of August 10, 2000.
2. SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Predecessor
Heritage, its subsidiaries, including the Operating Partnership, M-P Energy
Partnership, and Heritage Energy Resources, L.L.C. ("Resources"). Predecessor
Heritage accounts for its 50 percent partnership interest in Bi-State
Partnership, another propane retailer, using the equity method. All significant
intercompany transactions and accounts have been eliminated in consolidation.
The General Partner's 1.0101 percent interest in the Operating Partnership is
accounted for in the consolidated financial statements as a minority interest.
F-31
REVENUE RECOGNITION
Sales of propane, propane appliances, parts and fittings are recognized at the
time of delivery of the product to the customer or at 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.
INCOME TAXES
Predecessor Heritage is a limited partnership. As a result, Predecessor
Heritage's earnings or losses for federal income tax purposes are included in
the tax returns of the individual partners. Accordingly, no recognition has been
given to income taxes in the accompanying financial statements. Net earnings for
financial statement purposes may differ significantly from taxable income
reportable to unitholders as a result of differences between the tax basis and
financial reporting basis of assets and liabilities and the taxable income
allocation requirements under the partnership agreement.
INCOME PER LIMITED PARTNER UNIT
Basic net income per limited partner unit is computed by dividing net income,
after considering the General Partner's one percent interest, by the weighted
average number of Common and Subordinated Units outstanding. Diluted net income
per limited partner unit is computed by dividing net income, after considering
the General Partner's one percent interest, by the weighted average number of
Common and Subordinated Units outstanding and the weighted average number of
Restricted Units ("Phantom Units") granted under the Restricted Unit Plan (see
Note 5). A reconciliation of net income and weighted average units used in
computing basic and diluted earnings per unit is as follows:
<Table>
<Caption>
Period Year
Ended Ended
August 9, August 31,
---------- ----------
2000 1999
---------- ----------
BASIC NET INCOME PER LIMITED PARTNER UNIT:
Limited partners' interest in net income $ 6,439 $ 9,565
========== ==========
Weighted average limited partner units 9,712,927 8,589,335
========== ==========
Basic net income per limited partner unit $ .66 $ 1.11
========== ==========
DILUTED NET INCOME PER LIMITED PARTNER UNIT:
Limited partners' interest in net income $ 6,439 $ 9,565
========== ==========
Weighted average limited partner units 9,712,927 8,589,335
Dilutive effect of Phantom Units 75,166 56,623
---------- ----------
Weighted average limited partner units, assuming
dilutive effect of Phantom Units 9,788,093 8,645,958
========== ==========
Diluted net income per limited partner unit $ .66 $ 1.11
========== ==========
</Table>
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 amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain 1999 amounts have been reclassified to conform with the 2000
presentation. These reclassifications have no impact on net income.
F-32
3. ACQUISITIONS:
During the period ended August 9, 2000, Predecessor Heritage acquired certain
assets of W. T. Johnson, Inc. in Yulee, FL, J & J Propane Gas, Inc. in various
locations in Alabama and Tennessee, ServiGas with operations located in Texas,
New Mexico, and Arizona, Petro San Juan Leasing, Inc. and two other small
companies. Heritage Holdings, Inc. purchased all of the outstanding stock of
Eaves Oil Company, Inc. of New Ellenton, SC, Blue Flame Gas Co. Inc. of
Charleston, SC, Lake County Gas of Lower Lake, CA, Cumberland LP Gas, Inc. of
Cookeville, TN and one small company and conveyed the net assets to Predecessor
Heritage. The acquisitions totaled $54,904, which includes notes payable on
noncompete agreements of $3,575 for periods ranging from three to ten years and
liabilities assumed. These acquisitions were financed primarily with the
acquisition facility and the issuance of $4,064 of Common Units.
