AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 25, 2003
REGISTRATION NO. 333-
REGISTRATION NO. 333-
REGISTRATION NO. 333-
REGISTRATION NO. 333-
REGISTRATION NO. 333-
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
HERITAGE PROPANE PARTNERS, L.P. DELAWARE 73-1493906
HERITAGE OPERATING, L.P. DELAWARE 73-1495293
HERITAGE SERVICE CORP. DELAWARE 73-1495294
HERITAGE-BI STATE, L.L.C. DELAWARE 73-1496351
HERITAGE ENERGY RESOURCES, L.L.C. OKLAHOMA 73-1588029
(Exact name of each registrant (State or other jurisdiction of (I.R.S. Employer
as specified in its charter) incorporation or organization) Identification Number)
----------------
8801 SOUTH YALE AVENUE, SUITE 310
TULSA, OKLAHOMA 74137
(918) 492-7272
(Address, including zip code, and telephone number, including area code, of each
registrant's principal executive offices)
-----------------
MICHAEL L. GREENWOOD
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
HERITAGE PROPANE PARTNERS, L.P.
8801 SOUTH YALE AVENUE, SUITE 310
TULSA, OKLAHOMA 74137
(918) 492-7272
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
COPIES TO:
JOSHUA DAVIDSON ROBERT A. BURK
BAKER BOTTS L.L.P. DOERNER, SAUNDERS, DANIEL &
ONE SHELL PLAZA ANDERSON, L.L.P.
910 LOUISIANA STREET 320 SOUTH BOSTON, SUITE 500
HOUSTON, TEXAS 77002-4995 TULSA, OKLAHOMA 74103-3725
(713) 229-1234 (918) 582-1211
-----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this registration statement becomes effective.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
CALCULATION OF REGISTRATION FEE
==================================================================================================================================
PROPOSED
MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
AMOUNT TO BE OFFERING OFFERING PRICE REGISTRATION FEE
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT (1) (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Primary Offering:
Common Units representing limited partner interests (3)
Debt Securities of Heritage Propane Partners, L.P. (4)(5)
Debt Securities of Heritage Operating, L.P. (5)(6)
Guarantees of Debt Securities (7)
Total for sale by registrants (8) $ 800,000,000 $ 64,720
Secondary Offering: (9)
Common Units representing limited partner interests 6,415,762 $ 30.89 (10) $ 198,182,889 $ 16,033
--------- ------------ ------------- -------------
Total $ 998,182,889 $ 78,949 (11)
=================================================================================================================================
(1) Rule 457(o) permits the registration fee to be calculated on the basis
of the maximum offering price of all of the securities listed and,
therefore, with respect to the securities offered by the registrants,
the table does not specify by each class information as to the amount
to be registered or the proposed maximum offering price per security.
(2) The registration fee has been calculated in accordance with Rule 457(o)
under the Securities Act of 1933 with respect to the securities offered
by the registrants (reflecting the offering price rather than the
principal amount of any debt securities issued at a discount) and
pursuant to 457(c) with respect to the Common Units offered by the
selling unitholders based on the average of the high and low sales
prices of Common Units on the New York Stock Exchange on July 21,
2003.
(3) Subject to Note 8 below, an indeterminate amount of Common Units as may
be sold from time to time by Heritage Propane Partners, L.P. is being
registered hereunder.
(4) Subject to Note 8 below, an indeterminate principal amount of Debt
Securities as may be sold from time to time by Heritage Propane
Partners, L.P. is being registered hereunder.
(5) If any Debt Securities are issued at an original issue discount, then
the offering price of those Debt Securities shall be in an amount that
will result in an aggregate initial offering price not to exceed
$800,000,000, less the dollar amount of any registered securities
previously issued.
(6) Subject to Note 8 below, an indeterminate principal amount of Debt
Securities as may be sold from time to time by Heritage Operating, L.P.
is being registered hereunder.
(7) Heritage Propane Partners, L.P. will fully, irrevocably and
unconditionally guarantee on an unsecured basis the Debt Securities of
Heritage Operating, L.P. Heritage Service Corp., Heritage-Bi State,
L.L.C. and Heritage Energy Resources, L.L.C. may also guarantee the
Debt Securities of Heritage Operating, L.P. on the same basis. Heritage
Operating, L.P., Heritage Service Corp., Heritage-Bi State, L.L.C. and
Heritage Energy Resources, L.L.C. may guarantee the Debt Securities of
Heritage Propane Partners, L.P. on an unsecured basis. Pursuant to Rule
457(n) of the Securities Act of 1933, no separate fee is payable with
respect to the guarantees of the Debt Securities being registered
hereunder.
(8) In no event will the aggregate offering price of all securities issued
by the registrants from time to time pursuant to this Registration
Statement exceed $800,000,000.
(9) Up to 6,415,762 Common Units may be sold from time to time pursuant to
this Registration Statement by the selling unitholders.
(10) Estimated solely for the purpose of determining the registration fee on
the basis of the average of the high and low sales prices of Common
Units on the New York Stock Exchange on July 21, 2003.
(11) Pursuant to Rule 457(p) under the Securities Act, the registrants
hereby offset the registration fee required in connection with this
Registration Statement by $1,804 previously paid by the registrants
in respect of $6,491,400 of unsold securities registered pursuant to
the Registration Statement on Form S-3 (Registration No. 333-86057)
filed with the Securities and Exchange Commission on August 27, 1999.
Accordingly, pursuant to Rule 457(p), the total filing fee paid
herewith is $78,949.
EACH REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and it is not soliciting any offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
SUBJECT TO COMPLETION, DATED JULY 25, 2003
$800,000,000
HERITAGE PROPANE PARTNERS, L.P.
COMMON UNITS
DEBT SECURITIES
---------------
HERITAGE OPERATING, L.P.
DEBT SECURITIES
---------------
6,415,762
COMMON UNITS
OFFERED BY SELLING UNITHOLDERS
---------------
The following securities may be offered under this prospectus:
- Common units representing limited partner interests in
Heritage Propane Partners, L.P.;
- Debt securities of Heritage Propane Partners, L.P.; and
- Debt securities of Heritage Operating, L.P., in an aggregate
initial offering price of $800,000,000; and
- Up to 6,415,762 common units offered by selling unitholders.
The aggregate initial offering price of the securities that we offer by
this prospectus will not exceed $800,000,000. We will offer the securities in
amounts, at prices and on terms to be determined by market conditions at the
time of our offerings. This prospectus describes only the general terms of these
securities and the general manner in which we will offer the securities. The
specific terms of any securities we offer will be included in a supplement to
this prospectus. The prospectus supplement will describe the specific manner in
which we will offer the securities and also may add, update or change
information contained in this prospectus. The common units are traded on the New
York Stock Exchange under the symbol "HPG."
You should read this prospectus and the prospectus supplement carefully
before you invest in any of our securities. This prospectus may not be used to
consummate sales of our securities unless it is accompanied by a prospectus
supplement.
Investing in our securities involves risk. You should carefully
consider the risk factors described under "Risk Factors" beginning on page 3 of
this prospectus before you make any investment in our securities.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ,2003.
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS.......................................................................... 1
WHO WE ARE..................................................................................... 1
THE SUBSIDIARY GUARANTORS...................................................................... 1
WHERE YOU CAN FIND MORE INFORMATION............................................................ 1
RISK FACTORS................................................................................... 3
FORWARD-LOOKING STATEMENTS..................................................................... 14
USE OF PROCEEDS................................................................................ 15
RATIO OF EARNINGS TO FIXED CHARGES............................................................. 15
DESCRIPTION OF THE COMMON UNITS................................................................ 17
CASH DISTRIBUTION POLICY....................................................................... 21
DESCRIPTION OF THE DEBT SECURITIES............................................................. 26
SELLING UNITHOLDERS............................................................................ 35
MATERIAL TAX CONSIDERATIONS.................................................................... 36
INVESTMENT IN US BY EMPLOYEE BENEFIT PLANS..................................................... 48
PLAN OF DISTRIBUTION........................................................................... 49
LEGAL MATTERS.................................................................................. 50
EXPERTS........................................................................................ 50
You should rely only on the information contained in this prospectus,
any prospectus supplement and the documents we have incorporated by reference.
We have not authorized anyone else to give you different information. We are not
offering these securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or any prospectus
supplement is accurate as of any date other than the date on the front of those
documents. We will disclose any material changes in our affairs in an amendment
to this prospectus, a prospectus supplement or a future filing with the
Securities and Exchange Commission incorporated by reference in this prospectus.
i
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement on Form S-3 that we
have filed with the Securities and Exchange Commission using a "shelf"
registration process. Under this shelf registration process, we may sell, in one
or more offerings, up to $800,000,000 in total aggregate offering price of
securities described in this prospectus. In addition, certain selling
unitholders may offer and sell up to 6,415,762 common units under this
prospectus. This prospectus provides you with a general description of us and
the securities offered under this prospectus. Unless otherwise provided in a
prospectus supplement, we will not receive any proceeds from sales of common
units by the selling unitholders.
Each time we or a selling unitholder sells securities under this
prospectus, we will provide a prospectus supplement that will contain specific
information about the terms of that offering and the securities being offered.
The prospectus supplement also may add to, update or change information in this
prospectus. If there is any inconsistency between the information in this
prospectus and any prospectus supplement, you should rely on the information in
the prospectus supplement. You should read carefully this prospectus, any
prospectus supplement and the additional information described below under the
heading "Where You Can Find More Information."
As used in this prospectus, "we," "us" and "our" and similar terms mean
either or both of Heritage Propane Partners, L.P. and Heritage Operating, L.P.
and their subsidiaries, unless the context indicates otherwise.
WHO WE ARE
We are a publicly traded Delaware limited partnership formed in
conjunction with our initial public offering in June of 1996. We are engaged in
the retail and wholesale marketing of propane and related appliances and
services. We believe we are the fourth largest retail marketer of propane in the
United States, currently serving more than 650,000 customers from nearly 300
customer service locations in 29 states. Our operations extend from coast to
coast, with concentrations in the western, upper midwestern, northeastern, and
southeastern regions of the United States. We are also a wholesale propane
supplier in the southwestern and southeastern United States and in Canada, the
latter through participation in M-P Energy Partnership. M-P Energy Partnership
is a Canadian partnership in which we own a 60% interest, engaged in
lower-margin wholesale marketing and which also supplies our northern U.S.
locations. U.S. Propane, L.P. serves as our general partner and U.S. Propane,
L.L.C. serves as the general partner of U.S. Propane, L.P.
We maintain our principal executive offices at 8801 South Yale Avenue,
Suite 310, Tulsa, Oklahoma 74137, and our telephone number is (918) 492-7272.
THE SUBSIDIARY GUARANTORS
Heritage Propane Partners, L.P. will, and Heritage Service Corp.,
Heritage-Bi State, L.L.C. and Heritage Energy Resources, L.L.C. may,
unconditionally guarantee any series of debt securities of Heritage Operating,
L.P. offered by this prospectus, as set forth in a related prospectus
supplement. Heritage Operating, L.P., Heritage Service Corp., Heritage-Bi State,
L.L.C. and Heritage Energy Resources, L.L.C. may unconditionally guarantee any
series of debt securities of Heritage Propane Partners, L.P. offered by this
prospectus, as set forth in a related prospectus supplement. As used in this
prospectus, the term "Subsidiary Guarantors" means Heritage Service Corp.,
Heritage-Bi State, L.L.C. and Heritage Energy Resources, L.L.C. and also
includes Heritage Operating, L.P. when discussing subsidiary guarantees of the
debt securities of Heritage Propane Partners, L.P. The term "Guarantor" means
Heritage Propane Partners, L.P. in its role as guarantor of the debt securities
of Heritage Operating, L.P.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement with the SEC under the
Securities Act of 1933 that registers the securities offered by this prospectus.
The registration statement, including the attached exhibits, contains additional
relevant information about us. The rules and regulations of the SEC allow us to
omit some information included in the registration statement from this
prospectus.
In addition, we file annual, quarterly and other reports and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-732-0330 for further information on the operation
of the SEC's public reference room. Our SEC filings are available on the SEC's
web site at http://www.sec.gov. We also make available free of charge on our
website, at http://www.heritagepropane.com, all materials that we file
electronically with the SEC, including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, Section 16
1
reports and amendments to these reports as soon as reasonably practicable after
such materials are electronically filed with, or furnished to, the SEC.
Additionally, you can obtain information about us through the New York Stock
Exchange, 20 Broad Street, New York, New York 10005, on which our common units
are listed.
The SEC allows us to "incorporate by reference" the information we have
filed with the SEC. This means that we can disclose important information to you
without actually including the specific information in this prospectus by
referring you to other documents filed separately with the SEC. These other
documents contain important information about us, our financial condition and
results of operations. The information incorporated by reference is an important
part of this prospectus. Information that we file later with the SEC will
automatically update and may replace information in this prospectus and
information previously filed with the SEC.
We incorporate by reference in this prospectus the documents listed
below:
- our annual report on Form 10-K for the year ended August 31,
2002;
- our quarterly reports on Form 10-Q for the quarters ended
November 30, 2002, February 28, 2003 and May 31, 2003;
- our current reports on Form 8-K filed December 11, 2002,
January 6, 2003, May 12, 2003, May 14, 2003, May 20, 2003 and
July 25, 2003;
- our current report on Form 8-K/A filed March 18, 2003;
- the description of our common units in our registration
statement on Form 8-A (File No. 1-11727) filed pursuant to the
Securities Exchange Act of 1934 on May 14, 1996 and any
amendments or reports filed to update the description; and
- all documents filed by us under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 between the date
of this prospectus and the termination of the registration
statement.
You may obtain any of the documents incorporated by reference in this
prospectus from the SEC through the SEC's website at the address provided above.
You also may request a copy of any document incorporated by reference in this
prospectus (excluding any exhibits to those documents, unless the exhibit is
specifically incorporated by reference in this document), at no cost, by
visiting our internet website at www.heritagepropane.com, or by writing or
calling us at the following address:
Heritage Propane Partners, L.P.
8801 South Yale Avenue, Suite 310
Tulsa, Oklahoma 74137
Attention: Michael L. Greenwood
Telephone: (918) 492-7272
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RISK FACTORS
Limited partner interests are inherently different from the capital
stock of a corporation, although many of the business risks to which we are
subject are similar to those that would be faced by a corporation engaged in a
similar business. Before you invest in our securities, you should consider
carefully the following risk factors, together with all of the other information
included in this prospectus, any prospectus supplement and the documents we have
incorporated by reference.
If any of the following risks actually were to occur, our business,
financial condition or results of operations could be affected materially and
adversely. In that case, we may be unable to make distributions to our
unitholders or pay interest on, or the principal of, any debt securities, the
trading price of our securities could decline and you could lose all or part of
your investment.
RISKS INHERENT IN OUR BUSINESS
SINCE WEATHER CONDITIONS MAY ADVERSELY AFFECT DEMAND FOR PROPANE, OUR
FINANCIAL CONDITION IS VULNERABLE TO WARM WINTERS
Weather conditions have a significant impact on the demand for propane
for both heating and agricultural purposes because many of our customers rely
heavily on propane as a heating fuel. Typically, we sell approximately
two-thirds of our retail propane volume during the peak-heating season of
October through March. Our results of operations can be adversely affected by
warmer winter weather which results in lower sales volumes. Variations in
weather in one or more of the regions where we operate can significantly affect
the total volume of propane that we sell and the profits realized on these
sales. Agricultural demand for propane is also affected by weather during the
harvest season as poor harvests or dry weather reduce demand for propane used in
crop drying.
SUDDEN AND SHARP PROPANE PRICE INCREASES THAT CANNOT BE PASSED ON TO
CUSTOMERS MAY ADVERSELY AFFECT OUR PROFIT MARGINS
The propane industry is a "margin-based" business in which gross
profits depend on the excess of sales prices over supply costs. As a result, our
profitability is sensitive to changes in energy prices, and in particular,
changes in wholesale prices of propane. When there are sudden and sharp
increases in the wholesale cost of propane, we may not be able to pass on these
increases to our customers through retail or wholesale prices. Propane is a
commodity and the price we pay for it can fluctuate significantly in response to
changes in supply or other market conditions over which we have no control. In
addition, the timing of cost pass-throughs can significantly affect margins.
Sudden and extended wholesale price increases could reduce our gross profits and
could, if continued over an extended period of time, reduce demand by
encouraging our retail customers to conserve or convert to alternative energy
sources.
OUR RESULTS OF OPERATIONS AND OUR ABILITY TO MAKE DISTRIBUTIONS OR PAY
INTEREST OR PRINCIPAL ON DEBT SECURITIES COULD BE NEGATIVELY IMPACTED BY PRICE
AND INVENTORY RISK AND MANAGEMENT OF THESE RISKS
We generally attempt to minimize our price and inventory risk by
purchasing product on a short-term basis, under supply contracts that typically
have a one-year term and at a price that fluctuates based on the prevailing
market prices at major delivery points. In order to help ensure adequate supply
sources are available during periods of high demand, we may purchase large
volumes of propane during periods of low demand or low price, which generally
occur during the summer months, for storage in our facilities, at major storage
facilities or for future delivery. This strategy may not be effective in
limiting our price and inventory risks if, for example, market, weather or other
conditions prevent or allocate the delivery of physical product during periods
of peak demand. If the market price falls below the price at which we made such
purchases, it could adversely affect our profits.
Some of our propane sales are pursuant to commitments at fixed prices.
To mitigate the price risk related to our anticipated sales volumes under the
commitments, we may purchase and store physical product and/or enter into fixed
price over-the-counter energy commodity forward contracts and options.
Generally, over-the-counter energy commodity forward contracts have terms of
less than one year. We enter into such contracts and exercise such options at
volume levels that we believe are necessary to manage these commitments. The
risk management of our inventory and contracts for the future purchase of
product could impair our profitability if the customers do not fulfill their
obligations.
We also engage in other trading activities, and may enter into other
types of over-the-counter energy commodity forward contracts and options. These
trading activities are based on our management's estimates of
3
future events and prices and are intended to generate a profit. However, if
those estimates are incorrect or other market events outside of our control
occur, such activities could generate a loss in future periods and potentially
impair our profitability.
WE ARE DEPENDENT ON OUR PRINCIPAL SUPPLIERS, WHICH INCREASES THE RISK
OF AN INTERRUPTION IN SUPPLY
During the first nine months of fiscal 2003, we purchased approximately
41.8% of our propane from two suppliers. If supplies from these sources were
interrupted, the cost of procuring replacement supplies and transporting those
supplies from alternative locations might be materially higher and, at least on
a short-term basis, margins could be adversely affected. We purchased 19% of our
total propane needs for use in our northern operations during the first nine
months of fiscal 2003 from MP Energy, the Canadian partnership in which we own a
60% interest. Supply from Canada is subject to the additional risk of disruption
associated with foreign trade.
Historically, a substantial portion of the propane we purchase has
originated from one of the industry's major markets located in Mont Belvieu,
Texas and has been shipped to us through major common carrier pipelines. Any
significant interruption in the service at Mont Belvieu or other major market
points, or on the common carrier pipelines we use would adversely affect our
ability to obtain propane.
BECAUSE OF THE HIGHLY COMPETITIVE NATURE OF THE RETAIL PROPANE
BUSINESS, WE MAY NOT BE ABLE TO MAINTAIN EXISTING CUSTOMERS OR ACQUIRE NEW
CUSTOMERS, WHICH WOULD HAVE AN ADVERSE IMPACT ON OUR OPERATING RESULTS AND
FINANCIAL CONDITION
We compete with a number of large national and regional propane
companies, some of whom have greater financial resources than we do, and several
thousand small independent propane companies. Because of the relatively low
barriers to entry into the retail propane market, there is potential for small
independent propane retailers, as well as other companies that may not be
engaged in retail propane distribution, to compete with our retail outlets. As a
result, we are always subject to the risk of additional competition in the
future. Generally, warmer-than-normal weather further intensifies competition.
Most of our propane retail branch locations compete with several other marketers
or distributors in their service areas. The principal factors influencing
competition with other retail marketers are:
- price,
- reliability and quality of service,
- responsiveness to customer needs,
- safety concerns,
- long-standing customer relationships,
- the inconvenience of switching tanks and suppliers, and
- the lack of growth in the industry.
We can make no assurances that we will be able to compete successfully on the
basis of these factors.
COMPETITION FROM ALTERNATIVE ENERGY SOURCES MAY CAUSE US TO LOSE
CUSTOMERS, THEREBY REDUCING OUR REVENUES
Competition from alternative energy sources has been increasing as a
result of reduced regulation of many utilities. Propane is generally not
competitive with natural gas in areas where natural gas pipelines already exist
because natural gas is a less expensive source of energy than propane. The
gradual expansion of natural gas distribution systems and the availability of
natural gas in many areas that previously depended upon propane could cause us
to lose customers, thereby reducing our revenues. Fuel oil also competes with
propane and is generally less expensive than propane. In addition, the
successful development and increasing usage of alternative energy sources could
adversely affect our operations.
4
IF WE DO NOT CONTINUE TO MAKE ACQUISITIONS ON ECONOMICALLY ACCEPTABLE
TERMS, OUR FUTURE FINANCIAL PERFORMANCE WILL BE LIMITED
The propane industry is not a growth industry in part because of
increased competition from alternative energy sources. In addition, because of
long-standing customer relationships that are typical in the retail propane
industry, the inconvenience of switching tanks and suppliers, and propane's
higher cost relative to other energy sources, such as natural gas, we may have
difficulty in increasing our retail customer base except through acquisitions.
Therefore, our ability to grow will depend primarily upon our ability to acquire
other retail propane distributors. Any acquisition may involve one or more of
the following risks, including:
- an increase in our indebtedness, which may affect credit
ratings and our ability to make distributions to unitholders;
- the inability to integrate the operations of the acquired
business into our existing operations and make cost-saving
changes such that the acquisition will be accretive to
earnings and distributions to unitholders;
- the diversion of management's attention from other business
concerns;
- the assumption of unknown liabilities and/or the inability or
failure of the sellers to indemnify us under the acquisition
agreements; and
- greater-than-expected loss of customers or employees from the
acquired business.
We are also subject to certain covenants contained in our debt
agreements that may restrict our ability to incur debt to finance acquisitions.
In addition, to the extent that warm weather or other factors adversely affects
our operating and financial results, our access to capital and our acquisition
activities may be limited. If we were to acquire a material amount of
non-propane assets as part of our expansion strategy, we would face the
additional risk of integrating a new line of business into our operations.
