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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1999
REGISTRATION NO. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HERITAGE PROPANE PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 73-1493906
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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8801 SOUTH YALE AVENUE, SUITE 310 H. MICHAEL KRIMBILL
<S> <C>
TULSA, OKLAHOMA 74137 PRESIDENT
(918) 492-7272 HERITAGE PROPANE PARTNERS, L.P.
(Address, including zip code, and telephone 8801 SOUTH YALE AVENUE, SUITE 310
number, including area code, of TULSA, OKLAHOMA 74137
registrant's principal executive (918) 492-7272
offices) (Name, address, including zip code, and telephone number,
including area code, of agent for service)
</TABLE>
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With a copy to:
JOSHUA DAVIDSON
BAKER & BOTTS, L.L.P.
ONE SHELL PLAZA
HOUSTON, TEXAS 77002-4995
FAX: (713) 229-1522
Approximate date of commencement of proposed sale to the public: From time
to time after this registration statement becomes effective. [ ]
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box.[ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Proposed Maximum Aggregate Amount of
Securities to be Registered Offering Price(1)(2)(3)(4) Registration Fee
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Common Units ...................................
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Debt Securities.................................
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TOTAL $150,000,000 $41,700
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(1) We have estimated the proposed maximum aggregate offering price solely
to calculate the registration fee under Rule 457(o). In no event will
the aggregate initial offering price of all securities issued exceed
$150,000,000. To the extent applicable, the aggregate amount of common
units registered is further limited to that which is permissible under
Rule 415(a)(4) under the Securities Act. The registered securities may
be sold separately or as units with other registered securities.
(2) There are being registered hereunder a presently indeterminate number
of common units and an indeterminate principal amount of debt
securities.
(3) The proposed maximum aggregate offering price for each class of
securities to be registered is not specified pursuant to General
Instruction, II.D. of Form S-3.
(4) If any debt securities are issued at an original issue discount, then
the offering price of such debt securities shall be in such amount as
shall result in an aggregate initial offering price not to exceed
$150,000,000 less the dollar amount of any registered securities
previously issued.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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PROSPECTUS
SUBJECT TO COMPLETION, DATED AUGUST 27, 1999
$150,000,000
HERITAGE PROPANE PARTNERS, L.P.
COMMON UNITS
DEBT SECURITIES
This prospectus provides you with a general description of the
securities we may offer. Each time we sell securities we will provide a
prospectus supplement that will contain specific information about the terms of
that offering. The prospectus supplement may also add, update or change
information contained in this prospectus. You should read this prospectus and
any supplement carefully before you invest.
The common units are traded on the New York Stock Exchange under the
symbol "HPG." On August 26, 1999, the last reported sales price for the common
units as reported on the New York Stock Exchange Composite Transactions Tape was
$22.625 per common unit. We will provide information in the prospectus
supplement for the expected trading market, if any, for the debt securities.
You should carefully consider each of the risk factors described under
"Risk Factors" beginning on page 3 of this Prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is prohibited.
The date of this Prospectus is , 1999.
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TABLE OF CONTENTS
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WHO WE ARE....................................................................2
ABOUT THIS PROSPECTUS.........................................................2
RISK FACTORS..................................................................3
USE OF PROCEEDS .............................................................12
RATIO OF EARNINGS TO FIXED CHARGES ..........................................13
DESCRIPTION OF COMMON UNITS .................................................13
DESCRIPTION OF DEBT SECURITIES ..............................................16
TAX CONSIDERATIONS ..........................................................28
PLAN OF DISTRIBUTION ........................................................43
FORWARD LOOKING STATEMENTS ..................................................44
WHERE YOU CAN FIND MORE INFORMATION..........................................45
LEGAL OPINIONS ..............................................................46
EXPERTS .....................................................................46
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WHO WE ARE
We are a publicly traded Delaware limited partnership engaged in the
sale, distribution and marketing of propane and other related products in the
United States. We believe that we are the seventh largest retail marketer of
propane in the United States (as measured by retail gallons sold). We currently
serve more than 250,000 residential, commercial, industrial and agricultural
customers from 149 district locations in 26 states. Our operations extend from
coast to coast with concentrations in the western, upper midwestern and
southeastern regions of the United States, with expansion into the northeastern
United States in the last two years.
We maintain our principal executive offices at 8801 South Yale Avenue,
Suite 310, Tulsa, Oklahoma 74137, and our telephone number is (918) 492-7272.
As used in this prospectus, "we," "us," "our" and "Heritage Propane"
mean Heritage Propane Partners, L.P. and, unless the context requires otherwise,
our subsidiary operating partnership, Heritage Operating, L.P., and our wholly
owned subsidiary, Heritage Service Corp. Our subsidiary operating partnership is
sometimes referred to in this prospectus as the "Operating Partnership."
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed
with the Securities and Exchange Commission using a "shelf" registration
process. Under this shelf registration process, we may sell the common units and
debt securities described in this prospectus in one or more offerings. The
common units and debt securities are sometimes referred to in this prospectus as
the "Securities." This prospectus provides you with a general description of us
and the Securities. Each time we sell Securities with this prospectus, we will
provide a prospectus supplement that will contain specific information about the
terms of that offering. The prospectus supplement may also add to, update or
change information in this prospectus. The information in this prospectus is
accurate as of , 1999. You should carefully read this prospectus, the
prospectus supplement and the documents we have incorporated by reference under
the heading "Where You Can Find More Information."
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RISK FACTORS
Before you invest in the Securities, you should be aware that there are
risks in doing so, including those described below. You should consider
carefully these risk factors together with all of the other information included
in this prospectus, any prospectus supplement and the documents we have
incorporated by reference.
If any of the following risks actually occurs, then our business,
financial condition or results of operations could be materially adversely
affected. In such event, we may be unable to make distributions to our
unitholders or pay interest on or the principal of any debt securities, the
trading price of our Securities could decline and you may lose all or part of
your investment.
RISKS INHERENT IN OUR BUSINESS
Since weather conditions may adversely affect demand for propane, our
financial condition is vulnerable to warm winters
Weather conditions have a significant impact on the demand for propane
for both heating and agricultural purposes. Many of our customers rely heavily
on propane as a heating fuel. Typically, we sell approximately 66% of our retail
propane volume during the peak heating season of October through March. Lower
sales volume due to warmer winter weather will adversely affect our results of
operations. Furthermore, variations in weather in one or more of the regions
where we operate can significantly affect the total volume of propane that we
sell and the profits realized on these sales. In fiscal 1998, temperatures were
significantly warmer than normal in areas in which we sell propane. Agricultural
demand for propane is also affected by weather during the harvest season as poor
harvests reduce demand for propane used in crop drying.
Sudden and sharp propane price increases may adversely affect our
operating results
The amount of gross profit we make selling propane retail depends on
the excess of the sales price we receive over our propane supply costs. Propane
is a commodity and the price we pay for it can change significantly in response
to changes in supply or other market conditions over which we have no control.
Since we may not be able to pass on to our customers immediately or in full all
increases in our wholesale cost of propane, these increases could reduce our
gross profits.
Market volatility may cause us to sell inventory at less than the price
we purchased it, which could adversely affect our operating results
Because of the potential volatility of propane prices, the market price
for propane could fall below the price at which we purchased it, which would
adversely affect our profits or render sales from such inventory unprofitable.
While we generally attempt to minimize this inventory risk by purchasing propane
on a short-term basis, we may on occasion, depending on inventory and price
outlooks, purchase and store propane at both our service centers and in our
major storage facilities for future resale. We may purchase large volumes of
propane during periods of low demand and low prices, which generally occur
during the summer months, at the then current market price.
We are dependent on our principal suppliers which increases the risk of
an interruption in supply
During the first nine months of fiscal 1999, 67% of our propane was
purchased from domestic suppliers, and 33% was purchased through M-P Oils, Ltd.,
one of our wholly owned subsidiaries. M-P Oils, Ltd. holds a 60% interest in a
Canadian partnership that supplies our volume requirements in the northern
states. Although we believe that alternative sources of propane are readily
available, if we were unable to purchase propane from our usual sources, the
failure to obtain alternate sources at competitive prices and on a timely basis
could have a
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material adverse effect on our business. Because we purchase propane from
foreign sources, our business is subject to risks of disruption in foreign
supply.
Because of the highly competitive nature of the retail propane
business, we may not be able to maintain existing customers or acquire
new customers, which would have an adverse impact on our operating
results and financial condition
If we are unable to compete effectively in the propane business, we may
lose existing customers or fail to acquire new customers, which will have a
material adverse effect on our results of operations and financial condition. We
compete with a number of large national and regional firms and several thousand
small independent firms. Because of the relatively low barriers to entry into
the retail propane market, there is potential for small independent propane
retailers, as well as other companies who may not be engaged in retail propane
distribution, to compete with our retail outlets. As a result, we are always
subject to the risk of additional competition in the future. Certain of our
competitors have greater financial resources than we do. Should a competitor
attempt to increase market share by decreasing prices, our financial condition
and results of operations could be materially adversely affected. Generally,
warmer-than-normal weather further intensifies competition. We believe that our
ability to compete effectively depends on the reliability of our service, our
responsiveness to customers and our ability to maintain competitive retail
prices.
Propane competes with other sources of energy, some of which are less
costly for equivalent energy value. We compete for customers against suppliers
of electricity, natural gas and fuel oil. Competition from alternative energy
sources has been increasing as a result of reduced regulation of many utilities,
including natural gas and electricity. Except for certain industrial and
commercial applications, propane is generally not competitive with natural gas
in areas where natural gas pipelines already exist because natural gas is a
significantly less expensive source of energy than propane. The gradual
expansion of the nation's natural gas distribution systems has resulted in the
availability of natural gas in many areas that previously depended upon propane.
Although propane is similar to fuel oil in certain applications and market
demand, propane and fuel oil compete to a lesser extent primarily because of the
cost of converting from one to the other.
If we do not make acquisitions on economically acceptable terms, our
future financial performance will be limited
The retail propane industry is mature, and we foresee only limited
growth in total retail demand for propane. Moreover, because of long-standing
customer relationships that are typical in our industry, the inconvenience of
switching tanks and suppliers and propane's higher cost relative to other energy
sources, such as natural gas, it may be difficult for us to acquire new retail
customers except through acquisitions. Therefore, our ability to grow will
depend primarily upon our ability to acquire other retail propane distributors
and to successfully integrate them into our existing operations and to make
cost-saving changes. We cannot guarantee that we will identify attractive
acquisition candidates in the future, that we will be able to acquire such
businesses on economically acceptable terms or successfully integrate them into
our existing operations and make cost-saving changes, that any acquisition will
not dilute earnings and distributions to our unitholders or that any additional
debt incurred to finance an acquisition will not adversely affect our ability to
make distributions to unitholders. We are subject to certain covenants contained
in our debt agreements that may restrict our ability to incur debt to finance
acquisitions. In addition, to the extent that warm weather or other factors
adversely affects our operating and financial results, our access to capital and
our acquisition activities may be limited.
We are subject to operating and litigation risks that could adversely
affect our operating results to the extent not covered by insurance
Our operations are subject to all operating hazards and risks normally
incidental to handling, storing and delivering combustible liquids like propane.
As a result, we have been, and are likely to be, a defendant in
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various legal proceedings arising in the ordinary course of business. We
maintain insurance policies with insurers in such amounts and with such
coverages and deductibles as we believe are reasonable and prudent. However, we
cannot guarantee that our insurance will be adequate to protect us from all
material expenses related to potential future claims for personal injury and
property damage or that such levels of insurance will be available at economical
prices.
Energy efficiency and technological advances may affect the demand for
propane and adversely affect our operating results
The national trend toward increased conservation and technological
advances, including installation of improved insulation and the development of
more efficient furnaces and other heating devices, has decreased the demand for
propane by retail customers. We cannot predict how future conservation measures
or technological advances in heating, conservation, energy generation or other
devices might affect our operations.
Our results of operations and financial condition may be adversely
affected by governmental regulation and associated environmental and
regulatory costs
The propane business is subject to a wide range of federal and state
laws and regulations related to environmental and other regulated matters. We
have implemented environmental programs and policies designed to avoid potential
liability and costs under applicable environmental laws. It is possible,
however, that we will have increased costs due to stricter pollution control
requirements or liabilities resulting from non-compliance with operating or
other regulatory permits. New environmental regulations might adversely impact
our operations, storage and transportation of propane. It is possible that
material costs and liabilities will be incurred, including those relating to
claims for damages to property and persons.
RISKS INHERENT IN AN INVESTMENT IN HERITAGE PROPANE
Cash distributions are not guaranteed and may fluctuate with our
performance and other external factors
Because distributions on the common units are dependent on the amount
of cash generated, distributions may fluctuate based on our performance. The
actual amount of cash that is available will depend upon numerous factors,
including:
o cash flow generated by operations;
o required principal and interest payments on our debt;
o the costs of acquisitions;
o restrictions contained in our debt instruments;
o issuances of debt and equity securities;
o fluctuations in working capital;
o capital expenditures;
o adjustments in reserves made by the general partner in its
discretion;
o prevailing economic conditions; and
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o financial, business and other factors, a number of which will be
beyond our control.
Cash distributions are dependent primarily on cash flow, including from
reserves, and not on profitability, which is affected by non-cash items.
Therefore, cash distributions might be made during periods when we record losses
and might not be made during periods when we record profits.
The partnership agreement gives the general partner discretion in
establishing reserves for the proper conduct of our business. These reserves
will also affect the amount of cash available for distribution.
The distribution priority of holders of common units terminates at the
end of the subordination period
Currently the common units have the right to receive distributions of
available cash from our operations in an amount equal to $0.50 per unit before
any distributions of such available cash are made on our subordinated units.
This priority right is scheduled to end when certain financial tests, which are
related to generating cash from operations and distributing at least $0.50 per
unit on all common units and subordinated units, are satisfied for each of three
consecutive four-quarter periods ending on or after May 31, 2001. If these
financial tests are met, the subordinated units will convert into common units
and will thereafter share equally with other common units in distributions of
available cash. Pursuant to the terms of the partnership agreement, on July 7,
1999, 925,736 subordinated units converted into common units. The conversion of
the subordinated units was dependent on meeting these financial tests for the
period commencing with our public offering in June 1996. An additional 925,736
subordinated units will convert to common units after May 31, 2000 if these
financial tests are met for the three consecutive four-quarter periods ending on
such date. We met these financial tests for the four-quarter periods ended May
31, 1997, May 31, 1998 and May 31, 1999 and expect that we will meet the
remaining financial test in the four-quarter period ending May 31, 2000. The
period during which the common units have a priority right in distributions and
in which the right of the subordinated units to distributions is subordinated is
referred to as the subordination period.
We may sell additional limited partner interests, diluting existing
interests of unitholders
Our partnership agreement generally allows us to issue additional
limited partner interests and other equity securities without the approval of
the unitholders. During the subordination period, however, which will generally
extend at least through May 31, 2001, the number of common units that we may
issue is subject to certain limitations. These limitations do not apply to
issuances in connection with acquisitions or capital improvements that are
accretive, the repayment of certain indebtedness or certain employee benefit
plans. When we issue additional equity securities, your proportionate
partnership interest will decrease and the amount of cash distributed on each
unit and the market price of common units could decrease. Issuance of additional
common units will also diminish the relative voting strength of each previously
outstanding unit. Following the end of the subordination period, there are no
limits on the total number of common units or other equity securities that we
may issue.
Our debt agreements may limit our ability to make distributions to
unitholders and our financial flexibility
As of May 31, 1999, we had outstanding $167 million in senior secured
promissory notes with insurance companies and $22.8 million outstanding under
our bank credit facility. Our leverage may adversely affect our ability to
finance future operations and capital needs, limit our ability to pursue
acquisitions and other business opportunities and make our results of operations
more susceptible to adverse economic conditions. We may in the future incur
additional debt to finance acquisitions or for general business purposes, which
could result in a significant increase in our leverage. The payment of principal
and interest on our debt will reduce the cash available to make distributions on
the common units. We will not be able to make any distributions to our
unitholders if there is or will be an event of default under our debt
agreements. Our ability to make principal and interest payments depends on
future performance, which performance is subject to many factors, several of
which
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will be outside our control. We have granted liens on substantially all of our
personal property (other than vehicles) to secure our existing debt. If an event
of default occurs, the lenders can foreclose on the collateral.