During fiscal 1999, Predecessor Heritage acquired certain assets of Claredon Gas
Company in Manning, SC, Blue Flame Gas Corporation of Richmond, VT and one other
small company. Heritage Holdings, Inc. also purchased all of the outstanding
stock of S.R. Young, Inc. of Springfield, VT, Pioneer LPG Corporation of Madera,
CA and Foster's Gas, Inc. of Leitchfield, KY, and conveyed the net assets to
Predecessor Heritage. The acquisitions totaled $22,743, which includes notes
payable on noncompete agreements of $3,332 for periods ranging from three to ten
years. These acquisitions were financed primarily with the acquisition facility
and the issuance of $502 of Common Units.
The acquisitions have been accounted for by the purchase method and,
accordingly, the purchase prices have been allocated to assets acquired and
liabilities assumed based on the fair market values at the date of acquisitions.
Predecessor Heritage capitalized as part of the purchase price allocation
certain legal and other costs directly related to the acquisitions. The excess
of the purchase price over the fair market values of the net assets acquired has
been recorded as goodwill.
The results of operations of the acquired entities have been included in the
consolidated financial statements from the date of acquisition.
4. 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.
Rental expense under these leases totaled approximately $1,366 for the period
ended August 9, 2000 and $1,554 for fiscal 1999.
5. PARTNERS' CAPITAL:
Subsequent to August 31, 1999, Predecessor Heritage issued 76,152 Common Units
under Form S-4 registration statement in connection with the purchase of other
propane businesses, 4,500 Common Units in regards to the vesting rights under
the Restricted Unit Plan, 107,878 to the General Partner in connection with the
assumption of certain liabilities by the General Partner from Predecessor
Heritage's prior acquisition of certain assets of various propane companies and
1,200,000 Common Units under Form S-3 registration statement. On July 5, 2000,
925,736 Subordinated Units held by the General Partner converted to Common Units
pursuant to the terms of the Partnership Agreement.
The Agreement of Limited Partnership of Heritage Propane Partners, L.P.
("Partnership Agreement") contains specific provisions for the allocation of net
earnings and loss to each of the partners for purposes of maintaining the
partner capital accounts.
During the Subordination Period (as defined below), Predecessor Heritage may
issue up to 2,012,500 additional Common Units (excluding Common Units issued in
connection with conversion of Subordinated Units into Common Units) or an
equivalent number of securities ranking on a parity with the Common Units and an
unlimited number of partnership interests junior to the Common Units without a
Unitholder vote. Predecessor Heritage may also issue additional Common Units
during the Subordination Period in connection with certain acquisitions or the
repayment of certain indebtedness. During fiscal 1999, Predecessor Heritage
issued 23,213 Common Units to Heritage Holdings, Inc. These Units were issued in
connection with the assumption of certain liabilities by the General Partner
from Predecessor Heritage's prior acquisition of certain assets of a propane
company. After the Subordination Period, the Partnership Agreement authorizes
the General Partner to cause Predecessor Heritage to issue an unlimited number
of limited partner interests of any type without the approval of any
Unitholders. Pursuant
F-33
to the terms of the Partnership Agreement, 925,736 Subordinated Units held by
the General Partner converted to Common Units on July 7, 1999 and an additional
925,736 converted on July 5, 2000.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
Predecessor Heritage is expected to make quarterly cash distributions of all of
its Available Cash, generally defined as consolidated cash receipts less
consolidated operating expenses, debt service payments, maintenance capital
expenditures and net changes in reserves established by the General Partner for
future requirements. These reserves are retained to provide for the proper
conduct of Predecessor Heritage's business, or to provide funds for
distributions with respect to any one or more of the next four fiscal quarters.
Distributions by Predecessor Heritage in an amount equal to 100 percent of its
Available Cash will generally be made 98 percent to the Common and Subordinated
Unitholders and two percent to the General Partner, subject to the payment of
incentive distributions to the holders of Incentive Distribution Rights to the
extent that certain target levels of cash distributions are achieved. To the
extent there is sufficient Available Cash, the holders of Common Units have the
right to receive the Minimum Quarterly Distribution ($.50 per Unit), plus any
arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. Common Units will not accrue arrearages for any quarter
after the Subordination Period and Subordinated Units will not accrue any
arrearages with respect to distributions for any quarter.