WE ARE SUBJECT TO OPERATING AND LITIGATION RISKS THAT COULD ADVERSELY
AFFECT OUR OPERATING RESULTS
Our operations are subject to all operating hazards and risks normally
incidental to handling, storing and delivering combustible liquids like propane.
As a result, we have been, and are likely to be, a defendant in various legal
proceedings arising in the ordinary course of business. Our insurance may not be
adequate to protect us from all material expenses related to potential future
claims for personal injury and property damage and we may not be able to
continue purchasing such levels of insurance at economical prices. In addition,
the occurrence of a serious accident involving propane, whether or not we are
involved, may have an adverse effect on the public's desire to use propane.
ENERGY EFFICIENCY AND TECHNOLOGICAL ADVANCES MAY AFFECT THE DEMAND FOR
PROPANE AND ADVERSELY AFFECT OUR OPERATING RESULTS
The national trend toward increased conservation and technological
advances, including installation of improved insulation and the development of
more efficient furnaces and other heating devices, has decreased the demand for
propane by retail customers. Stricter conservation measures in the future or
technological advances in heating, conservation, energy generation or other
devices could adversely affect our operations.
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE ADVERSELY
AFFECTED BY GOVERNMENTAL REGULATION AND ASSOCIATED ENVIRONMENTAL AND REGULATORY
COSTS
The propane business is subject to a wide range of federal and state
laws and regulations related to environmental and other matters. We may have
higher costs in the future due to stricter pollution control requirements or
liabilities resulting from non-compliance with operating or other regulatory
permits. New environmental regulations might adversely impact our operations, as
well as the regulations relating to the storage and transportation of propane.
TERRORIST ATTACKS AIMED AT OUR FACILITIES OR OTHER ENERGY ASSETS COULD
ADVERSELY AFFECT OUR BUSINESS
Since the September 11, 2001 terrorist attacks on the United States,
the United States government has issued warnings that energy assets, including
our nation's production facilities, processing plants, refineries and pipeline
infrastructure, may be the future targets of terrorist organizations. Any
terrorist attack on our facilities,
5
those of our customers and suppliers or, in some cases, on those of our industry
participants, could have a material adverse effect on our business. An
escalation of political tensions in the Middle East and elsewhere could result
in increased volatility in the world's energy markets and result in a material
adverse effect on our business. Furthermore, as a result of the impact September
11, 2001 had on insurance carriers, it has been more difficult and expensive for
us to obtain certain types of insurance.
DUE TO OUR LACK OF ASSET DIVERSIFICATION, ADVERSE DEVELOPMENTS IN OUR
PROPANE BUSINESS WOULD REDUCE OUR ABILITY TO MAKE DISTRIBUTIONS TO OUR
UNITHOLDERS
We rely exclusively on the revenues generated from our propane
business. Due to our lack of asset diversification, an adverse development in
this business would have a significantly greater impact on our financial
condition and results of operations than if we maintained more diverse assets.
RISKS INHERENT IN AN INVESTMENT IN US
CASH DISTRIBUTIONS ARE NOT GUARANTEED AND MAY FLUCTUATE WITH OUR
PERFORMANCE AND OTHER EXTERNAL FACTORS
The amount of cash we can distribute on our common units or other
partnership securities depends upon the amount of cash we generate from our
operations. The amount of cash we generate from our operations will fluctuate
from quarter to quarter and will depend upon, among other things:
- the weather in our operating areas;
- the cost to us of the propane we buy for resale and the prices
we receive for our propane;
- the level of competition from other propane companies and
other energy providers; and
- prevailing economic conditions.
In addition, the actual amount of cash available for distribution will
also depend on other factors, such as:
- the level of capital expenditures we make;
- debt service requirements;
- fluctuations in working capital needs;
- our ability to borrow under our working capital facility to
make distributions; and
- the amount, if any, of cash reserves established by the
general partner in its discretion for the proper conduct of
our business.
Because of all these factors, we may not have sufficient available cash
each quarter to be able to pay the minimum quarterly distribution, as defined in
our partnership agreement.
Furthermore, you should be aware that the amount of cash we have
available for distribution depends primarily upon our cash flow, including cash
flow from financial reserves and working capital borrowings, and is not solely a
function of profitability, which will be affected by non-cash items. As a
result, we may make cash distributions during periods when we record net losses
and may not make cash distributions during periods when we record net income.
6
WE MAY SELL ADDITIONAL LIMITED PARTNER INTERESTS, DILUTING EXISTING
INTERESTS OF UNITHOLDERS
Our partnership agreement allows us to issue an unlimited number of
additional limited partner interests, including securities senior to the common
units, without the approval of the unitholders. The issuance of additional
common units or other equity securities will have the following effects:
- the proportionate ownership interest of our unitholders in us
will decrease;
- the amount of cash available for distribution on each common
unit or partnership security may decrease;
- the relative voting strength of each previously outstanding
common unit may be diminished; and
- the market price of the common units or partnership securities
may decline.
OUR DEBT AGREEMENTS MAY LIMIT OUR ABILITY TO MAKE DISTRIBUTIONS TO
UNITHOLDERS AND OUR FINANCIAL FLEXIBILITY
As of May 31, 2003, we had outstanding $365.1 million in senior secured
debt with insurance companies and $24.1 million in secured debt under our bank
credit facility. Our leverage may adversely affect our ability to finance future
operations and capital needs, limit our ability to pursue acquisitions and other
business opportunities and make our results of operations more susceptible to
adverse economic conditions. We may in the future incur additional debt to
finance acquisitions or for general business purposes, which could result in a
significant increase in our leverage. The payment of principal and interest on
our debt will reduce the cash available to make distributions on the common
units. We will not be able to make any distributions to our unitholders if there
is or will be an event of default under our debt agreements. Our ability to make
principal and interest payments depends on future performance, which is subject
to many factors, several of which will be outside our control. We have granted
liens on substantially all of our personal property (other than vehicles) to
secure our existing debt. If an event of default occurs, the secured lenders can
foreclose on the collateral.
The notes and the bank credit facility contain provisions relating to
changes in ownership and changes of our general partner. If these provisions are
triggered, the outstanding debt may become due. If that happens, we cannot
guarantee that we would be able to pay the debt. The general partner and its
partners are not prohibited from entering into a transaction that would trigger
these change-in-ownership provisions. The notes and the bank credit facility
also contain restrictive covenants that limit our ability to incur additional
debt and to engage in certain transactions. This could reduce our ability to
capitalize on business opportunities that arise. Any new indebtedness could be
reasonably expected to have similar or greater restrictions.
Our ability to access the capital markets for future offerings may be
limited by adverse market conditions resulting from, among other things, general
economic conditions, contingencies and uncertainties that are difficult to
predict and beyond our control. If we are unable to access the capital markets
for future offerings, we might be forced to seek extensions for some of our
short-term maturities or to refinance some of our debt obligations through bank
credit, as opposed to long-term public or private debt securities or equity
securities. The price and terms upon which we might receive such extensions or
additional bank credit could be more onerous than those contained in our
existing debt agreements. Any such arrangements could, in turn, increase the
risk that our leverage may adversely affect our future financial and operating
flexibility.
THE GENERAL PARTNER IS NOT ELECTED BY THE UNITHOLDERS AND CANNOT BE
REMOVED WITHOUT ITS CONSENT
Unlike the holders of common stock in a corporation, unitholders have
only limited voting rights on matters affecting our business, and therefore
limited ability to influence management's decisions regarding our business.
Unitholders did not elect our general partner and will have no right to elect
our general partner on an annual or other continuing basis. Although our general
partner has a fiduciary duty to manage us in a manner beneficial to Heritage
Propane Partners, L.P. and the unitholders, the directors of our general partner
and its general partner, U.S. Propane, L.L.C., have a fiduciary duty to manage
the general partner and its general partner in a manner beneficial to the owners
of those entities.
7
Furthermore, if the unitholders are dissatisfied with the performance
of our general partner, they will have little ability to remove our general
partner. The general partner generally may not be removed except upon the vote
of the holders of 66 2/3% of the outstanding units voting together as a single
class, including units owned by the general partner and its affiliates. Because
the general partner and its affiliates currently hold approximately 25.7% of all
the units, with an additional 11.0% of units held by our officers and directors,
it will be difficult to remove the general partner without the consent of the
general partner and our affiliates.
Furthermore, unitholders' voting rights are further restricted by the
partnership agreement provision providing that any units held by a person that
owns 20% or more of any class of units then outstanding, other than the general
partner and its affiliates, cannot be voted on any matter.
THE CONTROL OF OUR GENERAL PARTNER MAY BE TRANSFERRED TO A THIRD PARTY
WITHOUT UNITHOLDER CONSENT
The general partner may transfer its general partner interest to a
third party in a merger or in a sale of all or substantially all of its assets
without the consent of the unitholders. Furthermore, there is no restriction in
the partnership agreement on the ability of the general partner of our general
partner from transferring its general partner interest in our general partner to
a third party. Any new owner of the general partner would be in a position to
replace the officers of the general partner with its own choices and to control
the decisions taken by such officers.
UNITHOLDERS MAY BE REQUIRED TO SELL THEIR UNITS TO THE GENERAL PARTNER
AT AN UNDESIRABLE TIME OR PRICE
If at any time less than 20% of the outstanding units of any class are
held by persons other than the general partner and its affiliates, the general
partner will have the right to acquire all, but not less than all, of those
units at a price no less than their then-current market price. As a consequence,
a unitholder may be required to sell his common units at an undesirable time or
price. The general partner may assign this purchase right to any of its
affiliates or to us.
COST REIMBURSEMENTS DUE OUR GENERAL PARTNER MAY BE SUBSTANTIAL AND
REDUCE OUR ABILITY TO PAY THE DISTRIBUTIONS TO UNITHOLDERS
Prior to making any distributions on the units, we will reimburse our
general partner for all expenses it has incurred on our behalf. In addition, our
general partner and its affiliates may provide us with services for which we
will be charged reasonable fees as determined by the general partner. The
reimbursement of these expenses and the payment of these fees could adversely
affect our ability to make distributions to the unitholders. Our general partner
has sole discretion to determine the amount of these expenses and fees.
UNITHOLDERS MAY HAVE LIABILITY TO REPAY DISTRIBUTIONS
Under certain circumstances unitholders may have to repay us amounts
wrongfully returned or distributed to them. Under Delaware law, we may not make
a distribution to you if the distribution causes our liabilities to exceed the
fair value of our assets. Liabilities to partners on account of their
partnership interests and non-recourse liabilities are not counted for purposes
of determining whether a distribution is permitted. Delaware law provides that a
limited partner who receives such a distribution and knew at the time of the
distribution that the distribution violated Delaware law will be liable to the
limited partnership for the distribution amount for three years from the
distribution date. Under Delaware law, an assignee who becomes a substituted
limited partner of a limited partnership is liable for the obligations of the
assignor to make contributions to the partnership. However, such an assignee is
not obligated for liabilities unknown to him at the time he or she became a
limited partner if the liabilities could not be determined from the partnership
agreement.
OUR PARTNERSHIP AGREEMENT LIMITS OUR GENERAL PARTNER'S FIDUCIARY DUTIES
TO OUR UNITHOLDERS AND RESTRICTS THE REMEDIES AVAILABLE TO UNITHOLDERS FOR
ACTIONS TAKEN BY OUR GENERAL PARTNER THAT MIGHT OTHERWISE CONSTITUTE BREACHES OF
FIDUCIARY DUTY
Our partnership agreement contains provisions that waive or consent to
conduct by our general partner and its affiliates that reduce the obligations to
which our general partner would otherwise be held by state-law fiduciary duty
standards. For example, our partnership agreement:
- permits our general partner to make a number of decisions in
its "sole discretion." This entitles our general partner to
consider only the interests and factors that it desires, and
it has no duty or obligation to give any consideration to any
interest of, or factors affecting, us, our affiliates or any
limited partner;
8
- provides that our general partner is entitled to make other
decisions in its "reasonable discretion";
- generally provides that affiliated transactions and
resolutions of conflicts of interest not involving a required
vote of unitholders must be "fair and reasonable" to us and
that, in determining whether a transaction or resolution is
"fair and reasonable," our general partner may consider the
interests of all parties involved, including its own; and
- provides that our general partner and its officers and
directors will not be liable for monetary damages to us, our
limited partners or assignees for errors of judgment or for
any acts or omissions if our general partner and those other
persons acted in good faith.
In order to become a limited partner of our partnership, a common
unitholder is required to agree to be bound by the provisions in the partnership
agreement, including the provisions discussed above.
THE GENERAL PARTNER'S ABSOLUTE DISCRETION IN DETERMINING THE LEVEL OF
CASH RESERVES MAY ADVERSELY AFFECT OUR ABILITY TO MAKE CASH DISTRIBUTIONS TO OUR
UNITHOLDERS
Our partnership agreement requires the general partner to deduct from
operating surplus cash reserves that in its reasonable discretion are necessary
to fund our future operating expenditures. In addition, the partnership
agreement permits the general partner to reduce available cash by establishing
cash reserves for the proper conduct of our business, to comply with applicable
law or agreements to which we are a party or to provide funds for future
distributions to partners. These cash reserves will affect the amount of cash
available for distribution to unitholders.
OUR GENERAL PARTNER HAS CONFLICTS OF INTEREST AND LIMITED FIDUCIARY
RESPONSIBILITIES, WHICH MAY PERMIT OUR GENERAL PARTNER TO FAVOR ITS OWN
INTERESTS TO THE DETRIMENT OF UNITHOLDERS
Our general partner and its affiliates directly and indirectly own an
aggregate limited partner interest of approximately 25.2% and our officers and
directors own approximately 10.8% of the limited partner interests in us.
Conflicts of interest could arise in the future as a result of relationships
between our general partner and its affiliates, on the one hand, and us, on the
other hand. As a result of these conflicts our general partner may favor its own
interests and those of its affiliates over the interests of the unitholders. The
nature of these conflicts includes the following considerations:
- Our general partner may limit its liability and reduce its
fiduciary duties, while also restricting the remedies
available to unitholders for actions that might, without the
limitations, constitute breaches of fiduciary duty.
Unitholders are deemed to have consented to some actions and
conflicts of interest that might otherwise be deemed a breach
of fiduciary or other duties under applicable state law.
- Our general partner is allowed to take into account the
interests of parties in addition to us in resolving conflicts
of interest, thereby limiting its fiduciary duties to the
unitholders.
- Our general partner's affiliates are not prohibited from
engaging in other businesses or activities, including those in
direct competition with us.
- Our general partner determines the amount and timing of asset
purchases and sales, capital expenditures, borrowings and
reserves, each of which can affect the amount of cash that is
distributed to unitholders.
- Our general partner determines whether to issue additional
units or other equity securities of us.
- Our general partner determines which costs are reimbursable by
us.
- Our general partner controls the enforcement of obligations
owed to us by it.
- Our general partner decides whether to retain separate
counsel, accountants or others to perform services for us.
9
- Our general partner is not restricted from causing us to pay
it or its affiliates for any services rendered on terms that
are fair and reasonable to us or entering into additional
contractual arrangements with any of these entities on our
behalf.
- In some instances our general partner may borrow funds in
order to permit the payment of distributions, even if the
purpose or effect of the borrowing is to make incentive
distributions.
TAX RISKS
For a general discussion of the expected federal income tax
consequences of owning and disposing of common units, see "Material Tax
Considerations."
THE IRS COULD TREAT US AS A CORPORATION FOR TAX PURPOSES, WHICH WOULD
SUBSTANTIALLY REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS
The anticipated after-tax economic benefit of an investment in our
common units depends largely on our being treated as a partnership for federal
income tax purposes. We have not requested, and do not plan to request, a ruling
from the IRS on this or any other matter affecting us.
If we were treated as a corporation for federal income tax purposes, we
would pay federal income tax on our income at the corporate tax rate, which is
currently a maximum of 35% and we would likely pay state taxes as well.
Distributions to unitholders would generally be taxed again as corporate
distributions, and none of our income, gains, losses or deductions would flow
through to unitholders. Because a tax would be imposed upon us as a corporation,
our cash available for distribution to unitholders would be substantially
reduced. Therefore, our treatment as a corporation would result in a material
reduction in the after-tax return to the unitholders, likely causing a
substantial reduction in the value of our common units.
A change in current law or a change in our business could cause us to
be treated as a corporation for federal income tax purposes or otherwise subject
us to entity-level taxation. Our partnership agreement provides that, if a law
is enacted or existing law is modified or interpreted in a manner that causes us
to be treated as a corporation or otherwise subjects us to entity-level taxation
for federal, state or local income tax purposes, then the minimum quarterly
distribution and the target distribution levels will be adjusted to reflect that
impact on us.
A SUCCESSFUL IRS CONTEST OF THE FEDERAL INCOME TAX POSITIONS WE TAKE
MAY ADVERSELY AFFECT THE MARKET FOR COMMON UNITS AND THE COSTS OF ANY CONTEST
WILL BE BORNE BY OUR UNITHOLDERS AND OUR GENERAL PARTNER
We have not requested a ruling from the IRS with respect to any matter
affecting us. The IRS may adopt positions that differ from the conclusions of
our counsel expressed in this prospectus or from the positions we take. It may
be necessary to resort to administrative or court proceedings to sustain our
counsel's conclusions or the positions we take. A court may not concur with some
or all of our counsel's conclusions or the positions we take. Any contest with
the IRS may materially and adversely affect the market for our common units and
the price at which they trade. In addition, the costs of any contest with the
IRS, principally legal, accounting and related fees, will be indirectly borne by
our unitholders and our general partner since such costs will reduce the amount
of cash available for distribution.
UNITHOLDERS MAY BE REQUIRED TO PAY TAXES ON THEIR SHARE OF OUR INCOME
EVEN IF THEY DO NOT RECEIVE ANY CASH DISTRIBUTIONS FROM US
Unitholders will be required to pay federal income taxes and, in some
cases, state and local income taxes on their share of our taxable income even if
they do not receive any cash distributions from us. Unitholders may not receive
cash distributions from us equal to their share of our taxable income or even
equal to the actual tax liability that results from the taxation of their share
of our taxable income.
ONLY CALENDAR YEAR TAXPAYERS MAY BECOME PARTNERS
Only calendar year taxpayers may purchase common units. Any unitholder
who is not a calendar year taxpayer will not be admitted to Heritage Propane
Partners, L.P. as a partner, will not be entitled to receive distributions or
federal income tax allocations from Heritage Propane Partners, L.P. and may only
transfer these common units to a purchaser or other transferee.
10
TAX GAIN OR LOSS ON DISPOSITION OF COMMON UNITS COULD BE DIFFERENT THAN
EXPECTED
Unitholders who sell common units will recognize gain or loss equal to
the difference between the amount realized and their tax basis in those common
units. Prior distributions in excess of the total net taxable income allocated
for a common unit that decreased a unitholder's tax basis in that common unit
will, in effect, become taxable income to the unitholder if the common unit is
sold at a price greater than the unitholder's tax basis in that common unit,
even if the price is less than his original cost. A substantial portion of the
amount the unitholder realizes, whether or not representing gain, will likely be
ordinary income to the unitholder. Should the IRS successfully contest some
positions we take, a unitholder could recognize more gain on the sale of common
units than would be the case under those positions, without the benefit of
decreased income in prior years. Also, unitholders who sell common units may
incur a tax liability in excess of the amount of cash they receive from the
sale.
TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES AND FOREIGN PERSONS
FACE UNIQUE TAX ISSUES FROM OWNING COMMON UNITS WHICH MAY RESULT IN ADVERSE TAX
CONSEQUENCES TO THEM
Investment in common units by tax-exempt entities, including employee
benefit plans and individual retirement accounts (known as IRAs), regulated
investment companies (known as mutual funds) and non-U.S. persons raises issues
unique to them. For example, virtually all of our income allocated to
unitholders who are organizations exempt from federal income tax, may be
unrelated business taxable income and will be taxable to them. Very little of
our income will be qualifying income to a regulated investment company.
Distributions to non-U.S. persons will be reduced by withholding taxes, at the
highest effective tax rate applicable to individuals, and non-U.S. persons will
be required to file federal income tax returns and generally pay tax on their
share of our taxable income.
OUR REGISTRATION AS A "TAX SHELTER" MAY INCREASE THE RISK OF AN IRS
AUDIT OF US OR A UNITHOLDER
We are registered with the IRS as a "tax shelter." Our tax shelter
registration number is 96234000014. As a result, we may be audited by the IRS
and tax adjustments could be made. Any unitholder owning less than a 1% profits
interest in us has very limited rights to participate in the income tax audit
process. Further, any adjustments in our tax returns will lead to adjustments in
the unitholders' tax returns and may lead to audits of the unitholders' tax
returns and adjustments of items unrelated to us. Unitholders will bear the cost
of any expense incurred in connection with an examination of their personal tax
returns and will indirectly bear a portion of the cost of an audit of us.
WE WILL TREAT EACH PURCHASER OF COMMON UNITS AS HAVING THE SAME TAX
BENEFITS WITHOUT REGARD TO THE UNITS PURCHASED. THE IRS MAY CHALLENGE THIS
TREATMENT, WHICH COULD ADVERSELY AFFECT THE VALUE OF THE UNITS
Because we cannot match transferors and transferees of common units, we
will adopt depreciation and amortization positions that do not conform with all
aspects of existing Treasury regulations. A successful IRS challenge to those
positions could adversely affect the amount of tax benefits available to you. It
also could affect the timing of these tax benefits or the amount of gain from
the unitholder's sale of common units and could have a negative impact on the
value of the common units or result in audit adjustments to the unitholder's tax
returns.
UNITHOLDERS LIKELY WILL BE SUBJECT TO STATE AND LOCAL TAXES IN STATES
WHERE THEY DO NOT LIVE AS A RESULT OF AN INVESTMENT IN THE UNITS
In addition to federal income taxes, the unitholders may be subject to
other taxes, including state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property now or in the future, even
if they do not live in any of those jurisdictions. We presently conduct business
in 29 states. In the future, we may acquire property or do business in other
states or in foreign jurisdictions. Unitholders may be required to file state
and local income tax returns and pay state and local income taxes in some or all
of the jurisdictions. Further, unitholders may be subject to penalties for
failure to comply with those requirements. It is the responsibility of each
unitholder to file all federal, state and local tax returns. Our counsel has not
rendered an opinion on the state or local tax consequences of an investment in
us.
RISKS RELATING TO THE DEBT SECURITIES
References in these "Risks Relating to the Debt Securities" to "we,"
"us," and "our" means Heritage Propane Partners, L.P. and Heritage Operating,
L.P.
