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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO__________
COMMISSION FILE NUMBER 1-11727
HERITAGE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1493906
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8801 SOUTH YALE AVENUE, SUITE 310, TULSA, OKLAHOMA 74137
(Address of principal executive offices and zip code)
(918) 492-7272
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of each exchange on
which registered
Common Units New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value as of November 6, 2000, of the registrant's Common
Units held by nonaffiliates of the registrant, based on the reported closing
price of such units on the New York Stock Exchange on such date, was
approximately $142,092,000.
At November 6, 2000, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 9,746,196 Common Units
1,851,471 Subordinated Units
1,382,514 Class B Subordinated Units
Documents Incorporated by Reference: None
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HERITAGE PROPANE PARTNERS, L.P.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS. ............................................................................................1
ITEM 2. PROPERTIES............................................................................................9
ITEM 3. LEGAL PROCEEDINGS....................................................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS.....................................11
ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA.....................................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................15
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................................................27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................................28
ITEM 11. EXECUTIVE COMPENSATION................................................................................32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................37
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PART I
FORWARD-LOOKING STATEMENTS
CERTAIN MATTERS DISCUSSED IN THIS REPORT, EXCLUDING HISTORICAL
INFORMATION, AS WELL AS SOME STATEMENTS BY HERITAGE IN PERIODIC PRESS RELEASES,
INCLUDE CERTAIN "FORWARD-LOOKING" STATEMENTS. ALTHOUGH HERITAGE BELIEVES SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS AND CURRENT
EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS, NO ASSURANCE CAN BE GIVEN THAT
EVERY OBJECTIVE WILL BE REACHED. SUCH STATEMENTS ARE MADE IN RELIANCE ON THE
"SAFE HARBOR" PROTECTIONS PROVIDED UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.
AS REQUIRED BY THAT LAW, HERITAGE HEREBY IDENTIFIES THE FOLLOWING
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY
RESULTS PROJECTED, FORECASTED OR ESTIMATED BY HERITAGE IN FORWARD-LOOKING
STATEMENTS.
THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS:
o CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE UNITED STATES AS
WELL AS CHANGES IN GENERAL ECONOMIC CONDITIONS AND CURRENCIES
IN FOREIGN COUNTRIES;
o WEATHER CONDITIONS THAT VARY SIGNIFICANTLY FROM HISTORICALLY
NORMAL CONDITIONS;
o THE GENERAL LEVEL OF PETROLEUM PRODUCT DEMAND, AND THE
AVAILABILITY OF PROPANE SUPPLIES;
o ENERGY PRICES GENERALLY AND SPECIFICALLY, THE PRICE OF PROPANE
TO THE CONSUMER COMPARED TO THE PRICE OF ALTERNATIVE AND
COMPETING FUELS;
o COMPETITION FROM OTHER PROPANE DISTRIBUTORS AND ALTERNATE
FUELS;
o THE AVAILABILITY AND COST OF CAPITAL;
o CHANGES IN LAWS AND REGULATIONS TO WHICH HERITAGE IS SUBJECT,
INCLUDING TAX, ENVIRONMENTAL AND EMPLOYMENT REGULATIONS;
o THE COSTS AND EFFECTS OF LEGAL AND ADMINISTRATIVE PROCEEDINGS
AGAINST HERITAGE OR WHICH MAY BE BROUGHT AGAINST HERITAGE;
o THE ABILITY OF HERITAGE TO SUSTAIN ITS HISTORICAL LEVELS OF
INTERNAL GROWTH; AND
o THE ABILITY OF HERITAGE TO CONTINUE TO LOCATE AND ACQUIRE
OTHER PROPANE COMPANIES AT PURCHASE PRICES THAT ARE ACCRETIVE
TO ITS FINANCIAL RESULTS.
ITEM 1. BUSINESS
MERGER
In August 2000, TECO Energy, Inc. ("TECO"), Atmos Energy Corporation,
Piedmont Natural Gas Company, Inc. and AGL Resources, Inc. contributed each
company's propane operations, Peoples Gas Company ("Peoples Gas"), United Cities
Propane Gas, Inc. ("United Cities"), Piedmont Propane Company ("Piedmont"), and
AGL Propane, Inc. ("AGL"), respectively, to U.S. Propane, L.P. ("U.S. Propane")
in exchange for equity interests in U.S. Propane. The merger was accounted for
as an acquisition using the purchase method of accounting with Peoples Gas being
the accounting acquirer.
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In August 2000, U.S. Propane acquired all of the outstanding common
stock of Heritage Holdings, Inc., Heritage Propane Partners, L.P.'s General
Partner, for $120 million. By virtue of Heritage Holdings Inc.'s general partner
and limited partner interests in Heritage Propane Partners, L.P., U.S. Propane
gained control of Heritage Propane Partners, L.P. Simultaneously, U.S. Propane
transferred its propane operations, consisting of its interest in four separate
limited liability companies, AGL Propane, L.L.C., Peoples Gas Company, L.L.C.,
United Cities Propane Gas, L.L.C. and Retail Propane Company, L.L.C. (former
Piedmont operations) to Heritage Propane Partners, L.P. for $181.4 million plus
working capital. The $181.4 million was payable $139.5 million in cash, $31.8
million of assumed debt, and the issuance of 372,392 Common Units of Heritage
Propane Partners, L.P. valued at $7.3 million and a 1.0101 percent limited
partnership interest in Heritage Operating, L.P. valued at $2.7 million. The
purchase price and the issuance price for the Common Units were approved by an
independent committee of the Board of Directors of Heritage Holdings, Inc. The
issuance price for the Common Units was $19.73125 per unit under a formula based
on the average closing price of the Common Units on the New York Stock Exchange
for the twenty (20) day period beginning ten (10) days prior to the public
announcement of the transaction on June 15, 2000 (the "Formula Price"). The
working capital adjustment is anticipated to be settled in December 2000.
Concurrent with the acquisition, Heritage Propane Partners, L.P.
borrowed $180 million from several institutional investors and sold 1,161,814
Common Units and 1,382,514 Class B Subordinated Units in a private placement to
the former shareholders of Heritage Holdings, Inc. based on the Formula Price
resulting in net proceeds of $50.2 million. The total of these proceeds was
utilized to finance the transaction and retire a portion of existing debt.
Heritage Propane Partners, L.P. is the surviving entity for legal
purposes; however, U.S. Propane's propane operations will be the acquirer for
accounting purposes. For purposes of the discussion herein: (1) Peoples Gas is
described as the accounting acquirer because Peoples Gas was the acquirer in the
transaction that formed U.S. Propane; (2) the propane operations of Heritage
Propane Partners, L.P. prior to the series of transactions with U.S. Propane are
referred to as Predecessor Heritage; and (3) the combined operations of U.S.
Propane's propane operations and Predecessor Heritage are described as Heritage.
Peoples Gas has a fiscal year-end of December 31. The eight-month
period ended August 31, 2000 Form 10-K will be treated as a transition period
under the rules of the Securities and Exchange Commission. However, this Form
10-K is not a transition report as the registrant will continue to have an
August 31 fiscal year-end.
Heritage believes it is presently the fourth largest retail marketer of
propane in the United States (as measured by retail gallons sold). Heritage
currently serves more than 485,000 active residential, commercial, industrial
and agricultural customers located in 28 states. Heritage's operations extend
from coast to coast with concentrations in the western, upper midwestern,
northeastern and southeastern regions of the United States.
BUSINESS OF PREDECESSOR HERITAGE
Heritage Propane Partners, L.P., a publicly traded Delaware limited
partnership, was formed in April 1996. Heritage Propane Partners, L.P.'s
activities are conducted through its subsidiary, Heritage Operating, L.P. (the
"Operating Partnership"). Heritage, with a 98.9899 percent limited partner
interest, was the sole limited partner of the Operating Partnership. The
Operating Partnership accounts for nearly all of the consolidated assets, sales
and operating earnings of Heritage Propane Partners, L.P.
The business of Predecessor Heritage, starting with the formation of
Heritage Holdings, Inc. in 1989, has grown primarily through acquisitions of
retail propane operations and, to a lesser extent, through internal growth.
Since its inception in 1989 through August 9, 2000, Predecessor Heritage
completed 70 acquisitions for a total purchase price of approximately $297
million. Volumes of propane sold to retail customers have increased steadily
from 63.2 million gallons for the fiscal year ended August 31, 1992 to 170.9
million gallons for the period ended August 9, 2000.
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BUSINESS OF PEOPLES GAS
Peoples Gas is a Florida corporation and formerly a wholly owned
subsidiary of TECO. In June 1997, TECO acquired Lykes Energy, Inc. ("Lykes") for
approximately 12.1 million shares of its common stock valued at approximately
$300 million. Prior to the merger between TECO and Lykes, Peoples Gas was a
wholly owned subsidiary of Lykes.
In January 1998, TECO completed its merger with Griffis, Inc.
("Griffis") for approximately 600,000 shares of its common stock valued at
approximately $15 million. This merger was accounted for as a pooling of
interests. Concurrent with the merger, Griffis was merged into Peoples Gas.
GENERAL
At the time of the series of transactions that formed U.S. Propane and
combined the operations of Predecessor Heritage and U.S. Propane, Peoples Gas
was serving more than 70,000 active residential, commercial and wholesale
customers located in the Florida peninsula. Peoples Gas has grown by expanding
existing markets as well as through acquisitions of independent propane
operations located in northeast and southwest Florida. Prior to the series of
transactions, Peoples Gas believes it was among the top 25 independent propane
distributors nationally and was the largest independent propane distributor in
Florida.
Peoples Gas believes it has held competitive advantages in both the
residential and commercial markets through its focus on customer service and
product reliability. Following is a summary of retail sales volumes per fiscal
year for Peoples Gas. The transition period ended August 31, 2000 represents
seven months of Peoples Gas stand-alone and one month of Heritage.
For the
RETAIL PROPANE GALLONS Eight-months Ended
SOLD (IN MILLIONS) : For the Year Ended December 31, August 31,
----------------------------------------- ------------------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
24.7 26.7 29.1 30.9 33.6 38.3
As a result of the implementation of the strategy described
below, Predecessor Heritage has achieved the following retail sales volumes per
fiscal year and for the period ended August 9, 2000:
For the
Period
RETAIL PROPANE GALLONS Ended
SOLD (IN MILLIONS) : For the Year Ended August 31, August 9,
--------------------------------------------------------------------------- ---------
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
48.2 63.2 73.4 79.7 98.3 118.2 125.6 146.7 159.9 170.9
Heritage believes that its competitive strengths include: (i)
experience in identifying, evaluating and completing acquisitions, (ii)
operations that are focused in areas experiencing higher-than-average population
growth, (iii) a low cost administrative infrastructure and (iv) a decentralized
operating structure and entrepreneurial workforce. These competitive strengths
have enabled Predecessor Heritage to achieve levels of EBITDA per retail propane
gallon sold that Heritage believes are among the highest of any publicly traded
propane partnership. Heritage believes that as a result of its geographic
diversity and district-level incentive compensation program, it has been able to
reduce the effect of adverse weather conditions on EBITDA, including those
experienced by Predecessor Heritage during the warmer-than-normal winters of the
past five years with the winters of 1998 - 1999 and 1999 - 2000 recorded as two
of the warmest winters of this century. Heritage believes that its concentration
in higher-than-average population growth areas provides a strong economic
foundation for expansion through acquisitions and internal growth. Heritage does
not believe that it is significantly more vulnerable than its competitors to
displacement by natural gas distribution systems.
