HERITAGE PROPANE PARTNERS L P, 10-K, 2000-11-29

HERITAGE PROPANE PARTNERS L P
10-K, 2000-11-29
RETAIL STORES, NEC

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<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED AUGUST 31, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO__________

COMMISSION FILE NUMBER 1-11727

HERITAGE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)

DELAWARE 73-1493906
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

8801 SOUTH YALE AVENUE, SUITE 310, TULSA, OKLAHOMA 74137
(Address of principal executive offices and zip code)

(918) 492-7272
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of class Name of each exchange on
which registered
Common Units New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value as of November 6, 2000, of the registrant's Common
Units held by nonaffiliates of the registrant, based on the reported closing
price of such units on the New York Stock Exchange on such date, was
approximately $142,092,000.

At November 6, 2000, the registrant had units outstanding as follows:
Heritage Propane Partners, L.P. 9,746,196 Common Units
1,851,471 Subordinated Units
1,382,514 Class B Subordinated Units
Documents Incorporated by Reference: None

<PAGE> 2

HERITAGE PROPANE PARTNERS, L.P.

2000 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PAGE
----
<S> <C> <C>
PART I

ITEM 1. BUSINESS. ............................................................................................1

ITEM 2. PROPERTIES............................................................................................9

ITEM 3. LEGAL PROCEEDINGS....................................................................................10

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................10

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS.....................................11

ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA.....................................................12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................15

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................................................27

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................27

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................................28

ITEM 11. EXECUTIVE COMPENSATION................................................................................32

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................35

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................37

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................37
</TABLE>

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PART I

FORWARD-LOOKING STATEMENTS

CERTAIN MATTERS DISCUSSED IN THIS REPORT, EXCLUDING HISTORICAL
INFORMATION, AS WELL AS SOME STATEMENTS BY HERITAGE IN PERIODIC PRESS RELEASES,
INCLUDE CERTAIN "FORWARD-LOOKING" STATEMENTS. ALTHOUGH HERITAGE BELIEVES SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS AND CURRENT
EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS, NO ASSURANCE CAN BE GIVEN THAT
EVERY OBJECTIVE WILL BE REACHED. SUCH STATEMENTS ARE MADE IN RELIANCE ON THE
"SAFE HARBOR" PROTECTIONS PROVIDED UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.

AS REQUIRED BY THAT LAW, HERITAGE HEREBY IDENTIFIES THE FOLLOWING
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY
RESULTS PROJECTED, FORECASTED OR ESTIMATED BY HERITAGE IN FORWARD-LOOKING
STATEMENTS.

THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS:

o CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE UNITED STATES AS
WELL AS CHANGES IN GENERAL ECONOMIC CONDITIONS AND CURRENCIES
IN FOREIGN COUNTRIES;

o WEATHER CONDITIONS THAT VARY SIGNIFICANTLY FROM HISTORICALLY
NORMAL CONDITIONS;

o THE GENERAL LEVEL OF PETROLEUM PRODUCT DEMAND, AND THE
AVAILABILITY OF PROPANE SUPPLIES;

o ENERGY PRICES GENERALLY AND SPECIFICALLY, THE PRICE OF PROPANE
TO THE CONSUMER COMPARED TO THE PRICE OF ALTERNATIVE AND
COMPETING FUELS;

o COMPETITION FROM OTHER PROPANE DISTRIBUTORS AND ALTERNATE
FUELS;

o THE AVAILABILITY AND COST OF CAPITAL;

o CHANGES IN LAWS AND REGULATIONS TO WHICH HERITAGE IS SUBJECT,
INCLUDING TAX, ENVIRONMENTAL AND EMPLOYMENT REGULATIONS;

o THE COSTS AND EFFECTS OF LEGAL AND ADMINISTRATIVE PROCEEDINGS
AGAINST HERITAGE OR WHICH MAY BE BROUGHT AGAINST HERITAGE;

o THE ABILITY OF HERITAGE TO SUSTAIN ITS HISTORICAL LEVELS OF
INTERNAL GROWTH; AND

o THE ABILITY OF HERITAGE TO CONTINUE TO LOCATE AND ACQUIRE
OTHER PROPANE COMPANIES AT PURCHASE PRICES THAT ARE ACCRETIVE
TO ITS FINANCIAL RESULTS.