11
HERITAGE PROPANE PARTNERS, L.P. IS A HOLDING COMPANY AND CONDUCTS ITS
OPERATIONS THROUGH ITS SUBSIDIARIES AND DEPENDS ON CASH FLOW FROM ITS
SUBSIDIARIES TO SERVICE ANY OF ITS DEBT OBLIGATIONS
Heritage Propane Partners, L.P. conducts all of its operations through
its subsidiaries and owns no significant assets other than the ownership
interests in these subsidiaries. Therefore, the ability of Heritage Propane
Partners, L.P. to make required payments on any debt securities it issues will
depend on the performance of Heritage Operating, L.P. and its subsidiaries and
their ability to distribute funds to Heritage Propane Partners, L.P. The ability
of these subsidiaries to make such distributions may be restricted by, among
other things, their debt agreements and applicable state partnership laws and
other laws and regulations. If Heritage Propane Partners, L.P. is unable to
obtain the funds necessary to pay the principal amount at maturity of its debt
securities, or to repurchase its debt securities upon the occurrence of a change
of control, Heritage Propane Partners, L.P. may be required to adopt one or more
alternatives, such as a refinancing of the debt securities. We cannot assure you
that Heritage Propane Partners, L.P. would be able to so refinance its debt
securities.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE SECURITIES IS UNSECURED AND WILL
BE EFFECTIVELY SUBORDINATED TO OUR EXISTING AND FUTURE SECURED INDEBTEDNESS AND
TO INDEBTEDNESS OF ANY OF OUR SUBSIDIARIES WHO DO NOT GUARANTEE THE SECURITIES
Any debt securities, including any guarantees, issued by Heritage
Propane Partners, L.P., Heritage Operating, L.P. or the Subsidiary Guarantors
will be effectively subordinated to the claims of our secured creditors. In the
event of the insolvency, bankruptcy, liquidation, reorganization, dissolution or
winding up of the business of Heritage Propane Partners, L.P., Heritage
Operating, L.P. or any Subsidiary Guarantors, their secured creditors would
generally have the right to be paid in full before any distribution is made to
the holders of the debt securities. Furthermore, if any of our subsidiaries do
not guarantee the debt securities, the debt securities will be effectively
subordinated to the claims of all creditors, including trade creditors and tort
claimants, of those subsidiaries. In the event of the insolvency, bankruptcy,
liquidation, reorganization, dissolution or winding up of the business of a
subsidiary that is not a guarantor, creditors of that subsidiary would generally
have the right to be paid in full before any distribution is made to the issuer
of the debt securities or the holders of the debt securities.
A SUBSIDIARY GUARANTEE COULD BE DEEMED TO BE A FRAUDULENT CONVEYANCE
UNDER CERTAIN CIRCUMSTANCES, AND A COURT MAY TRY TO SUBORDINATE OR VOID THE
SUBSIDIARY GUARANTEES
Under federal bankruptcy laws and comparable provisions of state
fraudulent transfer laws, a guarantee by a subsidiary could be voided, or claims
in respect of a guarantee could be subordinated to all other debts of that
guarantor if, among other things, the guarantor, at the time it incurred the
indebtedness evidenced by its guarantee, received less than reasonably
equivalent fair value or fair consideration for the incurrence of such
guarantee, and
- was insolvent or rendered insolvent by reason of such
incurrence;
- was engaged in a business or transaction for which the
guarantor's remaining assets constituted unreasonably small
capital; or
- intended to incur, or believed that it would incur, debts
beyond its ability to pay such debts as they mature.
In addition, any payment by that subsidiary guarantor pursuant to its
guarantee could be voided and required to be returned to the guarantor, or to a
fund for the benefit of the creditors of the guarantor. The measures of
insolvency for purposes of these fraudulent transfer laws will vary depending
upon the law applied in any proceeding to determine whether a fraudulent
transfer has occurred. Generally, however, a guarantor would be considered
insolvent if:
- the sum of its assets, including contingent liabilities, were
greater than the fair saleable value of all of its assets;
- the present fair saleable value of its assets were less than
the amount that would be required to pay its procurable
liability, including contingent liabilities, on its existing
debts, as they become absolute or mature; or
- it could not pay its debts as they become due.
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HERITAGE PROPANE PARTNERS, L.P. AND HERITAGE OPERATING, L.P. ARE
REQUIRED TO DISTRIBUTE ALL OF THEIR AVAILABLE CASH TO THEIR UNITHOLDERS AND ARE
NOT REQUIRED TO ACCUMULATE CASH FOR THE PURPOSE OF MEETING THEIR FUTURE
OBLIGATIONS TO HOLDERS OF THEIR DEBT SECURITIES, WHICH MAY LIMIT THE CASH
AVAILABLE TO SERVICE THOSE DEBT SECURITIES
The partnership agreements of Heritage Propane Partners, L.P. and
Heritage Operating, L.P. require us to distribute all of our available cash each
fiscal quarter to our partners. Available cash is generally defined to mean all
cash on hand at the end of the quarter, plus certain 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 our business
(including reserves for future capital expenditures), to comply with applicable
law or agreements, including debt agreements, or to provide funds for future
distributions to partners. Depending on the timing and amount of our cash
distributions to unitholders and because we are not required to accumulate cash
for the purpose of meeting obligations to holders of any debt securities, such
distributions could significantly reduce the cash available to us in subsequent
periods to make payments on any debt securities.
13
FORWARD-LOOKING STATEMENTS
Some of the information included in this prospectus, any prospectus
supplement and the documents we incorporate by reference contain
"forward-looking" statements. These statements discuss goals, intentions and
expectations as to future trends, plans, events, results of operations or
financial condition, or state other information relating to us, based on the
current beliefs of our management as well as assumptions made by, and
information currently available to, management. Words such as "may," "will,"
"anticipate," "believe," "expect," "estimate," "intend," "project" and other
similar phrases or expressions identify forward-looking statements. When
considering forward-looking statements, you should keep in mind the risk factors
and other cautionary statements in this prospectus, any prospectus supplement
and the documents we have incorporated by reference.
Although we believe these forward-looking statements to be reasonable,
they are based upon a number of assumptions, any or all of which ultimately may
prove to be inaccurate. These statements are subject to numerous assumptions,
uncertainties and risks including, but not limited to, the following:
- the general economic conditions in the United States of
America as well as the general economic conditions and
currencies in foreign countries;
- the political and economic stability of petroleum producing
nations;
- the effect of weather conditions on demand for propane;
- the effectiveness of risk-management policies and procedures
and the ability of our liquids marketing counterparties to
satisfy their financial commitments;
- energy prices generally and specifically, and the price of
propane to the consumer compared to the price of alternative
and competing fuels;
- the general level of petroleum product demand and the
availability and price of propane supplies;
- our ability to obtain adequate supplies of propane for retail
sale in the event of an interruption in supply or
transportation and the availability of capacity to transport
propane to market areas;
- hazards or operating risks incidental to transporting, storing
and distributing propane that may not be fully covered by
insurance;
- the maturity of the propane industry and competition from
other propane distributors;
- energy efficiencies and technological trends;
- loss of key personnel;
- the availability and cost of capital and our ability to access
certain capital sources;
- changes in laws and regulations to which we are subject,
including tax, environmental, transportation and employment
regulations;
- the costs and effects of legal and administrative proceedings;
and
- our ability to successfully identify and consummate strategic
acquisitions at purchase prices that are accretive to our
financial results.
These factors are not necessarily all of the important factors that
could cause actual results to differ materially from those expressed in any of
our forward-looking statements. Our future results will depend upon various
other risks and uncertainties, including, but not limited to, those detailed in
our other filings with the SEC. For additional information, please read our
other current filings with the SEC under the Exchange Act and the Securities
Act. Other unknown or unpredictable factors also could have material adverse
effects on our future results. You should not put undue reliance on any
future-looking statements. When considering forward-looking statements, please
review the risk factors described under "Risk Factors" beginning on page 3 of
this prospectus.
14
USE OF PROCEEDS
Unless we specify otherwise in any prospectus supplement, we will use
the net proceeds (after the payment of offering expenses and underwriting
discounts and commissions) from the sale of securities for general partnership
purposes, which may include, among other things:
- paying or refinancing all or a portion of our indebtedness
outstanding at the time; and
- funding working capital, capital expenditures or acquisitions.
The actual application of proceeds from the sale of any particular
offering of securities using this prospectus will be described in the applicable
prospectus supplement relating to such offering. The precise amount and timing
of the application of these proceeds will depend upon our funding requirements
and the availability and cost of other funds.
Unless otherwise provided in a prospectus supplement, we will not
receive any of the proceeds from any sale of common units by the selling
unitholders.
RATIO OF EARNINGS TO FIXED CHARGES
In August 2000, Heritage Propane Partners, L.P. acquired all of the
propane operations of U.S. Propane, L.P., an entity that was formed when TECO
Energy, Inc., AGL Resources, Inc., Piedmont Natural Gas Company, Inc., and Atmos
Energy Corporation contributed each company's propane operations, Peoples Gas
Company, AGL Propane, Inc., Piedmont Propane Company, and United Cities Propane
Gas, Inc., respectively, to U.S. Propane, L.P. in exchange for equity interests
in U.S. Propane, L.P. Simultaneously with the transaction, U.S. Propane, L.P.
acquired all of the outstanding common stock of our former general partner,
Heritage Holdings, Inc., thereby acquiring control of us. The transaction was
accounted for as an acquisition using the purchase method of accounting with
Peoples Gas Company being treated as the acquiror for accounting purposes as a
result of Peoples Gas Company being the acquiror in the transaction that formed
U.S. Propane, L.P. However, Heritage Propane Partners, L.P. is the surviving
entity for legal purposes.
Because the fiscal year of Heritage Propane Partners, L.P. ended on
August 31 and Peoples Gas Company had a fiscal year-end of December 31, the
eight-month period ended August 31, 2000 was treated as a transition period
under the rules of the Securities and Exchange Commission and is presented
separately below. However, we continue to have an August 31 fiscal year-end.
The table below sets forth the ratio of earnings to fixed charges of
Heritage Propane Partners, L.P. and subsidiaries on a consolidated basis for the
periods indicated. The ratio of earnings to fixed charges presented below for
the years ending December 31, 1997, 1998 and 1999 includes information with
respect to Heritage Propane Partners, L.P. (formerly Peoples Gas). The ratio of
earnings to fixed charges presented below for the eight months ended August 31,
2000 includes information with respect to Heritage Propane Partners, L.P.
(formerly Peoples Gas), and beginning August 10, 2000 the propane operations of
U.S. Propane, L.P. and Heritage Propane Partners, L.P. (Predecessor Heritage).
RATIO OF EARNINGS TO FIXED CHARGES (formerly Peoples Gas):
EIGHT NINE
MONTHS MONTHS
ENDED YEAR ENDED ENDED
YEAR ENDED DECEMBER 31, AUGUST 31, AUGUST 31, MAY 31,
--------------------------- ---------- ------------- -------
1997 1998 1999 2000 2001 2002 2003
------ ------- ------- ---- ----- ----- -----
Ratio of Earnings to Fixed Charges 76.38x 436.37x 242.25x (A) 1.53x 1.12x 2.73x
(A) Earnings for the eight months ended August 31, 2000, were insufficient
to cover fixed charges by $3.5 million.
15
The table below sets forth the ratio of earnings to fixed charges of Heritage
Propane Partners, L.P. and subsidiaries (Predecessor Heritage) on a consolidated
basis for the periods indicated and does not include information with respect to
Peoples Gas or the propane operations of U.S. Propane, L.P. during those periods
(which were prior to the acquisition of U.S. Propane, L.P., by Heritage Propane
Partners, L.P.).
RATIO OF EARNINGS TO FIXED CHARGES (Predecessor Heritage):
PERIOD
ENDED
YEAR ENDED AUGUST 31, AUGUST 9,
--------------------- ---------
1998 1999 2000
----- ----- -----
Ratio of Earnings to Fixed Charges 1.57x 1.58x 1.35x
For these ratios, "earnings" is the amount resulting from adding the
following items:
- pre-tax income from continuing operations, before minority
interest and equity in earnings of affiliates;
- distributed income of equity investees; and
- fixed charges.
The term "fixed charges" means the sum of the following:
- interest expensed;
- amortized debt issuance costs; and
- estimated interest element of rentals.
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DESCRIPTION OF THE COMMON UNITS
References in this "Description of the Common Units" to "we," "us" and
"our" mean Heritage Propane Partners, L.P.
NUMBER OF UNITS
We currently have 17,947,111 common units outstanding, of which
11,333,448 are held by the public, 4,606,944 are held by our general partner or
its affiliates, and 2,006,719 are held by our officers and directors. The common
units represent an aggregate 98.0% limited partner interest. Our general partner
owns an aggregate 2.0% general partner interest in Heritage Propane Partners,
L.P. and Heritage Operating, L.P.
Our common units represent limited partner interests in us and entitle
the holders thereof to participate in distributions and exercise the rights and
privileges available to our limited partners under our partnership agreement. A
copy of the partnership agreement of Heritage Propane Partners, L.P. is filed as
an exhibit to this registration statement of which this prospectus is a part.
ISSUANCE OF ADDITIONAL SECURITIES
Our partnership agreement authorizes us to issue an unlimited number of
additional partnership securities and rights to buy partnership securities for
the consideration and on the terms and conditions established by our general
partner in its sole discretion, without the approval of the unitholders. Any
such additional partnership securities may be senior to the common units.
It is possible that we will fund acquisitions through the issuance of
additional common units or other equity securities. Holders of any additional
common units we issue will be entitled to share equally with the then-existing
holders of common units in our distributions of available cash. In addition, the
issuance of additional partnership interests may dilute the value of the
interests of the then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of our partnership
agreement, we may also issue additional partnership securities that, in the sole
discretion of the general partner, have special voting rights to which the
common units are not entitled.
Upon issuance of additional partnership securities, our general partner
will be required to make additional capital contributions to the extent
necessary to maintain its 2.0% general partner interest in us. Moreover, our
general partner will have the right, which it may from time to time assign in
whole or in part to any of its affiliates, to purchase common units or other
equity securities whenever, and on the same terms that, we issue those
securities to persons other than the general partner and its affiliates, to the
extent necessary to maintain its percentage interest, including its interest
represented by common units, that existed immediately prior to each issuance.
The holders of common units will not have preemptive rights to acquire
additional common units or other partnership securities.
VOTING
Our general partner manages and operates us. Unlike the holders of
common stock in a corporation, the holders of our units have only limited voting
rights on matters affecting our business. They have no right to elect our
general partner, or the directors of our general partner or its general partner,
on an annual or other continuing basis. On those matters that are submitted to a
vote of unitholders, each record holder of a unit has a vote according to his
percentage interest in us, although additional limited partner interests having
special voting rights could be issued. However, if at any time any person or
group, other than the general partner and its affiliates, owns, in the
aggregate, beneficial ownership of 20% or more of the common units then
outstanding, that person or group will lose voting rights on all of its common
units and its common units may not be voted on any matter and will not be
considered to be outstanding when sending notices of a meeting of unitholders,
calculating required votes, determining the presence of a quorum or for other
similar purposes.
The following matters require the approval of the majority of the
outstanding common units, including the common units owned by the general
partner and its affiliates:
- a merger of our partnership;
- a sale or exchange of all or substantially all of our assets;
- dissolution or reconstitution of our partnership upon
dissolution;
- certain amendments to the partnership agreement;
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- the transfer to another person of our general partner interest
before June 30, 2006 or the incentive distribution rights at
any time, except for transfers to affiliates of the general
partner or transfers in connection with the general partner's
merger or consolidation with or into, or sale of all or
substantially all of its assets to, another person; and
- the withdrawal of the general partner prior to June 30, 2006
in a manner that would cause the dissolution of our
partnership.
The removal of our general partner requires the approval of not less
than 66 2/3% of all outstanding units, including units held by our general
partner and its affiliates. Any removal is subject to the election of a
successor general partner by the holders of a majority of the outstanding common
units, including units held by our general partner and its affiliates.
AMENDMENTS TO OUR PARTNERSHIP AGREEMENT
Amendments to our partnership agreement may be proposed only by our
general partner. Certain amendments require the approval of a majority of the
outstanding common units, including common units owned by the general partner
and its affiliates. Any amendment that materially and adversely affects the
rights or preferences of any class of partnership interests in relation to other
classes of partnership interests will require the approval of at least a
majority of the class of partnership interests so affected. Our general partner
may make amendments to the partnership agreement without unitholder approval in
certain circumstances, including amendments that do not adversely affected the
limited partners in any material respect.
LIMITED CALL RIGHT
If at any time less than 20% of the outstanding common units of any
class are held by persons other than our general partner and its affiliates, our
general partner will have the right to acquire all, but not less than all, of
those common units at a price no less than their then-current market price. As a
consequence, a unitholder may be required to sell his common units at an
undesirable time or price. Our general partner may assign this purchase right to
any of its affiliates or us.
LISTING
Our outstanding common units are listed on the New York Stock Exchange
(NYSE) under the symbol "HPG." Any additional common units we issue also will be
listed on the NYSE.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common units is American Stock
Transfer & Trust Company.
TRANSFER OF COMMON UNITS
Each purchaser of common units offered by this prospectus must execute
a transfer application. By executing and delivering a transfer application, the
purchaser of common units:
- becomes the record holder of the common units and is an
assignee until admitted into our partnership as a substituted
limited partner;
- automatically requests admission as a substituted limited
partner in our partnership;
- agrees to be bound by the terms and conditions of, and
executes, our partnership agreement;
- represents that such person has the capacity, power and
authority to enter into the partnership agreement;
- grants powers of attorney to officers of the general partner
and any liquidator of our partnership, as specified in the
partnership agreement; and
- makes the consents and waivers contained in the partnership
agreement.
An assignee will become a substituted limited partner of our
partnership for the transferred common units upon the consent of our general
partner and the recording of the name of the assignee on our books and records.
The general partner may withhold its consent in its sole discretion.
Transfer applications may be completed, executed and delivered by a
purchaser's broker, agent or nominee. We are entitled to treat the nominee
holder of a common unit as the absolute owner. In that case, the beneficial
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holders' rights are limited solely to those that it has against the nominee
holder as a result of any agreement between the beneficial owner and the nominee
holder.
Common units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired, the
purchaser has the right to request admission as a substituted limited partner in
our partnership for the purchased common units. A purchaser of common units who
does not execute and deliver a transfer application obtains only:
- the right to assign the common unit to a purchaser or
transferee; and
- the right to transfer the right to seek admission as a
substituted limited partner in our partnership for the
purchased common units.
Thus, a purchaser of common units who does not execute and deliver a
transfer application:
- will not receive cash distributions or federal income tax
allocations, unless the common units are held in a nominee or
"street name" account and the nominee or broker has executed
and delivered a transfer application; and
- may not receive some federal income tax information or reports
furnished to record holders of common units.
Until a common unit has been transferred on our books, we and the
transfer agent, notwithstanding any notice to the contrary, may treat the record
holder of the unit as the absolute owner for all purposes, except as otherwise
required by law or NYSE regulations.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described under "--Limited Liability," the common units will
be fully paid, and the unitholders will not be required to make additional
capital contributions to us.
LIMITED LIABILITY
Assuming that a limited partner does not participate in the control of
our business within the meaning of the Delaware Revised Uniform Limited
Partnership Act (the "Delaware Act") and that he otherwise acts in conformity
with the provisions of our partnership agreement, his liability under the
Delaware Act will be limited, subject to possible exceptions, to the amount of
capital he is obligated to contribute to us for his common units plus his share
of any undistributed profits and assets. If it were determined, however, that
the right or exercise of the right by the limited partners as a group:
- to remove or replace the general partner;
- to approve some amendments to our partnership agreement; or
- to take other action under our partnership agreement;
constituted "participation in the control" of our business for the purposes of
the Delaware Act, then the limited partners could be held personally liable for
our obligations under Delaware law, to the same extent as the general partner.
This liability would extend to persons who transact business with us and who
reasonably believe that the limited partner is a general partner. Neither our
partnership agreement nor the Delaware Act specifically provides for legal
recourse against our general partner if a limited partner were to lose limited
liability through any fault of the general partner. While this does not mean
that a limited partner could not seek legal recourse, we have found no precedent
for this type of a claim in Delaware case law.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner if after the distribution all liabilities of the
limited partnership, other than liabilities to partners on account of their
partnership interests and liabilities for which the recourse of creditors is
limited to specific property of our partnership, exceed the fair value of the
assets of the limited partnership. For the purpose of determining the fair value
of the assets of a limited partnership, the Delaware Act provides that the fair
value of property subject to liability for which recourse of creditors is
limited shall be included in the assets of the limited partnership only to the
extent that the fair value of that property exceeds the nonrecourse liability.
The Delaware Act provides that a limited partner who receives a distribution and
knew at the time of the distribution that the distribution was in violation of
the Delaware Act shall be liable to the limited partnership for the amount of
the distribution for three years. Under the Delaware Act, an assignee who
becomes a substituted limited partner of a limited partnership is liable for the
obligations of his
19
assignor to make contributions to our partnership, except the assignee is not
obligated for liabilities unknown to him at the time he became a limited partner
and which could not be ascertained from our partnership agreement.
Our subsidiaries currently conduct business in 29 states: Alabama,
Arizona, California, Colorado, Delaware, Florida, Georgia, Idaho, Kentucky,
Massachusetts, Michigan, Minnesota, Montana, Nevada, New Hampshire, New Jersey,
New Mexico, New York, North Carolina, Oregon, Pennsylvania, South Carolina,
Tennessee, Texas, Utah, Vermont, Virginia, Washington and Wyoming. To maintain
the limited liability for Heritage Propane Partners, L.P., as the holder of a
98.9899% limited partner interest in Heritage Operating, L.P., we may be
required to comply with legal requirements in the jurisdictions in which
Heritage Operating, L.P. conducts business, including qualifying our
subsidiaries to do business there. Limitations on the liability of limited
partners for the obligations of a limited partnership have not been clearly
established in many jurisdictions. If it were determined that we were, by virtue
of our limited partner interest in Heritage Operating, L.P. or otherwise,
conducting business in any state without compliance with the applicable limited
partnership statute, or that our right or the exercise of our right to remove or
replace Heritage Operating, L.P.'s general partner, to approve some amendments
to Heritage Operating, L.P.'s partnership agreement, or to take other action
under Heritage Operating, L.P.'s partnership agreement constituted
"participation in the control" of Heritage Operating, L.P.'s business for
purposes of the statutes of any relevant jurisdiction, then we could be held
personally liable for Heritage Operating, L.P.'s obligations under the law of
that jurisdiction to the same extent as our general partner under the
circumstances. We will operate in a manner as our general partner considers
reasonable and necessary or appropriate to preserve our limited liability.