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BUSINESS STRATEGY
Heritage's strategy is to expand operations and increase retail market
share in order to increase the funds available for distribution to its
Unitholders. The three critical elements to this strategy are described below.
Acquisitions. Acquisitions will be the principal means of growth for
Heritage, as the retail propane industry is mature and overall demand for
propane is expected to experience limited growth in the foreseeable future.
Management believes that the fragmented nature of the propane industry provides
significant opportunities for growth through acquisition. Industry sources
indicate that there are over 8,000 retail propane operations, of which the 10
largest retailers, including Heritage, account for approximately 37 percent of
the total retail sales. Heritage follows a disciplined acquisition strategy that
concentrates on companies (i) in geographic areas experiencing
higher-than-average population growth, (ii) with a high percentage of sales to
residential customers, (iii) with local reputations for quality service and (iv)
with a high percentage of tank ownership. In addition Heritage attempts to
capitalize on the reputations of the companies it acquires by maintaining local
brand names, billing practices and employees, thereby creating a sense of
continuity and minimizing customer loss. Management believes that this strategy
has helped to make Heritage an attractive buyer for many acquisition candidates
from the seller's viewpoint.
Through August 9, 2000, Predecessor Heritage completed 70 acquisitions
for a total purchase price of approximately $297 million. On August 10, 2000
Predecessor Heritage completed the merger with U.S. Propane. During the period
between August 10, 2000 through August 31, 2000, Heritage completed two
additional acquisitions. Of these 70 companies acquired by Predecessor Heritage,
19 represent "core acquisitions" with multiple plants in a specific geographic
area, with the balance representing "blend-in companies" which operate in an
existing region. Heritage will focus on acquisition candidates in its existing
areas of operations, but will consider core acquisitions in other
higher-than-average population growth areas in order to further reduce the
impact of adverse weather patterns in any one region of Heritage's operations.
While Heritage is currently evaluating numerous acquisition candidates, there
can be no assurance that Heritage will identify attractive acquisition
candidates in the future, that Heritage will be able to acquire such businesses
on economically acceptable terms or successfully integrate them into existing
operations and make cost-saving changes, that any acquisition will not dilute
earnings and distributions to Unitholders or that any additional debt incurred
to finance an acquisition will not adversely affect the ability of Heritage to
make distributions to Unitholders.
In order to facilitate Heritage's acquisition strategy, the Operating
Partnership maintains a Bank Credit Facility. Heritage recently amended its Bank
Credit Facility to increase the total amount available for borrowings from $85
million to $100 million. The Bank Credit Facility consists of a $50 million
Acquisition Facility to be used for acquisitions and improvements and a $50
million Working Capital Facility to be used for working capital and other
general partnership purposes. Heritage also has the ability to fund acquisitions
through the issuance of additional partnership interests and through the Medium
Term Note Program and Senior Secured Notes if certain conditions are met. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Description of Indebtedness."
Internal Growth. In addition to pursuing expansion through
acquisitions, Predecessor Heritage has aggressively focused on internal growth
at its existing district locations. Heritage believes that, by concentrating its
operations in areas experiencing higher-than-average population growth, it is
well positioned to achieve internal growth by adding new customers. Heritage
also believes that its decentralized structure, in which operational decisions
are made at the district and regional level, together with a bonus system that
allocates a significant portion of a district's EBITDA in relation to budgeted
objectives to district employees, has fostered an entrepreneurial environment
that has allowed Heritage to achieve its high rates of internal growth. Heritage
believes that Predecessor Heritage's rate of internal growth has exceeded the
average internal growth rate in the industry.
Low Cost, Decentralized Operations. Heritage focuses on controlling
costs at the corporate and district levels. While Predecessor Heritage has
realized certain economies of scale as a result of its acquisitions, it
attributes its low operating costs primarily to its decentralized structure,
which Heritage plans to continue. By delegating all customer billing and
collection activities to the district level, Predecessor Heritage has been able
to operate without a large corporate staff. Of Heritage's 1,889 full-time
employees as of August 31, 2000, only 66, or approximately 4
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percent, were general and administrative. In addition Heritage's district level
incentive compensation program encourages district employees at all levels to
control costs and expand revenues.
INDUSTRY BACKGROUND AND COMPETITION
Propane, a by-product of natural gas processing and petroleum refining,
is a clean-burning energy source recognized for its transportability and ease of
use relative to alternative forms of stand-alone energy sources. Retail propane
use falls into three broad categories: (i) residential applications, (ii)
industrial, commercial, and agricultural applications, and (iii) other retail
applications, including motor fuel sales. Residential customers use propane
primarily for space and water heating. Industrial customers use propane
primarily as fuel for forklifts and stationary engines, to fire furnaces, as a
cutting gas, in mining operations and in other process applications. Commercial
customers, such as restaurants, motels, laundries and commercial buildings, use
propane in a variety of applications, including cooking, heating and drying. In
the agricultural market, propane is primarily used for tobacco curing, crop
drying, poultry brooding and weed control. Other retail uses include motor fuel
for cars and trucks, outdoor cooking and other recreational uses, propane
resales and sales to state and local governments. In its wholesale operations,
Heritage sells propane principally to large industrial end-users and other
propane distributors.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless: an odorant is added to allow
its detection. Like natural gas, propane is a clean burning fuel and is
considered an environmentally preferred energy source.
Propane competes with other sources of energy, some of which are less
costly for equivalent energy value. Heritage competes for customers against
suppliers of electricity, natural gas and fuel oil. Competition from alternative
energy sources has been increasing as a result of reduced regulation of many
utilities including natural gas and electricity. Except for certain industrial
and commercial applications, propane is generally not competitive with natural
gas in areas where natural gas pipelines already exist because natural gas is a
significantly less expensive source of energy than propane. The gradual
expansion of the nation's natural gas distribution systems has resulted in the
availability of natural gas in many areas that previously depended upon propane.
Although the extension of natural gas pipelines tends to displace propane
distribution in areas affected, Heritage believes that new opportunities for
propane sales arise as more geographically remote neighborhoods are developed.
Although propane is similar to fuel oil in certain applications and market
demand, propane and fuel oil compete to a lesser extent primarily because of the
cost of converting from one to another. Based upon information provided by the
Energy Information Agency, propane accounts for approximately three to four
percent of household energy consumption in the United States.
In addition to competing with alternative energy sources, Heritage
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and generally
occurs on a local basis with other large full-service multi-state propane
marketers, thousands of smaller local independent marketers and farm
cooperatives. Based on industry publications, Heritage believes that the
domestic retail market for propane is approximately 8.6 billion gallons annually
and that the 10 largest retailers, including Heritage, account for approximately
37 percent of the total retail sales of propane in the United States. Most of
Heritage's retail distribution branches compete with five or more marketers or
distributors. Each retail distribution outlet operates in its own competitive
environment because retail marketers tend to locate in close proximity to
customers. The typical retail distribution outlet generally has an effective
marketing radius of approximately 50 miles although in certain rural areas the
marketing radius may be extended by a satellite location.
The ability to compete effectively further depends on the reliability
of service, responsiveness to customers and the ability to maintain competitive
prices. Heritage believes that its safety programs, policies and procedures are
more comprehensive than many of its smaller, independent competitors and give it
a competitive advantage over such retailers. Heritage also believes that its
service capabilities and customer responsiveness differentiate it from many of
these smaller competitors. Heritage's employees are on call 24-hours-a-day,
7-days-a-week for emergency repairs and deliveries.
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The wholesale propane business is highly competitive. For the period
ended August 9, 2000, Predecessor Heritage's domestic wholesale operations
(excluding M-P Energy Partnership) accounted for only 4.0 percent of total
volumes and less than 1 percent of its gross profit. Heritage does not emphasize
wholesale operations, but it believes that limited wholesale activities enhance
its ability to supply its retail operations.
PRODUCTS, SERVICES AND MARKETING
Heritage distributes propane through a nationwide retail distribution
network consisting of over 225 customer service locations in 28 states.
Heritage's operations are concentrated in large part in the western, upper
midwestern and southeastern regions of the United States. Heritage serves almost
485,000 active customers. Historically, approximately two-thirds of Predecessor
Heritage's retail propane volumes and in excess of 80 percent of its EBITDA were
attributable to sales during the six-month peak heating season from October
through March, as many customers use propane for heating purposes. Consequently,
sales and operating profits were normally concentrated in Predecessor Heritage's
first and second fiscal quarters. Cash flows from operations however, were
generally greatest during the second and third fiscal quarters when customers
pay for propane purchased during the six-month peak season. Historically,
approximately half of Peoples Gas's propane volumes have been attributable to
sales during the five-month peak season from November through March, as Florida
realizes temporary growth from numerous seasonal residents. Consequently, sales
and operating profits were normally concentrated in the Peoples Gas' first and
fourth calendar quarters. Cash flows from operations for Peoples Gas, however,
were generally greatest during the first and second calendar quarters when
customers pay for propane purchased during the five-month peak season. To the
extent necessary, Heritage will reserve cash from peak periods for distribution
to Unitholders during the warmer seasons.
Typically, district locations are found in suburban and rural areas
where natural gas is not readily available. Generally, such locations consist of
a one to two acre parcel of land, an office, a small warehouse and service
facility, a dispenser and one or more 18,000 to 30,000 gallon storage tanks.
Propane is generally transported from refineries, pipeline terminals, leased
storage facilities and coastal terminals by rail or truck transports to
Heritage's district locations where it is unloaded into storage tanks. In order
to make a retail delivery of propane to a customer, a bobtail truck is loaded
with propane from the storage tank. Propane is then pumped from the bobtail
truck, which generally holds 2,500 to 3,000 gallons of propane, into a
stationary storage tank on the customer's premises. The capacity of these
customer tanks ranges from approximately 100 gallons to 1,200 gallons, with a
typical tank having a capacity of 100 to 300 gallons in milder climates and from
500 to 1,000 gallons in colder climates. Heritage also delivers propane to
retail customers in portable cylinders, which typically have a capacity of 5 to
35 gallons. When these cylinders are delivered to customers, empty cylinders are
picked up for refilling at Heritage's distribution locations or are refilled in
place. Heritage also delivers propane to certain other bulk end users of propane
in tractor-trailers known as transports, which typically have an average
capacity of approximately 10,500 gallons. End users receiving transport
deliveries include industrial customers, large-scale heating accounts, mining
operations, and large agricultural accounts.
Heritage encourages its customers to implement a regular delivery
schedule by, in some cases, charging extra for non-scheduled deliveries. Many of
Heritage's residential customers receive their propane supply pursuant to an
automatic delivery system which eliminates the customer's need to make an
affirmative purchase decision and allows for more efficient route scheduling and
maximization of volumes delivered. From its district locations, Heritage also
sells, installs and services equipment related to its propane distribution
business, including heating and cooking appliances.