In general, the Subordination Period will continue indefinitely until the first
day of any quarter beginning after May 31, 2001, in which distributions of
Available Cash equal or exceed the Minimum Quarterly Distribution ("MQD") on the
Common Units and the Subordinated Units for each of the three consecutive
four-quarter periods immediately preceding such date. Pursuant to the terms of
the Partnership Agreement, 925,736 Subordinated Units held by the General
Partner converted to Common Units on July 7, 1999, and an additional 925,736
converted on July 5, 2000. The conversion of these units was dependent on
meeting certain cash performance and distribution requirements during the period
that commenced with Predecessor Heritage's public offering in June of 1996. The
subordination period applicable to the remaining Subordinated Units will end the
first day of any quarter ending after May 31, 2001, in which certain cash
performance and distribution requirements have been met. Upon expiration of the
Subordination Period, all remaining Subordinated Units will convert to Common
Units.
Predecessor Heritage is expected to make distributions of its Available Cash
within 45 days after the end of each fiscal quarter ending November, February,
May and August to holders of record on the applicable record date. A pro rata
MQD of $.353 per Common and Subordinated Unit was made on October 15, 1996 for
the two month period between Predecessor Heritage's initial public offering and
the quarter ended August 31, 1996. The M Q D 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, respectively, were paid to the Common and Subordinated
Unitholders. The quarterly distributions for the quarters ended February 28,
1999 through May 31, 2000 included incentive distributions payable to the
General Partner to the extent the quarterly distribution exceeded $.55 per unit.
RESTRICTED UNIT PLAN
The General Partner adopted a Restricted Unit Plan (the "Restricted Unit Plan")
for its non-employee directors and key employees of the General Partner and its
affiliates effective June 1996. Rights to acquire 146,000 Common Units ("Phantom
Units") are available under the Restricted Unit Plan and may be granted to
employees from time to time at the discretion of the Restricted Unit Plan
Committee. Commencing on September 1, 1996 and on each September 1 thereafter
that the Restricted Unit Plan is in effect, each director who is in office
automatically receives 500 units. The Phantom Units vest upon, and in the same
proportions as (1) the conversion of Predecessor Heritage's Subordinated Units
into Common Units or if later, (2) the third anniversary of their grant date,
and (3) terms and conditions specified by each grant. During fiscal 1999, 21,300
of these Phantom Units were granted to non-employee directors and key employees.
During fiscal 1998, 20,200 of these Phantom Units were granted to non-employee
directors and key employees. As of August 31, 1999, Phantom Units with a value
of $1,346 have been awarded and the compensation cost related to such units will
be recognized over the vesting period of the related awards. Predecessor
Heritage applies APB Opinion No. 25, "Accounting for Stock Issued to Employees".
Compensation cost and directors' fee expense of $362 and $358 was recorded for
the period ended August 9, 2000 and fiscal 1999, respectively, related to the
issuance of the units. Subsequent to August 31, 1999, 4,500 of Phantom Unit
grants vested pursuant to the vesting rights of the Restricted Unit Plan.
Predecessor Heritage follows the
F-34
disclosure only provision of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-based Compensation". Proforma net income
and net income per limited partner unit under the fair value method of
accounting for equity instruments under SFAS No. 123 would be the same as
reported net income and net income per limited partner unit.
6. REGISTRATION STATEMENTS:
Effective November 19, 1997, Predecessor Heritage registered 2,000,000
additional Common Units on Form S-4 that may be issued from time to time by
Predecessor Heritage by means of a prospectus delivered in connection with its
negotiations for acquisition of other businesses, properties or securities in
business combination transactions. During the period ended August 9, 2000,
76,152 Common Units were issued from this registration statement in connection
with acquisitions.