MEETINGS; VOTING
Except as described below regarding a person or group owning 20% or
more of any class of units then outstanding, unitholders or assignees who are
record holders of units on the record date will be entitled to notice of, and to
vote at, meetings of our limited partners and to act upon matters for which
approvals may be solicited. Common units that are owned by an assignee who is a
record holder, but who has not yet been admitted as a limited partner, shall be
voted by our general partner at the written direction of the record holder.
Absent direction of this kind, the common units will not be voted, except that,
in the case of common units held by our general partner on behalf of non-citizen
assignees, our general partner shall distribute the votes on those common units
in the same ratios as the votes of limited partners on other units are cast.
Our general partner does not anticipate that any meeting of unitholders
will be called in the foreseeable future. Any action that is required or
permitted to be taken by the unitholders may be taken either at a meeting of the
unitholders or without a meeting if consents in writing describing the action so
taken are signed by holders of the number of units as would be necessary to
authorize or take that action at a meeting. Meetings of the unitholders may be
called by our general partner or by unitholders owning at least 20% of the
outstanding units of the class for which a meeting is proposed. Unitholders may
vote either in person or by proxy at meetings. The holders of a majority of the
outstanding units of the class or classes for which a meeting has been called
represented in person or by proxy shall constitute a quorum unless any action by
the unitholders requires approval by holders of a greater percentage of the
units, in which case the quorum shall be the greater percentage.
Each record holder of a unit has a vote according to his percentage
interest in us, although additional limited partner interests having special
voting rights could be issued. However, if at any time any person or group,
other than our general partner and its affiliates, owns, in the aggregate,
beneficial ownership of 20% or more of the common units then outstanding, the
person or group will lose voting rights on all of its common units and its
common units may not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of unitholders, calculating
required votes, determining the presence of a quorum or for other similar
purposes. Common units held in nominee or street name account will be voted by
the broker or other nominee in accordance with the instruction of the beneficial
owner unless the arrangement between the beneficial owner and his nominee
provides otherwise.
Any notice, demand, request, report or proxy material required or
permitted to be given or made to record holders of common units under our
partnership agreement will be delivered to the record holder by us or by the
transfer agent.
20
BOOKS AND REPORTS
Our general partner is required to keep appropriate books of our
business at our principal offices. The books will be maintained for both tax and
financial reporting purposes on an accrual basis. Reporting for tax purposes is
done on a calendar year basis.
We will furnish or make available to record holders of common units,
within 120 days after the close of each fiscal year, an annual report containing
audited financial statements and a report on those financial statements by our
independent public accountants. Except for our fourth quarter, we will also
furnish or make available summary financial information within 90 days after the
close of each quarter.
We will furnish each record holder of a unit with information
reasonably required for tax reporting purposes within 90 days after the close of
each calendar year. This information is expected to be furnished in summary form
so that some complex calculations normally required of partners can be avoided.
Our ability to furnish this summary information to unitholders will depend on
the cooperation of unitholders in supplying us with specific information. Every
unitholder will receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax returns,
regardless of whether he supplies us with information.
Our partnership agreement provides that a limited partner can, for a
purpose reasonably related to his interest as a limited partner, upon reasonable
demand and at his own expense, have furnished to him:
- a current list of the name and last known address of each
partner;
- a copy of our tax returns;
- information as to the amount of cash, and a description and
statement of the agreed value of any other property or
services, contributed or to be contributed by each partner and
the date on which each became a partner;
- copies of our partnership agreement, the certificate of
limited partnership of the partnership, related amendments and
powers of attorney under which they have been executed;
- information regarding the status of our business and financial
condition; and
- any other information regarding our affairs as is just and
reasonable.
Our general partner may, and intends to, keep confidential from the
limited partners trade secrets or other information the disclosure of which our
general partner believes in good faith is not in our best interests or that we
are required by law or by agreements with third parties to keep confidential.
CASH DISTRIBUTION POLICY
DISTRIBUTIONS OF AVAILABLE CASH
References in this "Cash Distribution Policy" to "we," "us" and "our"
mean Heritage Propane Partners, L.P.
General. We will distribute all of our "available cash" to our
unitholders and our general partner within 45 days following the end of each
fiscal quarter.
Definition of Available Cash. Available cash is defined in our
partnership agreement and generally means, with respect to any calendar quarter,
all cash on hand at the end of such quarter:
- less the amount of cash reserves that are necessary or
appropriate in the reasonable discretion of the general
partner to:
- provide for the proper conduct of our business;
- comply with applicable law or any debt instrument or other
agreement (including reserves for future capital expenditures
and for our future credit needs); or
- provide funds for distributions to unitholders and our general
partner in respect of any one or more of the next four
quarters;
- plus all cash on hand on the date of determination of
available cash for the quarter resulting from working capital
borrowings made after the end of the quarter. Working capital
borrowings are
21
generally borrowings that are made under our credit facilities
and in all cases are used solely for working capital purposes
or to pay distributions to partners.
OPERATING SURPLUS AND CAPITAL SURPLUS
General. All cash distributed to unitholders will be characterized as
either "operating surplus" or "capital surplus." We distribute available cash
from operating surplus differently than available cash from capital surplus.
Definition of Operating Surplus. Operating surplus for any period
generally means:
- our cash balance on the closing date of our initial public
offering; plus
- $10.0 million (as described below); plus
- all of our cash receipts since the closing of our initial
public offering, excluding cash from interim capital
transactions such as borrowings that are not working capital
borrowings, sales of equity and debt securities and sales or
other dispositions of assets outside the ordinary course of
business; plus
- working capital borrowings made after the end of a quarter but
before the date of determination of operating surplus for the
quarter; less
- all of our operating expenditures after the closing of our
initial public offering, including the repayment of working
capital borrowings, but not the repayment of other borrowings,
and including maintenance capital expenditures; less
- the amount of cash reserves that the general partner deems
necessary or advisable to provide funds for future operating
expenditures.
Definition of Capital Surplus. Generally, capital surplus will be
generated only by:
- borrowings other than working capital borrowings;
- sales of debt and equity securities; and
- sales or other disposition of assets for cash, other than
inventory, accounts receivable and other current assets sold
in the ordinary course of business or as part of normal
retirements or replacements of assets.
Characterization of Cash Distributions. We will treat all available
cash distributed as coming from operating surplus until the sum of all available
cash distributed since we began operations equals the operating surplus as of
the most recent date of determination of available cash. We will treat any
amount distributed in excess of operating surplus, regardless of its source, as
capital surplus. As reflected above, operating surplus includes $10.0 million in
addition to our cash balance on the closing date of our initial public offering,
cash receipts from our operations and cash from working capital borrowings. This
amount does not reflect actual cash on hand that is available for distribution
to our unitholders. Rather, it is a provision that will enable us, if we choose,
to distribute as operating surplus up to $10.0 million of cash we receive in the
future from non-operating sources, such as asset sales, issuances of securities,
and long-term borrowings, that would otherwise be distributed as capital
surplus. We do not anticipate that we will make any distributions from capital
surplus.
DISTRIBUTIONS OF AVAILABLE CASH
We will make distributions of available cash from operating surplus for
any quarter in the following manner:
- First, 98% to all unitholders, pro rata, and 2% to the general
partner, until all unitholders have received $0.50 per unit
for such quarter (the "minimum quarterly distribution");
- Second, 98% to all unitholders, pro rata, and 2% to the
general partner, until all unitholders have received $0.55 per
unit for such quarter (the "first target distribution");
- Third, 85% to all unitholders, pro rata, 13% to the holders of
incentive distribution rights, pro rata, and 2% to the general
partner, until all unitholders have received $0.635 per unit
for such quarter (the "second target distribution");
22
- Fourth, 75% to all unitholders, pro rata, 23% to the holders
of incentive distribution rights, pro rata, and 2% to the
general partner, until all unitholders have received $0.825
per unit for such quarter (the "third target distribution");
and
- Fifth, thereafter, 50% to all unitholders, pro rata, 48% to
the holders of incentive distribution rights, pro rata, and 2%
to the general partner.
DISTRIBUTIONS FROM CAPITAL SURPLUS
We will make distributions of available cash from capital surplus, if
any, in the following manner:
- First, 98% to all unitholders, pro rata, and 2% to the general
partner, until we distribute for each common unit, an amount
of available cash from capital surplus equal to the initial
public offering price;
- Thereafter, we will make all distributions of available cash
from capital surplus as if they were from operating surplus.
Our partnership agreement treats a distribution of capital surplus as
the repayment of the initial unit price from the initial public offering, which
is a return of capital. The initial public offering price less any distributions
of capital surplus per unit is referred to as the "unrecovered capital." Each
time a distribution of capital surplus is made, the minimum quarterly
distribution and the target distribution levels will be reduced in the same
proportion as the corresponding reduction in the unrecovered capital. Because
distributions of capital surplus will reduce the minimum quarterly distribution,
after any of these distributions are made, it may be easier for the general
partner to receive incentive distributions. However, any distribution of capital
surplus before the unrecovered capital is reduced to zero cannot be applied to
the payment of the minimum quarterly distribution.
Once we distribute capital surplus on a unit in an amount equal to the
initial unit price, we will reduce the minimum quarterly distribution and the
target distribution levels to zero. We will then make all future distributions
from operating surplus, with 50% being paid to the holders of units, 48% to the
holders of the incentive distribution rights and 2% to the general partner.
ADJUSTMENT TO THE MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to adjusting the minimum quarterly distribution and target
distribution levels to reflect a distribution of capital surplus, if we combine
our units into fewer units or subdivide our units into a greater number of
units, we will proportionately adjust:
- the minimum quarterly distribution;
- the target distribution levels; and
- unrecovered capital.
For example, if a two-for-one split of the common units should occur,
the minimum quarterly distribution, the target distribution levels and the
unrecovered capital would each be reduced to 50% of its initial level. We will
not make any adjustment by reason of the issuance of additional units for cash
or property.
In addition, if legislation is enacted or if existing law is modified
or interpreted in a manner that causes us to become taxable as a corporation or
otherwise subject to taxation as an entity for federal, state or local income
tax purposes, we will reduce the minimum quarterly distribution and the target
distribution levels by multiplying the same by one minus the sum of the highest
marginal federal corporate income tax rate that could apply and any increase in
the effective overall state and local income tax rates.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
General. If we dissolve in accordance with our partnership agreement,
we will sell or otherwise dispose of our assets in a process called liquidation.
We will first apply the proceeds of liquidation to the payment of our creditors.
We will distribute any remaining proceeds to the unitholders and the general
partner, in accordance with their capital account balances, as adjusted to
reflect any gain or loss upon the sale or other disposition of our assets in
liquidation.
Any further net gain recognized upon liquidation will be allocated in a
manner that takes into account the incentive distribution rights of the general
partner.
23
Manner of Adjustments for Gain. The manner of the adjustment for gain
is set forth in our partnership agreement in the following manner:
- First, to the general partner and the holders of units who
have negative balances in their capital accounts to the extent
of and in proportion to those negative balances;
- Second, 98% to the common unitholders, pro rata, and 2% to the
general partner, until the capital account for each common
unit is equal to the sum of:
- the unrecovered capital; and
- the amount of the minimum quarterly distribution for the
quarter during which our liquidation occurs;
- Third, 98% to all unitholders, pro rata, and 2% to the general
partner, until we allocate under this paragraph an amount per
unit equal to:
- the sum of the excess of the first target distribution per
unit over the minimum quarterly distribution per unit for each
quarter of our existence; less
- the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the minimum
quarterly distribution per unit that we distributed 98% to the
unitholders, pro rata, and 2% to the general partner, for each
quarter of our existence;
- Fourth, 85% to all unitholders, pro rata, 13% to the holders
of the incentive distribution rights, pro rata, and 2% to the
general partner, until we allocate under this paragraph an
amount per unit equal to:
- the sum of the excess of the second target distribution per
unit over the first target distribution per unit for each
quarter of our existence; less
- the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the first
target distribution per unit that we distributed 85% to the
unitholders, pro rata, 13% to the holders of the incentive
distribution rights, pro rata, and 2% to the general partner
for each quarter of our existence;
- Fifth, 75% to all unitholders, pro rata, 23% to the holders of
the incentive distribution rights, pro rata, and 2% to the
general partner, until we allocate under this paragraph an
amount per unit equal to:
- the sum of the excess of the third target distribution per
unit over the second target distribution per unit for each
quarter of our existence; less
- the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the second
target distribution per unit that we distributed 75% to the
unitholders, pro rata, 23% to the holders of the incentive
distribution rights, pro rata, and 2% to the general partner
for each quarter of our existence; and
- Sixth, thereafter, 50% to all unitholders, pro rata, 48% to
the holders of the incentive distribution rights, pro rata,
and 2% to the general partner.
Manner of Adjustments for Losses. Upon our liquidation, we will
generally allocate any loss to the general partner and the unitholders in the
following manner:
- First, 98% to the holders of common units in proportion to the
positive balances in their capital accounts and 2% to the
general partner, until the capital accounts of the common
unitholders have been reduced to zero; and
- Second, thereafter, 100% to the general partner.
Adjustments to Capital Accounts upon the Issuance of Additional Units.
We will make adjustments to capital accounts upon the issuance of additional
units. In doing so, we will allocate any unrealized and, for tax purposes,
unrecognized gain or loss resulting from the adjustments to the unitholders and
the general partner in the same manner as we allocate gain or loss upon
liquidation. In the event that we make positive adjustments to the capital
accounts upon the issuance of additional units, we will allocate any later
negative adjustments to the capital accounts resulting from the issuance of
additional units or upon our liquidation in a manner which results, to the
24
extent possible, in the general partner's capital account balances equaling the
amount which they would have been if no earlier positive adjustments to the
capital accounts had been made.
25
DESCRIPTION OF THE DEBT SECURITIES
Heritage Propane Partners, L.P. may issue senior debt securities on a
senior unsecured basis under an indenture among Heritage Propane Partners, L.P.,
as issuer, the Subsidiary Guarantors, if any, and a trustee that we will name in
the related prospectus supplement. We refer to this indenture as the Heritage
Propane senior indenture. Heritage Propane Partners, L.P. may also issue
subordinated debt securities under an indenture to be entered into among
Heritage Propane Partners, L.P., the Subsidiary Guarantors, if any, and the
trustee. We refer to this indenture as the Heritage Propane subordinated
indenture.
Heritage Operating, L.P. may issue senior debt securities on a senior
unsecured basis under an indenture among Heritage Operating, L.P., as issuer,
Heritage Propane Partners, L.P., as Guarantor, the Subsidiary Guarantors, if
any, and a trustee that we will name in the related prospectus supplement. We
refer to this indenture as the Heritage Operating senior indenture. Heritage
Operating, L.P. may also issue subordinated debt securities under an indenture
to be entered into among Heritage Operating, L.P., the Guarantor, the Subsidiary
Guarantors, if any, and the trustee. We refer to this indenture as the Heritage
Operating subordinated indenture.
We refer to the Heritage Propane senior indenture, the Heritage
Operating senior indenture, the Heritage Propane subordinated indenture and the
Heritage Operating subordinated indenture collectively as the indentures. The
debt securities will be governed by the provisions of the related indenture and
those made part of the indenture by reference to the Trust Indenture Act.
We have summarized material provisions of the indentures, the debt
securities and the guarantees below. This summary is not complete. We have filed
the form of senior indentures and the form of subordinated indentures with the
SEC as exhibits to the registration statement, and you should read the
indentures for provisions that may be important to you.
References in this "Description of the Debt Securities" to "we," "us"
and "our" mean Heritage Propane Partners, L.P. and Heritage Operating, L.P.
References in this prospectus to an "indenture" refer to the particular
indenture under which we issue a series of debt securities.
PROVISIONS APPLICABLE TO EACH INDENTURE
General. Any series of debt securities:
- will be general obligations of the issuer;
- will be general obligations of the Guarantor if they are
guaranteed by the Guarantor;
- will be general obligations of the Subsidiary Guarantors if
they are guaranteed by the Subsidiary Guarantors; and
- may be subordinated to the Senior Indebtedness of Heritage
Propane Partners, L.P., Heritage Operating, L.P. and the
Subsidiary Guarantors.
The indentures do not limit the amount of debt securities that may be
issued under any indenture, and do not limit the amount of other unsecured debt
or securities that we may issue. We may issue debt securities under the
indentures from time to time in one or more series, each in an amount authorized
prior to issuance.
No indenture contains any covenants or other provisions designed to
protect holders of the debt securities in the event we participate in a highly
leveraged transaction or upon a change of control. The indentures also do not
contain provisions that give holders the right to require us to repurchase their
securities in the event of a decline in our credit ratings for any reason,
including as a result of a takeover, recapitalization or similar restructuring
or otherwise.
Terms. We will prepare a prospectus supplement and either a
supplemental indenture, or authorizing resolutions of the board of directors of
our general partner's general partner, accompanied by an officers' certificate,
relating to any series of debt securities that we offer, which will include
specific terms relating to some or all of the following:
- whether the debt securities will be senior or subordinated
debt securities;
- the form and title of the debt securities of that series;
- the total principal amount of the debt securities of that
series;
26
- whether the debt securities will be issued in individual
certificates to each holder or in the form of temporary or
permanent global securities held by a depositary on behalf of
holders;
- the date or dates on which the principal of and any premium on
the debt securities of that series will be payable;
- any interest rate which the debt securities of that series
will bear, the date from which interest will accrue, interest
payment dates and record dates for interest payments;
- any right to extend or defer the interest payment periods and
the duration of the extension;
- whether and under what circumstances any additional amounts
with respect to the debt securities will be payable;
- whether debt securities are entitled to the benefits of any
guarantee of any Subsidiary Guarantor;
- the place or places where payments on the debt securities of
that series will be payable;
- any provisions for optional redemption or early repayment;
- any provisions that would require the redemption, purchase or
repayment of debt securities;
- the denominations in which the debt securities will be issued;
- whether payments on the debt securities will be payable in
foreign currency or currency units or another form and whether
payments will be payable by reference to any index or formula;
- the portion of the principal amount of debt securities that
will be payable if the maturity is accelerated, if other than
the entire principal amount;
- any additional means of defeasance of the debt securities, any
additional conditions or limitations to defeasance of the debt
securities or any changes to those conditions or limitations;
- any changes or additions to the events of default or covenants
described in this prospectus;
- any restrictions or other provisions relating to the transfer
or exchange of debt securities;
- any terms for the conversion or exchange of the debt
securities for our other securities or securities of any other
entity;
- any changes to the subordination provisions for the
subordinated debt securities; and
- any other terms of the debt securities of that series.
This description of debt securities will be deemed modified, amended or
supplemented by any description of any series of debt securities set forth in a
prospectus supplement related to that series.
We may sell the debt securities at a discount, which may be
substantial, below their stated principal amount. These debt securities may bear
no interest or interest at a rate that at the time of issuance is below market
rates. If we sell these debt securities, we will describe in the prospectus
supplement any material United States federal income tax consequences and other
special considerations.
If we sell any of the debt securities for any foreign currency or
currency unit or if payments on the debt securities are payable in any foreign
currency or currency unit, we will describe in the prospectus supplement the
restrictions, elections, tax consequences, specific terms and other information
relating to those debt securities and the foreign currency or currency unit.
Guarantee of Heritage Propane Partners, L.P. Heritage Propane Partners,
L.P. will fully, irrevocably and unconditionally guarantee on an unsecured basis
all series of debt securities of Heritage Operating, L.P., and will execute a
notation of guarantee as further evidence of its guarantee. As used in this
prospectus, the term "Guarantor" means Heritage Propane Partners, L.P. in its
role as guarantor of the debt securities of Heritage Operating, L.P. The
applicable prospectus supplement will describe the terms of any guarantee by
Heritage Propane Partners, L.P.
27
If a series of senior debt securities of Heritage Operating, L.P. is so
guaranteed, Heritage Propane Partners, L.P.'s guarantee of the senior debt
securities will be Heritage Propane Partners, L.P.'s unsecured and
unsubordinated general obligation, and will rank on a parity with all of
Heritage Propane Partners, L.P.'s other unsecured and unsubordinated
indebtedness. If a series of subordinated debt securities of Heritage Operating,
L.P. is so guaranteed, Heritage Propane Partners, L.P.'s guarantee of the
subordinated debt securities will be Heritage Propane Partners, L.P.'s unsecured
general obligation and will be subordinated to all of Heritage Propane Partners,
L.P.'s other unsecured and unsubordinated indebtedness.
The Subsidiary Guarantees. The Subsidiary Guarantors may fully,
irrevocably and unconditionally guarantee on an unsecured basis all series of
debt securities of Heritage Propane Partners, L.P. or Heritage Operating, L.P.,
and will execute a notation of guarantee as further evidence of their guarantee.
The term "Subsidiary Guarantors" means Heritage Service Corp., Heritage-Bi
State, L.L.C. and Heritage Energy Resources, L.L.C. and also includes Heritage
Operating, L.P. when discussing subsidiary guarantees of the debt securities of
Heritage Propane Partners, L.P. The applicable prospectus supplement will
describe the terms of any guarantee by the Subsidiary Guarantors.
If a series of senior debt securities of Heritage Propane Partners,
L.P. or Heritage Operating, L.P. is so guaranteed, the Subsidiary Guarantors'
guarantee of the senior debt securities will be the Subsidiary Guarantors'
unsecured and unsubordinated general obligation, and will rank on a parity with
all of the Subsidiary Guarantors' other unsecured and unsubordinated
indebtedness. If a series of subordinated debt securities of Heritage Propane
Partners, L.P. or Heritage Operating, L.P. is so guaranteed, the Subsidiary
Guarantors' guarantee of the subordinated debt securities will be the Subsidiary
Guarantors' unsecured general obligation and will be subordinated to all of the
Subsidiary Guarantors' other unsecured and unsubordinated indebtedness.
The obligations of each Subsidiary Guarantor under its guarantee of the
debt securities will be limited to the maximum amount that will not result in
the obligations of the Subsidiary Guarantor under the guarantee constituting a
fraudulent conveyance or fraudulent transfer under federal or state law, after
giving effect to:
- all other contingent and fixed liabilities of the Subsidiary
Guarantor; and
- any collections from or payments made by or on behalf of any
other Subsidiary Guarantors in respect of the obligations of
the Subsidiary Guarantor under its guarantee.