Propane use falls into three broad categories: (i) residential
applications, (ii) industrial, commercial and agricultural applications and
(iii) other retail applications, including motor fuel sales. Approximately 22
percent of the gallons sold by Peoples Gas in calendar 2000 were to retail
customers and 78 percent to commercial customers. Approximately 96 percent of
the domestic gallons sold by Predecessor Heritage in the period ended August 9,
2000 were to retail customers and approximately 4 percent were to wholesale
customers. Of the retail gallons sold by Predecessor Heritage in the period
ended August 9, 2000, 59 percent were to residential customers, 32 percent were
to industrial, commercial and agricultural customers, and 9 percent were to
other retail users. Sales to residential customers in the period ended August 9,
2000 for Predecessor Heritage accounted for 56 percent of total domestic gallons
sold inclusive of domestic wholesale but 71 percent of Predecessor Heritage's
gross profit from propane sales. Residential sales have a greater profit margin
and a more stable customer base than other markets served by
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Heritage. Industrial, commercial and agricultural sales accounted for 21 percent
of Predecessor Heritage's gross profit from propane sales for the period ended
August 9, 2000, with all other retail users accounting for 7 percent. Additional
volumes sold to wholesale customers contributed the remaining 1 percent of gross
profit from propane sales. No single customer accounts for 10 percent or more of
revenues.
The propane business is very seasonal with weather conditions
significantly affecting demand for propane. Heritage believes that the
geographic diversity of its operations helps to minimize its nationwide exposure
to regional weather. Although overall demand for propane is affected by climate,
changes in price and other factors, Heritage believes its residential and
commercial business to be relatively stable due to the following
characteristics: (i) residential and commercial demand for propane has been
relatively unaffected by general economic conditions due to the largely
non-discretionary nature of most propane purchases, (ii) loss of customers to
competing energy sources has been low, (iii) the tendency of Heritage 's
customers to remain with Heritage due to the product being delivered pursuant to
a regular delivery schedule and to Heritage's ownership of over 87 percent of
the storage tanks utilized by its customers, and (iv) the historic ability of
Heritage to more than offset customer losses through internal growth of its
customer base in existing markets. Since home heating usage is the most
sensitive to temperature, residential customers account for the greatest usage
variation due to weather. Variations in the weather in one or more regions in
which Heritage operates can significantly affect the total volumes of propane
sold by Heritage and the margins realized thereon and, consequently, Heritage's
results of operations. Heritage believes that sales to the commercial and
industrial markets, while affected by economic patterns, are not as sensitive to
variations in weather conditions as sales to residential and agricultural
markets.
PROPANE SUPPLY AND STORAGE
Heritage's propane supply is purchased from over 50 oil companies and
natural gas processors at numerous supply points located in the United States
and Canada. Heritage typically enters into one-year supply agreements subject to
annual renewal. The percentage of contract purchases may vary from year to year
as determined by Heritage. Supply contracts generally provide for pricing in
accordance with posted prices at the time of delivery or the current prices
established at major delivery points. Most of these agreements provide maximum
and minimum seasonal purchase guidelines. Heritage receives its supply of
propane predominately through railroad tank cars and common carrier transport.
Supplies of propane from Peoples Gas' sources historically have been
readily available. During the eight months ended August 31, 2000, Dynegy Liquids
Marketing and Trade ("Dynegy") provided approximately 35 percent of Heritage's
total propane supply.
Supplies of propane from Predecessor Heritage's sources historically
have been readily available. In the period ended August 9, 2000, Dynegy provided
approximately 15 percent of Predecessor Heritage's total domestic propane
supply. Heritage believes that, if supplies from Dynegy were interrupted, it
would be able to secure adequate propane supplies from other sources without a
material disruption of its operations. Aside from Dynegy, no single supplier
provided more than 10 percent of Heritage's or Predecessor Heritage's total
domestic propane supply. Although no assurances can be given that supplies of
propane will be readily available in the future, Heritage expects a sufficient
supply to continue to be available. However, increased demand for propane in
periods of severe cold weather, or otherwise, could cause future propane supply
interruptions or significant volatility in the price of propane.
During the period ended August 9, 2000, Predecessor Heritage purchased
approximately 77 percent of its propane supplies from domestic suppliers with
the remainder being procured through M-P Oils, Ltd., a wholly owned subsidiary
of Heritage. M-P Oils, Ltd. holds a 60 percent interest in a Canadian
partnership, M-P Energy Partnership, which buys and sells propane for its own
account as well as supplies Heritage's volume requirements in the northern
states. Those volumes are included in the sources of propane set forth in the
immediately preceding paragraph.
The market price of propane is subject to volatile changes as a result
of supply or other market conditions over which Heritage will have no control.
Since rapid increases in the wholesale cost of propane may not be immediately
passed on to customers, such increases could reduce Heritage's gross profits.
Predecessor Heritage has generally been successful in maintaining retail gross
margins on an annual basis despite changes in the wholesale cost of propane. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--
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General." However, there may be times when Heritage will be unable to pass on
fully such price increases to its customers. Consequently, Heritage's
profitability will be sensitive to changes in wholesale propane prices.
Heritage leases space in storage facilities in Michigan, Mississippi,
North Carolina and Arizona and smaller storage facilities in other locations and
has rights to use storage facilities in additional locations when it "pre-buys"
product from these sources. Heritage believes that it has adequate third party
storage to take advantage of supply purchasing advantages as they may occur from
time to time. Access to storage facilities allows Heritage to buy and store
large quantities of propane during periods of low demand, which generally occur
during the summer months, thereby helping to ensure a more secure supply of
propane during periods of intense demand or price instability.
PRICING POLICY
Pricing policy is an essential element in the marketing of propane.
Heritage relies on regional management to set prices based on prevailing market
conditions and product cost, as well as local management input. All regional
managers are advised regularly of any changes in the posted price of the
district's propane suppliers. In most situations, Heritage believes that its
pricing methods will permit Heritage to respond to changes in supply costs in a
manner that protects Heritage's gross margins and customer base, to the extent
possible. In some cases, however, Heritage's ability to respond quickly to cost
increases could occasionally cause its retail prices to rise more rapidly than
those of its competitors, possibly resulting in a loss of customers.
BILLING AND COLLECTION PROCEDURES
Customer billing and account collection responsibilities are retained
at the district level. Heritage believes that this decentralized approach is
beneficial for several reasons: (i) the customer is billed on a timely basis;
(ii) the customer is more apt to pay a "local" business; (iii) cash payments are
received faster, and; (iv) district personnel have a current account status
available to them at all times to answer customer inquiries.
GOVERNMENT REGULATION
Heritage is subject to various federal, state and local environmental,
health and safety laws and regulations. Generally, these laws impose limitations
on the discharge of pollutants and establish standards for the handling of solid
and hazardous wastes. These laws include without limitation, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the Clean Air Act, the Occupational
Safety and Health Act, the Emergency Planning and Community Right-to-Know Act,
the Clean Water Act, and comparable state statutes. CERCLA, also known as the
"Superfund" law, imposes joint and several liability in most instances, without
regard to fault or the legality of the original conduct on certain classes of
persons that are considered to have contributed to the release or threatened
release of a "hazardous substance" into the environment. Propane is not a
hazardous substance within the meaning of CERCLA. However, certain automotive
waste products generated by Heritage's truck fleet, as well as "hazardous
substances" or "hazardous waste" disposed of during past operations by third
parties on Heritage's properties, could subject Heritage to liability under
CERCLA. Such laws and regulations could result in civil or criminal penalties in
cases of non-compliance and impose liability for remediation costs. In addition,
third parties may make claims against owners or operators of properties for
personal injuries and property damage associated with releases of hazardous or
toxic substances or waste.
In connection with all acquisitions of retail propane businesses that
involve the acquisition of any interest in real estate, Heritage conducts an
environmental review in an attempt to determine whether any substance other than
propane has been sold from, or stored on, any such real estate prior to its
purchase. Such review includes questioning the seller, obtaining representations
and warranties concerning the seller's compliance with environmental laws and
conducting inspections of the properties. Where warranted, independent
environmental consulting firms are hired to look for evidence of hazardous
substances or the existence of underground storage tanks.
Petroleum-based contamination or environmental wastes are known to be
located on or adjacent to six sites, which Heritage presently or formerly
operates. These sites were evaluated at the time of their acquisition. In all
cases, remediation operations have been or will be undertaken by others, and in
all six cases, Heritage obtained indemnification for expenses associated with
any remediation from the former owners or related entities. Based on
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information currently available to Heritage, such projects are not expected to
have a material adverse effect on Heritage's financial condition or results of
operation.
National Fire Protection Association Pamphlets No. 54 and No. 58, which
establish rules and procedures governing the safe handling of propane, or
comparable regulations, have been adopted as the industry standard in all of the
states in which Heritage operates. In some states these laws are administered by
state agencies, and in others they are administered on a municipal level. With
respect to the transportation of propane by truck, Heritage is subject to
regulations promulgated under the Federal Motor Carrier Safety Act. These
regulations cover the transportation of hazardous materials and are administered
by the United States Department of Transportation. Heritage conducts ongoing
training programs to help ensure that its operations are in compliance with
applicable regulations. Heritage maintains various permits that are necessary to
operate some of its facilities, some of which may be material to its operations.
Heritage believes that the procedures currently in effect at all of its
facilities for the handling, storage and distribution of propane are consistent
with industry standards and are in compliance in all material respects with
applicable laws and regulations.
Heritage has implemented environmental programs and policies designed
to avoid potential liability and cost under applicable environmental laws. It is
possible, however, that Heritage will have increased costs due to stricter
pollution control requirements or liabilities resulting from non-compliance with
operating or other regulatory permits. It is not anticipated that Heritage's
compliance with or liabilities under environmental, health and safety laws and
regulations, including CERCLA, will have a material adverse effect on Heritage.
To the extent that there are any environmental liabilities unknown to Heritage
or environmental, health or safety laws or regulations are made more stringent,
there can be no assurance that Heritage's results of operations will not be
materially and adversely affected.
EMPLOYEES
As of August 31, 2000, Heritage had 1,889 full time employees, of whom
66 were general and administrative and 1,823 were operational employees. None of
Heritage's employees are represented by a labor union. Heritage believes that
its relations with its employees are satisfactory. Predecessor Heritage has
hired as many as 100 seasonal workers to meet peak winter demands.
ITEM 2. PROPERTIES
Heritage operates bulk storage facilities at over 250 customer service
locations, of which approximately 80 percent are owned or under long-term lease
and the balance are subject to renewal in the ordinary course of business during
the next ten years. Heritage believes that the increasing difficulty associated
with obtaining permits for new propane distribution locations makes its high
level of site ownership and control a competitive advantage. Heritage owns
approximately thirty million gallons of above ground storage capacity at its
various plant sites. In addition, Heritage has leased approximately 30.8 million
gallons of underground storage facilities in four states (5.0 million gallons of
storage in Alto, Michigan, 12.8 million gallons in Hattiesburg, Mississippi, 9.0
million gallons in Tirzah, North Carolina and 4.0 million gallons in Bumstead,
Arizona). Heritage does not own or operate any underground storage facilities
(excluding customer and local distribution tanks) or pipeline transportation
assets (excluding local delivery systems).