Effective September 13, 1999, Predecessor Heritage registered $150.0 million of
Common Units and Debt Securities on Form S-3 that may be offered for sale in one
or more offerings. On October 25, 1999, Predecessor Heritage issued a prospectus
supplement offering 1,200,000 Common Units, representing limited partner
interests in Predecessor Heritage. The underwriters delivered the Common Units
to purchasers on October 28, 1999 at a public offering price of $22.00 per
Common Unit. Predecessor Heritage used the net proceeds of approximately $24.0
million from this offering to repay a portion of the outstanding indebtedness
under its acquisition facility that was incurred to acquire propane businesses.
7. PROFIT SHARING AND 401(k) SAVINGS PLAN:
Predecessor Heritage sponsors a defined contribution profit sharing and 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 under the profit sharing provision of the Plan
during the period ended August 9, 2000 and the year ended August 31, 1999 was $0
and $425, respectively.
8. RELATED PARTY TRANSACTIONS:
Predecessor Heritage has no employees and is managed by the General Partner.
Pursuant to the Partnership Agreement, the General Partner is entitled to
reimbursement for all direct and indirect expenses incurred or payments it makes
on behalf of Predecessor Heritage, and all other necessary or appropriate
expenses allocable to Predecessor Heritage or otherwise reasonably incurred by
the General Partner in connection with operating Predecessor Heritage's
business. These costs, which totaled approximately $40,742 and $38,314 for the
period ended August 9, 2000 and the year ended August 31, 1999, respectively,
include compensation and benefits paid to officers and employees of the General
Partner. At August 31, 1999 accounts payable included amounts payable from
Predecessor Heritage to the General Partner of $1,964.
9. REPORTABLE SEGMENTS:
Predecessor Heritage's financial statements reflect four reportable segments:
the domestic retail operations of Predecessor Heritage, the domestic wholesale
operations of Predecessor Heritage, the foreign wholesale operations of M-P
Energy Partnership, and the trading activities of Resources. Predecessor
Heritage's reportable domestic and wholesale fuel segments are strategic
business units that sell products and services to different types of users:
retail and wholesale customers. Intersegment sales by the foreign wholesale
segment to the domestic segment are priced in accordance with the partnership
agreement. Resources is a trading company that buys and sells financial
instruments for its own account. Predecessor Heritage manages these segments
separately as each segment involves different distribution, sale and marketing
strategies. Predecessor Heritage evaluates the performance of its operating
segments based on operating income. The operating income below does not reflect
domestic and foreign selling, general, and administrative expenses of $5,974 and
$6,236 for the period ended August 9, 2000 and for the year ended August 31,
1999, respectively.
F-35
The following table presents financial information by segment for the period
ended August 9, 2000 and the year ended August 31, 1999:
<Table>
<Caption>
August 9, August 31,
2000 1999
--------- ---------
Gallons:
Domestic retail fuel 170,891 159,938
Domestic wholesale fuel 7,113 7,795
Foreign wholesale fuel
Affiliated 63,390 56,869
Unaffiliated 75,514 73,337
Elimination (63,390) (56,869)
--------- ---------
Total 253,518 241,070
========= =========
Revenues:
Domestic retail fuel $ 178,906 $ 137,403
Domestic wholesale fuel 4,342 3,409
Foreign wholesale fuel
Affiliated 29,038 16,903
Unaffiliated 30,803 20,628
Elimination (29,038) (16,903)
Liquids marketing 4,300 --
Other domestic revenues 24,140 22,580
--------- ---------
Total $ 242,491 $ 184,020
========= =========
Operating Income:
Domestic retail $ 27,670 $ 29,659
Domestic wholesale fuel 259 162
Foreign wholesale fuel
Affiliated 541 494
Unaffiliated 1,528 982
Elimination (541) (494)
Liquids marketing (8) --
--------- ---------
Total $ 29,449 $ 30,803
========= =========
Depreciation and amortization:
Domestic retail fuel $ 17,105 $ 14,691
Domestic wholesale 31 45
Foreign wholesale 7 13
--------- ---------
Total $ 17,143 $ 14,749
========= =========
</Table>
F-36
10. SIGNIFICANT INVESTEE:
At August 31, 1999, Predecessor Heritage held a 50 percent interest in Bi-State
Partnership. Predecessor Heritage accounts for its 50 percent interest in
Bi-State Partnership under the equity method. Predecessor Heritage received
distributions from Bi-State Partnership in the amount of $200 and $470 for the
period ended August 9, 2000, and for the year ended August 31, 1999,
respectively.