The notes and the bank credit facility contain provisions relating to
changes in ownership. If these provisions are triggered, the outstanding debt
may become due. If that happens, we cannot guarantee that we would be able to
pay the debt. The general partner and its stockholders are not prohibited from
entering into a transaction that would trigger these change-in-ownership
provisions. The notes and the bank credit facility also contain restrictive
covenants that limit our ability to incur additional debt and to engage in
certain transactions. This could reduce our ability to capitalize on business
opportunities that arise. Any new indebtedness could have similar or greater
restrictions.
Our holding company structure may limit our ability to repay debt
securities.
We are a holding company and have no material operations and only
limited assets. Accordingly, our ability to service our debt obligations will be
entirely dependent upon the receipt of distributions from the Operating
Partnership.
Our holding company structure results in two principal risks:
o The Operating Partnership may be restricted by contractual
provisions or applicable laws from providing us the cash that we
need to pay our debt service obligations, including payments on
any debt securities we offer under this prospectus; and
o In any liquidation, reorganization or insolvency proceeding
involving Heritage Propane or in any other proceeding involving
claims of creditors (other than Heritage Propane) of the
Operating Partnership (including trade creditors, secured
creditors, taxing authorities and creditors holding guarantees),
your claim as a holder of any debt securities we offer under this
prospectus will be effectively junior to the claims of holders of
any indebtedness of the Operating Partnership.
RISKS ARISING FROM OUR PARTNERSHIP STRUCTURE AND RELATIONSHIPS WITH OUR GENERAL
PARTNER
The general partner is not elected by the unitholders and cannot be
removed without its consent
The general partner manages and operates Heritage Propane. Unlike the
holders of common stock in a corporation, common unitholders will have only
limited voting rights on matters affecting our business. Common unitholders will
have no right to elect the general partner or the directors of the general
partner on an annual or other continuing basis, and the general partner may not
be removed except upon the vote of the holders of at least 66 2/3% of the
outstanding units (including units owned by the general partner and its
affiliates) and the election of a successor general partner by the vote of the
holders of not less than a majority of the outstanding common units and the
holders of not less than a majority of the outstanding subordinated units, each
voting as a separate class. Because the general partner owns all of the
subordinated units and more than one-third of all units, the general partner
cannot be removed without its consent.
Persons owning 20% or more of the common units cannot vote
Any units held by a person that owns 20% or more of any class of units
then outstanding cannot be voted. This limitation does not apply to the general
partner and its affiliates. This provision may:
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o discourage a person or group from attempting to remove the
general partner or otherwise changing management; and
o reduce the price at which the common units will trade under
certain circumstances.
Unitholders may be required to sell their units to the general partner
at an undesirable time or price
If at any time less than 20% of the outstanding units of any class are
held by persons other than the general partner and its affiliates, the general
partner will have the right to acquire all, but not less than all, of those
units at a price no less than their then-current market price. As a consequence,
a unitholder may be required to sell his common units at an undesirable time or
price. The general partner may assign this purchase right to any of its
affiliates or Heritage Propane.
The general partner can protect itself against dilution
Whenever we issue equity securities to any person other than the
general partner and its affiliates, the general partner has the right to
purchase additional limited partnership interests on the same terms to maintain
its percentage interest in Heritage Propane. No other unitholder has a similar
right. Therefore, only the general partner may protect itself against dilution
caused by the issuance of additional equity securities.
Unitholders may not have limited liability in certain circumstances and
may be liable for the return of certain distributions
A number of states have not clearly established limitations on the
liabilities of limited partners for the obligations of a limited partnership.
The unitholders might be held liable for our obligations as if they were a
general partner if:
o a court or government agency determined that we were conducting
business in the state but had not complied with the state's
partnership statute; or
o unitholders' rights to act together to remove or replace the
general partner or take other actions under the partnership
agreement constitute "control" of our business.
Unitholders may have liability to repay distributions
Unitholders will not be liable for assessments in addition to their
initial capital investment in the common units. Under certain circumstances,
however, unitholders may have to repay Heritage Propane amounts wrongfully
returned or distributed to them. Under Delaware law, we may not make a
distribution to you if the distribution causes the liabilities of Heritage
Propane to exceed the fair value of Heritage Propane's assets. Liabilities to
partners on account of their partnership interests and non-recourse liabilities
are not counted for purposes of determining whether a distribution is permitted.
Delaware law provides that a limited partner who receives such a distribution
and knew at the time of the distribution that the distribution violated Delaware
law will be liable to the limited partnership for the distribution amount for
three years from the distribution date. Under Delaware law, an assignee who
becomes a substituted limited partner of a limited partnership is liable for the
obligations of the assignor to make contributions to the partnership. However,
such an assignee is not obligated for liabilities unknown to him at the time he
or she became a limited partner if the liabilities could not be determined from
the partnership agreement.
The partnership agreement modifies the fiduciary duties of the general
partner under Delaware law
Our partnership agreement contains language limiting the liability of
the general partner to us and the unitholders. For example, our partnership
agreement provides that:
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o The general partner does not breach any duty to us or the
unitholders by borrowing funds or approving any borrowing. The
general partner is protected even if the purpose or effect of the
borrowing is to increase incentive distributions to the general
partner or to hasten the conversion of subordinated units into
common units;
o The general partner does not breach any duty to us or the
unitholders by taking any actions consistent with the standards
of reasonable discretion outlined in the definitions of Available
Cash and Operating Surplus contained in our partnership
agreement; and
o The general partner does not breach any standard of care or duty
by resolving conflicts of interest unless the general partner
acts in bad faith.
The modifications of state law standards of fiduciary duty contained in
our partnership agreement may significantly limit the ability of unitholders to
successfully challenge the actions of the general partner as being a breach of
what would otherwise have been a fiduciary duty. These standards include the
highest duties of good faith, fairness and loyalty to the limited partners. Such
a duty of loyalty would generally prohibit a general partner of a Delaware
limited partnership from taking any action or engaging in any transaction for
which it has a conflict of interest. Under the partnership agreement, the
general partner may exercise its broad discretion and authority in the
management of Heritage Propane and the conduct of its operations as long as the
general partner's actions are in the best interest of Heritage Propane.
POTENTIAL CONFLICTS OF INTEREST RELATED TO THE OPERATION OF HERITAGE PROPANE
Certain conflicts of interest could arise among the general partner and
Heritage Propane. Such conflicts may include, among others, the following
situations:
o we do not have any employees and we rely solely on employees of
the general partner and its affiliates;
o under the partnership agreement, we reimburse the general partner
for the costs of managing and operating Heritage Propane;
o decisions of the general partner concerning the amount and timing
of cash expenditures, borrowings, issuances of additional units
and reserves in any quarter may affect the level of cash
available to pay quarterly distributions to unitholders;
o the general partner tries to avoid being personally liable for
Heritage Propane's obligations. The general partner is permitted
to protect its assets in this manner by the partnership
agreement. Under the partnership agreement, the general partner
does not breach its fiduciary duty even if Heritage Propane could
have obtained more favorable terms without limitations on the
general partner's liability;
o under the partnership agreement, the general partner may pay its
affiliates for any services rendered on terms fair and reasonable
to Heritage Propane. The general partner may also enter into
additional contracts with any of its affiliates on Heritage
Propane's behalf. Agreements or contracts between Heritage
Propane and the general partner (and its affiliates) are not the
result of arms length negotiations;
o the general partner does not breach the partnership agreement by
exercising its call rights to purchase limited partnership
interests or by assigning its call rights to one of its
affiliates or to Heritage Propane.
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TAX RISKS
For a general discussion of the expected federal income tax
consequences of owning and disposing of common units, see "Tax Considerations."
Tax treatment is dependent on partnership status
The availability to a common unitholder of the federal income tax
benefits of an investment in the common units depends, in large part, on our
classification as a partnership for federal income tax purposes. Based on
certain representations of the general partner and Heritage Propane, Baker &
Botts, L.L.P., our tax counsel, is of the opinion that, under current law, we
will be classified as a partnership for federal income tax purposes. However, no
ruling from the IRS as to such status has been or is expected to be requested.
Instead, we are relying on the opinion of our tax counsel, which is not binding
on the IRS. One of the representations on which the opinion of our tax counsel
is based is that at least 90% of our gross income for each taxable year will be
"qualifying income" within the meaning of Section 7704 of the Internal Revenue
Code. Whether we will continue to be classified as a partnership in part depends
on our ability to meet this qualifying income test in the future.
If we were classified as an association taxable as a corporation for
federal income tax purposes, we would pay tax on our income at corporate rates
(currently a 35% federal rate). Distributions to the common unitholder would
generally be taxed a second time as corporate distributions, and no income,
gains, losses or deductions would flow through to the unitholders. Because a tax
would be imposed upon us as an entity, the cash available for distribution to
the common unitholders would be substantially reduced. Treatment of us as a
taxable entity would cause a material reduction in the anticipated cash flow and
after-tax return to the common unitholders, likely causing a substantial
reduction in the value of the common units.
We cannot guarantee that the law will not be changed so as to cause us
to be treated as an association taxable as a corporation for federal income tax
purposes or otherwise to be subject to entity-level taxation. Our partnership
agreement provides that if a law is enacted or existing law is modified or
interpreted in a manner that subjects us to taxation as a corporation or
otherwise subjects us to entity-level taxation for federal, state or local
income tax purposes, certain provisions of our partnership agreement will be
subject to change. Such changes would include a decrease in the minimum
quarterly distribution and the target distribution levels to reflect the impact
of such law on us.
We have not requested an IRS ruling with respect to our classification
as a partnership
We have not requested a ruling from the IRS with respect to our
classification as a partnership for federal income tax purposes, whether our
propane operations generate "qualifying income" under Section 7704 of the
Internal Revenue Code or any other matter affecting us. Accordingly, the IRS may
adopt positions that differ from the conclusions of our tax counsel expressed in
this prospectus or the positions taken by us. It may be necessary to resort to
administrative or court proceedings in an effort to sustain some or all of our
tax counsel's conclusions or the positions taken by us. A court may not concur
with some or all of our conclusions. Any contest with the IRS may materially and
adversely impact the market for the common units and the prices at which they
trade. In addition, the costs of any contest with the IRS will be borne directly
or indirectly by some or all of the unitholders and the general partner.
A unitholder's tax liability could exceed cash distributions on his
units
A unitholder will be required to pay federal income taxes and, in some
cases, state and local income taxes on his allocable share of our income, even
if he receives no cash distributions from us. We cannot guarantee that a
unitholder will receive cash distributions equal to his allocable share of our
taxable income or
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even the tax liability to him resulting from that income. Further, a unitholder
may incur a tax liability, in excess of the amount of cash received, upon the
sale of his common units.
Ownership of common units may have adverse tax consequences for
tax-exempt organizations and certain other investors
Investment in common units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to them. For
example, virtually all of our taxable income allocated to organizations exempt
from federal income tax, including individual retirement accounts and other
retirement plans, will be unrelated business taxable income and thus will be
taxable to the unitholder. Very little of our income will be qualifying income
to a regulated investment company. Distributions to foreign persons will be
reduced by withholding taxes.
Only calendar-year taxpayers may become partners
Only calendar-year taxpayers may purchase common units. Any unitholder
who is not a calendar-year taxpayer will not be admitted to Heritage Propane as
a partner, will not be entitled to receive distributions or federal income tax
allocations from Heritage Propane and may only transfer these interests to a
purchaser or other transferee.
There are limits on the deductibility of losses
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any losses generated by us will only
be available to offset our future income and cannot be used to offset income
from other activities, including other passive activities or investments. Unused
losses may be deducted when the unitholder disposes of his entire investment in
us in a fully taxable transaction with an unrelated party. A unitholder's share
of our net passive income may be offset by unused losses from us carried over
from prior years, but not by losses from other passive activities, including
losses from other publicly traded partnerships.
Tax shelter registration could increase risk of potential audit by the
IRS
We are registered with the IRS as a "tax shelter." The IRS has issued
us the following tax shelter registration number: 96234000014. Issuance of the
registration number does not indicate that an investment in us or the claimed
tax benefits have been reviewed, examined or approved by the IRS. We cannot
guarantee that we will not be audited by the IRS or that tax adjustments will
not be made. The rights of a unitholder owning less than a 1% profits interest
in us to participate in the income tax audit process are very limited. Further,
any adjustments in our tax returns will lead to adjustments in the unitholders'
tax returns and may lead to audits of unitholders' tax returns and adjustments
of items unrelated to us. Each unitholder would bear the cost of any expenses
incurred in connection with an examination of his personal tax return.
Tax gain or loss on disposition of common units could be different than
expected
A unitholder who sells common units will recognize gain or loss equal
to the difference between the amount realized and his tax basis in the common
units. Prior distributions in excess of cumulative net taxable income allocated
for a common unit which decreased a unitholder's tax basis in that common unit
will, in effect, become taxable income if the common unit is sold at a price
greater than the unitholder's tax basis in that common unit, even if the price
is less than his original cost. A portion of the amount realized, whether or not
representing gain, may be ordinary income. Furthermore, should the IRS
successfully contest some conventions used by us, a unitholder could recognize
more gain on the sale of common units than would be the case under those
conventions, without the benefit of decreased income in prior years.
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Reporting of partnership tax information is complicated and subject to
audits
We will furnish each unitholder with a Schedule K-1 that sets forth his
allocable share of income, gains, losses and deductions. In preparing these
schedules, we will use various accounting and reporting conventions and adopt
various depreciation and amortization methods. We cannot guarantee that these
schedules will yield a result that conforms to statutory or regulatory
requirements or to administrative pronouncements of the IRS. Further, our tax
return may be audited, which could result in an audit of a unitholder's
individual tax return and increased liabilities for taxes because of adjustments
resulting from the audit.
There is a possibility of loss of tax benefits relating to
nonuniformity of common units and nonconforming depreciation
conventions
Because we cannot match transferors and transferees of common units,
uniformity of the economic and tax characteristics of the common units to a
purchaser of common units of the same class must be maintained. To maintain
uniformity and for other reasons, we have adopted certain depreciation and
amortization conventions that do not conform with all aspects of certain
proposed and final Treasury Regulations. A successful challenge to those
conventions by the IRS could adversely affect the amount of tax benefits
available to a purchaser of common units and could have a negative impact on the
value of the common units.
There are state, local and other tax considerations
In addition to federal income taxes, unitholders will likely be subject
to other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which he resides or in which we do business or own property. A
unitholder will likely be required to file state and local income tax returns
and pay state and local income taxes in some or all of the various jurisdictions
in which we do business or own property and may be subject to penalties for
failure to comply with those requirements. It is the responsibility of each
unitholder to file all United States federal, state and local tax returns that
may be required of him. Our tax counsel has not rendered an opinion on the state
or local tax consequences of an investment in us.
Unitholders may have negative tax consequences if we default on our
debt or sell assets
If we default on any of our debt, the lenders will have the right to
sue us for non-payment. Such an action could cause an investment loss and
negative tax consequences for unitholders through the realization of taxable
income by unitholders without a corresponding cash distribution. Likewise, if we
were to dispose of assets and realize a taxable gain while there is substantial
debt outstanding and proceeds of the sale were applied to the debt, unitholders
could have increased taxable income without a corresponding cash distribution.
USE OF PROCEEDS
We will use the net proceeds from the sale of the Securities for
general business purposes, including debt repayment, future acquisitions,
capital expenditures and working capital. We may change the potential uses of
the net proceeds in a prospectus supplement.
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RATIO OF EARNINGS TO FIXED CHARGES
The table below sets forth the ratio of earnings to fixed charges of the
Partnership and for Heritage Holdings, Inc. (Predecessor) for the periods
indicated.