Heritage also owns 50 percent of Bi-State Propane, a California general
partnership that conducts business in South Lake Tahoe, Truckee, Mammoth Lakes
and other locations in California and in Reno and other Nevada locations. The
Bi-State Propane locations are included in Heritage's site counts and all site,
customer and other property descriptions contained herein include all Bi-State
Propane information on a gross basis.
The transportation of propane requires specialized equipment. The
trucks and railroad tank cars utilized for this purpose carry specialized steel
tanks that maintain the propane in a liquefied state. As of August 31, 2000,
Heritage had 36 transport truck tractors, 34 transport trailers and 7 railroad
tank cars, all of which are owned by Heritage. In addition, Heritage utilizes
approximately 880 bobtails and 1,300 other delivery and service vehicles, all of
which are owned by Heritage. As of August 31, 2000, Heritage owned approximately
340,000 customer storage tanks with typical capacities of 120 to 1,000 gallons.
These customer storage tanks are collateral to secure the obligations of
Heritage under its borrowings from its banks and noteholders.
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Heritage believes that it has satisfactory title to or valid rights to
use all of its material properties. Although some of such properties are subject
to liabilities and leases, liens for taxes not yet due and payable, encumbrances
securing payment obligations under non-competition agreements entered in
connection with acquisitions and immaterial encumbrances, easements and
restrictions, Heritage does not believe that any such burdens will materially
interfere with the continued use of such properties by Heritage in its business,
taken as a whole. In addition, Heritage believes that it has, or is in the
process of obtaining, all required material approvals, authorizations, orders,
licenses, permits, franchises and consents of, and has obtained or made all
required material registrations, qualifications and filings with, the various
state and local government and regulatory authorities which relate to ownership
of Heritage's properties or the operations of its business.
Heritage utilizes a variety of trademarks and tradenames that it owns,
including "Heritage Propane." Heritage believes that its strategy of retaining
the names of the acquired companies has maintained the local identification of
such companies and has been important to the continued success of these
businesses. Heritage's most significant trade names are AGL Propane, Balgas,
Bi-State Propane, Blue Flame Gas of Charleston, Blue Flame Gas of Mt. Pleasant,
Blue Flame Gas of Vermont, Carolane Propane Gas, Gas Service Company, Holton's
L. P. Gas, Ikard & Newsom, Northern Energy, Pardee Gas, Sawyer Gas, Keen
Propane, Gibson Propane, Peoples Gas Company, Piedmont Propane Company, Rural
Bottled Gas and Appliance, ServiGas and United Cities Propane Gas. Heritage
regards its trademarks, tradenames and other proprietary rights as valuable
assets and believes that they have significant value in the marketing of its
products.
ITEM 3. LEGAL PROCEEDINGS.
Heritage is threatened with or is named as a defendant in various
personal injury, property damage and product liability suits. In general, these
lawsuits have arisen in the ordinary course of Heritage's business since the
formation of Heritage and involve claims for actual damages arising from the
alleged negligence of Heritage or as a result of product defects or similar
matters. Of the pending or threatened matters, the suits currently involve
property damage and serious personal injuries. Although any litigation is
inherently uncertain, based on past experience, the information currently
available to it and the availability of insurance coverage, Heritage does not
believe that these pending or threatened litigation matters will have a material
adverse effect on its results of operations or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders of Heritage
Propane Partners, L.P. during the fiscal year ended August 31, 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS.
MARKET PRICE OF AND DISTRIBUTIONS ON THE COMMON UNITS AND RELATED UNITHOLDER
MATTERS
The Common Units representing limited partners interests ("Common
Units") are listed on the New York Stock Exchange, which is the principal
trading market for such securities, under the symbol "HPG". The following table
sets forth, for the periods indicated, the high and low sales prices per Common
Unit, as reported on the New York Stock Exchange Composite Tape, and the amount
of cash distributions paid per Common Unit.
Price Range Cash
High Low Distribution(1)
----- ---- ----------------
2000 FISCAL YEAR
First Quarter Ended November 30, 1999 $23.000 $18.688 $0.5625
Second Quarter Ended February 29, 2000 $19.500 $16.750 $0.5625
Third Quarter Ended May 31, 2000 $19.125 $16.500 $0.5625
Fourth Quarter Ended August 31, 2000 $21.250 $18.563 $0.5750
1999 FISCAL YEAR
First Quarter Ended November 30, 1998 $23.750 $20.813 $0.5000
Second Quarter Ended February 28, 1999 $24.000 $20.875 $0.5125
Third Quarter Ended May 31, 1999 $23.375 $21.500 $0.5625
Fourth Quarter Ended August 31, 1999 $23.375 $21.875 $0.5625
(1) Distributions are shown in the quarter with respect to which they were
declared. For each of the indicated quarters for which distributions have
been made, an identical per unit cash distribution was paid on the
Subordinated Units.
As of November 6, 2000 there were approximately 281 holders of record
of Heritage's Common Units, including Common Units held in street name,
representing approximately seven thousand individual common unitholders.
Heritage also has 1,851,471 Subordinated Units, all of which are held by the
General Partner and 1,382,514 Class B Subordinated Units, all of which are held
by former Heritage Holdings, Inc. shareholders for which there is no established
public trading market. Heritage will distribute to its partners on a quarterly
basis, all of its Available Cash in the manner described herein. Available Cash
generally means, with respect to any quarter of Heritage, 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 (i) provide
for the proper conduct of the Heritage's business, (ii) comply with applicable
law or any Heritage debt instrument or other agreement, or (iii) provide funds
for distributions to Unitholders and the General Partner in respect of any one
or more of the next four quarters. Available Cash is more fully defined in the
Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P. previously filed as an exhibit. Distributions of Available Cash
to the holders of the Subordinated Units and the Class B Subordinated Units are
subject to the prior rights of the holders of the Common Units to receive the
Minimum Quarterly Distributions of $.50 per unit for each quarter during the
subordination period, and to receive any arrearages in the distribution of
Minimum Quarterly Distributions on the Common Units for prior quarters during
the subordination period. The subordination period will not end earlier than
June 1, 2001 ("Subordination Period"). Restrictions on Heritage's distributions
required by Item 5 is incorporated herein by reference to Note 7 of Heritage's
Consolidated Financial Statements which begin on page F-1 of this Report, and to
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Description of Indebtedness.
CHANGES IN SECURITIES AND RECENT SALES OF UNREGISTERED SECURITIES
On August 10, 2000, 372,392 Common Units of Heritage Propane Partners,
L.P. were issued to U.S. Propane, L.P. in partial consideration for its
ownership interest in four separate limited liability companies holding
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the propane operations of AGL Propane, L.L.C., Peoples Gas Company, L.L.C.,
United Cities Propane Gas, L.L.C. and Retail Propane Company, L.L.C. (former
Piedmont operations). These Units were not registered with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"), by
virtue of an exemption under Section 4(2) thereof. These Units carry a
restrictive legend with regard to transfer of the Units.
Also, on August 10, 2000, 1,161,814 Common Units and 1,382,514 Class B
Subordinated Units of Heritage Propane Partners, L.P. were sold to the former
shareholders of Heritage Holdings, Inc. for $50.2 million. None of these Units
were registered with the Securities and Exchange Commission under the Act, by
virtue of an exemption under Section 4(2) thereof. These Units carry a
restrictive legend with regard to transfer of the Units. The Class B
Subordinated Units are convertible to Common Units on a one-for-one basis only
upon approval by the requisite vote or consent of unit holders required under
the Partnership Agreement and New York Stock Exchange rules or staff
interpretations for listing of the Common Units issued upon conversion.
On August 10, 2000, as a result of the acquisition of the General
Partner by U.S. Propane, 71,300 Common Units of Heritage Propane Partners, L.P.
were issued to participants in Heritage's Restricted Unit Plan. Subsequent to
August 31, 2000, 750 Common Units of Heritage Propane Partners, L.P. were issued
to participants in Heritage's Restricted Unit Plan in accordance with the
vesting rights of the Restricted Unit Plan. None of the Common Units were
registered with the Securities and Exchange Commission under the Act, by virtue
of an exemption under Section 4(2). These Units carry a restricted legend with
regard to their transfer.
On March 3, 2000 and March 17, 2000, Predecessor Heritage issued 19,899
and 38,419 Common Units of Heritage Propane Partners, L.P., respectively, to
Heritage Holdings, Inc., the General Partner, in connection with the assumption
of certain liabilities by the General Partner from Heritage's acquisition of
certain assets of two propane companies. The General Partner's Units were not
registered with the Securities and Exchange Commission under the Act, by virtue
of an exemption under Section 4(2) thereof. These Units carry a restrictive
legend with regard to transfer of the Units.
During fiscal 2000, Predecessor Heritage issued 76,152 Common Units of
Heritage Propane Partners, L.P. in exchange for certain assets in connection
with the acquisitions of certain propane businesses, for a total value of $1.7
million. The Units issued in connection with the acquisitions were issued
utilizing Heritage's Registration Statement No. 333-40407 on Form S-4.
On October 28, 1999, Predecessor Heritage sold 1,200,000 Common Units
in an underwritten public offering at a public offering price of $22.00 per
Common Unit. The net proceeds of approximately $24 million were used to repay a
portion of the outstanding indebtedness under the acquisition facility that was
incurred to acquire propane businesses.
ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth, for the periods and as of the dates
indicated, selected historical financial and operating data for Heritage Propane
Partners, L.P. (formerly Peoples Gas and surviving legal entity in the series of
transactions with U.S. Propane). The selected historical financial and operating
data should be read in conjunction with the financial statements of Heritage
Propane Partners, L.P. (formerly Peoples Gas Company) included elsewhere in this
Report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" also included elsewhere in this Report. The amounts in
the table below, except per unit data, are in thousands.
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Eight Months
Years ended December 31, Ended August 31,
---------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
(Unaudited)(Unaudited) (Unaudited)
Statements of Operating Data:
Revenues $ 32,194 $ 37,508 $ 32,874 $ 30,187 $ 34,045 $ 21,766 $ 63,072
Gross profit (a) 14,434 16,139 15,811 17,904 19,196 13,299 33,110
Depreciation and amortization 2,251 2,234 2,514 2,855 3,088 2,037 4,686
Operating income (loss) 3,028 4,611 1,370 3,961 2,885 2,666 (714)
Interest expense -- -- -- -- -- -- (2,409)
Income (loss) before income taxes and
minority interest 2,421 3,962 980 3,483 2,895 2,677 (3,547)
Provision for income taxes 776 1,323 378 1,412 1,127 1,035 379
Net income (loss) 1,645 2,639 602 2,071 1,768 1,642 (3,846)
Net Income (loss) per Unit (b) .95 1.52 .35 1.19 1.02 .92 (.37)
Cash dividends per Unit -- -- -- 1.13 1.30 1.30 --
As of December 31, As of August 31,
---------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
(Unaudited) (Unaudited)(Unaudited) (Unaudited)
Balance Sheet Data (end of period):
Current assets $ 4,645 $ 6,829 $ 5,278 $ 4,310 $ 6,643 $ 4,326 $ 81,420
Total assets 28,579 33,455 33,982 37,206 43,724 39,481 615,779
Current liabilities 2,139 12,619 8,204 13,671 19,636 15,716 107,033
Long-term debt -- -- -- -- -- -- 361,990
Partner's capital-General Partner (b) 31 37 39 39 37 41 1,409
Partners' capital-Limited Partner (b) 12,244 14,857 15,457 15,557 15,070 16,670 146,756
(d)
Eight Months
Years ended December 31, Ended August 31,
---------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
Operating Data (Unaudited):
EBITDA (c) $ 5,279 $ 6,845 $ 3,884 $ 6,816 $ 5,973 $ 4,703 $ 4,507
Capital expenditures (e)
Maintenance and growth 2,437 3,560 4,239 2,877 4,791 2,537 3,708
Acquisition -- -- -- 1,719 1,015 1,015 123,300
Retail propane gallons sold 24,659 26,654 29,077 30,921 33,608 22,118 38,268
(a) Gross profit is computed by reducing total revenues by the direct cost
of the products sold.