The guarantee of any Subsidiary Guarantor may be released under certain
circumstances. If we exercise our legal or covenant defeasance option with
respect to debt securities of a particular series as described below in
"--Defeasance," then any Subsidiary Guarantor will be released with respect to
that series. Further, if no default has occurred and is continuing under the
indentures, and to the extent not otherwise prohibited by the indentures, a
Subsidiary Guarantor will be unconditionally released and discharged from the
guarantee:
- automatically upon any sale, exchange or transfer, whether by
way of merger or otherwise, to any person that is not our
affiliate, of all of our direct or indirect limited
partnership or other equity interests in the Subsidiary
Guarantor;
- automatically upon the merger of the Subsidiary Guarantor into
us or any other Subsidiary Guarantor or the liquidation and
dissolution of the Subsidiary Guarantor; or
- following delivery of a written notice by us to the trustee,
upon the release of all guarantees by the Subsidiary Guarantor
of any debt of ours for borrowed money for a purchase money
obligation or for a guarantee of either, except for any series
of debt securities.
Consolidation, Merger and Sale of Assets. The indentures generally
permit a consolidation or merger involving Heritage Propane Partners, L.P.,
Heritage Operating, L.P. or the Subsidiary Guarantors. They also permit Heritage
Propane Partners, L.P., Heritage Operating, L.P. or the Subsidiary Guarantors,
as applicable, to lease, transfer or dispose of all or substantially all of its
assets. Each of Heritage Propane Partners, L.P., Heritage Operating, L.P. and
the Subsidiary Guarantors has agreed, however, that it will not consolidate with
or merge into any entity (other than Heritage Propane Partners, L.P., Heritage
Operating, L.P. or a Subsidiary Guarantor, as applicable) or lease, transfer or
dispose of all or substantially all of its assets to any entity (other than
Heritage Propane Partners, L.P., Heritage Operating, L.P. or a Subsidiary
Guarantor, as applicable) unless:
- it is the continuing entity; or
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- if it is not the continuing entity, the resulting entity or
transferee is organized and existing under the laws of any
United States jurisdiction and assumes the performance of its
covenants and obligations under the indentures; and
- in either case, immediately after giving effect to the
transaction, no default or event of default would occur and be
continuing or would result from the transaction.
Upon any such consolidation, merger or asset lease, transfer or
disposition involving Heritage Propane Partners, L.P., Heritage Operating, L.P.
or the Subsidiary Guarantors, the resulting entity or transferee will be
substituted for Heritage Propane Partners, L.P., Heritage Operating, L.P. or the
Subsidiary Guarantors, as applicable, under the applicable indenture and debt
securities. In the case of an asset transfer or disposition other than a lease,
Heritage Propane Partners, L.P. or the Subsidiary Guarantors, as applicable,
will be released from the applicable indenture.
Events of Default. Unless we inform you otherwise in the applicable
prospectus supplement, the following are events of default with respect to a
series of debt securities:
- failure to pay interest on that series of debt securities for
30 days when due;
- default in the payment of principal of or premium, if any, on
any debt securities of that series when due at its stated
maturity, upon redemption, upon required repurchase or
otherwise;
- default in the payment of any sinking fund payment on any debt
securities of that series when due;
- failure by us or, if the series of debt securities is
guaranteed by the Guarantor or any Subsidiary Guarantors, by
such Guarantor or Subsidiary Guarantor, to comply for 60 days
after notice with the other agreements contained in the
indentures, any supplement to the indentures or any board
resolution authorizing the issuance of that series;
- failure to comply with any covenant or agreement in that
series of debt securities or the applicable indenture for 60
days after written notice by the trustee or by the holders of
at least 25% in principal amount of the outstanding debt
securities issued under that indenture that are affected by
that failure;
- certain events of bankruptcy, insolvency or reorganization of
us or, if the series of debt securities is guaranteed by the
Guarantor or any Subsidiary Guarantor, of the Guarantor and/or
any such Subsidiary Guarantor;
- if the series of debt securities is guaranteed by the
Guarantor and/or any Subsidiary Guarantor:
- any of the guarantees ceases to be in full force and
effect, except as otherwise provided in the
indentures;
- any of the guarantees is declared null and void in a
judicial proceeding; or
- the Guarantor or any Subsidiary Guarantor denies or
disaffirms its obligations under the indentures or
its guarantee; and
- any other event of default provided for in that series of debt
securities.
A default under one series of debt securities will not necessarily be a
default under another series. The trustee may withhold notice to the holders of
the debt securities of any default or event of default (except in any payment on
the debt securities) if the trustee considers it in the interest of the holders
of the debt securities to do so.
If an event of default for any series of debt securities occurs and is
continuing, the trustee or the holders of at least 25% in principal amount of
the outstanding debt securities of the series affected by the default (or, in
some cases, 25% in principal amount of all debt securities issued under the
applicable indenture that are affected, voting as one class) may declare the
principal of and all accrued and unpaid interest on those debt securities to be
due and payable. If an event of default relating to certain events of
bankruptcy, insolvency or reorganization occurs, the principal of and interest
on all the debt securities issued under the applicable indenture will become
immediately due and payable without any action on the part of the trustee or any
holder. The holders of a majority in principal amount of the outstanding debt
securities of the series affected by the default (or, in some cases, of all debt
securities
29
issued under the applicable indenture that are affected, voting as one class)
may in some cases rescind this accelerated payment requirement.
A holder of a debt security of any series issued under each indenture
may pursue any remedy under that indenture only if:
- the holder gives the trustee written notice of a continuing
event of default for that series;
- the holders of at least 25% in principal amount of the
outstanding debt securities of that series make a written
request to the trustee to pursue the remedy;
- the holders offer to the trustee indemnity satisfactory to the
trustee;
- the trustee fails to act for a period of 60 days after receipt
of the request and offer of indemnity; and
- during that 60-day period, the holders of a majority in
principal amount of the debt securities of that series do not
give the trustee a direction inconsistent with the request.
This provision does not, however, affect the right of a holder of a debt
security to sue for enforcement of any overdue payment.
In most cases, holders of a majority in principal amount of the
outstanding debt securities of a series (or of all debt securities issued under
the applicable indenture that are affected, voting as one class) may direct the
time, method and place of:
- conducting any proceeding for any remedy available to the
trustee; and
- exercising any trust or power conferred upon the trustee
relating to or arising as a result of an event of default.
Under each of the indentures we are required to file each year with the
trustee a written statement as to their compliance with the covenants contained
in the applicable indenture.
Modification and Waiver. Each indenture may be amended or supplemented
if the holders of a majority in principal amount of the outstanding debt
securities of all series issued under that indenture that are affected by the
amendment or supplement (acting as one class) consent to it. Without the consent
of the holder of each debt security affected, however, no modification may:
- reduce the amount of debt securities whose holders must
consent to an amendment, a supplement or a waiver;
- reduce the rate of or change the time for payment of interest
on the debt security;
- reduce the principal of the debt security or change its stated
maturity;
- reduce any premium payable on the redemption of the debt
security or change the time at which the debt security may or
must be redeemed;
- change any obligation to pay additional amounts on the debt
security;
- make payments on the debt security payable in currency other
than as originally stated in the debt security;
- impair the holder's right to institute suit for the
enforcement of any payment on or with respect to the debt
security;
- make any change in the percentage of principal amount of debt
securities necessary to waive compliance with certain
provisions of the indenture or to make any change in the
provision related to modification;
- modify the provisions relating to the subordination of any
subordinated debt security in a manner adverse to the holder
of that security;
- waive a continuing default or event of default regarding any
payment on the debt securities; or
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- release the Guarantor, or any Subsidiary Guarantor, or modify
the guarantee of the Guarantor or any Subsidiary Guarantor in
any manner adverse to the holders.
Each indenture may be amended or supplemented or any provision of that
indenture may be waived without the consent of any holders of debt securities
issued under that indenture in certain circumstances, including:
- to cure any ambiguity, omission, defect or inconsistency;
- to provide for the assumption of our obligations under the
indentures by a successor upon any merger, consolidation or
asset transfer permitted under the indenture;
- to provide for uncertificated debt securities in addition to
or in place of certificated debt securities or to provide for
bearer debt securities;
- to provide any security for, any guarantees of or any
additional obligors on any series of debt securities or, with
respect to the senior indentures, the related guarantees;
- to comply with any requirement to effect or maintain the
qualification of that indenture under the Trust Indenture Act
of 1939;
- to add covenants that would benefit the holders of any debt
securities or to surrender any rights we have under the
indentures;
- to add events of default with respect to any debt securities;
and
- to make any change that does not adversely affect any
outstanding debt securities of any series issued under that
indenture in any material respect.
The holders of a majority in principal amount of the outstanding debt
securities of any series (or, in some cases, of all debt securities issued under
the applicable indenture that are affected, voting as one class) may waive any
existing or past default or event of default with respect to those debt
securities. Those holders may not, however, waive any default or event of
default in any payment on any debt security or compliance with a provision that
cannot be amended or supplemented without the consent of each holder affected.
Defeasance. When we use the term defeasance, we mean discharge from
some or all of our obligations under the indentures. If any combination of funds
or government securities are deposited with the trustee under an indenture
sufficient to make payments on the debt securities of a series issued under that
indenture on the dates those payments are due and payable, then, at our option,
either of the following will occur:
- we will be discharged from our or their obligations with
respect to the debt securities of that series and, if
applicable, the related guarantees ("legal defeasance"); or
- we will no longer have any obligation to comply with the
restrictive covenants, the merger covenant and other specified
covenants under the applicable indenture, and the related
events of default will no longer apply ("covenant
defeasance").
If a series of debt securities is defeased, the holders of the debt
securities of the series affected will not be entitled to the benefits of the
applicable indenture, except for obligations to register the transfer or
exchange of debt securities, replace stolen, lost or mutilated debt securities
or maintain paying agencies and hold moneys for payment in trust. In the case of
covenant defeasance, our obligation to pay principal, premium and interest on
the debt securities and, if applicable, guarantees of the payments will also
survive.
Unless we inform you otherwise in the prospectus supplement, we will be
required to deliver to the trustee an opinion of counsel that the deposit and
related defeasance would not cause the holders of the debt securities to
recognize income, gain or loss for U.S. federal income tax purposes. If we elect
legal defeasance, that opinion of counsel must be based upon a ruling from the
U.S. Internal Revenue Service or a change in law to that effect.
No Personal Liability of General Partner. U.S. Propane, L.P., our
general partner, and its directors, officers, employees, incorporators and
partners, as such, will not be liable for:
- any of Heritage Propane Partners, L.P.'s, Heritage Operating,
L.P.'s or Subsidiary Guarantors' obligations under the debt
securities, the indentures or the guarantees; or
31
- any claim based on, in respect of, or by reason of, such
obligations or their creation.
By accepting a debt security, each holder will be deemed to have waived
and released all such liability. This waiver and release are part of the
consideration for our issuance of the debt securities. This waiver may not be
effective, however, to waive liabilities under the federal securities laws, and
it is the view of the SEC that such a waiver is against public policy.
Governing Law. New York law will govern the indentures and the debt
securities.
Trustee. We may appoint a separate trustee for any series of debt
securities. We use the term "trustee" to refer to the trustee appointed with
respect to any such series of debt securities. We may maintain banking and other
commercial relationships with the trustee and its affiliates in the ordinary
course of business, and the trustee may own debt securities.
Form, Exchange, Registration and Transfer. The debt securities will be
issued in registered form, without interest coupons. There will be no service
charge for any registration of transfer or exchange of the debt securities.
However, payment of any transfer tax or similar governmental charge payable for
that registration may be required.
Debt securities of any series will be exchangeable for other debt
securities of the same series, the same total principal amount and the same
terms but in different authorized denominations in accordance with the
applicable indenture. Holders may present debt securities for registration of
transfer at the office of the security registrar or any transfer agent we
designate. The security registrar or transfer agent will effect the transfer or
exchange if its requirements and the requirements of the applicable indenture
are met.
The trustee will be appointed as security registrar for the debt
securities. If a prospectus supplement refers to any transfer agents we
initially designate, we may at any time rescind that designation or approve a
change in the location through which any transfer agent acts. We are required to
maintain an office or agency for transfers and exchanges in each place of
payment. We may at any time designate additional transfer agents for any series
of debt securities.
In the case of any redemption, we will not be required to register the
transfer or exchange of:
- any debt security during a period beginning 15 business days
prior to the mailing of the relevant notice of redemption and
ending on the close of business on the day of mailing of such
notice; or
- any debt security that has been called for redemption in whole
or in part, except the unredeemed portion of any debt security
being redeemed in part.
Payment and Paying Agents. Unless we inform you otherwise in a
prospectus supplement, payments on the debt securities will be made in U.S.
dollars at the office of the trustee and any paying agent. At our option,
however, payments may be made by wire transfer for global debt securities or by
check mailed to the address of the person entitled to the payment as it appears
in the security register. Unless we inform you otherwise in a prospectus
supplement, interest payments may be made to the person in whose name the debt
security is registered at the close of business on the record date for the
interest payment.
Unless we inform you otherwise in a prospectus supplement, the trustee
under the applicable indenture will be designated as the paying agent for
payments on debt securities issued under that indenture. We may at any time
designate additional paying agents or rescind the designation of any paying
agent or approve a change in the office through which any paying agent acts.
If the principal of or any premium or interest on debt securities of a
series is payable on a day that is not a business day, the payment will be made
on the following business day. For these purposes, unless we inform you
otherwise in a prospectus supplement, a "business day" is any day that is not a
Saturday, a Sunday or a day on which banking institutions in New York, New York
or a place of payment on the debt securities of that series is authorized or
obligated by law, regulation or executive order to remain closed.
Subject to the requirements of any applicable abandoned property laws,
the trustee and paying agent will pay to us upon written request any money held
by them for payments on the debt securities that remains unclaimed for two years
after the date upon which that payment has become due. After payment to us,
holders entitled to the money must look to us for payment. In that case, all
liability of the trustee or paying agent with respect to that money will cease.
32
Book-Entry Debt Securities. The debt securities of a series may be
issued in the form of one or more global debt securities that would be deposited
with a depositary or its nominee identified in the prospectus supplement. Global
debt securities may be issued in either temporary or permanent form. We will
describe in the prospectus supplement the terms of any depositary arrangement
and the rights and limitations of owners of beneficial interests in any global
debt security.
PROVISIONS APPLICABLE SOLELY TO THE HERITAGE PROPANE AND HERITAGE OPERATING
SUBORDINATED INDENTURES
Subordination. Debt securities of a series may be subordinated to our
"Senior Indebtedness," which we define generally to include any obligation
created or assumed by us (or, if the series is guaranteed, the Guarantor and any
Subsidiary Guarantors) for the repayment of borrowed money, any purchase money
obligation created or assumed by us, and any guarantee therefor, whether
outstanding or hereafter issued, unless, by the terms of the instrument creating
or evidencing such obligation, it is provided that such obligation is
subordinate or not superior in right of payment to the debt securities (or, if
the series is guaranteed, the guarantee of the Guarantor or any Subsidiary
Guarantor), or to other obligations which are pari passu with or subordinated to
the debt securities (or, if the series is guaranteed, the guarantee of the
Guarantor or any Subsidiary Guarantor). Subordinated debt securities will be
subordinated in right of payment, to the extent and in the manner set forth in
the subordinated indentures and the prospectus supplement relating to such
series, to the prior payment of all of our indebtedness and that of the
Guarantor or any Subsidiary Guarantor that is designated as "Senior
Indebtedness" with respect to the series.
The holders of Senior Indebtedness of ours or, if applicable, the
Guarantor or a Subsidiary Guarantor, will receive payment in full of the Senior
Indebtedness before holders of subordinated debt securities will receive any
payment of principal, premium or interest with respect to the subordinated debt
securities upon any payment or distribution of our assets or, if applicable to
any series of outstanding debt securities, the Subsidiary Guarantors' assets, to
creditors:
- upon a liquidation or dissolution of us or, if applicable to
any series of outstanding debt securities, the Subsidiary
Guarantors; or
- in a bankruptcy, receivership or similar proceeding relating
to us or, if applicable to any series of outstanding debt
securities, to the Subsidiary Guarantors.
Until the Senior Indebtedness is paid in full, any distribution to
which holders of subordinated debt securities would otherwise be entitled will
be made to the holders of Senior Indebtedness, except that the holders of
subordinated debt securities may receive units representing limited partner
interests and any debt securities that are subordinated to Senior Indebtedness
to at least the same extent as the subordinated debt securities.
If we do not pay any principal, premium or interest with respect to
Senior Indebtedness within any applicable grace period (including at maturity),
or any other default on Senior Indebtedness occurs and the maturity of the
Senior Indebtedness is accelerated in accordance with its terms, we may not:
- make any payments of principal, premium, if any, or interest
with respect to subordinated debt securities;
- make any deposit for the purpose of defeasance of the
subordinated debt securities; or
- repurchase, redeem or otherwise retire any subordinated debt
securities, except that in the case of subordinated debt
securities that provide for a mandatory sinking fund, we may
deliver subordinated debt securities to the trustee in
satisfaction of our sinking fund obligation,
unless, in either case,
- the default has been cured or waived and any declaration of
acceleration has been rescinded;
- the Senior Indebtedness has been paid in full in cash; or
- we and the trustee receive written notice approving the
payment from the representatives of each issue of "Designated
Senior Indebtedness."
Generally, "Designated Senior Indebtedness" will include:
- any specified issue of Senior Indebtedness of at least $100
million; and
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- any other Senior Indebtedness that we may designate in respect
of any series of subordinated debt securities.
During the continuance of any default, other than a default described
in the immediately preceding paragraph, that may cause the maturity of any
Designated Senior Indebtedness to be accelerated immediately without further
notice, other than any notice required to effect such acceleration, or the
expiration of any applicable grace periods, we may not pay the subordinated debt
securities for a period called the "Payment Blockage Period." A Payment Blockage
Period will commence on the receipt by us and the trustee of written notice of
the default, called a "Blockage Notice," from the representative of any
Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period and will end 179 days thereafter.
The Payment Blockage Period may be terminated before its expiration:
- by written notice from the person or persons who gave the
Blockage Notice;
- by repayment in full in cash of the Designated Senior
Indebtedness with respect to which the Blockage Notice was
given; or
- if the default giving rise to the Payment Blockage Period is
no longer continuing.
Unless the holders of the Designated Senior Indebtedness have
accelerated the maturity of the Designated Senior Indebtedness, we may resume
payments on the subordinated debt securities after the expiration of the Payment
Blockage Period.
Generally, not more than one Blockage Notice may be given in any period
of 360 consecutive days. The total number of days during which any one or more
Payment Blockage Periods are in effect, however, may not exceed an aggregate of
179 days during any period of 360 consecutive days.
After all Senior Indebtedness is paid in full and until the
subordinated debt securities are paid in full, holders of the subordinated debt
securities shall be subrogated to the rights of holders of Senior Indebtedness
to receive distributions applicable to Senior Indebtedness.
As a result of the subordination provisions described above, in the
event of insolvency, the holders of Senior Indebtedness, as well as certain of
our general creditors, may recover more, ratably, than the holders of the
subordinated debt securities.
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SELLING UNITHOLDERS
In addition to covering our offering of securities, this prospectus
covers the offering for resale of up to 6,415,762 common units by selling
unitholders. The following table sets forth information relating to the selling
unitholders' beneficial ownership of our common units as of the date of this
prospectus.
NAME OF SELLING UNITHOLDER NUMBER OF COMMON UNITS AVAILABLE FOR RESALE
- -------------------------- -------------------------------------------
U.S. Propane, L.P. 180,028
Heritage Holdings, Inc. 4,426,916
James E. Bertelsmeyer 1,027,946
H. Michael Krimbill 292,059
R.C. Mills 305,509
Bill W. Byrne 64,157
J. Charles Sawyer 64,157
Mark A. Darr 18,330
Thomas H. Rose 18,330
Curtis L. Weishahn 18,330
The applicable prospectus supplement will set forth, with respect to
the selling unitholders:
- the name of the selling unitholders in that offering;
- the nature of the position, office or other material
relationship which the selling unitholders will have had
within the prior three years with us or any of our affiliates;
- the number of common units owned by the selling unitholders
prior to the offering;
- the number of common units to be offered for the selling
unitholders' account; and
- the number and (if one percent or more) the percentage of
common units to be owned by the selling unitholders after the
completion of the offering.
All expenses incurred with the registration of the common units owned
by the selling unitholders, excluding any separate legal fees and expenses of
the selling unitholders, will be borne by us.
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MATERIAL TAX CONSIDERATIONS
This section is a summary of the material tax consequences that may be
relevant to prospective unitholders who are individual citizens or residents of
the United States and, unless otherwise noted in the following discussion, is
the opinion of Baker Botts L.L.P., special counsel to our general partner and
us, insofar as it relates to matters of United States federal income tax law and
legal conclusions with respect to those matters. This section is based upon
current provisions of the Internal Revenue Code, existing and proposed
regulations and current administrative rulings and court decisions, all of which
are subject to change. Later changes in these authorities may cause the tax
consequences to vary substantially from the consequences described below. Unless
the context otherwise requires, references in this section to "us" or "we" are
references to Heritage Propane Partners, L.P. and Heritage Operating, L.P.
No attempt has been made in this section to comment on all federal
income tax matters affecting us or the unitholders. Moreover, the discussion
focuses on unitholders who are individual citizens or residents of the United
States and has only limited application to corporations, estates, trusts,
nonresident aliens or other unitholders subject to specialized tax treatment,
such as tax-exempt institutions, foreign persons, individual retirement accounts
(IRAs), real estate investment trusts (REITs) or mutual funds. Accordingly, we
recommend that you consult, and depend on, your own tax advisor in analyzing the
federal, state, local and foreign tax consequences particular to you of an
investment in, or the disposition of, our securities.
All statements as to matters of law and legal conclusions, but not as
to factual matters, contained in this section, unless otherwise noted, are the
opinion of counsel, and some are based on the accuracy of the representations we
make.
No ruling has been or will be requested from the IRS regarding any
matter affecting us or prospective unitholders. An opinion of counsel represents
only that counsel's best legal judgment and does not bind the IRS or the courts.
Accordingly, the opinions and statements made here may not be sustained by a
court if contested by the IRS. Any contest of this sort with the IRS may
materially and adversely impact the market for the common units and the prices
at which common units trade. In addition, the costs of any contest with the IRS
will be borne directly or indirectly by the unitholders and the general partner.
Furthermore, the tax treatment of us or of an investment in us, may be
significantly modified by future legislative or administrative changes or court
decisions. Any modifications may or may not be retroactively applied.