<TABLE>
<CAPTION>
Nine Months Two Months Ten Months
Ended Year Ended Ended Ended Year Ended
May 31, August 31, August 31, June 30, August 31,
------- ---------- ---------- ---------- -----------
1999 1998 1998 1997 1996(1) 1996 1995 1994
---- ---- ----- ---- -------- ---- ---- ----
(Predecessor) (Predecessor)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings 2.3x 2.3x 1.5x 1.4x - 1.4x 1.0x 1.1x
to fixed charges
</TABLE>
(1) For the two months ended August 31, 1996, earnings were inadequate to
cover fixed charges by $1.8 million.
These computations include Heritage Propane and the Operating Partnership on a
consolidated basis for the periods indicated and Heritage Holdings, Inc.
(Predecessor) and subsidiaries on a consolidated basis for the periods
indicated. For these ratios, "earnings" is the amount resulting from adding the
following items:
- pre-tax income from continuing operations, before equity in earnings of
affiliates;
- distributed income of equity investees; and
- fixed charges.
The term "fixed charges" means the sum of the following:
- interest expensed;
- amortized debt issuance costs; and
- estimated interest element of rentals.
Earnings from continuing operations for the periods presented were reduced by
certain non-cash expenses, consisting principally of depreciation and
amortization and a non-cash employee stock ownership plan charge. Such non-cash
charges, excluding amortized debt issuance costs, totaled $8.6 million for the
year ended August 31, 1994, $8.7 million for the year ended August 31, 1995,
$7.2 million for the ten months ended June 30, 1996, $1.7 million for the two
months ended August 31, 1996, $10.8 million for the year ended August 31, 1997,
$13.4 million for the year ended August 31, 1998, and $9.8 million and $10.7
million for the nine months ended May 31, 1998 and 1999, respectively.
DESCRIPTION OF COMMON UNITS
NUMBER OF UNITS
As of August 27, 1999, we had 5,825,674 common units outstanding,
representing an approximate 66% limited partner interest in Heritage Propane,
and 2,777,207 subordinated units outstanding, representing an approximate 32%
limited partner interest in Heritage Propane. Heritage Holdings, Inc., our
general partner, owns all of the subordinated units and 1,116,243 of the common
units as well as the 2% general partner interest. The common units and the
subordinated units represent limited partner interests in Heritage Propane,
which entitle the holders thereof to participate in distributions and exercise
the rights and privileges available to limited partners under our partnership
agreement. A copy of our partnership agreement is filed as an exhibit to the
registration statement of which this prospectus is a part. A summary of the
important provisions of our partnership agreement is included in our reports
filed with the SEC.
Under our partnership agreement we may issue, without further
unitholder action, an unlimited number of additional limited partner interests
and other equity securities with such rights, preferences and privileges as
shall be established by the general partner in its sole discretion, except that,
during the subordination period, we may not issue equity securities senior to
the common units or an aggregate of more than 2,012,500 common units
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or other units having rights to distributions or in liquidation ranking on a
parity with the common units without the prior approval of at least a majority
of the outstanding common units voting as a class and at least a majority of the
outstanding subordinated units voting as a class; provided that, we may issue an
unlimited number of additional common units or parity securities prior to the
end of the subordination period and without unitholder approval in connection
with certain accretive acquisitions or the repayment of up to $30 million of
certain indebtedness.
COMMON UNITS
Listing
Our outstanding common units are listed on the NYSE under the symbol
"HPG." Any additional common units we issue will also be listed on the NYSE.
Voting
Each record holder of a unit has a vote according to his percentage
interest in Heritage Propane; provided that, if at any time any person or group
(other than our general partner and its affiliates) owns beneficially 20% or
more of all common units, any common units owned by that person or group shall
not be voted on any matter and shall not be considered to be outstanding when
sending notices of a meeting of unitholders (unless otherwise required by law),
calculating required votes, determining the presence of a quorum or for other
similar purposes under our partnership agreement. Except as otherwise provided
by law or our partnership agreement, the holders of common units and
subordinated units vote as one class.
Distributions
Our partnership agreement requires us to distribute all of our
"Available Cash" to our unitholders and our general partner within 45 days
following the end of each fiscal quarter. "Available Cash" generally means, with
respect to any fiscal quarter of Heritage Propane, all of our cash on hand at
the end of each quarter, less reserves established by our general partner in its
sole discretion to provide for the proper conduct of our business, to comply
with applicable law or agreements, or to provide funds for future distributions
to partners.
Currently, the common units have the right to receive distributions of
Available Cash from our operations in an amount equal to $0.50 per unit before
any distributions of such Available Cash are made on the subordinated units.
This subordination period is scheduled to end when certain financial tests,
which are related to generating cash from operations and distributing at least
$0.50 per unit on all common units and subordinated units, are satisfied for
each of three consecutive four-quarter periods ending on or after May 31, 2001.
If these financial tests are met, the subordinated units will convert into
common units and will thereafter share equally with other common units in
distributions of Available Cash. Pursuant to the terms of the partnership
agreement, on July 7, 1999, 925,736 subordinated units converted into common
units. The conversion of the subordinated units was dependent on meeting these
financial tests for the period commencing with our public offering in June 1996.
An additional 925,736 subordinated units will convert to common units after May
31, 2000 if these financial tests are met for the three consecutive four-quarter
periods ending on such date. We met these financial tests for the four-quarter
periods ended May 31, 1997, May 31, 1998 and May 31, 1999 and expect that we
will meet the remaining financial tests in the four-quarter period ending May
31, 2000; however, there can be no assurance that we will meet the remaining
financial tests in the three consecutive four-quarter periods ending May 31,
2000 or in any subsequent three consecutive four-quarter periods.
During the subordination period we distribute Available Cash from our
operations as follows:
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o first, 98% to the holders of common units, pro rata, and 2% to
the general partner, until the holders of common units have
received $0.50 per common unit for such quarter and any prior
quarter in which they failed to receive $0.50 per common unit;
o second, 98% to the holders of subordinated units, pro rata, and
2% to the general partner, until the holders of subordinated
units have received $0.50 per subordinated unit for such quarter;
o third, 98% to all unitholders, pro rata, and 2% to the general
partner, until all unitholders have received $0.55 per unit for
such quarter;
o fourth, 85% to all unitholders, pro rata, and 15% to the general
partner, until all unitholders have received $0.635 per unit for
such quarter;
o fifth, 75% to all unitholders, pro rata, and 25% to the general
partner, until all unitholders have received $0.825 per unit for
such quarter; and
o sixth, thereafter 50% to all unitholders, pro rata, and 50% to
the general partner.
Following the end of the subordination period, Available Cash from our
operations will be distributed as follows:
o first, 98% to all unitholders, pro rata, and 2% to the general
partner, until all unitholders have received $0.50 per unit for
such quarter;
o second, 98% to all unitholders, pro rata, and 2% to the general
partner, until all unitholders have received $0.55 per unit for
such quarter;
o third, 85% to all unitholders, pro rata, and 15% to the general
partner, until all unitholders have received $0.635 per unit for
such quarter;
o fourth, 75% to all unitholders, pro rata, and 25% to the general
partner, until all unitholders have received $0.825 per unit for
such quarter; and
o fifth, thereafter 50% to all unitholders, pro rata, and 50% to
the general partner.
Our quarterly distribution of Available Cash is currently $.5625 per
unit per quarter.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for the common units is American Stock
Transfer & Trust Company. You may contact them at the following address:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005-2301
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<PAGE> 17
DESCRIPTION OF DEBT SECURITIES
GENERAL
The debt securities will be:
o direct secured or unsecured general obligations of Heritage
Propane Partners, L.P. and Heritage Service Corp. as co-obligors;
and
o either senior debt securities or subordinated debt securities.
Senior debt securities will be issued under a Senior Indenture and
subordinated debt securities will be issued under a Subordinated Indenture. The
Senior Indenture and the Subordinated Indenture are each referred to as an
"Indenture" and collectively referred to as the "Indentures." We will enter into
the Indentures with a trustee that is qualified to act under the Trust Indenture
Act of 1939, as amended (the "TIA") (together with any other trustee(s) chosen
by us and appointed in a supplemental indenture with respect to a particular
series of debt securities, the "Trustee"). The Trustee for each series of debt
securities will be identified in the applicable Prospectus Supplement. The form
of Indentures and any supplemental indentures will be filed by us from time to
time by means of an exhibit to a Current Report on Form 8-K and will be
available for inspection at the corporate trust office of the Trustee, or as
described below under "Where You Can Find More Information." The Indentures will
be subject to, and governed by, the TIA. We will execute an Indenture and
supplemental indenture if and when we issue any debt securities.
We summarized the material provisions of the Indentures in the
following order:
o those provisions that apply only to the Senior Indenture;
o those provisions that apply only to the Subordinated Indenture;
and
o those provisions that apply to both Indentures.
We have not restated the Indentures in their entirety in this
prospectus. You should read the Indentures, because they, and not this
description, control your rights as holders of the debt securities. Capitalized
terms used in the summary have the meanings specified in the Indentures.
In this section, references to Heritage Propane relate only to Heritage
Propane Partners, L.P., the issuer of the debt securities, and not to our
Subsidiaries. In the Indentures, the term "Subsidiary" means, with respect to
any person:
o any partnership of which more than 50% of the partners' equity
interests (considering all partners' equity interests as a single
class) is at the time owned or controlled, directly or
indirectly, by such person or one or more of the other
Subsidiaries of such person or combination thereof, or
o any corporation, association or other business entity of which
more than 50% of the total voting power of the equity interests
entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by
such person or one or more of the other Subsidiaries of such
person or combination thereof.
At present, our only Subsidiaries are the Operating Partnership and Heritage
Service Corp.
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<PAGE> 18
SPECIFIC TERMS OF EACH SERIES OF DEBT SECURITIES IN THE PROSPECTUS SUPPLEMENT
A prospectus supplement and a supplemental indenture relating to any
series of debt securities being offered will include specific terms relating to
such debt securities. These terms will include some or all of the following:
o whether the debt securities are senior or subordinated debt
securities;
o the title of the debt securities;
o the total principal amount of the debt securities;
o the assets, if any, that are pledged as security for the payment
of the debt securities;
o whether we will issue the debt securities in individual
certificates to each holder in registered or bearer form, or in
the form of temporary or permanent global securities held by a
depository on behalf of holders;
o the prices at which we will issue the debt securities;
o the portion of the principal amount that will be payable if the
maturity of the debt securities is accelerated;
o the currency or currency unit in which the debt securities will
be payable, if not U.S. dollars;
o any right we may have to defer payments of interest by extending
the dates payments are due and whether interest on those deferred
amounts will be payable as well;
o the dates on which the principal of the debt securities will be
payable;
o the interest rate that the debt securities will bear and the
interest payment dates for the debt securities;
o any conversion or exchange provisions;
o any optional redemption provisions;
o any sinking fund or other provisions that would obligate us to
repurchase or otherwise redeem the debt securities;
o any changes to or additional Events of Default or covenants; and
o any other terms of the debt securities.
PROVISIONS ONLY IN THE SENIOR INDENTURE
Summary
The senior debt securities will rank equally in right of payment with
all of our other senior and unsubordinated debt and senior in right of payment
to any of our subordinated debt (including the subordinated debt securities).
The Senior Indenture will contain provisions that:
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o limit our ability to put liens on our principal assets; and
o limit our ability to sell and lease back our principal assets.
The Subordinated Indenture will not contain any similar provisions. We
have described below these provisions and some of the defined terms used in
them.
Limitations on Liens
The Senior Indenture will provide that Heritage Propane will not, nor
will it permit any Subsidiary to, create, assume, incur or suffer to exist any
lien upon any property or assets, whether owned or leased on the date of the
Senior Indenture or thereafter acquired, to secure any debt of Heritage Propane
or any other person (other than the senior debt securities issued thereunder),
without in any such case making effective provision whereby all of the senior
debt securities outstanding thereunder shall be secured equally and ratably
with, or prior to, such debt so long as such debt shall be so secured.
There is excluded from this restriction:
1. Permitted Liens (as defined below);
2. with respect to any series, any lien upon any property or assets of
Heritage Propane or any Subsidiary in existence on the date the senior debt
securities of such series are first issued or provided for pursuant to
agreements existing on such date;
3. any lien upon any property or assets created at the time of
acquisition of such property or assets by Heritage Propane or any Subsidiary or
within one year after such time to secure all or a portion of the purchase price
for such property or assets or debt incurred to finance such purchase price,
whether such debt was incurred prior to, at the time of or within one year after
the date of such acquisition;
4. any lien upon any property or assets existing thereon at the time of
the acquisition thereof by Heritage Propane or any Subsidiary; provided,
however, that such lien only encumbers the property or assets so acquired;
5. any lien upon any property or assets of a person existing thereon at
the time such person becomes a Subsidiary by acquisition, merger or otherwise;
provided, however, that such lien only encumbers the property or assets of such
person at the time such person becomes a Subsidiary;
6. any lien upon any property or assets to secure all or part of the
cost of construction, development, repair or improvements thereon or to secure
debt incurred prior to, at the time of, or within one year after completion of
such construction, development, repair or improvements or the commencement of
full operations thereof (whichever is later), to provide funds for any such
purpose;
7. liens imposed by law or order as a result of any proceeding before
any court or regulatory body that is being contested in good faith, and liens
which secure a judgment or other court-ordered award or settlement as to which
Heritage Propane or the applicable Subsidiary has not exhausted its appellate
rights;
8. any lien upon any additions, improvements, replacements, repairs,
fixtures, appurtenances or component parts thereof attaching to or required to
be attached to property or assets pursuant to the terms of any mortgage, pledge
agreement, security agreement or other similar instrument, creating a lien upon
such property or assets permitted by clauses (1) through (7) above; or
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9. any extension, renewal, refinancing, refunding or replacement (or
successive extensions, renewals, refinancing, refunding or replacements) of
liens, in whole or in part, referred to in clauses (1) through (8) above;
provided, however, that any such extension, renewal, refinancing, refunding or
replacement lien shall be limited to the property or assets covered by the lien
extended, renewed, refinanced, refunded or replaced and that the obligations
secured by any such extension, renewal, refinancing, refunding or replacement
lien shall be in an amount not greater than the amount of the obligations
secured by the lien extended, renewed, refinanced, refunded or replaced and any
expenses of Heritage Propane and its subsidiaries (including any premium)
incurred in connection with such extension, renewal, refinancing, refunding
replacement; or
10. any lien resulting from the deposit of moneys or evidence of
indebtedness in trust for the purpose of defeasing debt of Heritage Propane or
any Subsidiary.
Notwithstanding the foregoing, under the Senior Indenture, Heritage
Propane may, and may permit any Subsidiary to, create, assume, incur, or suffer
to exist any lien upon any property or assets to secure debt of Heritage Propane
or any person (other than the senior debt securities) that is not excepted by
clauses (1) through (10), inclusive, above without securing the senior debt
securities issued under the Senior Indenture, provided that the aggregate
principal amount of all debt then outstanding secured by such lien and all
similar liens, together with all Attributable Indebtedness (as defined below)
from Sale-Leaseback Transactions (excluding Sale-Leaseback Transactions
permitted by clauses (1) through (4), inclusive, of the first paragraph of the
restriction on sale-leasebacks covenant described below) does not exceed 10% of
Consolidated Net Tangible Assets (as defined below).