(b) Net income (loss) per unit is computed by dividing the net income by
the weighted average number of units outstanding. Although equity
accounts of Peoples Gas survive the merger, Predecessor Heritage's
partnership structure and partnership units survive. Accordingly, the
equity accounts of Peoples Gas have been restated based on general
partner interest and Common Units received by Peoples Gas in the
merger.
(c) EBITDA is defined as operating income plus non-cash compensation,
depreciation and amortization (including the EBITDA of investees).
EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow
(as a measure of liquidity or ability to service debt obligations), but
provides additional information for evaluating Heritage's ability to
make the Minimum Quarterly Distribution.
(d) Partners' Capital is anticipated to decrease to the extent depreciation
and amortization exceeds maintenance capital expenditure requirements.
(e) Capital expenditures fall generally into three categories: (i)
maintenance capital expenditures which include expenditures for repairs
that extend the life of the assets and replacement of property, plant
and equipment, (ii) growth capital expenditures, which include
expenditures for purchase of new propane tanks and other equipment to
facilitate retail customer base expansion, and (iii) acquisition
expenditures which include expenditures related to the acquisition of
retail propane operations and the portion of the purchase price
allocated to intangibles associated with such acquired businesses.
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The following table sets forth, for the periods and as of the dates
indicated, selected historical financial and operating data for Predecessor
Heritage. The selected historical financial and operating data of Predecessor
Heritage should be read in conjunction with the financial statements of
Predecessor Heritage included elsewhere in this Report and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" also
included elsewhere in this Report. The amounts in the table below, except per
Unit data, are in thousands.
Ten Two
Months Months Years Ended Period
Year Ended Ended Ended August 31, Ended
August 31, June 30, August 31, -------------------------------- August 9,
1995 (e) 1996 (e) 1996 1997 1998 1999 2000
----------- ----------- ----------- ---------- ---------- ---------- -----------
Statements of Operating Data:
Revenues $ 131,508 $ 144,623 $ 18,477 $ 199,785 $ 185,987 $ 184,020 $ 242,491
Gross Profit(a) 55,841 55,634 6,314 73,838 89,103 96,753 101,746
Depreciation and amortization 8,896 7,581 1,733 11,124 13,680 14,749 17,143
Operating income (loss) 12,675 15,755 (1,956) 16,919 22,929 24,567 23,475
Interest expense 12,201 10,833 1,962 12,063 14,599 15,915 17,664
Income (loss) before income taxes
and minority interest 759 6,084 (4,087) 5,625 9,266 10,116 6,936
Provision for income taxes 666 2,735 -- -- -- -- --
Net income (loss) (211) 2,921 (8,423) 5,177 8,790 9,662 6,504
Basic and Diluted Net Income (loss)
per Unit(b) -- -- (1.06) 0.64 1.04 1.11 .66
August 31,
-----------------------------------------------------------
1995(e) 1996 1997 1998 1999
-----------------------------------------------------------
Balance Sheet Data (end of period):
Current Assets $ 21,293 $ 24,014 $ 27,951 $ 26,185 $ 29,267
Total Assets 163,423 187,850 203,799 239,964 262,958
Current Liabilities 35,825 24,728 34,426 35,444 47,680
Long-term debt 103,412 132,521 148,453 177,431 196,216
Redeemable preferred stock 12,337 -- -- -- --
Stockholders' deficit (6,975) -- -- -- --
Partner's capital-General Partner -- 307 208 273 176
Partners' capital-Limited Partner(g) -- 30,294 20,712 26,816 18,886
Period
Years ended December 31, Ended
----------------------------------------------------------- August 9,
1995 (e) 1996 (f) 1997 1998 1999 2000
----------------------------------------------------------- --------
Operating Data (unaudited):
EBITDA(c) $ 21,672 $ 24,365 $ 28,718 $ 37,792 $ 41,047 $ 42,373
Capital Expenditures(d)
Maintenance and growth 8,634 7,244 7,170 9,359 14,974 12,931
Acquisition 27,879 16,665 14,549 23,276 17,931 46,801
Retail propane gallons sold 98,318 118,200 125,605 146,747 159,938 170,891
(a) Gross profit is computed by reducing total revenues by the direct cost
of the products sold.
(b) Net income (loss) per Unit is computed by dividing the limited
partners' interest in net income (loss) by the limited partners'
weighted average number of units outstanding.
(c) EBITDA is defined as operating income plus non-cash compensation,
depreciation and amortization (including the EBITDA of investees).
EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow
(as a measure of liquidity or ability to service debt obligations), but
provides additional information for evaluating Heritage's ability to
make the Minimum Quarterly Distribution. EBITDA for the year ended
August 31, 1998 was restated to account for non-cash compensation. The
minority interest of MP Energy Partnership, a majority owned
partnership, is deducted from the EBITDA calculation.
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(d) Capital expenditures fall generally into three categories: (i)
maintenance capital expenditures of approximately $5.1 million for the
period ended August 9, 2000 and $4.6 million, $3.6 million and $2.3
million in fiscal 1999, 1998 and 1997, respectively, which include
expenditures for repairs that extend the life of the assets and
replacement of property, plant and equipment, (ii) growth capital
expenditures, which include expenditures for purchases of new propane
tanks and other equipment to facilitate retail customer base expansion,
and (iii) acquisition capital expenditures, which include expenditures
related to the acquisition of retail propane operations and the portion
of the purchase price allocated to intangibles associated with such
acquired businesses.
(e) Information for Heritage Propane Partners, L.P.'s predecessor, Heritage
Holdings, Inc.
(f) Reflects unaudited pro forma information for Predecessor Heritage as if
Heritage Propane Partners, L.P. formation had occurred as of the
beginning of the period presented.
(g) Partners' Capital is anticipated to decrease to the extent depreciation
and amortization exceeds maintenance capital expenditure requirements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
CERTAIN MATTERS DISCUSSED IN THIS REPORT, EXCLUDING HISTORICAL
INFORMATION, AS WELL AS SOME STATEMENTS BY HERITAGE IN PERIODIC PRESS RELEASES,
INCLUDE CERTAIN "FORWARD-LOOKING" STATEMENTS. ALTHOUGH HERITAGE BELIEVES SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS AND CURRENT
EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS, NO ASSURANCE CAN BE GIVEN THAT
EVERY OBJECTIVE WILL BE REACHED. SUCH STATEMENTS ARE MADE IN RELIANCE ON THE
"SAFE HARBOR" PROTECTIONS PROVIDED UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.
AS REQUIRED BY THAT LAW, HERITAGE HEREBY IDENTIFIES THE FOLLOWING
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY
RESULTS PROJECTED, FORECASTED OR ESTIMATED BY HERITAGE IN FORWARD-LOOKING
STATEMENTS.
THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS:
o CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE UNITED STATES AS
WELL AS CHANGES IN GENERAL ECONOMIC CONDITIONS AND CURRENCIES
IN FOREIGN COUNTRIES;
o WEATHER CONDITIONS THAT VARY SIGNIFICANTLY FROM HISTORICALLY
NORMAL CONDITIONS;
o THE GENERAL LEVEL OF PETROLEUM PRODUCT DEMAND, AND THE
AVAILABILITY OF PROPANE SUPPLIES;
o ENERGY PRICES GENERALLY AND SPECIFICALLY, THE PRICE OF PROPANE
TO THE CONSUMER COMPARED TO THE PRICE OF ALTERNATIVE AND
COMPETING FUELS;
o COMPETITION FROM OTHER PROPANE DISTRIBUTORS AND ALTERNATE
FUELS;
o THE AVAILABILITY AND COST OF CAPITAL;
o CHANGES IN LAWS AND REGULATIONS TO WHICH HERITAGE IS SUBJECT,
INCLUDING TAX, ENVIRONMENTAL AND EMPLOYMENT REGULATIONS;
o THE COSTS AND EFFECTS OF LEGAL AND ADMINISTRATIVE PROCEEDINGS
AGAINST HERITAGE OR WHICH MAY BE BROUGHT AGAINST HERITAGE;
o THE ABILITY OF HERITAGE TO SUSTAIN ITS HISTORICAL LEVELS OF
INTERNAL GROWTH; AND
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o THE ABILITY OF HERITAGE TO CONTINUE TO LOCATE AND ACQUIRE
OTHER PROPANE COMPANIES AT PURCHASE PRICES THAT ARE ACCRETIVE
TO ITS FINANCIAL RESULTS.
WEATHER AND SEASONALITY
Heritage's propane distribution business is seasonal and dependent upon
weather conditions in its service areas. Propane sales to residential and
commercial customers are affected by winter heating season requirements, which
generally results in higher operating revenues and net income during the period
from October through March of each year and lower operating revenues and either
net losses or lower net income during the period from April through September of
each year. Sales to industrial and agricultural customers are much less weather
sensitive.
Gross profit margins are not only affected by weather patterns but also
by changes in customer mix. For example, sales to residential customers
ordinarily generate higher margins than sales to other customer groups, such as
commercial or agricultural customers. In addition, gross profit margins vary by
geographic region. Accordingly, gross profit margins could vary significantly
from year to year in a period of identical sales volumes.
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY AND SURVIVING LEGAL ENTITY IN THE SERIES OF
TRANSACTIONS WITH U.S. PROPANE)
GENERAL
Peoples Gas engaged in the sale, distribution and marketing of propane
and other related products. Revenues are derived primarily from the retail
propane marketing business. Peoples Gas believes that prior to the series of
transactions with Atmos, AGL, Piedmont and Predecessor Heritage, it was among
the top 25 retail propane marketers nationally and was the largest independent
propane distributor in Florida. At the time of the merger, Peoples Gas was
serving more than 70,000 residential, commercial and industrial customers
located in the Florida peninsula.
In August 2000, TECO Energy, Inc., Atmos Energy Corporation, Piedmont
Natural Gas Company, Inc. and AGL Resources, Inc. contributed each company's
propane operations, Peoples Gas Company ("Peoples Gas"), United Cities Propane
Gas, Inc. ("United Cities"), Piedmont Propane Company ("Piedmont"), and AGL
Propane, Inc. ("AGL"), respectively, to U.S. Propane, L.P. ("U.S. Propane") in
exchange for equity interests in U.S. Propane. The merger was accounted for as
an acquisition using the purchase method of accounting with Peoples Gas being
the accounting acquirer.