Bi-State Partnership's results of operations for the period ended August 9, 2000
and the fiscal year ended August 31, 1999 are summarized below:
<Table>
<Caption>
2000 1999
------- -------
Revenues $12,298 $12,627
Gross profit 6,008 7,356
Net income:
Heritage 613 1,004
Other partner 753 1,149
</Table>
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
The retail propane distribution business is largely seasonal due to propane's
use as a heating source in residential and commercial buildings. Historically,
approximately two-thirds of Predecessor Heritage's retail propane volume and
more than 80 percent of the EBITDA is attributable to sales during the six-month
peak heating season of October through March. Consequently, sales and operating
profits are concentrated in Predecessor Heritage's first and second fiscal
quarters. Cash flow from operations, however, is greatest during the second and
third fiscal quarters when customers pay for propane purchased during the
six-month peak-heating season.
<Table>
<Caption>
Fiscal 2000: Quarter Ended
------------------------------------------- Period Ended
November 30 February 28 May 31 August 9,
------------ ----------- -------- ------------
Revenues $ 51,890 $102,160 $ 57,224 $ 31,217
Operating income (loss) 3,430 21,253 2,732 (3,940)
Net income (loss) (808) 16,971 (2,198) (7,461)
Net income (loss) per unit-
basic and diluted (0.09) 1.70 (0.22) (.72)
</Table>
<Table>
<Caption>
Fiscal 1999: Quarter Ended
----------------------------------------------------------
November 30 February 28 May 31 August 31
----------- ----------- -------- ---------
Revenues $ 41,558 $ 68,498 $ 43,150 $ 30,814
Operating income (loss) 4,563 18,070 5,009 (3,075)
Net income (loss) 1,215 14,404 1,344 (7,301)
Net income (loss) per unit-
basic and diluted 0.14 1.66 0.15 (0.84)
</Table>
12. SUBSEQUENT EVENT:
On August 22, 2001, the final payment to settle the working capital adjustment
was made to the partners of U.S. Propane. Total payments made to settle the
working capital adjustment were approximately $12,900. Accordingly, an
additional amount of approximately $7,900 was recorded as goodwill (See Note 1).
F-37
INDEX TO EXHIBITS
The exhibits listed on the following Exhibit Index are filed as part of
this Report. Exhibits required by Item 601 of Regulation S-K, but which are not
listed below, are not applicable.
<Table>
<Caption>
Exhibit
Number Description
------- -----------
(1) 3.1 Agreement of Limited Partnership of Heritage Propane
Partners, L.P.
(10) 3.1.1 Amendment No. 1 to Amended and Restated Agreement of
Limited Partnership of Heritage Propane Partners,
L.P.
(16) 3.1.2 Amendment No. 2 to Amended and Restated Agreement of
Limited Partnership of Heritage Propane Partners,
L.P.
(1) 3.2 Agreement of Limited Partnership of Heritage
Operating, L.P.
(12) 3.2.1 Amendment No. 1 to Amended and Restated Agreement of
Limited Partnership of Heritage Operating, L.P.