"Permitted Liens" means:
(1) zoning restrictions, easements, licenses, covenants,
reservations, restrictions on the use of real property or minor
irregularities of title incident thereto that do not, in the
aggregate, materially detract from the value of the property or
the assets of Heritage Propane or any of its Subsidiaries or
impair the use of such property in the operation of the business
of Heritage Propane or any of its Subsidiaries;
(2) any statutory or governmental lien or lien arising by operation
of law, or any mechanics', repairmen's, materialmen's,
suppliers', vendors', carriers', landlords', warehousemen's or
similar lien incurred in the ordinary course of business which is
not yet due or which is being contested in good faith by
appropriate proceedings and any undetermined lien which is
incidental to construction, development, improvement or repair;
(3) the right reserved to, or vested in, any municipality or public
authority by the terms of any right, power, franchise, grant,
license, permit or by any provision of law, to purchase or
recapture or to designate a purchaser of, any property;
(4) liens of taxes and assessments which are (A) for the then current
year, (B) not at the time delinquent, or (C) delinquent but the
validity of which is being contested at the time by Heritage
Propane or any Subsidiary in good faith;
(5) liens of, or to secure performance of, leases, other than capital
leases;
(6) any lien upon, or deposits of, any assets in favor of any surety
company or clerk of court for the purpose of obtaining indemnity
or stay of judicial proceedings;
(7) any lien upon property or assets acquired or sold by Heritage
Propane or any Subsidiary resulting from the exercise of any
rights arising out of defaults on receivables;
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(8) any lien incurred in the ordinary course of business in
connection with workmen's compensation, unemployment insurance,
temporary disability, social security, retiree health or similar
laws or regulations or to secure obligations imposed by statute
or governmental regulations;
(9) any lien in favor of Heritage Propane or any Subsidiary;
(10) any lien in favor of the United States of America or any state
thereof, or any department, agency or instrumentality or
political subdivision of the United States of America or any
state thereof, to secure partial, progress, advance, or other
payments pursuant to any contract or statute, or any debt
incurred by Heritage Propane or any Subsidiary for the purpose of
financing all or any part of the purchase price of, or the cost
of constructing, developing, repairing or improving, the property
or assets subject to such lien;
(11) any lien securing industrial development, pollution control or
similar revenue bonds;
(12) any lien securing debt of Heritage Propane or any Subsidiary, all
or a portion of the net proceeds of which are used, substantially
concurrent with the funding thereof (and for purposes of
determining such "substantial concurrence," taking into
consideration, among other things, required notices to be given
to holders of outstanding securities under the Indenture
(including the debt securities) in connection with such
refunding, refinancing or repurchase, and the required
corresponding durations thereof), to refinance, refund or
repurchase all outstanding securities under the Indenture
(including the debt securities), including the amount of all
accrued interest thereon and reasonable fees and expenses and
premium, if any, incurred by Heritage Propane or any Subsidiary
in connection therewith;
(13) liens in favor of any person to secure obligations under the
provisions of any letters of credit, bank guarantees, bonds or
surety obligations required or requested by any governmental
authority in connection with any contract or statute; or
(14) any lien upon or deposits of any assets to secure performance of
bids, trade contracts, leases or statutory obligations.
"Consolidated Net Tangible Assets" means, at any date of determination,
the total amount of assets after deducting therefrom:
(1) all current liabilities (excluding (A) any current liabilities
that by their terms are extendable or renewable at the option of
the obligor thereon to a time more than 12 months after the time
as of which the amount thereof is being computed, and (B) current
maturities of debt), and
(2) the value (net of any applicable reserves) of all goodwill, trade
names, trademarks, patents and other like intangible assets, all
as set forth, or on a pro forma basis would be set forth, on the
consolidated balance sheet of Heritage Propane and its
consolidated subsidiaries for Heritage Propane's most recently
completed fiscal quarter, prepared in accordance with generally
accepted accounting principles.
Restriction on Sale-Leasebacks
The Senior Indenture will provide that Heritage Propane will not, and
will not permit any Subsidiary to, engage in the sale or transfer by Heritage
Propane or any Subsidiary of any property or assets to a person (other than
Heritage Propane or a Subsidiary) and the taking back by Heritage Propane or any
Subsidiary, as the case may be, of a lease of such property or assets (a
"Sale-Leaseback Transaction"), unless:
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(1) such Sale-Leaseback Transaction occurs within one year from the
date of completion of the acquisition of the property or assets
subject thereto or the date of the completion of construction,
development or substantial repair or improvement, or commencement
of full operations on such property or assets, whichever is
later;
(2) the Sale-Leaseback Transaction involves a lease for a period,
including renewals, of not more than the lesser of (A) three
years and (B) 60% of the useful remaining life of such property;
(3) Heritage Propane or such Subsidiary would be entitled to incur
debt secured by a lien on the property or assets subject thereto
in a principal amount equal to or exceeding the Attributable
Indebtedness from such Sale-Leaseback Transaction without equally
and ratably securing the senior debt securities; or
(4) Heritage Propane or such Subsidiary, within a one-year period
after such Sale-Leaseback Transaction, applies or causes to be
applied an amount not less than the Attributable Indebtedness
from such Sale- Leaseback Transaction to (A) the prepayment,
repayment, redemption, reduction or retirement of any debt of
Heritage Propane or any Subsidiary that is not subordinated to
the senior debt securities, or (B) the expenditure or
expenditures for property or assets used or to be used in the
ordinary course of business of Heritage Propane or its
Subsidiaries.
Notwithstanding the foregoing, the Indenture will permit Heritage Propane and
its Subsidiaries to enter into Sale-Leaseback Transactions relating to propane
tanks up to an aggregate principal amount of $25 million at any time, provided
that such transactions would not cause a default.
"Attributable Indebtedness," when used with respect to any to any
Sale-Leaseback Transaction, means, as at the time of determination, the present
value (discounted at the rate set forth or implicit in the terms of the lease
included in such transaction) of the total obligations of the lessee for rental
payments (other than amounts required to be paid on account of property taxes,
repairs, maintenance, insurance, assessments, utilities, operating and labor
costs and other items that do not constitute payments for property rights)
during the remaining term of the lease included in such Sale-Leaseback
Transaction (including any period for which such lease has been extended). In
the case of any lease that is terminable by the lessee upon the payment of a
penalty or other termination payment, such amount shall be the lesser of the
amount determined assuming termination upon the first date such lease may be
terminated (in which case the amount shall also include the amount of the
penalty or termination payment, but no rent shall be considered as required to
be paid under such lease subsequent to the first date upon which it may be so
terminated) or the amount determined assuming no such termination.
Notwithstanding the foregoing, under the Senior Indenture Heritage
Propane may, and may permit any Subsidiary to, effect any Sale-Leaseback
Transaction that is not excepted by clauses (1) through (4), inclusive, of the
above paragraph, provided that the Attributable Indebtedness from such
Sale-Leaseback together with the aggregate principal amount of outstanding debt
(other than the senior debt securities) secured by liens upon property and
assets not excepted by clauses (1) through (10), inclusive, of the second
paragraph of the limitation on liens covenant described above, do not exceed 10%
of Consolidated Net Tangible Assets.
PROVISIONS ONLY IN THE SUBORDINATED INDENTURE
Subordinated Debt Securities Subordinated to Senior Debt
The subordinated debt securities will rank junior in right of payment
to all of our Senior Debt. "Senior Debt" is defined to include all notes or
other evidences of indebtedness, including guarantees of Heritage Propane for
money borrowed by Heritage Propane, not expressed to be subordinate or junior in
right of payment to any other indebtedness of Heritage Propane.
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Payment Blockages
The Subordinated Indenture will provide that no payment of principal,
interest and any premium on the subordinated debt securities may be made in the
event:
o we or our property are involved in any voluntary or involuntary
liquidation or bankruptcy;
o we fail to pay the principal, interest, any premium or any other
amounts on any Senior Debt when due; or
o we have a nonpayment default on any Senior Debt that imposes a
payment blockage on the subordinated debt securities for a
maximum of 179 days at any one time.
No Limitation on Amount of Senior Debt
The Subordinated Indenture will not limit the amount of Senior Debt
that we incur.
CONSOLIDATION, MERGER OR ASSET SALE
Each Indenture will, in general, allow us to consolidate or merge with
another domestic entity. They will also allow us to sell, lease or transfer all
or substantially all of our property and assets to another domestic entity. If
this happens, the remaining or acquiring entity must assume all of our
responsibilities and liabilities under the Indentures including the payment of
all amounts due on the debt securities and performance of the covenants in the
Indentures.
However, we will only consolidate or merge with or into an entity or
sell, lease or transfer all or substantially all of our assets according to the
terms and conditions of the Indentures, which will include the following
requirements:
o the remaining or acquiring entity is organized under the laws of
the United States, any state or the District of Columbia;
o the remaining or acquiring entity assumes Heritage Propane's
obligations under the Indentures; and
o immediately after giving effect to the transaction no Default or
Event of Default (as defined below) exists.
The remaining or acquiring entity will be substituted for us in the
Indentures with the same effect as if it had been an original party to the
Indentures. Thereafter, the successor may exercise our rights and powers under
the Indentures, in our name or in its own name. If we sell or transfer all or
substantially all of our assets, we will be released from all our liabilities
and obligations under the Indentures and under the debt securities. If we lease
all or substantially all of our assets, we will not be released from our
obligations under the Indentures.
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MODIFICATION OF INDENTURES
We may modify or amend each Indenture if the holders of a majority in
principal amount of the outstanding debt securities of all series issued under
the Indenture affected by the modification or amendment consent to it. Without
the consent of each outstanding debt security affected, however, no modification
may:
o change the stated maturity of the principal of or any installment
of principal of or interest on any debt security
o reduce the principal amount of, the interest rate on or the
premium payable upon redemption of any debt security
o change the redemption date for any debt security
o change our obligation, if any, to pay additional amounts
o reduce the principal amount of an original discount debt security
payable upon acceleration of maturity
o change the coin or currency in which any debt security or any
premium or interest on any debt security is payable
o change the redemption right of any holder
o impair the right to institute suit for the enforcement of any
payment on any debt security
o reduce the percentage in principal amount of outstanding debt
securities of any series necessary to modify the Indenture, to
waive compliance with certain provisions of the Indenture or to
waive certain defaults
o reduce quorum or voting requirements
o change our obligation to maintain an office or agency in the
places and for the purposes required by the Indenture
o modify any of the above provisions
We may modify or amend the Indenture without the consent of any holders
of the debt securities in certain circumstances, including:
o to provide for the assumption of our obligations under the
Indenture and the debt securities by a successor upon any merger,
consolidation or asset transfer
o to add covenants and events of default or to surrender any rights
we have under the Indenture
o to make any change that does not adversely affect any outstanding
debt securities of a series in any material respect
o to secure the senior debt securities as described above under
"Provisions Only in the Senior Indenture -- Limitations on Liens"
o to provide for successor trustees
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o to cure any ambiguity, omission, defect or inconsistency
The holders of a majority in principal amount of the outstanding debt
securities of any series may waive past defaults under the Indenture and
compliance by us with our covenants with respect to the debt securities of that
series only. Those holders may not, however, waive any default in any payment on
any debt security of that series or compliance with a provision that cannot be
modified or amended without the consent of each holder affected.
EVENTS OF DEFAULT AND REMEDIES
"Event of Default" when used in an Indenture, will mean any of the
following:
o failure to pay the principal of or any premium on any debt
security when due;
o failure to pay interest on any debt security for 30 days;
o failure to perform any other covenant in the Indenture that
continues for 60 days after being given written notice;
o certain events of bankruptcy, insolvency or reorganization of
Heritage Propane; or
o any other Event of Default included in any Indenture or
supplemental indenture.
The subordination does not affect our obligation, which is absolute and
unconditional, to pay, when due, the principal of and any premium and interest
on the subordinated debt securities. In addition, the subordination does not
prevent the occurrence of any default under the subordinated indenture.
An Event of Default for a particular series of debt securities does not
necessarily constitute an Event of Default for any other series of debt
securities issued under an Indenture. The Trustee may withhold notice to the
holders of debt securities of any default (except in the payment of principal or
interest) if it considers such withholding of notice to be in the best interests
of the holders.
If an Event of Default for any series of debt securities occurs and
continues, the Trustee or the holders of at least 25% in aggregate principal
amount of the debt securities of the series may declare the entire principal of
all the debt securities of that series to be due and payable immediately. If
this happens, subject to certain conditions, the holders of a majority of the
aggregate principal amount of the debt securities of that series can void the
declaration.
Other than its duties in case of a default, a Trustee is not obligated
to exercise any of its rights or powers under any Indenture at the request,
order or direction of any holders, unless the holders offer the Trustee
reasonable indemnity. If they provide this reasonable indemnification, the
holders of a majority in principal amount of any series of debt securities may
direct the time, method and place of conducting any proceeding or any remedy
available to the Trustee, or exercising any power conferred upon the Trustee,
for any series of debt securities.
NO LIMIT ON AMOUNT OF DEBT SECURITIES
Neither of the Indentures will limit the amount of debt securities that
we may issue. Each Indenture allows us to issue debt securities up to the
principal amount that we authorize.
REGISTRATION OF NOTES
We may issue debt securities of a series in registered, bearer, coupon
or form.
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MINIMUM DENOMINATIONS
Unless the prospectus supplement for each issuance of debt securities
states otherwise the securities will be issued in registered form in amounts of
$1,000 each or multiples of $1,000.
NO PERSONAL LIABILITY OF GENERAL PARTNER
Unless otherwise stated in a prospectus supplement and supplemental
indenture relating to a series of debt securities being offered, the general
partner and its directors, officers, employees and stockholders will not have
any liability for our obligations under the Indentures or the debt securities.
Each holder of debt securities by accepting a debt security waives and releases
all such liability. The waiver and release are part of the consideration for the
issuance of the debt securities.
PAYMENT AND TRANSFER
Principal, interest and any premium on fully registered securities will
be paid at designated places. Payment will be made by check mailed to the
persons in whose names the debt securities are registered on days specified in
the Indentures or any prospectus supplement. Debt securities payments in other
forms will be paid at a place designated by us and specified in a prospectus
supplement.
Fully registered securities may be transferred or exchanged at the
corporate trust office of the Trustee or at any other office or agency
maintained by us for such purposes, without the payment of any service charge
except for any tax or governmental charge.
FORM, EXCHANGE, REGISTRATION AND TRANSFER
Debt securities of any series will be exchangeable for other debt
securities of the same series, the same total principal amount and the same
terms but in different authorized denominations in accordance with the
Indenture. Holders may present debt securities for registration of transfer at
the office of the security registrar or any transfer agent we designate. The
security registrar or transfer agent will effect the transfer or exchange when
it is satisfied with the documents of title and identity of the person making
the request. We will not charge a service charge for any registration of
transfer or exchange of the debt securities. We may, however, require the
payment of any tax or other governmental charge payable for that registration.
We will appoint the trustee under each Indenture as security registrar
for the debt securities issued under that Indenture. We are required to maintain
an office or agency for transfers and exchanges in each place of payment. We may
at any time designate additional transfer agents for any series of debt
securities.
In the case of any redemption in part, we will not be required:
o to issue, register the transfer of or exchange debt securities of
a series either during a period beginning 15 business days prior
to the selection of debt securities of that series for redemption
and ending on the close of business on the day of mailing of the
relevant notice of redemption or
o to register the transfer of or exchange any debt security, or
portion of any debt security, called for redemption, except the
unredeemed portion of any debt security we are redeeming in part.
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DISCHARGING OUR OBLIGATIONS
We may choose to either discharge our obligations on the debt
securities of any series in a legal defeasance, or to release ourselves from our
covenant restrictions on the debt securities of any series in a covenant
defeasance. We may do so at any time on the 91st day after we deposit with the
Trustee sufficient cash or government securities to pay the principal, interest,
any premium and any other sums due to the stated maturity date or a redemption
date of the debt securities of the series. If we choose the legal defeasance
option, the holders of the debt securities of the series will not be entitled to
the benefits of the Indenture except for registration of transfer and exchange
of debt securities, replacement of lost, stolen or mutilated debt securities,
conversion or exchange of debt securities, sinking fund payments and receipt of
principal and interest on the original stated due dates or specified redemption
dates.
We may discharge our obligations under the Indentures or release
ourselves from covenant restrictions only if we meet certain requirements. Among
other things, we must deliver an opinion of our legal counsel that the discharge
will not result in holders of debt securities having to recognize taxable income
or loss or subject then to different tax treatment. In the case of legal
defeasance, this opinion must be based on either an IRS letter ruling or change
in federal tax law. We may not have a default on the debt securities discharged
on the date of deposit. The discharge may not violate any of our agreements. The
discharge may not result in our becoming an investment company in violation of
the Investment Company Act of 1940.