In August 2000, U.S. Propane acquired all of the outstanding common
stock of Heritage Holdings, Inc., Heritage Propane Partner, L.P.'s General
Partner, for $120 million. By virtue of Heritage Holdings, Inc.'s general
partner and limited partner interests in Heritage Propane Partners, L.P., U.S.
Propane gained control of Heritage Propane Partners, L.P. Simultaneously, U.S.
Propane transferred its propane operations, consisting of its interest in four
separate limited liability companies, AGL Propane, L.L.C., Peoples Gas Company,
L.L.C., United Cities Propane Gas, L.L.C. and Retail Propane Company, L.L.C.
(former Piedmont operations) to Heritage Propane Partners, L.P. for $181.4
million plus working capital. The $181.4 million was payable $139.5 million in
cash, $31.8 million of assumed debt, and the issuance of 372,392 Common Units of
Heritage Propane Partners, L.P. valued at $7.3 million and a 1.0101 percent
limited partnership interest in Heritage Operating, L.P. valued at $2.7 million.
The purchase price and the issuance price for the Common Units were approved by
an independent committee of the Board of Directors of Heritage Holdings, Inc.
The issuance price for the Common Units was $19.73125 per unit under a formula
based on the average closing price of Heritage Propane Partners, L.P.'s Common
Units on the New York Stock Exchange for the twenty (20) day period beginning
ten (10) days prior to the public announcement of the transaction on June 15,
2000. The working capital adjustment is anticipated to be settled in December
2000
The formation of U.S. Propane and the merger with Predecessor Heritage
affect the comparability of the eight months ended August 31, 2000 and August
31, 1999, because the volumes and results of operations for the period from
August 10, 2000 through August 31, 2000 include the volumes and results of
operations of AGL, United
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Cities, Piedmont and Predecessor Heritage. The increases in the line items
discussed below are a result of these transactions. Amounts discussed below
reflect 100 percent of the results of M-P Energy Partnership during the period
from August 10, 2000 through August 31, 2000. M-P Energy Partnership is a
general partnership in which Heritage owns a 60 percent interest. Because M-P
Energy Partnership is primarily engaged in lower-margin wholesale distribution,
its contribution to Heritage's net income is not significant and the minority
interest of this partnership is excluded from the EBITDA calculation.
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS - HERITAGE PROPANE PARTNERS, L.P.
(FORMERLY PEOPLES GAS)
The following discussion of the historical financial condition and
results of operations of Peoples Gas should be read in conjunction with the
Selected Historical Financial and Operating Data and notes thereto, and the
historical financial statements and notes thereto included elsewhere herein.
EIGHT MONTHS ENDED AUGUST 31, 2000 COMPARED TO THE EIGHT MONTHS ENDED AUGUST 31,
1999 (UNAUDITED)
Volume. Total retail gallons sold in the eight months ended August 31,
2000 were 38.3 million, an increase of 16.2 million over the 22.1 million
gallons sold in the eight months ended August 31, 1999. Heritage sold 16.3
million retail gallons in the period from August 10, 2000 through August 31,
2000, thus the increase in retail gallons is primarily attributable to the
transactions referred to above.
Revenues. Total revenues for the eight months ended August 31, 2000
were $63.1 million, an increase of $41.3 million as compared to $21.8 million in
the eight months ended August 31, 1999. Revenues for Heritage for the period
from August 10, 2000 through August 31, 2000 were $36.4 million, of which $11.7
million was due to trading activity conducted through Heritage Energy Resources
and the remainder related to increased volumes. The increase in revenue is
primarily attributable to the transactions referred to above.
Cost of Products Sold. Total cost of products sold increased $33.0
million to $41.5 million for the eight months ended August 31, 2000. Of this
increase, $11.5 million is the result of trading activity for the period from
August 10, 2000 through August 31, 2000, with the remainder relating to the
increased volumes described above.
Operating Expenses. Operating expenses were $16.6 million for the
eight-month period ended August 31, 2000 as compared to $8.6 million for the
eight months ended August 31, 1999. The increase of $8.0 million is the result
of the additional operating expense related to the merger.
Depreciation and Amortization. Depreciation and amortization was $4.7
million in the eight months ended August 31, 2000 as compared to $2.0 million in
the eight months ended August 31, 1999. The increase is attributable to the
transactions referred to above.
Operating Income (Loss). Heritage had an operating loss of $.7 million
for the eight months ended August 31, 2000 as compared to operating income of
$2.7 million for the eight months ended August 31, 1999. The decrease is the
result of the additional operating expenses and depreciation and amortization
resulting from the merger.
Provision for Income Taxes. Provision for income taxes decreased $.6
million, to $.4 million in the eight months ended August 31, 2000 as compared to
$1.0 million for the eight months ended August 31, 1999. This decrease is a
result of the decrease in income before provision for income taxes in the
comparable eight-month period of Peoples Gas. Prior to the transaction with
Predecessor Heritage, Peoples Gas filed a consolidated federal income tax return
with TECO and, based on a tax sharing agreement, included, in its statements of
operations, a provision for income taxes calculated on a separate return basis.
Net Income (Loss). For the eight-month period ended August 31, 2000,
Heritage had a net loss of $3.8 million, a decrease of $5.4 million as compared
to net income for the eight months ended August 31, 1999 of $1.6 million. This
decrease is the result of decreased operating income described above.
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FISCAL YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO FISCAL YEAR 1998
Volume. Peoples Gas sold 33.6 million gallons in fiscal 1999, an
increase of 2.7 million gallons, or 9 percent from the 30.9 million gallons sold
in fiscal 1998, primarily as a result of the July 1999 acquisition of Commercial
Propane, Inc. The increase in volumes was net of the effects of unseasonably
warm weather.
Revenues. Total revenues for Peoples Gas increased $3.8 million, or 12.6
percent to $34.0 million from fiscal 1998's total revenues of $30.2 million. The
increase is primarily the result of increased volumes associated with the July
1999 acquisition of Commercial Propane, Inc. and the effects of higher cost of
fuel.
Cost of Products Sold. Total cost of product sold increased $2.5
million, or 20.3 percent to $14.8 million for fiscal 1999 as compared to $12.3
million for fiscal 1998. The increase is primarily the result of increased
volumes associated with the July 1999 acquisition of Commercial Propane, Inc.
and the effects of higher cost of propane that was passed through to customers.
Operating Expenses. Operating expenses for fiscal 1999 increased $2.1
million, or 18.9 percent to $13.2 million as compared to $11.1 million in fiscal
1998. This increase is primarily the result of increased costs related to
additional marketing efforts and costs related to the July 1999 acquisition of
Commercial Propane, Inc.
Depreciation and Amortization. Depreciation and amortization was $3.1
million for fiscal 1999, a $0.2 million increase over fiscal 1998's $2.9
million. This increase is the result of additional depreciation on maintenance
and growth capital expenditures and fixed assets recorded in relation to
acquisitions.
Operating Income. Operating income decreased $1.1 million, or 27.5
percent to $2.9 million as compared to $4.0 million in fiscal 1998. The
increased revenues described above were more than offset by the increases in
operating expenses, depreciation and amortization, also described above, which
resulted in this decrease.
Provision for Income Taxes. Provision for income taxes decreased $0.3
million, or 21.4 percent to $1.1 million as compared to $1.4 million for 1998.
This decrease is a result of the decrease in income before provision for income
taxes.
Net Income. Net income for fiscal year 1999 decreased $0.3 million, or
14.3 percent to $1.8 million as compared to fiscal 1998's net income of $2.1
million. This decrease is the result of decreased operating income being
somewhat offset by lower taxes, as discussed above.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Volume. Peoples Gas sold 30.9 million gallons in fiscal 1998, an
increase of 1.8 million gallons, or 6 percent from the 29.1 million gallons sold
in fiscal 1997, primarily as a result of the January 1998 acquisition of Ankney
Gas, Inc. and the July 1998 acquisition of Florida Gas Service Corp.
Revenues. Total revenues for Peoples Gas decreased $2.7 million, or 8.2
percent to $30.2 million from fiscal 1997's total revenues of $32.9 million. The
decrease is primarily the result of higher volumes sold being more than offset
by lower costs of propane that was passed through to customers.
Cost of Products Sold. Total cost of product sold decreased $4.8
million, or 28.1 percent to $12.3 million for fiscal 1998 as compared to $17.1
for fiscal 1997. The decrease in cost of products sold directly relates to a
decrease in the cost per gallon of propane.
Operating Expenses. Operating expenses for fiscal 1998 decreased $0.8
million, or 6.7 percent to $11.1 million as compared to $11.9 million in fiscal
1997. The decrease was attributable to synergies leading to lower operating
costs realized from the January 1998 acquisition of Griffis Inc.
Depreciation and Amortization. Depreciation and amortization was $2.9
million for fiscal 1998, a $0.4 million increase over fiscal 1997's $2.5
million. This increase was primarily the result of additional depreciation and
amortization associated with the Griffis Inc. acquisition.
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21
Operating Income. Operating income increased $2.6 million, or 185.7
percent to $4.0 million as compared to $1.4 million in fiscal 1997. This
increase was the result of the increase in gross profit and decreases in
operating expenses.
Provision for Income Taxes. Provision for income taxes increased $1.0
million, or 250.0 percent to $1.4 million as compared to $0.4 million for 1997.
This increase is a result of the increase in income before provision for income
taxes.
Net income. Net income for fiscal year 1998 increased $1.5 million, or
250.0 percent to $2.1 million as compared to fiscal 1997's net income of $0.6
million. This increase is due to higher operating income for the fiscal year
1998 as compared to 1997, partially offset by increased provision for income
taxes.
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES (PREDECESSOR HERITAGE)
(THE PROPANE OPERATIONS OF HERITAGE PROPANE PARTNERS, L.P., PRIOR TO THE SERIES
OF TRANSACTIONS WITH U.S. PROPANE)
GENERAL
Predecessor Heritage engaged in the sale, distribution and marketing of
propane and other related products. Predecessor Heritage derived its revenue
primarily from the retail propane marketing business. The General Partner
believes that Predecessor Heritage was the seventh largest retail marketer of
propane in the United States, based on retail gallons sold prior to the series
of transactions with U.S. Propane, serving almost 286,000 residential,
industrial/commercial and agricultural customers in 27 states through over 170
retail outlets. The General Partner believes that after the U.S. Propane
transactions, Heritage is the fourth largest retail marketer of propane in the
United States, based on retail gallons sold, serving almost 485,000 residential,
industrial/commercial and agricultural customers in 28 states through over 250
retail outlets.
Since its formation in 1989, Predecessor Heritage grew primarily
through acquisitions of retail propane operations and, to a lesser extent,
through internal growth. Through August 9, 2000, Predecessor Heritage completed
70 acquisitions for an aggregate purchase price of approximately $297 million.