For the reasons described below, counsel has not rendered an opinion
with respect to the following specific federal income tax issues:
(a) the treatment of a unitholder whose common units are
loaned to a short seller to cover a short sale of common units (please
read "--Tax Consequences of Unit Ownership--Treatment of Short Sales");
(b) whether our monthly convention for allocating taxable
income and losses is permitted by existing Treasury regulations (please
read "--Disposition of Common Units--Allocations Between Transferors
and Transferees"); and
(c) whether our method for depreciating Section 743
adjustments is sustainable (please read "--Tax Consequences of Unit
Ownership--Section 754 Election").
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his allocable share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of whether
cash distributions are made to him by the partnership. Distributions of cash by
a partnership to a partner generally are not taxable unless the amount of cash
distributed is in excess of the partner's adjusted basis in his partnership
interest.
No ruling has been or will be sought from the IRS and the IRS has made
no determination as to the status of Heritage Propane Partners, L.P. as a
partnership for federal income tax purposes or whether our operations generate
"qualifying income" under Section 7704 of the Code, or any other matter
affecting our prospective unitholders. Instead, we have relied on the opinion of
Baker Botts L.L.P. that, based upon the Internal Revenue Code, its regulations,
published revenue rulings and court decisions and the representations described
below,
36
Heritage Propane Partners, L.P. has been, is, and will continue to be,
classified as a partnership for federal income tax purposes.
In rendering its opinion, Baker Botts L.L.P. has relied on factual
representations made by us and our general partner. The representations made by
us and our general partner upon which counsel has relied are:
(a) Neither we nor Heritage Operating, L.P. has elected
or will elect to be treated as a corporation;
(b) Heritage Propane Partners, L.P. and Heritage
Operating, L.P. have been and will be operated in accordance with
applicable partnership statutes, the applicable partnership agreement
and in the manner described in this prospectus; and
(c) For each taxable year, more than 90% of our gross
income has been and will be income that our counsel has opined or will
opine is "qualifying income" within the meaning of Section 7704(d) of
the Internal Revenue Code.
Section 7704 of the Internal Revenue Code provides that publicly-traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "Qualifying Income Exception," exists with respect
to publicly-traded partnerships of which 90% or more of the gross income for
every taxable year consists of "qualifying income." Qualifying income includes
income and gains derived from the processing, transportation and marketing of
crude oil, natural gas and products thereof, including the retail and wholesale
marketing of propane, certain hedging activities and the transportation of
propane and natural gas liquids. Other types of qualifying income include
interest other than from a financial business, dividends, gains from the sale of
real property and gains from the sale or other disposition of assets held for
the production of income that otherwise constitutes qualifying income. We
estimate that approximately seven percent of our current gross income is not
qualifying income; however, this estimate could change from time to time. Based
upon and subject to this estimate, the factual representations made by us and
the general partner and a review of the applicable legal authorities, Baker
Botts L.L.P. is of the opinion that at least 90% of our current gross income
constitutes qualifying income.
If we fail to meet the Qualifying Income Exception, other than a
failure which is determined by the IRS to be inadvertent and which is cured
within a reasonable time after discovery, we will be treated as if we had
transferred all of our assets, subject to liabilities, to a newly formed
corporation, on the first day of the year in which we fail to meet the
Qualifying Income Exception, in return for stock in that corporation, and then
distributed that stock to the unitholders in liquidation of their interests in
us. This contribution and liquidation should be tax-free to unitholders and us
so long as we, at that time, do not have liabilities in excess of the tax basis
of our assets. Thereafter, we would be treated as a corporation for federal
income tax purposes.
If we were treated as an association taxable as a corporation in any
taxable year, either as a result of a failure to meet the Qualifying Income
Exception or otherwise, our items of income, gain, loss and deduction would be
reflected only on our separate tax returns rather than being passed through to
the unitholders, and our net income would be taxed to us at corporate rates. In
addition, any distribution made to a unitholder would be treated as either
taxable dividend income, to the extent of Heritage Propane Partners, L.P.'s
current or accumulated earnings and profits, or, in the absence of earnings and
profits, a nontaxable return of capital, to the extent of the unitholder's tax
basis in his common units, or taxable capital gain, after the unitholder's tax
basis in his common units is reduced to zero. Accordingly, taxation as a
corporation would result in a material reduction in a unitholder's cash flow and
after-tax return and thus would likely result in a substantial reduction of the
value of the units.
The remainder of this section is based on Baker Botts L.L.P.'s opinion
that Heritage Propane Partners, L.P. and Heritage Operating, L.P. will be
classified as partnerships for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of Heritage Propane
Partners, L.P. will be treated as partners of Heritage Propane Partners, L.P.
for federal income tax purposes. Also:
(a) assignees who have executed and delivered transfer
applications, and are awaiting admission as limited partners, and
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(b) unitholders whose common units are held in street
name or by a nominee and who have the right to direct the nominee in
the exercise of all substantive rights attendant to the ownership of
their common units,
will be treated as partners of Heritage Propane Partners, L.P. for federal
income tax purposes. As there is no direct authority addressing assignees of
common units who are entitled to execute and deliver transfer applications and
become entitled to direct the exercise of attendant rights, but who fail to
execute and deliver transfer applications, counsel's opinion does not extend to
these persons. Furthermore, a purchaser or other transferee of common units who
does not execute and deliver a transfer application may not receive some federal
income tax information or reports furnished to record holders of common units
unless the common units are held in a nominee or street name account and the
nominee or broker has executed and delivered a transfer application for those
common units.
A beneficial owner of common units whose units have been transferred to
a short seller to complete a short sale would appear to lose his status as a
partner with respect to those units for federal income tax purposes. Please read
"--Tax Consequences of Unit Ownership--Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by
a unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. These holders
should consult their own tax advisors with respect to their status as partners
in Heritage Propane Partners, L.P. for federal income tax purposes.
TAX CONSEQUENCES OF UNIT OWNERSHIP
Flow-through of Taxable Income. We will not pay any federal income tax.
Instead, each unitholder will be required to report on his income tax return his
allocable share of our income, gains, losses and deductions without regard to
whether corresponding cash distributions are received by him. Consequently, we
may allocate income to a unitholder even if he has not received a cash
distribution. Each unitholder will be required to include in income his
allocable share of our income, gains, losses and deductions for our taxable year
ending with or within his taxable year.
Treatment of Distributions. Our distributions to a unitholder generally
will not be taxable to the unitholder for federal income tax purposes to the
extent of his tax basis in his common units immediately before the distribution.
Our cash distributions in excess of a unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the common units, taxable in
accordance with the rules described under "--Disposition of Common Units" below.
Any reduction in a unitholder's share of our liabilities for which no partner,
including the general partner, bears the economic risk of loss, known as
"nonrecourse liabilities," will be treated as a distribution of cash to that
unitholder. To the extent our distributions cause a unitholder's "at risk"
amount to be less than zero at the end of any taxable year, he must recapture
any losses deducted in previous years that are equal to the amount of that
shortfall. Please read "--Limitations on Deductibility of Losses."
A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease his share of our nonrecourse
liabilities, and thus will result in a corresponding deemed distribution of
cash. A non-pro rata distribution of money or property may result in ordinary
income to a unitholder, regardless of his tax basis in his common units, if that
distribution reduces the unitholder's share of our "unrealized receivables,"
including depreciation recapture, and/or substantially appreciated "inventory
items," both as defined in the Internal Revenue Code, and collectively, "Section
751 Assets."
To that extent, he will be treated as having been distributed his
proportionate share of the Section 751 Assets and having exchanged those assets
with us in return for the non-pro rata portion of the actual distribution made
to him. This latter deemed exchange generally will result in the unitholder's
realization of ordinary income. That income will equal the excess of (1) the
non-pro rata portion of that distribution over (2) the unitholder's tax basis
for the share of Section 751 Assets deemed relinquished in the exchange.
Basis of Common Units. A unitholder's initial tax basis for his common
units will be the amount he paid for the common units plus his share of our
nonrecourse liabilities. That basis will be increased by his share of our income
and by any increases in his share of our nonrecourse liabilities. That basis
will be decreased, but not below zero, by distributions from us, by the
unitholder's share of our losses, by any decreases in his share of our
nonrecourse liabilities and by his share of our expenditures that are not
deductible in computing taxable income and
38
are not required to be capitalized. A limited partner will have no share of our
debt which is recourse to the general partner, but will have a share, generally
based on his share of profits, of our nonrecourse liabilities. Please read
"--Disposition of Common Units--Recognition of Gain or Loss."
Limitations on Deductibility of Losses. The deduction by a unitholder
of his share of our losses will be limited to the tax basis in his units and, in
the case of an individual unitholder or a corporate unitholder that is subject
to the "at risk" rules (for example, if more than 50% of the value of the
corporate unitholder's stock is owned directly or indirectly by five or fewer
individuals or some tax-exempt organizations), to the amount for which the
unitholder is considered to be "at risk" with respect to our activities, if that
is less than his tax basis. A unitholder must recapture losses deducted in
previous years to the extent that distributions cause his at risk amount to be
less than zero at the end of any taxable year. Losses disallowed to a unitholder
or recaptured as a result of these limitations will carry forward and will be
allowable to the extent that his tax basis or at risk amount, whichever is the
limiting factor, is subsequently increased. Upon the taxable disposition of a
common unit, any gain recognized by a unitholder can be offset by losses that
were previously suspended by the at risk limitation but may not be offset by
losses suspended by the basis limitation. Any excess loss above that gain
previously suspended by the at risk or basis limitations is no longer
utilizable.
In general, a unitholder will be at risk to the extent of the tax basis
of his common units, excluding any portion of that basis attributable to his
share of our nonrecourse liabilities, reduced by any amount of money he borrows
to acquire or hold his common units, if the lender of those borrowed funds owns
an interest in us, is related to the unitholder or can look only to the units
for repayment. A unitholder's at risk amount will increase or decrease as the
tax basis of the unitholder's common units increases or decreases, other than
tax basis increases or decreases attributable to increases or decreases in his
share of our nonrecourse liabilities.
The passive loss limitations generally provide that individuals,
estates, trusts and some closely-held corporations and personal service
corporations can deduct losses from passive activities, which are generally
activities in which the taxpayer does not materially participate, only to the
extent of the taxpayer's income from those passive activities. The passive loss
limitations are applied separately with respect to each publicly-traded
partnership. Consequently, any losses we generate will only be available to
offset our passive income generated in the future and will not be available to
offset income from other passive activities or investments, including our
investments or investments in other publicly-traded partnerships, or salary or
active business income. Passive losses that are not deductible because they
exceed a unitholder's share of income we generate may be deducted in full when
he disposes of his entire investment in us in a fully taxable transaction with
an unrelated party. The passive activity loss rules are applied after other
applicable limitations on deductions, including the at risk rules and the basis
limitation.
A unitholder's share of our net income may be offset by any suspended
passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other
publicly-traded partnerships.
Limitations on Interest Deductions. The deductibility of a
non-corporate taxpayer's "investment interest expense" is generally limited to
the amount of that taxpayer's "net investment income." The IRS has indicated
that net passive income from a publicly-traded partnership constitutes
investment income for purposes of the limitations on the deductibility of
investment interest. In addition, the unitholder's share of our portfolio income
will be treated as investment income. Investment interest expense includes:
(a) interest on indebtedness properly allocable to
property held for investment;
(b) our interest expense attributed to portfolio income;
and
(c) the portion of interest expense incurred to purchase
or carry an interest in a passive activity to the extent attributable
to portfolio income.
The computation of a unitholder's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than interest, directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.
39
Entity-Level Collections. If we are required or elect under applicable
law to pay any federal, state or local income tax on behalf of any unitholder or
the general partner or any former unitholder, we are authorized to pay those
taxes from our funds. That payment, if made, will be treated as a distribution
of cash to the partner on whose behalf the payment was made. If the payment is
made on behalf of a person whose identity cannot be determined, we are
authorized to treat the payment as a distribution to all current unitholders. We
are authorized to amend the partnership agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of units and to adjust
later distributions, so that after giving effect to these distributions, the
priority and characterization of distributions otherwise applicable under the
partnership agreement is maintained as nearly as is practicable. Payments by us
as described above could give rise to an overpayment of tax on behalf of an
individual partner in which event the partner would be required to file a claim
in order to obtain a credit or refund.
Allocation of Income, Gain, Loss and Deduction. In general, if we have
a net profit, our items of income, gain, loss and deduction will be allocated
among the general partner and the unitholders in accordance with their
percentage interests in us. At any time that incentive distributions are made to
the general partner, gross income will be allocated to the general partner to
the extent of these distributions. If we have a net loss for the entire year,
that loss will be allocated first to the general partner and the unitholders in
accordance with their percentage interests in us to the extent of their positive
capital accounts and, second, to the general partner.
Specified items of our income, gain, loss and deduction will be
allocated to account for the difference between the tax basis and fair market
value of our assets at the time of an offering, referred to in this discussion
as "Contributed Property." The effect of these allocations to a unitholder
purchasing common units in our offering will be essentially the same as if the
tax basis of our assets were equal to their fair market value at the time of the
offering. In addition, items of recapture income will be allocated to the extent
possible to the partner who was allocated the deduction giving rise to the
treatment of that gain as recapture income in order to minimize the recognition
of ordinary income by some unitholders. Finally, although we do not expect that
our operations will result in the creation of negative capital accounts, if
negative capital accounts nevertheless result, items of our income and gain will
be allocated in an amount and manner to eliminate the negative balance as
quickly as possible.
An allocation of items of our income, gain, loss or deduction, other
than an allocation required by the Internal Revenue Code to eliminate the
difference between a partner's "book" capital account, credited with the fair
market value of Contributed Property, and "tax" capital account, credited with
the tax basis of Contributed Property, referred to in this discussion as the
"Book-Tax Disparity," will generally be given effect for federal income tax
purposes in determining a partner's share of an item of income, gain, loss or
deduction only if the allocation has substantial economic effect. In any other
case, a partner's share of an item will be determined on the basis of his
interest in us, which will be determined by taking into account all the facts
and circumstances, including his relative contributions to us, the interests of
all the partners in profits and losses, the interest of all the partners in cash
flow and other nonliquidating distributions and rights of all the partners to
distributions of capital upon liquidation.
Baker Botts L.L.P. is of the opinion that, with the exception of the
issues described in "--Tax Consequences of Unit Ownership--Section 754 Election"
and "--Disposition of Common Units--Allocations Between Transferors and
Transferees," allocations under our partnership agreement will be given effect
for federal income tax purposes in determining a partner's share of an item of
income, gain, loss or deduction.
Treatment of Short Sales. A unitholder whose units are loaned to a
"short seller" to cover a short sale of units may be considered as having
disposed of those units. If so, he would no longer be a partner for those units
during the period of the loan and may recognize gain or loss from the
disposition. As a result, during this period:
(a) any of our income, gain, loss or deduction with
respect to those units would not be reportable by the unitholder;
(b) any cash distributions received by the unitholder as
to those units would be fully taxable; and
(c) all of these distributions would appear to be
ordinary income.
Baker Botts L.L.P. has not rendered an opinion regarding the treatment
of a unitholder where common units are loaned to a short seller to cover a short
sale of common units; therefore, unitholders desiring to assure their status as
partners and avoid the risk of gain recognition from a loan to a short seller
should modify any applicable brokerage account agreements to prohibit their
brokers from borrowing their units. The IRS has announced that it is
40
actively studying issues relating to the tax treatment of short sales of
partnership interests. Please also read "--Disposition of Common Units
- --Recognition of Gain or Loss."
Alternative Minimum Tax. Each unitholder will be required to take into
account his distributive share of any items of our income, gain, loss or
deduction for purposes of the alternative minimum tax. The current minimum tax
rate for noncorporate taxpayers is 26% on the first $175,000 of alternative
minimum taxable income in excess of the exemption amount and 28% on any
additional alternative minimum taxable income. Prospective unitholders should
consult with their tax advisors as to the impact of an investment in units on
their liability for the alternative minimum tax.
Tax Rates. In general, the highest effective United States federal
income tax rate for individuals for 2003 is 35% and the maximum United States
federal income tax rate for net capital gains recognized by an individual after
May 6, 2003 is 20% if the asset disposed of was held for more than 12 months at
the time of disposition.
Section 754 Election. We have made the election permitted by Section
754 of the Internal Revenue Code. That election is irrevocable without the
consent of the IRS. The election will generally permit us to adjust a common
unit purchaser's tax basis in our assets ("inside basis") under Section 743(b)
of the Internal Revenue Code to reflect his purchase price. This election does
not apply to a person who purchases common units directly from us. The Section
743(b) adjustment belongs to the purchaser and not to other partners. For
purposes of this discussion, a partner's inside basis in our assets will be
considered to have two components: (1) his share of our tax basis in our assets
("common basis") and (2) his Section 743(b) adjustment to that basis.
Treasury regulations under Section 743 of the Internal Revenue Code
require, if the remedial allocation method is adopted (which we have adopted), a
portion of the Section 743(b) adjustment attributable to recovery property to be
depreciated over the remaining cost recovery period for the Section 704(c)
built-in gain. Under Treasury Regulation Section 1.167(c)-l(a)(6), a Section
743(b) adjustment attributable to property subject to depreciation under Section
167 of the Internal Revenue Code rather than cost recovery deductions under
Section 168 is generally required to be depreciated using either the
straight-line method or the 150% declining balance method. Under our partnership
agreement, the general partner is authorized to take a position to preserve the
uniformity of units even if that position is not consistent with these Treasury
regulations. Please read "--Uniformity of Units."
Although Baker Botts L.L.P. is unable to opine as to the validity of
this approach because there is no clear authority on this issue, we intend to
depreciate the portion of a Section 743(b) adjustment attributable to unrealized
appreciation in the value of Contributed Property, to the extent of any
unamortized Book-Tax Disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful life applied to
the common basis of the property, or treat that portion as non-amortizable to
the extent attributable to property the common basis of which is not
amortizable. This method is consistent with the regulations under Section 743
but is arguably inconsistent with Treasury Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of our assets. To
the extent this Section 743(b) adjustment is attributable to appreciation in
value in excess of the unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury regulations and legislative history. If we determine
that this position cannot reasonably be taken, we may take a depreciation or
amortization position under which all purchasers acquiring units in the same
month would receive depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same applicable rate as if
they had purchased a direct interest in our assets. This kind of aggregate
approach may result in lower annual depreciation or amortization deductions than
would otherwise be allowable to some unitholders. Please read "--Uniformity of
Units."
A Section 754 election is advantageous if the transferee's tax basis in
his units is higher than the units' share of the aggregate tax basis of our
assets immediately prior to the transfer. In that case, as a result of the
election, the transferee would have, among other items, a greater amount of
depreciation and depletion deductions and his share of any gain on a sale of our
assets would be less. Conversely, a Section 754 election is disadvantageous if
the transferee's tax basis in his units is lower than those units' share of the
aggregate tax basis of our assets immediately prior to the transfer. Thus, the
fair market value of the units may be affected either favorably or unfavorably
by the election.
The calculations involved in the Section 754 election are complex and
will be made on the basis of assumptions as to the value of our assets and other
matters. For example, the allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue Code. The IRS could
seek to reallocate some or all of any Section 743(b) adjustment we allocated to
our tangible assets to goodwill instead.
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Goodwill, as an intangible asset, is generally amortizable over a longer period
of time or under a less accelerated method than our tangible assets. We cannot
assure you that the determinations we make will not be successfully challenged
by the IRS and that the deductions resulting from them will not be reduced or
disallowed altogether. Should the IRS require a different basis adjustment to be
made, and should, in our opinion, the expense of compliance exceed the benefit
of the election, we may seek permission from the IRS to revoke our Section 754
election. If permission is granted, a subsequent purchaser of units may be
allocated more income than he would have been allocated had the election not
been revoked.
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year. We use the year ending December 31
as our taxable year and the accrual method of accounting for federal income tax
purposes. Each unitholder will be required to include in income his share of our
income, gain, loss and deduction for our taxable year ending within or with his
taxable year.
Tax Basis, Depreciation and Amortization. The tax basis of our assets
will be used for purposes of computing depreciation and cost recovery deductions
and, ultimately, gain or loss on the disposition of these assets. The federal
income tax burden associated with the difference between the fair market value
of our assets and their tax basis immediately prior to an offering will be borne
by the general partner, its affiliates and our other unitholders as of that
time. Please read "--Allocation of Income, Gain, Loss and Deduction."
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. We are not entitled to any
amortization deductions with respect to any goodwill conveyed to us on
formation. Property we subsequently acquire or construct may be depreciated
using accelerated methods permitted by the Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure, or
otherwise, all or a portion of any gain, determined by reference to the amount
of depreciation previously deducted and the nature of the property, may be
subject to the recapture rules and taxed as ordinary income rather than capital
gain. Similarly, a partner who has taken cost recovery or depreciation
deductions with respect to property we own will likely be required to recapture
some or all of those deductions as ordinary income upon a sale of his interest
in us. Please read "--Tax Consequences of Unit Ownership--Allocation of Income,
Gain, Loss and Deduction" and "--Disposition of Common Units--Recognition of
Gain or Loss."
The costs incurred in selling our units (called "syndication expenses")
must be capitalized and cannot be deducted currently, ratably or upon our
termination. There are uncertainties regarding the classification of costs as
organization expenses, which we may amortize, and as syndication expenses, which
we may not amortize. The underwriting discounts and commissions we incur will be
treated as syndication expenses.
Valuation and Tax Basis of Our Properties. The federal income tax
consequences of the ownership and disposition of units will depend in part on
our estimates of the relative fair market values, and the initial tax bases, of
our assets. Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the relative fair
market value estimates ourselves. These estimates of basis are subject to
challenge and will not be binding on the IRS or the courts. If the estimates of
fair market value or basis are later found to be incorrect, the character and
amount of items of income, gain, loss or deductions previously reported by
unitholders might change, and unitholders might be required to adjust their tax
liability for prior years and incur interest and penalties with respect to those
adjustments.
DISPOSITION OF COMMON UNITS
Recognition of Gain or Loss. Gain or loss will be recognized on a sale
of units equal to the difference between the amount realized and the
unitholder's tax basis for the units sold. A unitholder's amount realized will
be measured by the sum of the cash or the fair market value of other property he
receives plus his share of our nonrecourse liabilities. Because the amount
realized includes a unitholder's share of our nonrecourse liabilities, the gain
recognized on the sale of units could result in a tax liability in excess of any
cash received from the sale.
Prior distributions from us in excess of cumulative net taxable income
for a common unit that decreased a unitholder's tax basis in that common unit
will, in effect, become taxable income if the common unit is sold at a price
greater than the unitholder's tax basis in that common unit, even if the price
received is less than his original cost.