BOOK ENTRY, DELIVERY AND FORM
The debt securities of a series may be issued in whole or in part in
the form of one or more global certificates that will be deposited with a
depositary identified in a prospectus supplement.
Unless otherwise stated in any prospectus supplement, The Depository
Trust Company, New York, New York ("DTC") will act as depositary. Book-entry
notes of a series will be issued in the form of a global note that will be
deposited with DTC. This means that we will not issue certificates to each
holder. One global note will be issued to DTC who will keep a computerized
record of its participants (for example, your broker) whose clients have
purchased the notes. The participant will then keep a record of its clients who
purchased the notes. Unless it is exchanged in whole or in part for a
certificated note, a global note may not be transferred, except that DTC, its
nominees and their successors may transfer a global note as a whole to one
another.
Beneficial interests in global notes will be shown on, and transfers of
global notes will be made only through, records maintained by DTC and its
participants.
DTC has provided us the following information: DTC is a limited-purpose
trust company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the United States
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds
securities that its participants ("Direct Participants") deposit with DTC. DTC
also records the settlement among Direct Participants of securities
transactions, such as transfers and pledges, in deposited securities through
computerized records for Direct Participant's accounts. This eliminates the need
to exchange certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
Direct Participant. The rules that apply to DTC and its participants are on file
with the SEC.
DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., The American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
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We will wire principal and interest payments to DTC's nominee. We and
the Trustee will treat DTC's nominee as the owner of the global notes for all
purposes. Accordingly, we, the Trustee and any paying agent will have no direct
responsibility or liability to pay amounts due on the global notes to owners of
beneficial interests in the global notes.
It is DTC's current practice, upon receipt of any payment of principal
or interest, to credit Direct Participants' accounts on the payment date
according to their respective holdings of beneficial interests in the global
notes as shown on DTC's records. In addition, it is DTC's current practice to
assign any consenting or voting rights to Direct Participants whose accounts are
credited with notes on a record date, by using an omnibus proxy. Payments by
participants to owners of beneficial interests in the global notes, and voting
by participants, will be governed by the customary practices between the
participants and owners of beneficial interests, as is the case with notes held
for the account of customers registered in "street name." However, payments will
be the responsibility of the participants and not of DTC, the Trustee or us.
Notes represented by a global note will be exchangeable for
certificated notes with the same terms in authorized denominations only if:
o DTC notifies us that it is unwilling or unable to continue as
depositary or if DTC ceases to be a clearing agency registered
under applicable law and a successor depositary is not appointed
by us within 90 days; or
o we determine not to require all of the notes of a series to be
represented by a global note and notify the Trustee of our
decision.
THE TRUSTEE
Resignation or Removal of Trustee
Under provisions of the Indentures and the Trust Indenture Act of 1939,
as amended, governing trustee conflicts of interest, any uncured Event of
Default with respect to any series of senior debt securities will force the
trustee to resign as trustee under either the Subordinated Indenture or the
Senior Indenture. Also, any uncured Event of Default with respect to any series
of subordinated debt securities will force the trustee to resign as trustee
under either the Senior Indenture or the Subordinated Indenture. Any resignation
will require the appointment of a successor trustee under the applicable
Indenture in accordance with the terms and conditions of such Indenture.
The Trustee may resign or be removed by us with respect to one or more
series of debt securities and a successor trustee may be appointed to act with
respect to any such series. The holders of a majority in aggregate principal
amount of the debt securities of any series may remove the Trustee with respect
to the debt securities of such series.
Limitations on Trustee if it is a Creditor of Heritage Propane
Each Indenture will contain certain limitations on the right of the
Trustee thereunder, in the event that it becomes a creditor of Heritage Propane,
to obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise.
Annual Trustee Report to Holders of Debt Securities
The Trustee is required to submit an annual report to the holders of
the debt securities regarding, among other things, the Trustee's eligibility to
serve as such, the priority of the Trustee's claims regarding certain advances
made by it, and any action taken by the Trustee materially affecting the debt
securities.
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Certificates and Opinions to be Furnished to Trustee
Each Indenture will provide that, in addition to other certificates or
opinions that may be specifically required by other provisions of an Indenture,
every application by us for action by the Trustee shall be accompanied by a
certificate of certain of our officers and an opinion of counsel (who may be our
counsel) stating that, in the opinion of the signers, all conditions precedent
to such action have been complied with by us.
TAX CONSIDERATIONS
This section is a summary of material tax considerations that may be
relevant to prospective unitholders and, to the extent set forth below under "--
Legal Opinions and Advice," expresses the opinion of Baker & Botts, L.L.P.,
special counsel to Heritage Propane, insofar as it relates to matters of law and
legal conclusions. This section is based upon current provisions of the Internal
Revenue Code, existing and proposed regulations thereunder and current
administrative rulings and court decisions as of August 27, 1999, all of which
are subject to change. Subsequent changes in such authorities may cause the tax
consequences to vary substantially from the consequences described below. Unless
the context otherwise requires, references in this section to "us" are
references to Heritage Propane and the Operating Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or residents of
the United States and has only limited application to corporations, estates,
trusts, non-resident aliens or other unitholders subject to specialized tax
treatment, such as tax-exempt institutions, foreign persons, individual
retirement accounts, REITs or mutual funds. Accordingly, each prospective
unitholder should consult, and should depend on, his own tax advisor in
analyzing the federal, state, local and foreign tax consequences peculiar to him
of the ownership or disposition of common units.
LEGAL OPINIONS AND ADVICE
Counsel is of the opinion that, as of August 27, 1999 and based on the
accuracy of the representations and subject to the qualifications set forth in
the detailed discussion that follows, for federal income tax purposes (i)
Heritage Propane and the Operating Partnership will each be treated as a
partnership, and (ii) owners of common units, with certain exceptions, as
described in "--Limited Partner Status" below, will be treated as partners of
Heritage Propane, but not the Operating Partnership. In addition, all statements
as to matters of law and legal conclusions contained in this section, unless
otherwise noted, reflect the opinion of counsel as of August 27, 1999. All
references to "us," "we" or "our" are to Heritage Propane and not Baker & Botts,
L.L.P.
We have not requested, and do not expect to request, a ruling from the
IRS with respect to our classification as a partnership for federal income tax
purposes, whether our propane operations generate "qualifying income" under
Section 7704 of the Internal Revenue Code or any other matter affecting us or
prospective unitholders. Instead, we have relied, and will rely, on the opinions
of counsel as to these matters. An opinion of counsel represents only that
counsel's best legal judgment and does not bind the IRS or the courts. No
assurance can be provided that the opinions and statements set forth herein
would be sustained by a court if contested by the IRS. Any such contest with the
IRS may materially and adversely impact the market for the common units and the
prices at which common units trade even if we prevail. In addition, the costs of
any contest with the IRS will be borne directly or indirectly by the unitholders
and the general partner. Furthermore, no assurance can be given that our
treatment, or an investment in Heritage Propane, will not be significantly
modified by future legislative or administrative changes or court decisions. Any
such modification may or may not be retroactively applied.
For the reasons hereinafter described, counsel has not rendered an
opinion with respect to the following specific federal income tax issues:
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(1) the treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units (see "--Tax
Treatment of Unitholders-- Treatment of Short Sales");
(2) whether a unitholder acquiring common units in separate
transactions must maintain a single aggregate adjusted tax basis
in his common units (see "--Disposition of Common Units--
Recognition of Gain or Loss");
(3) whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (see
"--Disposition of Common Units--Allocations Between Transferors
and Transferees"); and
(4) whether our method for depreciating Section 743 adjustments is
sustainable (see "--Tax Treatment of Operations--Section 754
Election").
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his allocable
share of items of income, gain, loss and deduction of the partnership in
computing his federal income tax liability, regardless of whether cash
distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the amount of cash distributed to a partner is in
excess of the partner's adjusted basis in his partnership interest.
We have not requested, and do not expect to request any ruling from the
IRS as to the status of Heritage Propane or the Operating Partnership as a
partnership for federal income tax purposes. Instead we have relied on the
opinion of counsel that, based upon the Internal Revenue Code, Treasury
Regulations, published revenue rulings and court decisions and representations
described below, Heritage Propane and the Operating Partnership will each be
classified as a partnership for federal income tax purposes. In rendering its
opinion, counsel has relied on certain factual representations made by Heritage
Propane and the general partner. Such factual matters are as follows:
(a) Neither Heritage Propane nor the Operating Partnership has
elected or will elect to be treated as an association or
corporation;
(b) Heritage Propane and the Operating Partnership have been and will
be operated in accordance with,
(1) all applicable partnership statutes;
(2) the partnership agreement or operating partnership
agreement (whichever is applicable);
and
(3) the description of the applicable agreement in this
Prospectus; and
(c) For each taxable year, more than 90% of our gross income will be
derived from:
(1) the exploration, development, production, processing,
refining, transportation or marketing of any mineral or
natural resource, including oil, gas or products thereof;
or
(2) other items as to which counsel has or will opine are
"qualifying income" within the meaning of Section 7704(d)
of the Internal Revenue Code.
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Section 7704 of the Internal Revenue Code provides that publicly-traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "Qualifying Income Exception," exists with respect
to publicly-traded partnerships of which 90% or more of the gross income for
every taxable year consists of "qualifying income." Qualifying income includes
interest from other than a financial business, dividends and income and gains
from the processing, transportation and marketing of crude oil, natural gas, and
products thereof, including the retail and wholesale marketing of propane,
certain hedging activities and the transportation of propane and natural gas
liquids. Based upon the representations of Heritage Propane and the general
partner and a review of the applicable legal authorities, counsel is of the
opinion that at least 90% of our gross income for each taxable year will not
constitute qualifying income.
If we fail to meet the Qualifying Income Exception, other than a
failure which is determined by the IRS to be inadvertent and which is cured
within a reasonable time after discovery, we will be treated as if we
transferred all of our assets, subject to liabilities, to a newly formed
corporation, on the first day of the year in which we fail to meet the
Qualifying Income Exception, in return for stock in that corporation, and then
distributed that stock to the partners in liquidation of their interests in us.
This contribution and liquidation should be tax-free to unitholders and Heritage
Propane, so long as we, at that time, do not have liabilities in excess of the
tax basis of our assets. Thereafter, we would be treated as a corporation for
federal income tax purposes.
If Heritage Propane or the Operating Partnership were treated as an
association taxable as a corporation in any taxable year, either as a result of
a failure to meet the Qualifying Income Exception or otherwise, its items of
income, gain, loss and deduction would be reflected only on its tax return
rather than being passed through to the unitholders, and our net income would be
taxed to Heritage Propane or the Operating Partnership at corporate rates. In
addition, any distributions we made to a unitholder would be treated as either
taxable dividend income, to the extent of Heritage Propane's current or
accumulated earnings and profits, or, in the absence of earnings and profits, a
nontaxable return of capital, to the extent of the unitholder's tax basis in his
common units, or taxable capital gain, after the unitholder's tax basis in the
common units is reduced to zero. Accordingly, treatment of either Heritage
Propane or the Operating Partnership as an association taxable as a corporation
would result in a material reduction in a unitholder's cash flow and after-tax
return and thus would likely result in a substantial reduction of the value of
the common units.
The discussion below is based on the assumption that we will be
classified as a partnership for federal income tax purposes.
TAX TREATMENT OF UNITHOLDERS
Limited Partner Status
Unitholders who have become our limited partners will be treated as our
partners for federal income tax purposes. Counsel is of the opinion that
assignees who have executed and delivered Transfer Applications, and are
awaiting admission as limited partners, and unitholders whose common units are
held in street name or by a nominee and who have the right to direct the nominee
in the exercise of all substantive rights attendant to the ownership of their
common units will be treated as our partners for federal income tax purposes.
Because there is no direct authority addressing assignees of common units who
are entitled to execute and deliver Transfer Applications and thereby become
entitled to direct the exercise of attendant rights, but who fail to execute and
deliver Transfer Applications, it is not clear whether such assignees will be
treated as partners of Heritage Propane for federal income tax purposes.
Furthermore, a purchaser or other transferee of common units who does not
execute and deliver a Transfer Application may not receive certain federal
income tax information or reports furnished to record holders of common units
unless the common units are held in a nominee or street name account and the
nominee or broker has executed and delivered a Transfer Application with respect
to such common units.
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A beneficial owner of common units whose common units have been
transferred to a short seller to complete a short sale would appear to lose his
status as a partner with respect to such common units for federal income tax
purposes. See "--Tax Treatment of Unitholders--Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by
a unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by such a unitholder would therefore be fully taxable as
ordinary income. These holders should consult their own tax advisors with
respect to their status as our partners for federal income tax purposes.
Flow-through of Taxable Income
We will not pay any federal income tax. Instead, each unitholder must
report on his income tax return his allocable share of our income, gains, losses
and deductions without regard to whether corresponding cash distributions are
received by that unitholder. Consequently, a unitholder may be allocated a share
of our income even if he has not received a cash distribution. Each unitholder
must include in income his allocable share of our income, gain, loss and
deduction for our taxable year ending with or within his taxable year.
Treatment of Partnership Distributions
Distributions by us to a unitholder generally will not be taxable to
him for federal income tax purposes to the extent of the tax basis he has in his
common units immediately before the distribution. Our cash distributions in
excess of a unitholder's tax basis generally will be considered to be gain from
the sale or exchange of the common units, taxable in accordance with the rules
described under "--Disposition of Common Units" below. Any reduction in a
unitholder's share of our liabilities for which no partner, including the
general partner, bears the economic risk of loss, known as "nonrecourse
liabilities," will be treated as a distribution of cash to that unitholder. To
the extent that our distributions cause a unitholder's "at risk" amount to be
less than zero at the end of any taxable year, he must recapture any losses
deducted in previous years. See "--Tax Treatment of Unitholders--Limitations on
Deductibility of Partnership Losses."
A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease such unitholder's share of
nonrecourse liabilities, and thus will result in a corresponding deemed
distribution of cash. A non-pro rata distribution of money or property may
result in ordinary income to a unitholder, regardless of his tax basis in his
common units, if such distribution reduces the unitholder's share of our
"unrealized receivables," including depreciation recapture, and/or substantially
appreciated "inventory items," both as defined in Section 751 of the Internal
Revenue Code, and collectively, "Section 751 Assets". To that extent, the
unitholder will be treated as having been distributed his proportionate share of
the Section 751 Assets and having exchanged such assets with us in return for
the non-pro rata portion of the actual distribution made to him. This latter
deemed exchange will generally result in the unitholder's realization of
ordinary income under Section 751(b) of the Internal Revenue Code. Such income
will equal the excess of (1) the non-pro rata portion of such distribution over
(2) the unitholder's tax basis for the share of such Section 751 Assets deemed
relinquished in the exchange.
Alternative Minimum Tax
Each unitholder will be required to take into account his distributive
share of any of our items of income, gain, deduction or loss for purposes of the
alternative minimum tax. A portion of our depreciation deductions may be treated
as an item of tax preference for this purpose. A unitholder's alternative
minimum taxable income derived from us may be higher than his share of our net
income because we may use accelerated methods of depreciation for purposes of
computing federal taxable income or loss. The minimum tax rate for noncorporate
taxpayers is 26% on the first $175,000 of alternative minimum taxable income in
excess of the exemption amount
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and 28% on any additional alternative minimum taxable income. Prospective
unitholders should consult with their tax advisors as to the impact of an
investment in common units on their liability for the alternative minimum tax.
Basis of Common Units
A unitholder will have an initial tax basis for his common units equal
to the amount he paid for the common units plus his share of our nonrecourse
liabilities. That basis will be increased by his share of our income and by any
increases in his share of our nonrecourse liabilities. That basis will be
decreased, but not below zero, by distributions from us, by his share of our
losses, by any decrease in his share of our nonrecourse liabilities and by his
share of our expenditures that are not deductible in computing our taxable
income and are not required to be capitalized. A limited partner will have no
share of our debt which is recourse to the general partner, but will have a
share, generally based on his share of profits, of our nonrecourse liabilities.