Predecessor Heritage completed 42 of these acquisitions since its initial public
offering on June 25, 1996. During the period between August 9, 2000 and August
31, 2000, Heritage completed two additional acquisitions. Annual retail propane
sales volumes in gallons for Predecessor Heritage were 170.9 million for the
period ended August 9, 2000 and 159.9 million and 146.7 million for the fiscal
years ended August 31, 1999 and 1998, respectively.
The retail propane business of Predecessor Heritage consisted
principally of transporting propane purchased in the contract and spot markets,
primarily from major oil companies, to its retail distribution outlets and then
to tanks located on the customers' premises, as well as to portable propane
cylinders. In the residential and commercial markets, propane is primarily used
for space heating, water heating and cooking. In the agricultural market,
propane is primarily used for crop drying, tobacco curing, poultry brooding and
weed control. In addition, propane is used for certain industrial applications,
including use as an engine fuel that burns in internal combustion engines that
power vehicles and forklifts and as a heating source in manufacturing and mining
processes.
The retail propane distribution business is largely seasonal due to
propane's use as a heating source in residential and commercial buildings.
Historically, approximately two-thirds of Predecessor Heritage's retail propane
volume and in excess of 80 percent of Predecessor Heritage's EBITDA was
attributable to sales during the six-month peak heating season of October
through March. Consequently, sales and operating profits were concentrated in
Predecessor Heritage's first and second fiscal quarters. Cash flow from
operations, however, was generally greatest during the second and third fiscal
quarters when customers pay for propane purchased during the six-month
peak-heating season.
A substantial portion of Predecessor Heritage's propane was used in the
heating-sensitive residential and commercial markets causing the temperatures
realized in Predecessor Heritage's areas of operations, particularly during the
six-month peak heating season, to have a significant effect on their financial
performance. In any given
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area, sustained warmer-than-normal temperatures will tend to result in reduced
propane use, while sustained colder-than-normal temperatures will tend to result
in greater propane use. Heritage therefore uses information on normal
temperatures in understanding how temperatures that are colder or warmer than
normal affect historical results of operations and in preparing forecasts of
future operations, which assumes that normal weather will prevail in each of the
regions in which it operates.
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales price over propane supply costs. The
market price of propane is often subject to volatile changes as a result of
supply or other market conditions over which Heritage will have no control.
Product supply contracts are one-year agreements subject to annual renewal and
generally permit suppliers to charge posted prices (plus transportation costs)
at the time of delivery or the current prices established at major delivery
points. Since rapid increases in the wholesale cost of propane may not be
immediately passed on to retail customers, such increases could reduce gross
profits. In the past, Predecessor Heritage generally attempted to reduce price
risk by purchasing propane on a short-term basis. Predecessor Heritage had on
occasion purchased significant volumes of propane during periods of low demand,
which generally occur during the summer months, at the then current market
price, for storage both at its service centers and in major storage facilities
for future resale.
Gross profit margins vary according to customer mix. For example, sales
to residential customers generate higher margins than sales to certain other
customer groups, such as agricultural customers. Wholesale margins are
substantially lower than retail margins. In addition, gross profit margins vary
by geographical region. Accordingly, a change in customer or geographic mix can
affect gross profit without necessarily affecting total revenues.
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS - PREDECESSOR HERITAGE
The following discussion of the historical financial condition and
results of operations of Predecessor Heritage should be read in conjunction with
the Selected Historical Financial and Operating Data and notes thereto, and the
historical financial statements and notes thereto included elsewhere herein.
The following discussion reflects for the periods indicated the results
of operations and operating data for Predecessor Heritage. Most of the increases
in the line items discussed below result from the acquisitions made by
Predecessor Heritage during the periods discussed. During the period ended
August 9, 2000, Predecessor Heritage completed 11 acquisitions for a total
purchase price of $54.9 million. In fiscal 1999, Predecessor Heritage
consummated six acquisitions for a total purchase price of $22.7 million. In
fiscal 1998, Predecessor Heritage consummated seven acquisitions for a total
purchase price of $37.1 million. These acquisitions affect the comparability of
prior period financial matters, as the volumes are not included in the prior
period's results of operations. Amounts discussed below reflect 100 percent of
the results of M-P Energy Partnership, a general partnership in which
Predecessor Heritage owns a 60 percent interest. Because M-P Energy Partnership
is primarily engaged in lower-margin wholesale distribution, its contribution to
Predecessor Heritage's net income is not significant and the minority interest
of this partnership is excluded from the EBITDA calculation. As a result of the
series of transactions between Predecessor Heritage and U.S Propane, the results
of Predecessor Heritage are included in the results of Heritage beginning August
10, 2000.
THE PERIOD SEPTEMBER 1, 1999 TO AUGUST 9, 2000 COMPARED TO FISCAL YEAR 1999
The following discussion compares the period September 1, 1999 to
August 9, 2000, an approximate eleven-month period for Predecessor Heritage to
its full fiscal year ended August 31, 1999. The pro forma amounts include the
"stand alone" results of Predecessor Heritage without the effect of the series
of transactions with U.S. Propane.
Volume. Predecessor Heritage sold 170.9 million retail gallons during
the period ended August 9, 2000, an increase of 11.0 million gallons or 6.9
percent from the 159.9 million gallons sold in fiscal 1999 primarily as a result
of acquisitions. The increases in volumes were net of the effects of one of the
warmest winters this century. The pro forma retail gallons for Predecessor
Heritage sold through August 31, 2000 were approximately 180.6 million, an
increase of 20.7 million gallons or 12.9 percent as compared to fiscal 1999.
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Predecessor Heritage also sold approximately 82.6 million wholesale
gallons during the period ended August 9, 2000, a increase of 1.5 million
gallons from fiscal 1999's 81.1 million gallons. The increase in the wholesale
volumes was attributable to the net of an increase of 2.2 million gallons in the
foreign operations of M-P Energy Partnership and the decline of .7 million
gallons in the U.S. wholesale operations.
Revenues. Total revenues for Predecessor Heritage increased $58.5
million or 31.8 percent to $242.5 million for the period ended August 9, 2000 as
compared to $184.0 million for fiscal 1999. The current period's domestic retail
propane revenues increased $41.5 million or 30.2 percent to $178.9 million as
compared to fiscal 1999's results of $137.4 million due to increased volumes and
higher selling prices. The U.S. wholesale revenues increased slightly in this
comparison to $4.3 million as compared to $3.4 million for fiscal 1999, due to
higher selling prices. Other revenues increased $1.5 million or 6.6 percent to
$24.1 million as a result of acquisitions and internal growth. Foreign revenues
increased $10.2 million for the period ended August 9, 2000, to $30.8 million as
compared to $20.6 million for the fiscal year ended August 31, 1999, primarily
as a result of higher selling prices and to a lesser degree, increased volume.
Sales price per gallon during the period ended August 9, 2000 continued to
remain above last year's level due to the higher cost of propane, which was
passed through to customers, as compared to the same period last year. Total
revenues included $4.3 million of trading activity for the period ended August
9, 2000, which Predecessor Heritage did not have last fiscal year. The pro forma
results for Predecessor Heritage for the period ended August 31, 2000, would
reflect total revenues of approximately $271.1 million, an $87.1 million
increase or 47.3 percent as compared to fiscal 1999. This pro forma amount
includes $15.9 million of trading revenues, which are new to Predecessor
Heritage as of July 1, 2000.
Cost of Sales. Total cost of sales increased $53.5 million or 61.3
percent to $140.8 million for the period ended August 9, 2000 as compared to
$87.3 million for the fiscal year ended August 31, 1999. This increase is the
result of a significant increase in the wholesale propane prices which began
increasing during the first fiscal quarter as compared to the low wholesale
costs experienced in the fiscal year ended August 31, 1999, the increase in
gallons sold and $4.3 million of trading cost of sales which were not included
in fiscal 1999 cost of sales. Retail fuel cost of sales increased $37.5 million
or 65.1 percent to $95.1 million during the period ended August 9, 2000,
compared to $57.6 million for the fiscal year ended August 31, 1999. Foreign
wholesale cost of sales also reflected an increase, increasing from $19.1
million for the fiscal year ended August 31, 1999 to $29.3 million for the
period ended August 9, 2000 due to the impact of the increase in the cost of
propane and increased volumes in this area. U. S. wholesale cost of sales
increased $.9 million as a result of the higher cost of fuel. Other cost of
sales also increased $.7 million due to an increase in other revenues. The pro
forma cost of sales for the period ended August 31, 2000, for Predecessor
Heritage is approximately $162.8 million, of which $15.8 million represents
trading cost of sales that are not included in fiscal 1999 cost of sales.
Gross Profit. Total gross profit increased $4.9 million or 5.1 percent
to $101.7 million for the period ended August 9, 2000, as compared to $96.8
million for the fiscal year ended August 31, 1999 due to the increases in
volumes sold and revenues discussed above, offset by the increase in product
costs. The pro forma gross profit for Predecessor Heritage for the twelve months
ended August 31, 2000 is approximately $108.3 million as compared to $96.8
million for the fiscal year ended August 31, 1999, an increase of $11.5 million
or 11.9 percent.
Operating Expenses. Operating expenses increased $3.9 million or 7.6
percent to $55.1 million in the period ended August 9, 2000 as compared to $51.2
million in the fiscal year ended August 31, 1999 primarily due to acquisition
related operating expenses. Pro forma operating expenses for Predecessor
Heritage for the period ended August 31, 2000 were approximately $61.3 million,
a 19.7 percent increase over fiscal 1999.
Selling, General and Administrative. Selling, general and
administrative expenses were $6.0 million for the period ended August 9, 2000, a
decrease of $.2 million from the $6.2 million reported for the fiscal year ended
August 31, 1999. Selling, general and administrative expenses for the pro forma
period ended August 31, 2000 for Predecessor Heritage were approximately $6.5
million, a $.3 million increase over fiscal 1999.
Depreciation and Amortization. Depreciation and amortization increased
$2.4 million for the period ended August 9, 2000 to $17.1 million as compared to
$14.7 million for the same period last year. This increase is primarily the
result of additional depreciation and amortization cost on the fixed assets and
intangible assets recorded in connection with acquisitions. Pro forma
depreciation and amortization for the period ended August 31, 2000 was
approximately $19.0 million.
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Operating Income. Operating income for the period ended August 9, 2000
decreased $1.1 million to $23.5 million as compared to $24.6 million for the
fiscal year ended August 31, 1999. The pro forma operating income for
Predecessor Heritage for the period ended August 31, 2000 was $21.5 million.
This decrease is primarily attributable to the increased operating expenses and
depreciation and amortization related to acquisitions, as well as lower volumes
in existing operations as a result of unusually warm weather.
Interest Expense. Interest expense increased $1.8 million or 11.3
percent to $17.7 million for the period ended August 9, 2000 as compared to
$15.9 million for the twelve-month ended August 31, 1999. The increase was
primarily due to borrowings related to acquisitions and to lesser extent,
increased borrowings as a result of higher product costs. Interest expense for
the pro forma twelve month period ended August 31, 2000, was approximately $19.5
million, a $3.6 million increase over fiscal 1999's interest expense.