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Except as noted below, gain or loss recognized by a unitholder, other
than a "dealer" in units, on the sale or exchange of a unit held for more than
one year will generally be taxable as capital gain or loss. Capital gain
recognized by an individual on the sale of units held more than 12 months will
generally be taxed at a maximum rate of 15%. A portion of this gain or loss,
which will likely be substantial, however, will be separately computed and taxed
as ordinary income or loss under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" we own. The term "unrealized
receivables" includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory
items and depreciation recapture may exceed net taxable gain realized upon the
sale of a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize both ordinary
income and a capital loss upon a sale of units. Net capital loss may offset
capital gains and no more than $3,000 of ordinary income, in the case of
individuals, and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those interests and maintain a
single adjusted tax basis for all those interests. Upon a sale or other
disposition of less than all of those interests, a portion of that tax basis
must be allocated to the interests sold using an "equitable apportionment"
method. Treasury regulations allow a selling unitholder who can identify common
units transferred with an ascertainable holding period to elect to use the
actual holding period of the common units transferred. Thus, according to the
ruling, a common unitholder will be unable to select high or low basis common
units to sell as would be the case with corporate stock, but, according to the
regulations, may designate specific common units sold for purposes of
determining the holding period of units transferred. A unitholder electing to
use the actual holding period of common units transferred must consistently use
that identification method for all subsequent sales or exchanges of common
units. A unitholder considering the purchase of additional units or a sale of
common units purchased in separate transactions should consult his tax advisor
as to the possible consequences of this ruling and application of the Treasury
regulations.
Specific provisions of the Internal Revenue Code affect the taxation of
some financial products and securities, including partnership interests, by
treating a taxpayer as having sold an "appreciated" partnership interest, one in
which gain would be recognized if it were sold, assigned or terminated at its
fair market value, if the taxpayer or related persons enter(s) into:
(a) a short sale;
(b) an offsetting notional principal contract; or
(c) a futures or forward contract with respect to the
partnership interest or substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having sold
that position if the taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of Treasury is also
authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
Allocations Between Transferors and Transferees. In general, our
taxable income and losses will be determined annually, will be prorated on a
monthly basis and will be subsequently apportioned among the unitholders in
proportion to the number of units owned by each of them as of the opening of the
applicable exchange on the first business day of the month (the "Allocation
Date"). However, gain or loss realized on a sale or other disposition of our
assets other than in the ordinary course of business will be allocated among the
unitholders on the Allocation Date in the month in which that gain or loss is
recognized. As a result, a unitholder transferring units may be allocated
income, gain, loss and deduction realized after the date of transfer.
The use of this method may not be permitted under existing Treasury
regulations. Accordingly, Baker Botts L.L.P. is unable to opine on the validity
of this method of allocating income and deductions between unitholders. If this
method is not allowed under the Treasury regulations, or only applies to
transfers of less than all of the unitholder's interest, our taxable income or
losses might be reallocated among the unitholders. We are authorized to
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revise our method of allocation between unitholders to conform to a method
permitted under future Treasury regulations.
A unitholder who owns units at any time during a quarter and who
disposes of them prior to the record date set for a cash distribution for that
quarter will be allocated items of our income, gain, loss and deductions
attributable to that quarter but will not be entitled to receive that cash
distribution.
Notification Requirements. A purchaser of units from another unitholder
is required to notify us in writing of that purchase within 30 days after the
purchase. We are required to notify the IRS of that transaction and to furnish
specified information to the transferor and transferee. However, these reporting
requirements do not apply to a sale by an individual who is a citizen of the
United States and who effects the sale or exchange through a broker.
Additionally, a transferor and a transferee of a unit will be required to
furnish statements to the IRS, filed with their income tax returns for the
taxable year in which the sale or exchange occurred, that describe the amount of
the consideration received for the unit that is allocated to our goodwill or
going concern value.
Constructive Termination. We will be considered to have been terminated
for tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a 12-month period. A constructive
termination results in the closing of our taxable year for all unitholders. We
would be required to make new tax elections after a termination, including a new
election under Section 754 of the Internal Revenue Code, and a termination would
result in a deferral of our deductions for depreciation. A termination could
also result in penalties if we were unable to determine that the termination had
occurred. Moreover, a termination might either accelerate the application of, or
subject us to, any tax legislation enacted before the termination.
UNIFORMITY OF UNITS
Because we cannot match transferors and transferees of units, we must
maintain uniformity of the economic and tax characteristics of the units to a
purchaser of these units. In the absence of uniformity, we may be unable to
completely comply with a number of federal income tax requirements, both
statutory and regulatory. A lack of uniformity can result from a literal
application of Treasury Regulation Section 1.167(c)-1(a)(6). Any non-uniformity
could have a negative impact on the value of the units. Please read "--Tax
Consequences of Unit Ownership --Section 754 Election."
We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property, to
the extent of any unamortized Book-Tax Disparity, using a rate of depreciation
or amortization derived from the depreciation or amortization method and useful
life applied to the common basis of that property, or treat that portion as
nonamortizable, to the extent attributable to property the common basis of which
is not amortizable, consistent with the regulations under Section 743, even
though that position may be inconsistent with Treasury Regulation Section
1.167(c)-1(a)(6) which is not expected to directly apply to a material portion
of our assets. Please read "--Tax Consequences of Unit Ownership --Section 754
Election." To the extent that the Section 743(b) adjustment is attributable to
appreciation in value in excess of the unamortized Book-Tax Disparity, we will
apply the rules described in the Treasury regulations and legislative history.
If we determine that this position cannot reasonably be taken, we may adopt a
depreciation and amortization position under which all purchasers acquiring
units in the same month would receive depreciation and amortization deductions,
whether attributable to a common basis or Section 743(b) adjustment, based upon
the same applicable rate as if they had purchased a direct interest in our
property. If this position is adopted, it may result in lower annual
depreciation and amortization deductions than would otherwise be allowable to
some unitholders and risk the loss of depreciation and amortization deductions
not taken in the year that these deductions are otherwise allowable. This
position will not be adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on the unitholders.
If we choose not to utilize this aggregate method, we may use any other
reasonable depreciation and amortization method to preserve the uniformity of
the intrinsic tax characteristics of any units that would not have a material
adverse effect on the unitholders. The IRS may challenge any method of
depreciating the Section 743(b) adjustment described in this paragraph. If this
challenge were sustained, the uniformity of units might be affected, and the
gain from the sale of units might be increased without the benefit of additional
deductions. Please read "--Disposition of Common Units --Recognition of Gain or
Loss."
TAX-EXEMPT ORGANIZATIONS AND OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences to them.
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Employee benefit plans and most other organizations exempt from federal
income tax, including individual retirement accounts and other retirement plans,
are subject to federal income tax on unrelated business taxable income.
Virtually all of our income allocated to a unitholder which is a tax-exempt
organization will be unrelated business taxable income and will be taxable to
them.
A regulated investment company or "mutual fund" is required to derive
90% or more of its gross income from interest, dividends and gains from the sale
of stocks or securities or foreign currency or specified related sources. It is
not anticipated that any significant amount of our gross income will include
that type of income.
Non-resident aliens and foreign corporations, trusts or estates that
own units will be considered to be engaged in business in the United States
because of the ownership of units. As a consequence they will be required to
file federal tax returns to report their share of our income, gain, loss or
deduction and pay federal income tax at regular rates on their share of our net
income or gain. And, under rules applicable to publicly traded partnerships, we
will withhold tax, at the highest effective rate applicable to individuals, from
cash distributions made quarterly to foreign unitholders. Each foreign
unitholder must obtain a taxpayer identification number from the IRS and submit
that number to our transfer agent on a Form W-8 BEN or applicable substitute
form in order to obtain credit for these withholding taxes.
In addition, because a foreign corporation that owns units will be
treated as engaged in a United States trade or business, that corporation may be
subject to the United States branch profits tax at a rate of 30%, in addition to
regular federal income tax, on its share of our income and gain, as adjusted for
changes in the foreign corporation's "U.S. net equity," which are effectively
connected with the conduct of a United States trade or business. That tax may be
reduced or eliminated by an income tax treaty between the United States and the
country in which the foreign corporate unitholder is a "qualified resident." In
addition, this type of unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on the
sale or disposition of that unit to the extent that this gain is effectively
connected with a United States trade or business of the foreign unitholder.
Apart from the ruling, a foreign unitholder will not be taxed or subject to
withholding upon the sale or disposition of a unit if he has owned less than 5%
in value of the units during the five-year period ending on the date of the
disposition and if the units are regularly traded on an established securities
market at the time of the sale or disposition.
ADMINISTRATIVE MATTERS
Information Returns and Audit Procedures. We intend to furnish to each
unitholder, within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes his share of our income,
gain, loss and deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take various
accounting and reporting positions, some of which have been mentioned earlier,
to determine his share of income, gain, loss and deduction. We cannot assure you
that those positions will yield a result that conforms to the requirements of
the Internal Revenue Code, regulations or administrative interpretations of the
IRS. Neither we nor counsel can assure prospective unitholders that the IRS will
not successfully contend in court that those positions are impermissible. Any
challenge by the IRS could negatively affect the value of the units.
The IRS may audit our federal income tax information returns.
Adjustments resulting from an IRS audit may require each unitholder to adjust a
prior year's tax liability, and possibly may result in an audit of his own
return. Any audit of a unitholder's return could result in adjustments not
related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Internal Revenue Code requires
that one partner be designated as the "Tax Matters Partner" for these purposes.
The partnership agreement names the general partner as our Tax Matters Partner.
The Tax Matters Partner will make some elections on our behalf and on
behalf of unitholders. In addition, the Tax Matters Partner can extend the
statute of limitations for assessment of tax deficiencies against unitholders
for items in our returns. The Tax Matters Partner may bind a unitholder with
less than a 1% profits interest in us to a settlement with the IRS unless that
unitholder elects, by filing a statement with the IRS, not to give that
authority to
45
the Tax Matters Partner. The Tax Matters Partner may seek judicial review, by
which all the unitholders are bound, of a final partnership administrative
adjustment and, if the Tax Matters Partner fails to seek judicial review,
judicial review may be sought by any unitholder having at least a 1% interest in
profits or by any group of unitholders having in the aggregate at least a 5%
interest in profits. However, only one action for judicial review will go
forward, and each unitholder with an interest in the outcome may participate.
A unitholder must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is not consistent
with the treatment of the item on our return. Intentional or negligent disregard
of this consistency requirement may subject a unitholder to substantial
penalties.
Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
(a) the name, address and taxpayer identification number
of the beneficial owner and the nominee;
(b) whether the beneficial owner is
(i) a person that is not a United States person,
(ii) a foreign government, an international
organization or any wholly owned agency or
instrumentality of either of the foregoing,
or
(iii) a tax-exempt entity;
(c) the amount and description of units held, acquired or
transferred for the beneficial owner; and
(d) specific information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and
acquisition cost for purchases, as well as the amount of net proceeds
from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of the units with the
information furnished to us.
Registration as a Tax Shelter. The Internal Revenue Code requires that
"tax shelters" be registered with the Secretary of the Treasury. The temporary
Treasury regulations interpreting the tax shelter registration provisions of the
Internal Revenue Code are extremely broad. It is arguable that we are not
subject to the registration requirement on the basis that we will not constitute
a tax shelter. However, we have registered as a tax shelter with the Secretary
of Treasury in the absence of assurance that we will not be subject to tax
shelter registration and in light of the substantial penalties which might be
imposed if registration is required and not undertaken.
OUR TAX SHELTER REGISTRATION NUMBER IS 96234000014.
ISSUANCE OF THIS REGISTRATION NUMBER DOES NOT INDICATE THAT INVESTMENT IN US OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS.
A unitholder who sells or otherwise transfers a unit in a later
transaction must furnish the registration number to the transferee. The penalty
for failure of the transferor of a unit to furnish the registration number to
the transferee is $100 for each failure. The unitholders must disclose our tax
shelter registration number on Form 8271 to be attached to the tax return on
which any deduction, loss or other benefit we generate is claimed or on which
any of our income is included. A unitholder who fails to disclose the tax
shelter registration number on his return, without reasonable cause for that
failure, will be subject to a $250 penalty for each failure. Any penalties
discussed are not deductible for federal income tax purposes.
46
Accuracy-related Penalties. An additional tax equal to 20% of the
amount of any portion of an underpayment of tax that is attributable to one or
more specified causes, including negligence or disregard of rules or
regulations, substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No penalty will be
imposed, however, for any portion of an underpayment if it is shown that there
was a reasonable cause for that portion and that the taxpayer acted in good
faith regarding that portion.
A substantial understatement of income tax in any taxable year exists
if the amount of the understatement exceeds the greater of 10% of the tax
required to be shown on the return for the taxable year or $5,000 ($10,000 for
most corporations). The amount of any understatement subject to penalty
generally is reduced if any portion is attributable to a position adopted on the
return:
(a) for which there is, or was, "substantial authority,"
or
(b) as to which there is a reasonable basis and the
pertinent facts of that position are disclosed on the return.
More stringent rules apply to "tax shelters," a term that in this
context does not appear to include us. If any item of income, gain, loss or
deduction included in the distributive shares of unitholders might result in
that kind of an "understatement" of income for which no "substantial authority"
exists, we must disclose the pertinent facts on our return. In addition, we will
make a reasonable effort to furnish sufficient information for unitholders to
make adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any
property, or the adjusted basis of any property, claimed on a tax return is 200%
or more of the amount determined to be the correct amount of the valuation or
adjusted basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000 for
most corporations). If the valuation claimed on a return is 400% or more than
the correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, you will be subject to other
taxes, including state and local income taxes, unincorporated business taxes,
and estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property or in which you are a
resident. We currently do business or own property in 29 states, most of which
impose income taxes. We may also own property or do business in other states or
foreign jurisdictions in the future. Although an analysis of those various taxes
is not presented here, each prospective unitholder should consider their
potential impact on his investment in us. You may not be required to file a
return and pay taxes in some states because your income from that state falls
below the filing and payment requirement. You will be required, however, to file
state income tax returns and to pay state income taxes in many of the states in
which we do business or own property, and you may be subject to penalties for
failure to comply with those requirements. In some states, tax losses may not
produce a tax benefit in the year incurred and also may not be available to
offset income in subsequent taxable years. Some of the states may require us, or
we may elect, to withhold a percentage of income from amounts to be distributed
to a unitholder who is not a resident of the state. Withholding, the amount of
which may be greater or less than a particular unitholder's income tax liability
to the state, generally does not relieve a nonresident unitholder from the
obligation to file an income tax return. Amounts withheld may be treated as if
distributed to unitholders for purposes of determining the amounts distributed
by us. Please read "--Tax Consequences of Unit Ownership --Entity-Level
Collections." Based on current law and our estimate of our future operations,
the general partner anticipates that any amounts required to be withheld will
not be material.
IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO INVESTIGATE THE LEGAL
AND TAX CONSEQUENCES, UNDER THE LAWS OF PERTINENT STATES AND LOCALITIES, OF HIS
INVESTMENT IN US. ACCORDINGLY, EACH PROSPECTIVE UNITHOLDER SHOULD CONSULT, AND
MUST DEPEND UPON, HIS OWN TAX COUNSEL OR OTHER ADVISOR WITH REGARD TO THOSE
MATTERS. FURTHER, IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO FILE ALL STATE
AND LOCAL, AS WELL AS UNITED STATES FEDERAL TAX RETURNS, THAT MAY BE REQUIRED OF
HIM. BAKER BOTTS L.L.P. HAS NOT RENDERED AN OPINION ON THE STATE OR LOCAL TAX
CONSEQUENCES OF AN INVESTMENT IN US.
TAX CONSEQUENCES OF OWNERSHIP OF DEBT SECURITIES
A description of the material federal income tax consequences of the
acquisition, ownership and disposition of debt securities will be set forth on
the prospectus supplement relating to the offering of debt securities.
47
INVESTMENT IN US BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to certain
additional considerations because the investments of such plans are subject to
the fiduciary responsibility and prohibited transaction provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
restrictions imposed by Section 4975 of the Internal Revenue Code. As used
herein, the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified
employee pension plans and tax deferred annuities or IRAs established or
maintained by an employer or employee organization. Among other things,
consideration should be given to (a) whether such investment is prudent under
Section 404(a)(1)(B) of ERISA; (b) whether in making such investment, such plan
will satisfy the diversification requirement of Section 404(a)(1)(C) of ERISA;
and (c) whether such investment will result in recognition of unrelated business
taxable income by such plan and, if so, the potential after-tax investment
return. Please read "Tax Considerations--Tax-Exempt Organizations and Other
Investors." The person with investment discretion with respect to the assets of
an employee benefit plan (a "fiduciary") should determine whether an investment
in us is authorized by the appropriate governing instrument and is a proper
investment for such plan.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code
(which also applies to IRAs that are not considered part of an employee benefit
plan) prohibit an employee benefit plan from engaging in certain transactions
involving "plan assets" with parties that are "parties in interest" under ERISA
or "disqualified persons" under the Internal Revenue Code with respect to the
plan.
In addition to considering whether the purchase of limited partnership
units is a prohibited transaction, a fiduciary of an employee benefit plan
should consider whether such plan will, by investing in us, be deemed to own an
undivided interest in our assets, with the result that our general partner also
would be a fiduciary of such plan and our operations would be subject to the
regulatory restrictions of ERISA, including its prohibited transaction rules, as
well as the prohibited transaction rules of the Internal Revenue Code.
The Department of Labor regulations provide guidance with respect to
whether the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under certain circumstances. Pursuant to
these regulations, an entity's assets would not be considered to be "plan
assets" if, among other things, (a) the equity interest acquired by employee
benefit plans are publicly offered securities --i.e., the equity interests are
widely held by 100 or more investors independent of the issuer and each other,
freely transferable and registered pursuant to certain provisions of the federal
securities laws, (b) the entity is an "Operating Partnership"--i.e., it is
primarily engaged in the production or sale of a product or service other than
the investment of capital either directly or through a majority owned subsidiary
or subsidiaries, or (c) there is no significant investment by benefit plan
investors, which is defined to mean that less than 25% of the value of each
class of equity interest (disregarding certain interests held by our general
partner, its affiliates and certain other persons) is held by the employee
benefit plans referred to above, IRAs and other employee benefit plans not
subject to ERISA (such as governmental plans). Our assets should not be
considered "plan assets" under these regulations because it is expected that the
investment will satisfy the requirements in (a) and (b) above and may also
satisfy the requirements in (c) above.
Plan fiduciaries contemplating a purchase of limited partnership units
should consult with their own counsel regarding the consequences under ERISA and
the Internal Revenue Code in light of the serious penalties imposed on persons
who engage in prohibited transactions or other violations.
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PLAN OF DISTRIBUTION
We may sell the securities being offered hereby directly to purchasers,
through agents, through underwriters or through dealers.
We, or agents designated by us, may directly solicit, from time to
time, offers to purchase the securities. Any such agent may be deemed to be an
underwriter as that term is defined in the Securities Act of 1933. We will name
the agents involved in the offer or sale of the securities and describe any
commissions payable by us to these agents in the prospectus supplement. Unless
otherwise indicated in the prospectus supplement, these agents will be acting on
a best efforts basis for the period of their appointment. The agents may be
entitled under agreements which may be entered into with us to indemnification
by us against specific civil liabilities, including liabilities under the
Securities Act of 1933. The agents may also be our customers or may engage in
transactions with or perform services for us in the ordinary course of business.
If we utilize any underwriters in the sale of the securities in respect
of which this prospectus is delivered, we will enter into an underwriting
agreement with those underwriters at the time of sale to them. We will set forth
the names of these underwriters and the terms of the transaction in the
prospectus supplement, which will be used by the underwriters to make resales of
the securities in respect of which this prospectus is delivered to the public.
We may indemnify the underwriters under the relevant underwriting agreement to
indemnification by us against specific liabilities, including liabilities under
the Securities Act. The underwriters may also be our customers or may engage in
transactions with or perform services for us in the ordinary course of business.
If we utilize a dealer in the sale of the securities in respect of
which this prospectus is delivered, we will sell those securities to the dealer,
as principal. The dealer may then resell those securities to the public at
varying prices to be determined by the dealer at the time of resale. We may
indemnify the dealers against specific liabilities, including liabilities under
the Securities Act. The dealers may also be our customers or may engage in
transactions with, or perform services for us in the ordinary course of
business.
Common units and debt securities may also be sold directly by us. In
this case, no underwriters or agents would be involved. We may use electronic
media, including the Internet, to sell offered securities directly.
To the extent required, this prospectus may be amended or supplemented
from time to time to describe a specific plan of distribution. The place and
time of delivery for the securities in respect of which this prospectus is
delivered are set forth in the accompanying prospectus supplement.
DISTRIBUTION BY SELLING UNITHOLDERS
Distribution of any common units to be offered by one or more of the
selling unitholders may be effected from time to time in one or more
transactions (which may involve block transactions) (1) on the New York Stock
Exchange, (2) in the over-the-counter market, (3) in underwritten transactions,
(4) in transactions otherwise than on the New York Stock Exchange or in the
over-the-counter market or (5) in a combination of any of these transactions.
The transactions may be effected by the selling unitholders at market prices
prevailing at the time of sale, at prices related to the prevailing market
prices, at negotiated prices or at fixed prices. The selling unitholders may
offer their shares through underwriters, brokers, dealers or agents, who may
receive compensation in the form of underwriting discounts, commissions or
concessions from the selling unitholders and/or the purchasers of the shares for
whom they act as agent. The selling unitholders may engage in short sales, short
sales against the box, puts and calls and other transactions in our securities,
or derivatives thereof, and may sell and deliver their common units in
connection therewith. In addition, the selling unitholders may from time to time
sell their common units in transactions permitted by Rule 144 under the
Securities Act.
As of the date of this prospectus, we have not engaged any underwriter,
broker, dealer or agent in connection with the distribution of common units
pursuant to this prospectus by the selling unitholders. To the extent required,
the number of common units to be sold, the purchase price, the name of any
applicable agent, broker, dealer or underwriter and any applicable commissions
with respect to a particular offer will be set forth in the applicable
prospectus supplement. The aggregate net proceeds to the selling unitholders
from the sale of their common units offered hereby will be the sale price of
those shares, less any commissions, if any, and other expenses of issuance and
distribution not borne by us.
The selling unitholders and any brokers, dealers, agents or
underwriters that participate with the selling unitholders in the distribution
of shares may be deemed to be "underwriters" within the meaning of the
Securities Act, in which event any discounts, concessions and commissions
received by such brokers, dealers, agents or
49
underwriters and any profit on the resale of the shares purchased by them may be
deemed to be underwriting discounts and commissions under the Securities Act.