See "--Disposition of Common Units--Recognition of Gain or Loss."
Limitations on Deductibility of Partnership Losses
The deduction by a unitholder of his share of our losses will be
limited to his tax basis in his common units and, in the case of an individual
unitholder or a corporate unitholder, if more than 50% of the value of its stock
is owned directly or indirectly by five or fewer individuals or certain
tax-exempt organizations, to the amount for which the unitholder is considered
to be "at risk" with respect to our activities, if that is less than the
unitholder's tax basis. A unitholder must recapture losses deducted in previous
years to the extent that our distributions cause the unitholder's at risk amount
to be less than zero at the end of any taxable year. Losses disallowed to a
unitholder or recaptured as a result of these limitations will carry forward and
will be allowable to the extent that the unitholder's tax basis or at risk
amount, whichever is the limiting factor, subsequently increases. Upon the
taxable disposition of a common unit, any gain recognized by a unitholder can be
offset by losses that were previously suspended by the at risk limitation but
may not be offset by losses suspended by the basis limitation. Any excess loss
above such gain previously suspended by the at risk or basis limitations is no
longer utilizable.
In general, a unitholder will be at risk to the extent of his tax basis
in his common units, excluding any portion of that basis attributable to his
share of our nonrecourse liabilities, reduced by any amount of money the
unitholder borrows to acquire or hold his common units if the lender of such
borrowed funds owns an interest in us, is related to the unitholder or can look
only to common units for repayment. A unitholder's at risk amount will increase
or decrease as the tax basis of the unitholder's common units increases or
decreases, other than tax basis increases or decreases attributable to increases
or decreases in his share of our nonrecourse liabilities.
The passive loss limitations generally provide that individuals,
estates, trusts and certain closely-held corporations and personal service
corporations can deduct losses from passive activities, generally, activities in
which the taxpayer does not materially participate, only to the extent of the
taxpayer's income from those passive activities. The passive loss limitations
are applied separately with respect to each publicly-traded partnership.
Consequently, any passive losses we generate will only be available to offset
future income generated by us and will not be available to offset income from
other passive activities or investments, including other publicly-traded
partnerships, or salary or active business income. Passive losses which are not
deductible because they exceed a unitholder's share of our income may be
deducted in full when he disposes of his entire investment in us in a fully
taxable transaction to an unrelated party. The passive activity loss rules are
applied after other applicable limitations on deductions such as the at risk
rules and the basis limitation.
A unitholder's share of our net income may be offset by any suspended
passive losses from us, but it may not be offset by any other current or
carryover losses from other passive activities, including those attributable to
other publicly-traded partnerships. The IRS has announced that Treasury
Regulations will be issued which
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characterize net passive income from a publicly-traded partnership as investment
income for purposes of the limitations on the deductibility of investment
interest.
Limitations on Interest Deductions
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a unitholder's net passive income from us will be treated as
investment income for this purpose. In addition, the unitholder's share of our
portfolio income will be treated as investment income. Investment interest
expense includes:
(1) interest on indebtedness properly allocable to property held for
investment;
(2) our interest expense attributed to portfolio income; and
(3) the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
The computation of a unitholder's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a common unit. Net investment income includes gross income
from property held for investment and amounts treated as portfolio income
pursuant to the passive loss rules less deductible expenses, other than
interest, directly connected with the production of investment income, but
generally does not include gains attributable to the disposition of property
held for investment.
Allocation of Partnership Income, Gain, Loss and Deduction
In general, if we have a net profit, our items of income, gain, loss
and deduction are allocated among the general partner and the unitholders in
accordance with their respective percentage interests in us. At any time that
distributions are made to the common units and not to the subordinated units, or
that incentive distributions are made to the general partner, gross income is
allocated to the recipients to the extent of such distributions. If we have a
net loss, our items of income, gain, loss and deduction are generally allocated
first, to the general partner and the unitholders in accordance with their
respective percentage interests to the extent of their positive capital
accounts, as maintained under the partnership agreement, and, second, to the
general partner.
As required by Section 704(c) of the Internal Revenue Code and as
permitted by its Regulations, certain items of our income, deduction, gain and
loss are allocated to account for the difference between the tax basis and fair
market value of property contributed or deemed contributed to us by each of our
partners, referred to in this discussion as "Contributed Property," and to
account for the difference between the fair market value of our assets and their
carrying value on our books at the time of any offering made pursuant to this
prospectus. The effect of these allocations to a unitholder purchasing common
units pursuant to this prospectus will be essentially the same as if the tax
basis of our assets were equal to their fair market value at the time of
purchase. In addition, certain items of recapture income are allocated to the
extent possible to the partner allocated the deduction or curative allocation
giving rise to the treatment of such gain as recapture income in order to
minimize the recognition of ordinary income by some unitholders. Finally,
although we do not expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts nevertheless result,
items of our income and gain will be allocated in an amount and manner
sufficient to eliminate the negative balance as quickly as possible.
Regulations provide that an allocation of items of partnership income,
gain, loss or deduction, other than an allocation required by Section 704(c) of
the Internal Revenue Code to eliminate the difference between a partner's "book"
capital account, credited with the fair market value of Contributed Property,
and "tax" capital
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account, credited with the tax basis of Contributed Property (the "Book-Tax
Disparity"), will generally be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction only if the allocation has substantial economic effect. In any other
case, a partner's distributive share of an item will be determined on the basis
of the partner's interest in the partnership, which will be determined by taking
into account all the facts and circumstances, including the partners' relative
contributions to the partnership, the interests of the partners in economic
profits and losses, the interest of the partners in cash flow and other
nonliquidating distributions and rights of the partners to distributions of
capital upon liquidation.
Counsel is of the opinion that, with the exception of the issues
described in "Tax Treatment of Operations--Section 754 Election" and
"Disposition of Common Units--Allocations Between Transferors and Transferees,"
allocations under our partnership agreement will be given effect for federal
income tax purposes in determining a partner's distributive share of an item of
income, gain, loss or deduction.
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year
We currently use the year ending December 31 as our taxable year and we
have adopted the accrual method of accounting for federal income tax purposes.
Each unitholder will be required to include in income his allocable share of our
income, gain, loss and deduction for our taxable year ending within or with his
taxable year.
Initial Tax Basis, Depreciation and Amortization
We use the tax basis of our various assets for purposes of computing
depreciation and cost recovery deductions and, ultimately, gain or loss on the
disposition of such assets. Our assets initially had an aggregate tax basis
equal to the tax basis of the assets in the possession of the general partner
immediately prior to our formation. The federal income tax burden associated
with the difference between the fair market value of our property and its tax
basis immediately prior to this offering will be borne by partners holding
interests in us prior to this offering. See "--Tax Treatment of Unitholders--
Allocation of Partnership Income, Gain, Loss and Deduction."
If we dispose of depreciable property by sale, foreclosure, or
otherwise, all or a portion of any gain, determined by reference to the amount
of depreciation previously deducted and the nature of the property, may be
subject to the recapture rules and taxed as ordinary income rather than capital
gain. Similarly, a partner who has taken cost recovery or depreciation
deductions with respect to property owned by us may be required to recapture
such deductions as ordinary income upon a sale of his interest in us. See "--Tax
Treatment of Unitholders--Allocation of Partnership Income, Gain, Loss and
Deduction" and "--Disposition of Common Units--Recognition of Gain or Loss."
Costs incurred in our organization are being amortized over a period of
60 months. The costs incurred in promoting the issuance of common units (i.e.
syndication expenses) must be capitalized and cannot be deducted currently,
ratably or upon our termination. Uncertainties exist regarding the
classification of costs as organization expenses, which may be amortized, and as
syndication expenses, which may not be amortized. Under recently adopted
regulations, underwriting discounts and commissions are treated as a syndication
cost.
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Section 754 Election
We have made the election permitted by Section 754 of the Internal
Revenue Code. The election is irrevocable without the consent of the IRS. The
election generally permits us to adjust a common unit purchaser's tax basis in
our assets ("inside basis") pursuant to Section 743(b) of the Internal Revenue
Code to reflect his purchase price. This election does not apply to a person who
purchases units directly from us. The Section 743(b) adjustment belongs to the
purchaser and not to other partners. For purposes of this discussion, a
partner's inside basis in our assets will be considered to have two components:
(1) his share of our tax basis in such assets ("common basis") and (2) his
Section 743(b) adjustment to that basis.
Proposed Treasury Regulations under Section 743 of the Internal Revenue
Code require a partnership that adopts the remedial allocation method (which we
have done) to depreciate a portion of the Section 743(b) adjustment attributable
to recovery property over the remaining cost recovery period for the Section
704(c) built-in gain. Nevertheless, the proposed regulations under Section 197
indicate that the Section 743(b) adjustment attributable to an amortizable
Section 197 intangible should be treated as a newly-acquired asset placed in
service in the month when the purchaser acquires the common unit. Under Treasury
Regulation Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to
property subject to depreciation under Section 167 of the Internal Revenue Code
rather than cost recovery deductions under Section 168 of the Internal Revenue
Code is generally required to be depreciated using either the straight-line
method or the 150% declining balance method. Although the proposed regulations
under Section 743 will likely eliminate many of the inconsistencies if finalized
in their current form, the depreciation and amortization methods and useful
lives associated with the Section 743(b) adjustment may differ from the methods
and useful lives generally used to depreciate the common basis in such
properties. Pursuant to our partnership agreement, we have adopted a convention
to preserve the uniformity of common units even if such convention is not
consistent with certain Treasury Regulations. See "--Uniformity of Common
Units."
Although counsel is unable to opine as to the validity of this method,
we intend to depreciate the portion of a Section 743(b) adjustment attributable
to unrealized appreciation in the value of contributed property, to the extent
of any unamortized Book-Tax Disparity, using a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the common basis of such property, or treat that portion as
non-amortizable to the extent attributable to property the common basis of which
is not amortizable. This method is consistent with the proposed regulations
under Section 743 but is arguably inconsistent with Treasury Regulation Section
1.167(c)-1(a)(6), which is not expected to directly apply to a material portion
of our assets, and Proposed Treasury Regulation Section 1.197-2(g)(3). To the
extent such Section 743(b) adjustment is attributable to appreciation in value
in excess of the unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury Regulations and legislative history. If we determine
that this position cannot reasonably be taken, we may adopt a depreciation or
amortization convention under which all purchasers acquiring common units in the
same month would receive depreciation or amortization, whether attributable to
common basis or Section 743(b) adjustment, based upon the same applicable rate
as if they had purchased a direct interest in our assets. Such an aggregate
approach may result in lower annual depreciation or amortization deductions than
would otherwise be allowable to certain unitholders. See "--Uniformity of Common
Units."
The allocation of the Section 743(b) adjustment must be made in
accordance with the Internal Revenue Code. The IRS may seek to reallocate some
or all of any Section 743(b) adjustment not so allocated by us to goodwill.
Goodwill, as an intangible asset, would be amortizable over a longer period of
time than our tangible assets.
A Section 754 election is advantageous if the transferee's tax basis in
his common units is higher than such common units' share of the aggregate tax
basis of our assets immediately prior to the transfer. In such a case, as a
result of the election, the transferee would have a higher tax basis in his
share of our assets for purposes of calculating, among other items, his
depreciation and depletion deductions and his share of any gain or loss on a
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sale of our assets. Conversely, a Section 754 election is disadvantageous if the
transferee's tax basis in his common units is lower than such common units'
share of the aggregate tax basis of our assets immediately prior to the
transfer. Thus, the fair market value of the common units may be affected either
favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and
are made by us on the basis of certain assumptions as to the value of our assets
and other matters. There is no assurance that the determinations made by us will
not be successfully challenged by the IRS and that the deductions resulting from
them will not be reduced or disallowed altogether. Should the IRS require a
different basis adjustment to be made, and should, in our opinion, the expense
of compliance exceed the benefit of the election, we may seek permission from
the IRS to revoke our Section 754 election. If such permission is granted, a
subsequent purchaser of common units may be allocated more income than he would
have been allocated had the election not been revoked.
Valuation of Partnership Property and Basis of Properties
The federal income tax consequences of the ownership and disposition of
common units will depend in part on our estimates as to the relative fair market
values, and determinations of the initial tax bases, of our assets. Although we
may from time to time consult with professional appraisers with respect to
valuation matters, we will make many of the relative fair market value
estimates. These estimates and determinations of basis are subject to challenge
and will not be binding on the IRS or the courts. If the estimates of fair
market value or determinations of basis are subsequently found to be incorrect,
the character and amount of items of income, gain, loss or deductions previously
reported by unitholders might change, and unitholders might be required to
adjust their tax liability for prior years.
Entity-Level Collections
If we are required or elect under applicable law to pay any federal,
state or local income tax on behalf of any unitholder or the general partner or
any former unitholder, we are authorized to pay those taxes from our funds. Such
payment, if made, will be treated as a distribution of cash to the partner on
whose behalf the payment was made. If the payment is made on behalf of a person
whose identity cannot be determined, we are authorized to treat the payment as a
distribution to current unitholders. We are authorized to amend our partnership
agreement in the manner necessary to maintain uniformity of intrinsic tax
characteristics of common units and to adjust subsequent distributions, so that
after giving effect to such distributions, the priority and characterization of
distributions otherwise applicable under our partnership agreement is maintained
as nearly as is practicable. Payments by us as described above could give rise
to an overpayment of tax on behalf of an individual partner in which event the
partner could file a claim for credit or refund.
Treatment of Short Sales
A unitholder whose common units are loaned to a "short seller" to cover
a short sale of common units may be considered as having disposed of ownership
of those common units. If so, he would no longer be a partner with respect to
those common units during the period of the loan and may recognize gain or loss
from the disposition. As a result, during this period, any of our income, gain,
deduction or loss with respect to those common units would not be reportable by
the unitholder, any cash distributions received by the unitholder with respect
to those common units would be fully taxable and all of such distributions would
appear to be treated as ordinary income. Unitholders desiring to assure their
status as partners and avoid the risk of gain recognition should modify any
applicable brokerage account agreements to prohibit their brokers from borrowing
their common units. The IRS has announced that it is actively studying issues
relating to the tax treatment of short sales of partnership interests. See also
"--Disposition of Common Units--Recognition of Gain or Loss."
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DISPOSITION OF COMMON UNITS
Recognition of Gain or Loss
A unitholder will recognize gain or loss on a sale of common units
equal to the difference between the amount realized and the unitholder's tax
basis for the common units sold. A unitholder's amount realized will be measured
by the sum of the cash or the fair market value of other property received plus
his share of our nonrecourse liabilities. Because the amount realized includes a
unitholder's share of our nonrecourse liabilities, the gain recognized on the
sale of common units could result in a tax liability in excess of any cash
received from such sale.
Prior distributions from us in excess of cumulative net taxable income
allocated for a common unit which decreased a unitholder's tax basis in such
common unit will, in effect, become taxable income if the common unit is sold at
a price greater than the unitholder's tax basis in such common unit, even if the
price is less than his original cost.
Should the IRS successfully contest our convention to amortize only a
portion of the Section 743(b) adjustment, described under "--Tax Treatment of
Operations--Section 754 Election," attributable to an amortizable Section 197
intangible after a sale of common units, a unitholder could realize additional
gain from the sale of common units than had such convention been respected. In
that case, the unitholder may have been entitled to additional deductions
against income in prior years but may be unable to claim them, with the result
to him of greater overall taxable income than appropriate. Counsel is unable to
opine as to the validity of the convention because of the lack of specific
regulatory authority for its use.