Net Income. Net income for the period ended August 9, 2000 was $6.5
million as compared to the net income of $9.7 million for the fiscal year ended
August 31, 1999. The $3.2 million decrease is the result of the decrease in
operating income described above together with an increase in interest costs.
Net income for the pro forma period ended August 31, 2000 for Predecessor
Heritage was approximately $3.2 million, a $6.5 million decrease from fiscal
1999.
EBITDA. Earnings before interest, taxes, depreciation and amortization
increased $1.4 million to $42.4 million for the period ended August 9, 2000, as
compared to fiscal 1999's EBITDA of $41.0 million. The pro forma EBITDA for
Predecessor Heritage for the twelve months ended August 31, 2000 was $42.3
million. Heritage's EBITDA includes the EBITDA of investees, but does not
include the EBITDA of the minority interest of M-P Energy Partnership. EBITDA
should not be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating Heritage's ability to make the Minimum Quarterly
Distribution.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Volume. Predecessor Heritage sold 159.9 million retail gallons in
fiscal 1999, an increase of 13.2 million gallons or 9.0 percent from the 146.7
million gallons sold in fiscal 1998 primarily as a result of acquisitions. The
increases in volumes were net of the effects of one of the warmest winters this
century.
Predecessor Heritage also sold approximately 81.1 million wholesale
gallons during fiscal 1999, a decrease of 5.1 million gallons from fiscal 1998's
86.2 million gallons. The decrease in the wholesale volumes was attributable to
a decline of 1.5 million gallons in the foreign operations of M-P Energy
Partnership and the decline of 3.6 million gallons in the U.S. wholesale
operations. The warm weather this past heating season was the main factor in the
decline in these volumes.
Revenues. Total revenues for Predecessor Heritage decreased $2.0
million to $184.0 million from fiscal 1998 total revenues of $186.0 million.
Retail fuel revenues increased $1.1 million to $137.4 million while domestic
wholesale fuel revenues decreased $1.9 million and foreign wholesale revenues
decreased $4.3 million. The increase in retail fuel revenues due to increased
volumes was partially offset by the effects of lower cost of fuel in fiscal year
1999. The decreases in the U.S. and foreign wholesale revenues correspond
primarily to the decrease in volumes. Other revenues increased $3.2 million
primarily as a result of acquisitions and to a lesser extent internal growth.
Cost of Sales. Total cost of sales decreased $9.7 million, or 10.0
percent to $87.2 million for the fiscal year ended August 31, 1999 as compared
to $96.9 million for fiscal year ended August 31, 1998. Domestic cost of sales
decreased $5.0 million, or 6.8 percent to $68.1 million and foreign cost of
sales decreased $4.7 million, or 19.7 percent to $19.1 million. Retail fuel cost
of sales decreased $4.4 million to $57.6 million in fiscal 1999 due to the lower
cost of propane realized in 1999, which offset the increase in volumes. Domestic
wholesale and foreign cost of sales both decreased due to the lower cost of fuel
realized in fiscal 1999 and the decrease in volumes.
Gross Profit. Total gross profit for fiscal 1999 was $96.8 million, a
$7.7 million increase or 8.6 percent over fiscal 1998's gross profit of $89.1
million. The reduction in the cost of fuel in fiscal year 1999 was the primary
contributing factor in the increase in gross profit along with the increase in
other revenues.
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Operating Expenses. Operating expenses for fiscal 1999 increased $4.2
million or 8.9 percent to $51.2 million as compared to $47.0 million in fiscal
1998. This increase is primarily the result of increased costs related to
acquisitions.
Selling, General and Administrative. Selling, general and
administrative expense increased $.7 million or 12.7 percent to $6.2 million for
fiscal 1999 as compared to $5.5 million for fiscal 1998. The increase was the
result of additional expenses to support business growth.
Depreciation and Amortization. Depreciation and amortization was $14.7
million for fiscal 1999, a $1.0 million increase over fiscal 1998's $13.7
million. This increase is the result of additional depreciation and amortization
costs on the fixed assets and intangibles recorded in relation to acquisitions.
Operating Income. Operating income increased 7.4 percent to $24.6
million in fiscal 1999, a $1.7 million increase over fiscal 1998's $22.9
million. The increased gross profit described above offset by the increases in
operating and other expenses, also described above, resulted in this increase.
Net Income. Net income for the fiscal year ended August 31, 1999,
increased $.9 million, or 10.2 percent to $9.7 million as compared to fiscal
1998's net income of $8.8 million. This increase is the result of increased
operating income partially offset by increased interest costs related to
acquisition debt.
EBITDA. Earnings before interest, taxes, depreciation and amortization
increased $3.2 million or 8.5 percent to $41.0 million for fiscal 1999 as
compared to the restated 1998 EBITDA of $37.8 million. Fiscal 1998's EBITDA was
restated to account for the non-cash compensation expense that was previously
included. Predecessor Heritage's EBITDA includes the EBITDA of investees, but
does not include the EBITDA of the minority interest of M-P Energy Partnership.
EBITDA should not be considered as an alternative to net income (as an indicator
of operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligation), but provides additional
information for evaluating Heritage's ability to make the Minimum Quarterly
Distribution.
LIQUIDITY AND CAPITAL RESOURCES
The ability of Heritage to satisfy its obligations will depend on its
future performance, which will be subject to prevailing economic, financial,
business and weather conditions and other factors, many of which are beyond its
control. Future capital requirements of Heritage are expected to be provided by
cash flows from operating activities. To the extent future capital requirements
exceed cash flows from operating activities:
a) working capital will be financed by the working capital line of
credit and repaid from subsequent seasonal reductions in inventory
and accounts receivable
b) growth capital, mainly for customer tanks, expended will be
financed by the revolving acquisition bank line of credit; and
c) acquisition capital expenditures will be financed by revolving
acquisition bank line of credit; other lines of credit, long term
debt, issues of additional Common Units or a combination thereof.
Cash Flows - Heritage Propane Partners, L.P. (Formerly Peoples Gas)
Operating Activities. Cash provided by operating activities during the
period ended August 31, 2000, was $14.5 million compared to cash provided by
operating activities of $9.4 million in the twelve months ended December 31,
1999. The net cash provided from operations for the period ended August 31, 2000
consisted of a net loss of $3.8 million offset by the impact of working capital
provided of $12.5 million and noncash charges of $5.8 million, principally
depreciation and amortization. Working Capital items have increased over the
period ended August 31, 2000 as a result of the net effect of the formation of
U.S. Propane and the merger with Predecessor Heritage.
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Investing Activities. Cash used in investing activities is primarily
the result of the $171.4 million spent in the formation of U.S. Propane.
Heritage completed two acquisitions during the period from August 10, 2000 and
August 31, 2000 spending $1.9 million, net of cash received, to purchase the two
propane companies. In January 2000, Peoples Gas purchased substantially all of
the assets of a company for approximately $3.8 million. These capital
expenditure amounts are reflected in the cash used in investing activities of
$183.0 million along with $3.5 million spent for maintenance needed to sustain
operations at current levels and customer tanks to support growth of operations
and other investing activities of $2.4 million.
Financing Activities. Cash provided by financing activities during the
period ended August 31, 2000 of $173.4 million was primarily from the $180.0
million received from the issuance of Senior Secured Promissory Notes in
conjunction with the merger with U.S. Propane. (See Description of
Indebtedness). The proceeds were used in conjunction with the merger with U.S.
Propane and to repay the outstanding indebtedness under the Acquisition Facility
and a portion of the Working Capital Facility assumed in the transaction with
Predecessor Heritage. Proceeds of $50.2 million were received from the sale of
Common and Subordinated Units to the former shareholders of the General Partner.
These increases were offset by debt issuance costs of $1.1 million and dividends
paid by Peoples Gas to their parent company of $1.5 million.
Cash Flows - Predecessor Heritage
Operating Activities. Cash provided by operating activities during the
period ended August 9, 2000, was $14.1 million compared to cash provided of
$23.6 million in the twelve months ended August 31, 1999. The net cash provided
from operations for the period ended August 9, 2000 consisted of net income of
$6.5 million and the impact of working capital used of $9.1 million offset by
noncash charges of $16.8 million, principally depreciation and amortization.
Accounts receivable have increased over last year as a result of the net effect
of the increase in propane costs which in part was passed on to the customers
and a larger customer base due to acquisitions. Accounts payable has also
increased due to the same related reasons of increased cost of propane and
acquisitions.
Investing Activities. Predecessor Heritage completed eleven
acquisitions during the period ended August 9, 2000 spending $46.8 million, net
of cash received, to purchase propane companies. This capital expenditure amount
is reflected in the cash used in investing activities of $58.3 million along
with $12.9 million spent for maintenance needed to sustain operations at current
levels and customer tanks to support growth of operations.
Financing Activities. Cash provided by financing activities during the
period ended August 9, 2000 of $44.6 million is primarily the result of net
proceeds received in a public offering of 1,200,000 Common Units of Heritage
Propane Partners, L.P. The net proceeds of approximately $24 million were used
to repay a portion of the outstanding indebtedness under the Acquisition
Facility that was incurred to acquire propane businesses. Other cash provided by
financing activities of $20.6 million was mainly from a net increase in the
working capital facility of $13.4 million and a net increase in the Acquisition
Facility of $31.0 million used to acquire other propane businesses. These
increases were offset by cash distributions to unitholders of $21.9 million,
payments on other long-term debt of $2.2 million and contributions by the
General Partner of $.3 million.
Financing and Sources of Liquidity
Heritage has a Bank Credit Facility, which includes a Working Capital
Facility, a revolving credit facility providing for up to $50.0 million of
borrowings to be used for working capital and other general partnership
purposes, and an Acquisition Facility, a revolving credit facility providing for
up to $50.0 million of borrowings to be used for acquisitions and improvements.
See page F-14, "Notes to Consolidated Financial Statements - 5. Working Capital
Facilities and Long-Term Debt."
Predecessor Heritage used its cash provided by operating and financing
activities to provide distributions to unitholders and to fund acquisition,
maintenance and growth capital expenditures. Acquisition capital expenditures,
which include expenditures related to the acquisition of retail propane
operations and intangibles associated with such acquired businesses, were $46.8
million for the period ended August 9, 2000 as compared to $17.9 million for
fiscal year 1999 and $23.3 million during fiscal 1998. In addition to the $46.8
million of cash expended for acquisitions during the period ended August 9,
2000, $4.1 million of Common Units and $3.6 million for notes payable on
non-compete agreements were issued in connection with certain acquisitions. In
addition to the $17.9
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million of cash expended for acquisitions during fiscal 1999, $1.0 million of
Common Units and $3.3 million for notes payable on non-compete agreements were
issued in connection with certain acquisitions.
Under its Partnership Agreement, Heritage will distribute to its
partners, 45 days after the end of each fiscal quarter, an amount equal to all
of its Available Cash for such quarter. Available Cash generally means, with
respect to any quarter of Heritage, 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 (i) provide for the proper
conduct of the Heritage's business, (ii) comply with applicable law or any
Heritage debt instrument or other agreement, or (iii) provide funds for
distributions to Unitholders and the General Partner in respect of any one or
more of the next four quarters. Available Cash is more fully defined