The applicable prospectus supplement will set forth the extent to which
we will have agreed to bear fees and expenses of the selling unitholders in
connection with the registration of the common units being offered hereby by
them. We may, if so indicated in the applicable prospectus supplement, agree to
indemnify selling unitholders against certain civil liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the securities offered in this prospectus will be
passed upon for us by Baker Botts L.L.P., Houston, Texas and Doerner, Saunders,
Daniel & Anderson, L.L.P., Tulsa, Oklahoma. Baker Botts L.L.P. will also render
an opinion on the material federal income tax considerations regarding the
securities. If certain legal matters in connection with an offering of the
securities made by this prospectus and a related prospectus supplement are
passed on by counsel for the underwriters of such offering, that counsel will be
named in the applicable prospectus supplement related to that offering.
EXPERTS
The consolidated financial statements of Heritage Propane Partners,
L.P. as of August 31, 2002 and 2001, and for the years then ended, the financial
statements of Bi-State Propane as of August 31, 2002 and for the year then
ended, and the consolidated balance sheet of U.S. Propane, L.P., the general
partner of Heritage Propane Partners, L.P., as of August 31, 2002, incorporated
by reference in this prospectus and elsewhere in the registration statement of
which this prospectus is a part, have been audited by Grant Thornton LLP,
independent certified public accountants, as indicated in their reports with
respect thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in giving such reports.
The combined financial statements of V-1 Oil Co. and V-1 Gas Co. as of
December 31, 2001 and 2000, and for each of the three years in the period ended
December 31, 2001, incorporated by reference in this prospectus and elsewhere in
the registration statement of which this prospectus is a part, have been audited
by Grant Thornton LLP, independent certified public accountants, as indicated in
their report with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving such reports.
The consolidated financial statements of Heritage Propane Partners,
L.P. for the eight months ended August 31, 2000, the period ended August 9,
2000, and the year ended December 31, 1999, incorporated by reference in the
accompanying prospectus and elsewhere in the registration statement of which the
accompanying prospectus is a part, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are incorporated by reference herein in reliance upon the authority
of said firm as experts in giving such reports. Arthur Andersen LLP has not
consented to the incorporation by reference of their reports in this prospectus,
and we have dispensed with the requirement to file their consent in reliance
upon Rule 437a of the Securities Act of 1933. Because Arthur Andersen LLP has
not consented to the incorporation by reference of their reports in this
prospectus, you will not be able to recover against Arthur Andersen LLP under
Section 11 of the Securities Act of 1933 for any untrue statements of a material
fact contained in the financial statements audited by Arthur Andersen LLP or any
omissions to state a material fact required to be stated therein.
50
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are the expenses (other than underwriting discounts and
commissions) expected to be incurred in connection with the issuance and
distribution of the securities registered hereby. With the exception of the
Securities and Exchange Commission registration fee, the amounts set forth below
are estimates:
Securities and Exchange Commission registration fee $ 78,949
Legal fees and expenses $ 75,000
Accounting fees and expenses $ 30,000
Printing and engraving expenses $ 10,000
Trustee's fees $ 15,000
Miscellaneous $ 5,000
--------
TOTAL $213,949
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Heritage Propane Partners, L.P. and Heritage Operating, L.P.
The partnership agreements of each of Heritage Propane Partners, L.P.
and Heritage Operating, L.P. provide that each partnership, as applicable, will
indemnify (i) its respective general partner, any departing partner (as defined
therein), any person who is or was an affiliate of its respective general
partner or any departing partner, (ii) any person who is or was a director,
officer, employee, agent or trustee of the partnerships, (iii) any person who is
or was an officer, director, employee, agent or trustee of its respective
general partner or any departing partner or any affiliate of its respective
general partner or any departing partner, or (iv) any person who is or was
serving at the request of its respective general partner or any departing
partner or any affiliate of its respective general partner or any departing
partner as an officer, director, employee, partner, agent, fiduciary or trustee
of another person (each, an "Indemnitee"), to the fullest extent permitted by
law, from and against any and all losses, claims, damages, liabilities (joint
and several), expenses (including, without limitation, legal fees and expenses),
judgments, fines, penalties, interest, settlements and other amounts arising
from any and all claims, demands, actions, suits or proceedings, whether civil,
criminal, administrative or investigative, in which any Indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, by reason of
its status as any of the foregoing; provided that in each case the Indemnitee
acted in good faith and in a manner that such Indemnitee reasonably believed to
be in or not opposed to the best interests of each partnership and, with respect
to any criminal proceeding, had no reasonable cause to believe its conduct was
unlawful. Any indemnification under these provisions will be only out of the
assets of each of the partnerships, and the respective general partner shall not
be personally liable for, or have any obligation to contribute or loan funds or
assets to each applicable partnership to enable it to effectuate, such
indemnification. Each partnership is authorized to purchase (or to reimburse the
general partner or its affiliates for the cost of) insurance against liabilities
asserted against and expenses incurred by such persons in connection with each
of the partnerships' activities, regardless of whether each of the partnerships
would have the power to indemnify such person against such liabilities under the
provisions described above.
Heritage Service Corp.
Delaware law permits a corporation to adopt a provision in its
certificate of incorporation eliminating or limiting the personal liability of a
director, but not an officer in his or her capacity as such, to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except that such provision shall not limit the liability of a director
for (i) any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) liability under
section 174 of the Delaware General Corporation Law for unlawful payment of
dividends or stock purchases or redemptions, or (iv) any transaction from which
the director derived an improper personal benefit. Heritage Service Corp.'s
Certificate of Incorporation provides that, to the fullest extent of Delaware
law, no Heritage Service Corp. director shall be liable to Heritage Service
Corp. or Heritage Service Corp. stockholders for monetary damages for breach of
fiduciary duty as a director.
II-1
Under Delaware law, a corporation may indemnify any individual made a
party or threatened to be made a party to any type of proceeding, other than an
action by or in the right of the corporation, because he or she is or was an
officer, director, employee or agent of the corporation or was serving at the
request of the corporation as an officer, director, employee or agent of another
corporation or entity against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with such proceeding:
(i) if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation; or
(ii) in the case of a criminal proceeding, he or she had no reasonable cause to
believe that his or her conduct was unlawful. A corporation may indemnify any
individual made a party or threatened to be made a party to any threatened,
pending or completed action or suit brought by or in the right of the
corporation because he or she was an officer, director, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or other entity,
against expenses actually and reasonably incurred in connection with such action
or suit if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation,
provided that such indemnification will be denied if the individual is found
liable to the corporation unless, in such a case, the court determines the
person is nonetheless entitled to indemnification for such expenses. A
corporation must indemnify a present or former director or officer who
successfully defends himself or herself in a proceeding to which he or she was a
party because he or she was a director or officer of the corporation against
expenses actually and reasonably incurred by him or her. Expenses incurred by an
officer or director, or any employees or agents as deemed appropriate by the
board of directors, in defending civil or criminal proceedings may be paid by
the corporation in advance of the final disposition of such proceedings upon
receipt of an undertaking by or on behalf of such director, officer, employee or
agent to repay such amount if it shall ultimately be determined that he or she
is not entitled to be indemnified by the corporation. The Delaware law regarding
indemnification and expense advancement is not exclusive of any other rights
which may be granted by Heritage Service Corp.'s Certificate of Incorporation or
Bylaws, a vote of stockholders or disinterested directors, agreement or
otherwise.
Under the Delaware General Corporation Law, termination of any
proceeding by conviction or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that such person is prohibited from
being indemnified.
The Bylaws of Heritage Service Corp. provide for the indemnification
and advancement of expenses of any individual made, or threatened to be made, a
party to an action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he or she is or was a director or
officer of Heritage Service Corp. or is or was a director or officer of Heritage
Service Corp. serving as an officer or director, employee or agent of any other
enterprise at the request of Heritage Service Corp. Heritage Service Corp.'s
bylaws provide for such indemnification and advancement of expenses if such
officer or director acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of Heritage Service Corp.
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his or her conduct was unlawful.
II-2
Heritage-Bi State, L.L.C.
Under the Delaware Limited Liability Company Act, a limited liability
company may, and shall have the power to, indemnify and hold harmless any member
or manager or other person from and against any and all claims and demands
whatsoever.
The Amended and Restated Agreement of Limited Liability Company of
Heritage-Bi State, L.L.C. provides that a member shall not be liable to
Heritage-Bi State, L.L.C. for any act or omission based upon errors of judgment
in connection with the business or affairs of Heritage-Bi State, L.L.C. if such
member's conduct does not constitute gross negligence or willful misconduct.
Furthermore, the Amended and Restated Agreement of Limited Liability Company of
Heritage-Bi State, L.L.C. provides that a member shall be indemnified by
Heritage-Bi State, L.L.C., to the fullest extent permitted by law, from and
against any and all losses, claims, damages and settlements arising from any and
all claims, demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which the member is involved, as a party or
otherwise, by reason of the management of the affairs of Heritage-Bi State,
L.L.C. or the fact that such member is or was an agent of Heritage-Bi State,
L.L.C., provided that no member shall be entitled to indemnification for such
losses, claims, damages and settlements arising as a result of the gross
negligence or willful misconduct of such member.
Heritage Energy Resources, L.L.C.
Under the Oklahoma Limited Liability Company Act, a limited liability
company may (i) limit or eliminate the personal liability of a manager for
monetary damages for breach of any duty under the Oklahoma Limited Liability
Company Act or (ii) provide for indemnification of a manager for judgments,
settlements, penalties, fines or expenses incurred in any proceeding because
such manager is or was a manager of the limited liability company, except, in
either case, for any breach of a manager's duty of loyalty or any acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law.
The Operating Agreement of Heritage Energy Resources, L.L.C. provides
indemnification and eliminates liability for each manager or officer of Heritage
Energy Resources, L.L.C. from any and all monetary damages, claims, demands and
actions of every kind and nature whatsoever which may arise by reason of a
manager's or officer's performance of his or her duties and responsibilities,
except (i) for liabilities arising as a result of a breach of the manager's or
officer's duty of loyalty to Heritage Energy Resources, L.L.C. or its members,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law, (iii) for any transaction from
which the manager or officer derived an improper personal benefit and (iv) with
respect to indemnification, a breach of any provision of Heritage Energy
Resources, L.L.C.'s Operating Agreement.
Any underwriting agreement entered into in connection with the sale of
the securities offered pursuant to this registration statement will provide for
indemnification of officers, directors, members or managers of the general
partner, Heritage Service Corp., Heritage-Bi State, L.L.C. and Heritage Energy
Resources, L.L.C., including liabilities under the Securities Act.
II-3
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following documents are filed as
exhibits to this registration:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1* Form of Underwriting Agreement.
4.1 Amended and Restated Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(incorporated by reference to Exhibit 3.1 to Heritage Propane Partners, L.P.'s Registration
Statement on Form S-1, filed on June 21, 1996).
4.2 Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P. (incorporated by reference to Exhibit 3.1.1 to Heritage Propane Partners, L.P.'s
Current Report on Form 8-K dated August 23, 2000).
4.3 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P. (incorporated by reference to Exhibit 3.1.2 to Heritage Propane Partners, L.P.'s
Annual Report on Form 10-K for the year ended August 31, 2001).
4.4 Amendment No. 3 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P. (incorporated by reference to Exhibit 3.1.3 to Heritage Propane Partners, L.P.'s
Quarterly Report on Form 10-Q for the quarter ended May 31, 2002).
4.5 Amendment No. 4 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P. (incorporated by reference to Exhibit 3.1.4 to Heritage Propane Partners, L.P.'s
Quarterly Report on Form 10-Q for the quarter ended May 31, 2002).
4.6 Amended and Restated Agreement of Limited Partnership of Heritage Operating, L.P. (incorporated
by reference to Exhibit 3.2 to Heritage Propane Partners, L.P.'s Registration Statement on Form
S-1, filed on June 21, 1996).
4.7 Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Heritage Operating,
L.P. (incorporated by reference to Exhibit 3.2.1 to Heritage Propane Partners, L.P.'s Annual
Report on Form 10-K for the year ended August 31, 2000).
4.8 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage Operating,
L.P. (incorporated by reference to Exhibit 3.2.2 to Heritage Propane Partners, L.P.'s Quarterly
Report on Form 10-Q for the quarter ended May 31, 2002).
4.9** Form of Senior Indenture of Heritage Propane Partners, L.P.
4.10** Form of Subordinated Indenture of Heritage Propane Partners, L.P.
4.11** Form of Senior Indenture of Heritage Operating, L.P.
4.12** Form of Subordinated Indenture of Heritage Operating, L.P.
5.1** Opinion of Baker Botts L.L.P. as to the legality of the securities registered hereby.
5.2** Opinion of Doerner, Saunders, Daniel & Anderson, L.L.P. as to the legality of the securities
registered hereby.
8.1** Opinion of Baker Botts L.L.P. as to tax matters.
12.1** Computation of ratio of earnings to fixed charges.
23.1** Consent of Baker Botts L.L.P. (included in Exhibits 5.1 and 8.1).
23.2** Consent of Doerner, Saunders, Daniel & Anderson, L.L.P. (included in Exhibit 5.2).
23.3** Consent of Grant Thornton LLP.
24.1** Power of Attorney (included on the signature page to this Registration Statement).
II-4
25.1* Form T-1 Statement of Eligibility and Qualification respecting the Senior Indenture of Heritage
Propane Partners, L.P.
25.2* Form T-1 Statement of Eligibility and Qualification respecting the Subordinated Indenture of
Heritage Propane Partners, L.P.
25.3* Form T-1 Statement of Eligibility and Qualification respecting the Senior Indenture of Heritage
Operating, L.P.
25.4* Form T-1 Statement of Eligibility and Qualification respecting the Subordinated Indenture of
Heritage Operating, L.P.
99.1 Balance sheet of U.S. Propane, L.P. (incorporated by reference to Exhibit 99.1 to Heritage
Propane Partners, L.P.'s Annual Report on Form 10-K for the year ended August 31, 2002).
- ------------------
* To be filed by a post-effective amendment to this registration
statement or as an exhibit to a current report on Form 8-K.
** Filed herewith.
(b) Financial Statement Schedules
No financial statement schedules are included herein. All other
schedules for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are not required under the related
instructions, are inapplicable, or the information is included in the
consolidated financial statements, and have therefore been omitted.
(c) Reports, Opinions, and Appraisals
The following reports, opinions, and appraisals are included herein:
None.
ITEM 17. UNDERTAKINGS
I. Each of the undersigned registrants hereby undertakes:
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(b) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(c) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a) and (b) above do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-5
To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II. Each undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
III. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of any registrant pursuant to the provisions described in Item 15 above,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, each registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
each of the registrants certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Tulsa, State of Oklahoma, on July 25, 2003.
HERITAGE PROPANE PARTNERS, L.P.
By: U.S. PROPANE, L.P.
its General Partner
By: U.S. PROPANE, L.L.C.
its General Partner
By: /s/ Michael L. Greenwood
------------------------------
Name: Michael L. Greenwood
Title: Vice President and
Chief Financial Officer
HERITAGE OPERATING, L.P.
By: U.S. PROPANE, L.P.
its General Partner
By: U.S. PROPANE, L.L.C.
its General Partner
By: /s/ Michael L. Greenwood
------------------------------
Name: Michael L. Greenwood
Title: Vice President and
Chief Financial Officer
HERITAGE SERVICE CORP.
By: /s/ Michael L. Greenwood
------------------------------
Name: Michael L. Greenwood
Title: Vice President and
Chief Financial Officer
HERITAGE-BI STATE, L.L.C.
By: /s/ Michael L. Greenwood
------------------------------
Name: Michael L. Greenwood
Title: Vice President and
Chief Financial Officer
HERITAGE ENERGY RESOURCES, L.L.C.
By: /s/ Michael L. Greenwood
------------------------------
Name: Michael L. Greenwood
Title: Vice President and
Chief Financial Officer
II-7
POWER OF ATTORNEY
Each person whose signature appears below appoints H. Michael Krimbill
and Michael L. Greenwood, and each of them, any of whom may act without the
joinder of the other, as his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement and any Registration Statement (including any amendment thereto) for
this offering that is to be effective upon filing pursuant to Rule 462(b) under
the Securities Act of 1933, as amended, and to file the same, with all exhibits
thereto, and all other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he or she might or
would do in person, hereby ratifying and confirming all that said attorneys-in
fact and agents or any of them or their or his or her substitute and
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated below.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ H. Michael Krimbill (i) President and Chief Executive
- --------------------------------------- Officer (Principal Executive Officer)
H. Michael Krimbill of U.S. Propane, L.L.C., Heritage
Service Corp., Heritage-Bi State, July 25, 2003
L.L.C. and Heritage Energy Resources,
L.L.C., (ii) Director of U.S. Propane
L.L.C. and Heritage Service Corp. and
(iii) Manager of Heritage Energy
Resources, L.L.C.
/s/ James E. Bertelsmeyer Chairman of the Board and July 25, 2003
- --------------------------------------- Director of U.S. Propane, L.L.C.
James E. Bertelsmeyer
/s/ Michael L. Greenwood (i) Vice President and Chief
- --------------------------------------- Financial Officer (Principal
Michael L. Greenwood Financial and Accounting Officer) of
U.S. Propane, L.L.C., Heritage
Service Corp., Heritage-Bi State, July 25, 2003
L.L.C. and Heritage Energy Resources,
L.L.C. and (ii) Manager of Heritage
Energy Resources, L.L.C.
/s/ Bill W. Byrne Director of U.S. Propane, L.L.C. July 25, 2003
- ---------------------------------------
Bill W. Byrne
/s/ J. Charles Sawyer Director of U.S. Propane, L.L.C. July 25, 2003
- ---------------------------------------
J. Charles Sawyer
/s/ Stephen L. Cropper Director of U.S. Propane, L.L.C. July 25, 2003
- ---------------------------------------
Stephen L. Cropper
/s/ J. Patrick Reddy Director of U.S. Propane, L.L.C. July 25, 2003
- ---------------------------------------
J. Patrick Reddy
/s/ Royston K. Eustace Director of U.S. Propane, L.L.C. July 25, 2003
- ---------------------------------------
Royston K. Eustace
</Table>
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/s/ William N. Cantrell Director of U.S. Propane, L.L.C. July 25, 2003
- ---------------------------------------
William N. Cantrell
/s/ Kevin M. O'Hara Director of U.S. Propane, L.L.C. July 25, 2003
- ---------------------------------------
Kevin M. O'Hara
/s/ Andrew W. Evans Director of U.S. Propane, L.L.C. July 25, 2003
- ---------------------------------------
Andrew W. Evans
/s/ Richard T. O'Brien Director of U.S. Propane, L.L.C. July 25, 2003
- ---------------------------------------
Richard T. O'Brien
</Table>
U.S. Propane, L.L.C. is the general partner of U.S. Propane, L.P., the
general partner of each of Heritage Propane Partners, L.P. and Heritage
Operating, L.P. Heritage Propane Partners, L.P. and Heritage Operating, L.P. are
the only members of Heritage-Bi State, L.L.C.
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1* Form of Underwriting Agreement.
4.1 Amended and Restated Agreement of Limited Partnership of Heritage Propane Partners, L.P.
(incorporated by reference to Exhibit 3.1 to Heritage Propane Partners, L.P.'s Registration
Statement on Form S-1, filed on June 21, 1996).
4.2 Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P. (incorporated by reference to Exhibit 3.1.1 to Heritage Propane Partners,
L.P.'s Current Report on Form 8-K dated August 23, 2000).
4.3 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P. (incorporated by reference to Exhibit 3.1.2 to Heritage Propane Partners,
L.P.'s Annual Report on Form 10-K for the year ended August 31, 2001).
4.4 Amendment No. 3 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P. (incorporated by reference to Exhibit 3.1.3 to Heritage Propane Partners,
L.P.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 2002).
4.5 Amendment No. 4 to Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P. (incorporated by reference to Exhibit 3.1.4 to Heritage Propane Partners,
L.P.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 2002).
4.6 Amended and Restated Agreement of Limited Partnership of Heritage Operating, L.P.
(incorporated by reference to Exhibit 3.2 to Heritage Propane Partners, L.P.'s Registration
Statement on Form S-1, filed on June 21, 1996).
4.7 Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Heritage
Operating, L.P. (incorporated by reference to Exhibit 3.2.1 to Heritage Propane Partners,
L.P.'s Annual Report on Form 10-K for the year ended August 31, 2000).
4.8 Amendment No. 2 to Amended and Restated Agreement of Limited Partnership of Heritage
Operating, L.P. (incorporated by reference to Exhibit 3.2.2 to Heritage Propane Partners,
L.P.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 2002).
4.9** Form of Senior Indenture of Heritage Propane Partners, L.P.
4.10** Form of Subordinated Indenture of Heritage Propane Partners, L.P.
4.11** Form of Senior Indenture of Heritage Operating, L.P.
4.12** Form of Subordinated Indenture of Heritage Operating, L.P.
5.1** Opinion of Baker Botts L.L.P. as to the legality of the securities registered hereby.
5.2** Opinion of Doerner, Saunders, Daniel & Anderson, L.L.P. as to the legality of the securities
registered hereby.
8.1** Opinion of Baker Botts L.L.P. as to tax matters.
12.1** Computation of ratio of earnings to fixed charges.
23.1** Consent of Baker Botts L.L.P. (included in Exhibits 5.1 and 8.1).
23.2** Consent of Doerner, Saunders, Daniel & Anderson, L.L.P. (included in Exhibit 5.2).
23.3** Consent of Grant Thornton LLP.
24.1** Power of Attorney (included on the signature page to this Registration Statement).
25.1* Form T-1 Statement of Eligibility and Qualification respecting the Senior Indenture of
Heritage Propane Partners, L.P.
25.2* Form T-1 Statement of Eligibility and Qualification respecting the Subordinated Indenture of
Heritage Propane Partners, L.P.
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25.3* Form T-1 Statement of Eligibility and Qualification respecting the Senior Indenture of
Heritage Operating, L.P.
25.4* Form T-1 Statement of Eligibility and Qualification respecting the Subordinated Indenture of
Heritage Operating, L.P.
99.1 Balance sheet of U.S. Propane, L.P. (incorporated by reference to Exhibit 99.1 to Heritage
Propane Partners, L.P.'s Annual Report on Form 10-K for the year ended August 31, 2002).
- ------------------
* To be filed by a post-effective amendment to this registration
statement or as an exhibit to a current report on Form 8-K.
** Filed herewith.
II-11