Gain or loss recognized by a unitholder, other than a "dealer" in
common units, on the sale or exchange of a common unit will generally be taxable
as capital gain or loss. Capital gain recognized on the sale of common units
held for more than 12 months will generally be taxed at a maximum rate of 20%. A
portion of this gain or loss, which could be substantial, however, will be
separately computed and taxed as ordinary income or loss under Section 751 of
the Internal Revenue Code to the extent attributable to assets giving rise to
depreciation recapture or other "unrealized receivables" or to "inventory items"
owned by us. The term "unrealized receivables" includes potential recapture
items, including depreciation recapture. Ordinary income attributable to
unrealized receivables, inventory items and depreciation recapture may exceed
net taxable gain realized upon the sale of the common unit and may be recognized
even if there is a net taxable loss realized on the sale of the common unit.
Thus, a unitholder may recognize both ordinary income and a capital loss upon a
disposition of common units. Net capital loss may offset no more than $3,000 of
ordinary income in the case of individuals and may only be used to offset
capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those interests and maintain a
single adjusted tax basis. Upon a sale or other disposition of less than all of
such interests, a portion of that tax basis must be allocated to the interests
sold using an "equitable apportionment" method. The ruling is unclear as to how
the holding period of these interests is determined once they are combined. If
this ruling is applicable to the holders of common units, a unitholder will be
unable to select high or low basis common units to sell as would be the case
with corporate stock. It is not clear whether the ruling applies to us because,
similar to corporate stock, our interests are evidenced by separate
certificates. Accordingly, counsel is unable to opine as to the effect such
ruling will have on the unitholders. A unitholder considering the purchase of
additional common units or a sale of common units purchased in separate
transactions should consult his tax advisor as to the possible consequences of
such ruling.
Certain provisions of the Internal Revenue Code affect the taxation of
certain financial products and securities, including partnership interests by
treating a taxpayer as having sold an "appreciated" partnership
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interest, one in which gain would be recognized if it were sold, assigned or
otherwise terminated at its fair market value, if the taxpayer or a related
person enters into,
(1) a short sale;
(2) an offsetting notional principal contract; or
(3) a futures or forward contract with respect to the partnership
interest or substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to a partnership interest, the taxpayer will be treated as having sold
such position if the taxpayer or a related person then acquires the partnership
interest or substantially similar property. The Secretary of the Treasury is
also authorized to issue regulations that treat a taxpayer that enters in
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
Allocations Between Transferors and Transferees
In general, our taxable income and losses are determined annually, are
prorated on a monthly basis and are subsequently apportioned among the
unitholders in proportion to the number of common units owned by each of them as
of the opening of the principal national securities exchange on which the common
units are then traded on the first business day of the month (the "Allocation
Date"). However, gain or loss realized on a sale or other disposition of our
assets other than in the ordinary course of business is allocated among the
unitholders on the Allocation Date in the month in which that gain or loss is
recognized. As a result, a unitholder transferring common units in the open
market may be allocated income, gain, loss and deduction accrued after the date
of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of common units. If this method is not allowed under the Treasury
Regulations, or only applies to transfers of less than all of the unitholder's
interest, our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of allocation between
transferors and transferees, as well as among partners whose interests otherwise
vary during a taxable period, to conform to a method permitted under future
Treasury Regulations.
Any unitholder who owns common units at any time during a quarter and
who disposes of such common units prior to the record date set for a cash
distribution with respect to such quarter will be allocated items of our income,
gain, loss and deductions attributable to such quarter but will not be entitled
to receive that cash distribution.
Notification Requirements
A unitholder who sells or exchanges common units is required to notify
us in writing of that sale or exchange within 30 days after the sale or exchange
and in any event by no later than January 15 of the year following the calendar
year in which the sale or exchange occurred. We are required to notify the IRS
of that transaction and to furnish certain information to the transferor and
transferee. However, these reporting requirements do not apply with respect to a
sale by an individual who is a citizen of the United States and who effects the
sale or exchange through a broker. Additionally, a transferee of a common unit
will be required to furnish a statement to the IRS, filed with its income tax
return for the taxable year in which the sale or exchange
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occurred, that sets forth the amount of the consideration paid for the common
unit. Failure to satisfy these reporting obligations may lead to the imposition
of substantial penalties.
Constructive Termination
We will be considered to have been terminated if there is a sale or
exchange of 50% or more of the total interests in our capital and profits within
a 12-month period. If we elect to be treated as a large partnership, which we
currently do not intend to do, we will not terminate by reason of the sale or
exchange of interests in us. A termination of Heritage Propane will cause a
termination of the Operating Partnership. Any such termination would result in
the closing of our taxable year for all unitholders. New tax elections required
to be made by us, including a new election under Section 754 of the Internal
Revenue Code, must be made subsequent to a termination, and a termination could
result in a deferral of our deductions for depreciation. A termination could
also result in penalties if we were unable to determine that the termination had
occurred. Moreover, a termination might either accelerate the application of, or
subject us to, any tax legislation enacted prior to the termination.
UNIFORMITY OF COMMON UNITS
Because we cannot match transferors and transferees of common units,
uniformity of the economic and tax characteristics of the common units to a
purchaser of such common units must be maintained. In the absence of uniformity,
compliance with a number of federal income tax requirements, both statutory and
regulatory, could be substantially diminished. A lack of uniformity can result
from a literal application of Treasury Regulation Section 1.167(c)-1(a)(6) and
Proposed Treasury Regulation Section 1.197-2(g)(3). Any non-uniformity could
have a negative impact on the value of the common units. See "--Tax Treatment of
Operations--Section 754 Election."
Although counsel is unable to opine on the validity of this method, we
depreciate the portion of a Section 743(b) adjustment attributable to unrealized
appreciation in the value of contributed property or adjusted property, to the
extent of any unamortized Book-Tax Disparity, using a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the common basis of such property, or treat that portion as
nonamortizable, to the extent attributable to property the common basis of which
is not amortizable. This method is consistent with the proposed regulations
under Section 743, but is arguably inconsistent with Treasury Regulation Section
1.167(c)-1(a)(6), which is not expected to directly apply to a material portion
of our assets, and Proposed Treasury Regulation Section 1.197-2(g)(3). See
"--Tax Treatment of Operations--Section 754 Election." To the extent such
Section 743(b) adjustment is attributable to appreciation in value in excess of
the unamortized Book-Tax Disparity, we apply the rules described in the Treasury
Regulations and legislative history. If we determine that this position cannot
reasonably be taken, we may adopt a depreciation and amortization convention
under which all purchasers acquiring common units in the same month would
receive depreciation and amortization deductions, whether attributable to common
basis or Section 743(b) basis, based upon the same applicable rate as if they
had purchased a direct interest in our property. If such an aggregate approach
is adopted, it may result in lower annual depreciation and amortization
deductions than would otherwise be allowable to certain unitholders and risk the
loss of depreciation and amortization deductions not taken in the year that such
deductions are otherwise allowable. This convention will not be adopted if we
determine that the loss of depreciation and amortization deductions will have a
material adverse effect on the unitholders. If we choose not to utilize this
aggregate method, we may use any other reasonable depreciation and amortization
convention to preserve the uniformity of the intrinsic tax characteristics of
any common units that would not have a material adverse effect on the
unitholders. The IRS may challenge any method of depreciating the Section 743(b)
adjustment described in this paragraph. If such a challenge were sustained, the
uniformity of common units might be affected, and the gain from the sale of
common units might be increased without the benefit of additional deductions.
See "--Disposition of Common Units--Recognition of Gain or Loss."
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TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of common units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and, as
described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax,
including individual retirement accounts and other retirement plans, are subject
to federal income tax on unrelated business taxable income. Virtually all of our
taxable income allocated to such an organization will be unrelated business
taxable income and thus will be taxable to such a unitholder.
A regulated investment company or "mutual fund" is required to derive
90% or more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.
Non-resident aliens and foreign corporations, trusts or estates which
hold common units will be considered to be engaged in business in the United
States on account of ownership of common units. As a consequence they will be
required to file federal tax returns in respect of their share of our income,
gain, loss or deduction and pay federal income tax at regular rates on any net
income or gain. Generally, a partnership is required to pay a withholding tax on
the portion of the partnership's income which is effectively connected with the
conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been made
to such partners. However, under rules applicable to publicly-traded
partnerships, we will withhold taxes (currently at the rate of 39.6%) on actual
cash distributions made quarterly to foreign unitholders. Each foreign
unitholder must obtain a taxpayer identification number from the IRS and submit
that number to our Transfer Agent on a Form W-8 in order to obtain credit for
the taxes withheld. A change in applicable law may require us to change these
procedures.
Because a foreign corporation which owns common units will be treated
as engaged in a United States trade or business, such a corporation may be
subject to United States branch profits tax at a rate of 30%, in addition to
regular federal income tax, on its allocable share of our income and gain, as
adjusted for changes in the foreign corporation's "U.S. net equity," which are
effectively connected with the conduct of a United States trade or business. An
income tax treaty between the United States and the country in which the foreign
corporate unitholder is a "qualified resident" may reduce or eliminate this tax.
In addition, such a unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a common unit will be subject to federal income tax on gain realized
on the disposition of such common unit to the extent that such gain is
effectively connected with a United States trade or business of the foreign
unitholder. Apart from the ruling, a foreign unitholder will not be taxed upon
the disposition of a common unit if that foreign unitholder has held less than
5% in value of the common units during the five-year period ending on the date
of the disposition and if the common units are regularly traded on an
established securities market at the time of the disposition.
ADMINISTRATIVE MATTERS
Information Returns and Audit Procedures
We intend to furnish to each unitholder, within 90 days after the close
of each calendar year, certain tax information, including a Substitute Schedule
K-1, which sets forth such unitholder's share of our income, gain, loss and
deduction for our preceding taxable year. In preparing this information, which
will generally not be reviewed by counsel, we will use various accounting and
reporting conventions, some of which have been mentioned in the previous
discussion, to determine the unitholder's share of income, gain, loss and
deduction. There is no assurance that any of those conventions will yield a
result which conforms to the requirements of the
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Internal Revenue Code, Treasury Regulations or administrative interpretations of
the IRS. We cannot assure prospective unitholders that the IRS will not
successfully contend in court that such accounting and reporting conventions are
impermissible. Any such challenge by the IRS could negatively affect the value
of the common units.
The IRS may audit our federal income tax information returns.
Adjustments resulting from any such audit may require each unitholder to adjust
a prior year's tax liability, and possibly may result in an audit of the
unitholder's own return. Any audit of a unitholder's return could result in
adjustments not related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Internal Revenue Code provides
for one partner to be designated as the "Tax Matters Partner" for these
purposes. Our partnership agreement appoints the general partner as our Tax
Matters Partner.
The Tax Matters Partner will make certain elections on our behalf and
on behalf of the unitholders and can extend the statute of limitations for
assessment of tax deficiencies against unitholders with respect to items in our
returns. The Tax Matters Partner may bind a unitholder with less than a 1%
profits interest in us to a settlement with the IRS unless that unitholder
elects, by filing a statement with the IRS, not to give such authority to the
Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which
all the unitholders are bound, of a final partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, such review may
be sought by any unitholder having at least a 1% interest in our profits and by
the unitholders having in the aggregate at least a 5% profits interest. However,
only one action for judicial review will go forward, and each unitholder with an
interest in the outcome may participate. However, if we elect to be treated as a
large partnership, which we do not intend to do because of the costs of
application, a unitholder will not have a right to participate in settlement
conferences with the IRS or to seek a refund.
A unitholder must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is not consistent
with the treatment of the item on our return. Intentional or negligent disregard
of the consistency requirement may subject a unitholder to substantial
penalties. Partners in electing large partnerships are required to treat all
items from the partnership's return in a manner consistent with such return. If
we elect to be treated as a large partnership, each partner would take into
account separately his share of the following items, determined at the
partnership level: (1) taxable income or loss from passive loss limitation
activities; (2) taxable income or loss from other activities, such as portfolio
income or loss; (3) net capital gains to the extent allocable to passive loss
limitation activities and other activities; (4) tax exempt interest; (5) a net
alternative minimum tax adjustment separately computed for passive loss
limitation activities and other activities; (6) general credits; (7) low-income
housing credit; (8) rehabilitation credit; (9) foreign income taxes; (10) credit
for producing fuel from a nonconventional source; and (11) any other items the
Secretary of Treasury deems appropriate. Moreover, miscellaneous itemized
deductions would not be passed through to the partners and 30% of those
deductions would be used at the partnership level.
Adjustments relating to partnership items for a previous taxable year
are generally taken into account by those persons who were partners in the
previous taxable year. Each partner in an electing large partnership, however,
must take into account his share of any adjustments to partnership items in the
year such adjustments are made. Alternatively, a large partnership could elect
to or, in some circumstances, could be required to directly pay the tax
resulting from any such adjustments. In either case, therefore, unitholders of
an electing large partnership could bear significant costs associated with tax
adjustments relating to periods predating their acquisition of units. We do not
expect to elect to have the large partnership provisions apply to us because of
the cost of their application.
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Nominee Reporting
Persons who hold an interest in us as a nominee for another person are
required to furnish to us (a) the name, address and taxpayer identification
number of the beneficial owner and the nominee; (b) whether the beneficial owner
is (i) a person that is not a United States person, (ii) a foreign government,
an international organization or any wholly-owned agency or instrumentality of
either of the foregoing, or (iii) a tax-exempt entity; (c) the amount and
description of common units held, acquired or transferred for the beneficial
owner; and (d) certain information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition cost for
purchases, as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and certain
information on common units they acquire, hold or transfer for their own
account. A penalty of $50 per failure, up to a maximum of $100,000 per calendar
year, is imposed by the Internal Revenue Code for failure to report such
information to us. The nominee is required to supply the beneficial owner of the
common units with the information furnished to us.
Registration as a Tax Shelter
The Internal Revenue Code requires that "tax shelters" be registered
with the Secretary of the Treasury. The temporary Treasury Regulations
interpreting the tax shelter registration provisions of the Internal Revenue
Code are extremely broad. It is arguable that we are not subject to the
registration requirement on the basis that we do not constitute a tax shelter.
However, the general partner, as our principal organizer, has registered us as a
tax shelter with the Secretary of the Treasury in the absence of assurance that
we are not subject to tax shelter registration and in light of the substantial
penalties which might be imposed if registration is required and not undertaken.
The IRS has issued us the following tax shelter registration number:
96234000014.
ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN
INVESTMENT IN US OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR
APPROVED BY THE IRS.
We must furnish the registration number to the unitholders, and a
unitholder who sells or otherwise transfers a common unit in a subsequent
transaction must furnish the registration number to the transferee. The penalty
for failure of the transferor of a common unit to furnish the registration
number to the transferee is $100 for each such failure. The unitholders must
disclose our tax shelter registration number on Form 8271 to be attached to the
tax return on which any deduction, loss or other benefit generated by us is
claimed or our income is included. A unitholder who fails to disclose the tax
shelter registration number on his return, without reasonable cause for that
failure, will be subject to a $250 penalty for each failure. Any penalties
discussed herein are not deductible for federal income tax purposes.
Registration as a tax shelter may increase the risk of an audit.
Accuracy-Related Penalties
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more specified causes,
including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Internal Revenue Code. No penalty will be imposed, however, with
respect to any portion of an underpayment if it is shown that there was a
reasonable cause for that portion and that the taxpayer acted in good faith with
respect to that portion.