(7) 10.1 First Amended and Restated Credit Agreement with
Banks Dated May 31, 1999
(8) 10.1.1 First Amendment to the First Amended and Restated
Credit Agreement dated as of October 15, 1999
(9) 10.1.2 Second Amendment to First Amended and Restated Credit
Agreement dated as of May 31, 2000
(10) 10.1.3 Third Amendment dated as of August 10, 2000 to First
Amended and Restated Credit Agreement
(13) 10.1.4 Fourth Amendment to First Amended and Restated Credit
Agreement dated as of December 28, 2000
(16) 10.1.5 Fifth Amendment to First Amended and Restated Credit
Agreement dated as of July 16, 2001
(1) 10.2 Form of Note Purchase Agreement (June 25, 1996)
(3) 10.2.1 Amendment of Note Purchase Agreement (June 25, 1996)
dated as of July 25, 1996
(4) 10.2.2 Amendment of Note Purchase Agreement (June 25, 2996)
dated as of March 11, 1997
(6) 10.2.3 Amendment of Note Purchase Agreement (June 25, 1996)
dated as of October 15, 1998
(8) 10.2.4 Second Amendment Agreement dated September 1, 1999 to
June 25, 1996 Note Purchase Agreement
(11) 10.2.5 Third Amendment Agreement dated May 31, 2000 to June
25, 1996 Note Purchase Agreement and November 19,
1997 Note Purchase Agreement
(10) 10.2.6 Fourth Amendment Agreement dated August 10, 2000 to
June 25, 1996 Note Purchase Agreement and November
19, 1997 Note Purchase Agreement
</Table>
E-1
<Table>
<Caption>
Exhibit
Number Description
------- -----------
(13) 10.2.7 Fifth Amendment Agreement dated as of December 28,
2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August
10, 2000 Note Purchase Agreement
(1) 10.3 Form of Contribution, Conveyance and Assumption
Agreement among Heritage Holdings, Inc., Heritage
Propane Partners, L.P. and Heritage Operating, L.P.
(1) 10.6 Restricted Unit Plan
(4) 10.6.1 Amendment of Restricted Unit Plan dated as of October
17, 1996
(12) 10.6.2 Amended and Restated Restricted Unit Plan dated as of
August 10, 2000
(12) 10.7 Employment Agreement for James E. Bertelsmeyer dated
as of August 10, 2000
(12) 10.8 Employment Agreement for R. C. Mills dated as of
August 10, 2000
(12) 10.9 Employment Agreement for Larry J. Dagley dated as of
August 10, 2000
(12) 10.10 Employment Agreement for H. Michael Krimbill dated as
of August 10, 2000
(12) 10.11 Employment Agreement for Bradley K. Atkinson dated as
of August 10, 2000
(7) 10.12 First Amended and Restated Revolving Credit Agreement
between Heritage Service Corp. and Banks Dated May
31, 1999
(16) 10.12.1 First Amendment to First Amended and Restated
Revolving Credit Agreement, dated October 15, 1999
(16) 10.12.2 Second Amendment to First Amended and Restated
Revolving Credit Agreement, dated August 10, 2000
(16) 10.12.3 Third Amendment to First Amended and Restated
Revolving Credit Agreement, dated December 28, 2000
(16) 10.12.4 Fourth Amendment to First Amended and Restated
Revolving Credit Agreement, dated July 16, 2001
(12) 10.13 Employment Agreement for Mark A. Darr dated as of
August 10, 2000
(12) 10.14 Employment Agreement for Thomas H. Rose dated as of
August 10, 2000
(12) 10.15 Employment Agreement for Curtis L. Weishahn dated as
of August 10, 2000
(5) 10.16 Note Purchase Agreement dated as of November 19, 1997
(6) 10.16.1 Amendment dated October 15, 1998 to November 19, 1997
Note Purchase Agreement
(8) 10.16.2 Second Amendment Agreement dated September 1, 1999 to
November 19, 1997 Note Purchase Agreement and June
25, 1996 Note Purchase Agreement
(9) 10.16.3 Third Amendment Agreement dated May 31, 2000 to
November 19, 1997 Note Purchase Agreement and June
25, 1996 Note Purchase Agreement
</Table>
E-2
<Table>
<Caption>
Exhibit
Number Description
------- -----------
(10) 10.16.4 Fourth Amendment Agreement dated August 10, 2000 to
November 19, 1997 Note Purchase Agreement and June
25, 1996 Note Purchase Agreement
(13) 10.16.5 Fifth Amendment Agreement dated as of December 28,
2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August
10, 2000 Note Purchase Agreement
(10) 10.17 Contribution Agreement dated June 15, 2000 among U.S.