A substantial understatement of income tax in any taxable year exists
if the amount of the understatement exceeds the greater of 10% of the tax
required to be shown on the return for the taxable year or $5,000 ($10,000 for
most corporations). The amount of any understatement subject to penalty
generally is reduced if any portion is attributable to a position adopted on the
return (i) with respect to which there is, or was, "substantial authority" or
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(ii) as to which there is a reasonable basis and the pertinent facts of such
position are disclosed on the return. More stringent rules apply to "tax
shelters," a term that in this context does not appear to include us. If any
item of our income, gain, loss or deduction included in the distributive shares
of unitholders might result in such an "understatement" of income for which no
"substantial authority" exists, we must disclose the pertinent facts on our
return. In addition, we will make a reasonable effort to furnish sufficient
information for unitholders to make adequate disclosure on their returns to
avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any
property, or the adjusted basis of any property, claimed on a tax return is 200%
or more of the amount determined to be the correct amount of such valuation or
adjusted basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000 for
most corporations). If the valuation claimed on a return is 400% or more than
the correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, a unitholder will be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that may be imposed by the
various jurisdictions in which he resides or in which we do business or own
property. Although an analysis of those various taxes is not presented here,
each prospective unitholder should consider their potential impact on his
investment in us. We currently conduct business in 26 states. Many of these
states currently impose a state income tax. A unitholder will be required to
file state income tax returns and to pay state income taxes in some or all of
these states and may be subject to penalties for failure to comply with those
requirements. In some states, tax losses may not produce a tax benefit in the
year incurred and also may not be available to offset income in subsequent
taxable years. Some of the states may require us, or we may elect, to withhold a
percentage of income from amounts to be distributed to a unitholder who is not a
resident of the state. Withholding, the amount of which may be greater or less
than a particular unitholder's income tax liability to the state, generally does
not relieve the non-resident unitholder from the obligation to file an income
tax return. Amounts withheld may be treated as if distributed to unitholders for
purposes of determining the amounts distributed by us. See "--Tax Treatment of
Unitholders--Entity-Level Collections." Based on current law and our estimate of
future operations, we anticipate that any amounts required to be withheld will
not be material.
IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO INVESTIGATE THE LEGAL
AND TAX CONSEQUENCES, UNDER THE LAWS OF PERTINENT STATES AND LOCALITIES OF HIS
INVESTMENT IN US. ACCORDINGLY, EACH PROSPECTIVE UNITHOLDER SHOULD CONSULT, AND
MUST DEPEND UPON, HIS OWN TAX COUNSEL OR OTHER ADVISOR WITH REGARD TO THOSE
MATTERS. FURTHER, IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO FILE ALL STATE
AND LOCAL, AS WELL AS U.S. FEDERAL, TAX RETURNS THAT MAY BE REQUIRED OF SUCH
UNITHOLDER. COUNSEL HAS NOT RENDERED AN OPINION ON THE STATE OR LOCAL TAX
CONSEQUENCES OF AN INVESTMENT IN US.
PLAN OF DISTRIBUTION
We may sell the Securities covered by this prospectus, directly,
through agents, or to or through underwriters or dealers (possibly including our
affiliates). Read the prospectus supplement to find the terms of the Securities
offering, including:
o the names of any underwriters, dealers or agents;
o the offering price;
o underwriting discounts;
o sales agents' commissions;
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o other forms of underwriter or agent compensation;
o discounts, concessions or commissions that underwriters may pass
on to other dealers;
o any exchange on which the Securities are listed.
If we use underwriters or dealers in the sale, they will acquire the
Securities for their own account and they may resell these Securities from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of the
sale. The Securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more of such firms. Unless otherwise disclosed in the prospectus supplement,
the obligations of the underwriters to purchase Securities will be subject to
certain conditions precedent, and the underwriters will be obligated to purchase
all of the Securities offered by the prospectus supplement if any are purchased.
Any initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
During and after an offering through underwriters, the underwriters
may purchase and sell the Securities in the open market. These transactions may
include overallotment and stabilizing transactions and purchases to cover
syndicate short positions created in connection with the offering. The
underwriters also may impose a penalty bid, which means that selling
concessions allowed to syndicate members or other broker-dealers for the
offered securities sold for their account may be reclaimed by the syndicate if
the offered securities are repurchased by the syndicate in stabilizing or
covering transactions. These activities may stabilize, maintain or otherwise
affect the market price of the offered securities, which may be higher than the
price that might otherwise prevail in the open market. If commenced, the
underwriters may discontinue these activities at any time.
We may sell the Securities directly or through agents designated by us
from time to time. We will name any agent involved in the offering and sale of
the Securities and disclose any commissions payable by us to the agent or the
method by which the commissions can be determined, in the prospectus supplement.
Unless otherwise indicated in the prospectus supplement, any agent will be
acting on a best efforts basis for the period of its appointment.
Any brokers or dealers that participate in the distribution of the
Securities may be "underwriters" within the meaning of the Securities Act for
such sales. Profits, commissions, discounts or concessions received by any such
broker or dealer may be underwriting discounts and commissions under the
Securities Act.
We may, through agreements, indemnify underwriters, dealers or agents
who participate in the distribution of the Securities against certain
liabilities including liabilities under the Securities Act. We may also provide
funds for payments such underwriters, dealers or agents may be required to make.
Underwriters, dealers and agents, and their affiliates may conduct business with
us and our affiliates in the ordinary course of their businesses.
FORWARD LOOKING STATEMENTS
Some information in this prospectus or any prospectus supplement may
contain forward-looking statements. Such statements use forward-looking words
such as "anticipate," "continue," "estimate," "expect," "may," "will," or other
similar words. These statements discuss future expectations or contain
projections. Specific factors which could cause actual results to differ from
those in the forward-looking statements, include:
o the effect of weather conditions on demand for propane;
o price and availability of propane supplies;
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o the availability of capacity to transport propane to market
areas;
o competition from other energy sources and within the propane
industry;
o operating risks incidental to transporting, sorting, and
distributing propane;
o changes in interest rates;
o governmental legislation and regulations;
o energy efficiency and technology trends;
o our ability to acquire other retail propane distributors and
successfully integrate them into our existing operations and make
cost saving changes;
o our ability to obtain new customers and retain existing
customers;
o the condition of the capital markets in the United States; and .
o the political and economic stability of the oil producing nations
of the world.
When considering forward-looking statements, you should keep in mind
the risk factors described in "Risk Factors" above. The risk factors could cause
our actual results to differ materially from those contained in any
forward-looking statement. We disclaim any obligation to update the above list
or to announce publicly the result of any revisions to any of the forward
looking statements to reflect future events or developments.
You should consider the above information when reading any forward
looking statements in:
o this prospectus;
o documents incorporated in this prospectus by reference;
o reports filed with the SEC;
o press releases; or
o oral statements made by us or any of our officers or other
persons acting on our behalf.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read our SEC filings over the Internet
at the SEC's website at http://www.sec.gov. You may also read and copy documents
at the public reference room maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room.
We also provide information to the NYSE because the common units are
traded on the NYSE. You may obtain reports and other information at the offices
of the NYSE at 20 Broad Street, New York, New York 10002.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose to you important information
contained in other documents filed with the SEC by referring you to those
documents. The information incorporated by reference is an important part of
this prospectus. Information
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we later file with the SEC will automatically update and supersede this
information. We incorporate by reference the documents listed below:
o our annual report on Form 10-K for the year ended August 31,
1998;
o our quarterly reports on Form 10-Q for the quarters ended
November 30, 1998, February 28, 1999 and May 31, 1999;
o the description of the common units in our registration statement
on Form 8-A (File No. 1-11727) filed pursuant to the Securities
Exchange Act of 1934 on May 14, 1996 and any amendments or
reports filed to update the description; and
o all documents filed by us under Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934 between the date of this
prospectus and the termination of the registration statement.
If information in incorporated documents conflicts with information in
this prospectus you should rely on the most recent information. If information
in an incorporated document conflicts with information in another incorporated
document, you should rely on the most recent incorporated document.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Heritage Propane Partners, L.P.
8801 S. Yale Avenue, Suite 310
Tulsa, Oklahoma 74137
Attention: H. Michael Krimbill
Telephone: (918) 492-7272
You should only rely on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. We are making offers of
the securities only in states where the offer is permitted. You should not
assume that the information in this prospectus or any prospectus supplement is
accurate as of any date other than the date on the front of those documents.
LEGAL OPINIONS
Certain legal matters relating to the Securities being offered will be
passed upon for us by Baker & Botts, L.L.P., Houston, Texas. If certain legal
matters in connection with an offering of Securities made by this prospectus and
a related prospectus supplement are passed on by counsel for the underwriters of
such offering, that counsel will be named in the applicable prospectus
supplement relating to that offering.
EXPERTS
The consolidated financial statements of Heritage Propane Partners,
L.P. incorporated by reference in this prospectus and elsewhere in the
registration statement to the extent and for the periods indicated in their
report have been audited by Arthur Andersen LLP, independent public accountants,
and are included herein in reliance upon the authority of said firm as experts
in giving said report.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We will incur and pay the following costs of this transaction. All
amounts other than the Securities and Exchange Commission registration fee are
estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee $ 41,700
Legal fees and expenses *
Accounting fees and expenses *
Printing expenses *
Transfer Agent and Registrar fees and expenses *
Miscellaneous *
---------
Total $ *
=========
</TABLE>
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*To be provided by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The partnership agreement of Heritage Propane provides that Heritage
Propane will indemnify the general partner, any departing partner, any person
who is or was an affiliate of the general partner or any departing partner, and
any person who is or was an officer, director, partner or trustee of the general
partner or any departing partner or any affiliate of the general partner or any
departing partner, or any person who is or was serving at the request of the
general partner or any departing partner or any affiliate of the general partner
or any departing partner as an officer, director, employee, partner, agent or
trustee of another person (each, an "Indemnitee"), to the fullest extent
permitted by law, from and against any and all losses, claims, damages,
liabilities (joint and several), expenses (including, without limitation, legal
fees and expenses), judgments, fines, penalties, interest, settlements and other
amounts arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in which any
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, by reason of its status as any of the foregoing; provided that in
each case the Indemnitee acted in good faith and in a manner that such
Indemnitee reasonably believed to be in or not opposed to the best interests of
Heritage Propane and, with respect to any criminal proceeding, had no reasonable
cause to believe its conduct was unlawful. Any indemnification under these
provisions will be only out of the assets of Heritage Propane, and the general
partner shall not be personally liable for, or have any obligation to contribute
or loan funds or assets to Heritage Propane to enable it to effectuate, such
indemnification. Heritage Propane is authorized to purchase (or to reimburse the
general partner or its affiliates for the cost of) insurance against liabilities
asserted against and expenses incurred by such persons in connection with
Heritage Propane's activities, regardless of whether Heritage Propane would have
the power to indemnify such person against such liabilities under the provisions
described above.
ITEM 16. EXHIBITS
**1.1 - Form of Underwriting Agreement
***3.1 - Agreement of Limited Partnership of Heritage Propane
Partners, L.P. (Exhibit 3.1 to Heritage Propane's
registration statement on Form S-1, File No. 333-4018,
filed on June 21, 1996)
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**4.1 - Form of Senior Indenture
**4.2 - Form of Subordinated Indenture
**5.1 - Opinion of Baker & Botts, L.L.P. as to the legality of
the securities registered hereby
**8.1 - Opinion of Baker & Botts, L.L.P. as to tax matters
12.1 - Computation of ratio of earnings to fixed charges
**23.1 - Consent of Baker & Botts, L.L.P. (included in Exhibits
5.1 and 8.1)
23.2 - Consent of Arthur Andersen LLP (filed herewith)
24.1 - Power of Attorney (included on signature page)
*99.1 - Balance Sheet of Heritage Holdings, Inc.
- --------------------------------
* To be filed by an amendment to this registration statement.
** To be filed by a post-effective amendment to this
registration statement or as an exhibit to a current report
on Form 8-K.
*** Incorporated by reference.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and/or persons controlling the registrant pursuant to the foregoing
provisions, the registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by Heritage Propane of expenses incurred or paid by a
director, officer or controlling person of Heritage Propane in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered,
Heritage Propane will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represents a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
Provided, however, that paragraphs 1(i) and 1(ii) do not apply if
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), that are
incorporated by reference in the registration statement.
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<PAGE> 50
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 51
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Tulsa, State of Oklahoma, on August 27, 1999.
HERITAGE PROPANE PARTNERS, L.P.
(A Delaware Limited Partnership)
By: HERITAGE HOLDINGS, INC.
as General Partner
By: /s/ James E. Bertelsmeyer
-------------------------------
James E. Bertelsmeyer
Chairman of the Board and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James E. Bertelsmeyer and H. Michael
Krimbill, and each of them, either of whom may act without the joinder of the
other, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any or all amendments (including post-effective
amendments) to this registration statement or any registration statement for the
same offering that is to be effective upon filing pursuant to Rule 462 under the
Securities Act of 1933, as amended, and to file the same, with all exhibits
thereto and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, and each of them, or the substitute or substitutes
of any or all of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ James E. Bertelsmeyer Chairman of the Board, Chief Executive Officer August 27, 1999
- --------------------------------- and Director (Principal Executive Officer)
James E. Bertelsmeyer
/s/ J. T. Atkins Director August 27, 1999
- ---------------------------------
J. T. Atkins
/s/ Bill W. Byrne Director August 27, 1999
- ---------------------------------
Bill W. Byrne
/s/ J. Charles Sawyer Director August 27, 1999
- ---------------------------------
J. Charles Sawyer
/s/ H. Michael Krimbill President and Chief Financial Officer (Principal August 27, 1999
- --------------------------------- Financial Officer and Principal Accounting Officer)
H. Michael Krimbill
</TABLE>
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<PAGE> 52
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ------------
<S> <C> <C>
**1.1 - Form of Underwriting Agreement
***3.1 - Agreement of Limited Partnership of Heritage Propane Partners,
L.P. (Exhibit 3.1 to Heritage Propane's registration statement on
Form S-1, File No. 333-4018, filed on June 21, 1996)
**4.1 - Form of Senior Indenture
**4.2 - Form of Subordinated Indenture
**5.1 - Opinion of Baker & Botts, L.L.P. as to the legality of the
securities registered hereby
**8.1 - Opinion of Baker & Botts, L.L.P. as to tax matters
12.1 - Computation of ratio of earnings to fixed charges
**23.1 - Consent of Baker & Botts, L.L.P. (included in Exhibits 5.1 and
8.1)
23.2 - Consent of Arthur Andersen LLP (filed herewith)
24.1 - Power of Attorney (included on signature page)
*99.1 - Balance Sheet of Heritage Holdings, Inc.
- -----------------
</TABLE>
* To be filed by an amendment to this registration statement.
** To be filed by a post-effective amendment to this registration
statement or as an exhibit to a current report on Form 8-K.
*** Incorporated by reference.
II-5
<PAGE> 1
EXHIBIT 12.1
HERITAGE PROPANE PARTNERS, L.P.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Two-Months Ten-Months
Nine-Months Ended Year Ended Ended Ended Year Ended
May 31, August 31, August 31, June 30, August 31,
----------------- ---------------- ---------- ---------- -----------------
1999 1998 1998 1997 1996 1996 1995 1994
---- ---- ---- ---- ---- ---- ---- ----
(Predecessor) (Predecessor)(Predecessor)
Fixed Charges
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Expensed 11,950 10,975 14,829 12,187 1,983 10,913 12,201 8,761
Amortization of Debt
Costs 349 331 447 401 62 182 208 208
Interest Element of
Rentals 401 394 531 453 75 337 361 339
------ ------ ------ ------ ------ ------ ------ ------
Total 12,700 11,700 15,807 13,041 2,120 11,432 12,770 9,308
====== ====== ====== ====== ====== ====== ====== ======
Earnings
Income from Continuing
Operations 16,963 15,540 8,790 5,177 (4,087) 5,656 455 983
Add -
Distributions of
Equity Investees 250 -- 100 100 -- -- -- --
Fixed Charges 12,700 11,700 15,807 13,041 2,120 11,432 12,770 9,308
Less -
Income from Equity
Investees 1,185 857 707 487 (119) 662 37 --
------ ------ ------ ------ ------ ------ ------ ------
Total 28,728 26,383 23,990 17,831 (1,848) 16,426 13,188 10,291
====== ====== ====== ====== ====== ====== ====== ======
Ratio 2.3 2.3 1.5 1.4 (0.9) 1.4 1.0 1.1
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<PAGE> 1
Exhibit 23.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation by reference in this registration statement of our report dated
October 15, 1998 included in Heritage Propane Partners, L.P. Form 10-K for the
year ended August 31, 1998 and to all references to our Firm included in this
registration statement.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
August 27, 1999
II-6