Propane, L.P., Heritage Operating, L.P. and Heritage
Propane Partners, L.P.
(10) 10.17.1 Amendment dated August 10, 2000 to June 15, 2000
Contribution Agreement
(10) 10.18 Subscription Agreement dated June 15, 2000 between
Heritage Propane Partners, L.P. and individual
investors
(10) 10.18.1 Amendment dated August 10, 2000 to June 15, 2000
Subscription Agreement
(16) 10.18.2 Amendment Agreement dated January 3, 2001 to the June
15, 2000 Subscription Agreement.
(10) 10.19 Note Purchase Agreement dated as of August 10, 2000
(13) 10.19.1 Fifth Amendment Agreement dated as of December 28,
2000 to June 25, 1996 Note Purchase Agreement,
November 19, 1997 Note Purchase Agreement and August
10, 2000 Note Purchase Agreement
(14) 10.19.2 First Supplemental Note Purchase Agreement dated as
of May 24, 2001 to the August 10, 2000 Note Purchase
Agreement
(15) 10.20 Stock Purchase Agreement dated as of July 5, 2001
among the shareholders of ProFlame, Inc. and Heritage
Holdings, Inc.
(15) 10.21 Stock Purchase Agreement dated as of July 5, 2001
among the shareholders of Coast Liquid Gas, Inc. and
Heritage Holdings, Inc.
(15) 10.22 Agreement and Plan of Merger dated as of July 5, 2001
among California Western Gas Company, the Majority
Stockholders of California Western Gas Company
signatories thereto, Heritage Holdings, Inc. and
California Western Merger Corp.
(15) 10.23 Agreement and Plan of Merger dated as of July 5, 2001
among Growth Properties, the Majority Shareholders
signatories thereto, Heritage Holdings, Inc. and
Growth Properties Merger Corp.
(15) 10.24 Asset Purchase Agreement dated as of July 5, 2001
among L.P.G. Associates, the Shareholders of L.P.G.
Associates and Heritage Operating, L.P.
(15) 10.25 Asset Purchase Agreement dated as of July 5, 2001
among WMJB, Inc., the Shareholders of WMJB, Inc. and
Heritage Operating, L.P.
(15) 10.25.1 Amendment to Asset Purchase Agreement dated as of
July 5, 2001 among WMJB, Inc., the Shareholders of
WMJB, Inc. and Heritage Operating, L.P.
(16) 21.1 List of Subsidiaries
</Table>
E-3
<Table>
<Caption>
Exhibit
Number Description
------- -----------
(16) 23.3 Consent of Arthur Andersen LLP
(*) 23.4 Consent of Grant Thornton LLP
(16) 99.1 Balance Sheet of Heritage Holdings, Inc. as of August
31, 2001
</Table>
- ----------
(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement of Form S-1, File No. 333-04018, filed with the
Commission on June 21, 1996.
(2) Incorporated by reference to Exhibit 10.11 to Registrant's Registration
Statement on Form S-1, File No. 333-04018, filed with the Commission on
June 21, 1996.
(3) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 1996.
(4) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended February 28, 1997.
(5) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended May 31, 1998.
(6) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1998.
(7) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 1999.
(8) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1999.
(9) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2000.
(10) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 23, 2000.
(11) File as Exhibit 10.16.3.
(12) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2000.
(13) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended February 28, 2001.
(14) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2001.
(15) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 15, 2001.
E-4
(16) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 2001.
(*) Filed herewith
E-5