ITEM 1. BUSINESS

MERGER

In August 2000, TECO Energy, Inc. ("TECO"), Atmos Energy Corporation,
Piedmont Natural Gas Company, Inc. and AGL Resources, Inc. contributed each
company's propane operations, Peoples Gas Company ("Peoples Gas"), United Cities
Propane Gas, Inc. ("United Cities"), Piedmont Propane Company ("Piedmont"), and
AGL Propane, Inc. ("AGL"), respectively, to U.S. Propane, L.P. ("U.S. Propane")
in exchange for equity interests in U.S. Propane. The merger was accounted for
as an acquisition using the purchase method of accounting with Peoples Gas being
the accounting acquirer.

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In August 2000, U.S. Propane acquired all of the outstanding common
stock of Heritage Holdings, Inc., Heritage Propane Partners, L.P.'s General
Partner, for $120 million. By virtue of Heritage Holdings Inc.'s general partner
and limited partner interests in Heritage Propane Partners, L.P., U.S. Propane
gained control of Heritage Propane Partners, L.P. Simultaneously, U.S. Propane
transferred its propane operations, consisting of its interest in four separate
limited liability companies, AGL Propane, L.L.C., Peoples Gas Company, L.L.C.,
United Cities Propane Gas, L.L.C. and Retail Propane Company, L.L.C. (former
Piedmont operations) to Heritage Propane Partners, L.P. for $181.4 million plus
working capital. The $181.4 million was payable $139.5 million in cash, $31.8
million of assumed debt, and the issuance of 372,392 Common Units of Heritage
Propane Partners, L.P. valued at $7.3 million and a 1.0101 percent limited
partnership interest in Heritage Operating, L.P. valued at $2.7 million. The
purchase price and the issuance price for the Common Units were approved by an
independent committee of the Board of Directors of Heritage Holdings, Inc. The
issuance price for the Common Units was $19.73125 per unit under a formula based
on the average closing price of the Common Units on the New York Stock Exchange
for the twenty (20) day period beginning ten (10) days prior to the public
announcement of the transaction on June 15, 2000 (the "Formula Price"). The
working capital adjustment is anticipated to be settled in December 2000.

Concurrent with the acquisition, Heritage Propane Partners, L.P.
borrowed $180 million from several institutional investors and sold 1,161,814
Common Units and 1,382,514 Class B Subordinated Units in a private placement to
the former shareholders of Heritage Holdings, Inc. based on the Formula Price
resulting in net proceeds of $50.2 million. The total of these proceeds was
utilized to finance the transaction and retire a portion of existing debt.

Heritage Propane Partners, L.P. is the surviving entity for legal
purposes; however, U.S. Propane's propane operations will be the acquirer for
accounting purposes. For purposes of the discussion herein: (1) Peoples Gas is
described as the accounting acquirer because Peoples Gas was the acquirer in the
transaction that formed U.S. Propane; (2) the propane operations of Heritage
Propane Partners, L.P. prior to the series of transactions with U.S. Propane are
referred to as Predecessor Heritage; and (3) the combined operations of U.S.
Propane's propane operations and Predecessor Heritage are described as Heritage.

Peoples Gas has a fiscal year-end of December 31. The eight-month
period ended August 31, 2000 Form 10-K will be treated as a transition period
under the rules of the Securities and Exchange Commission. However, this Form
10-K is not a transition report as the registrant will continue to have an
August 31 fiscal year-end.

Heritage believes it is presently the fourth largest retail marketer of
propane in the United States (as measured by retail gallons sold). Heritage
currently serves more than 485,000 active residential, commercial, industrial
and agricultural customers located in 28 states. Heritage's operations extend
from coast to coast with concentrations in the western, upper midwestern,
northeastern and southeastern regions of the United States.

BUSINESS OF PREDECESSOR HERITAGE

Heritage Propane Partners, L.P., a publicly traded Delaware limited
partnership, was formed in April 1996. Heritage Propane Partners, L.P.'s
activities are conducted through its subsidiary, Heritage Operating, L.P. (the
"Operating Partnership"). Heritage, with a 98.9899 percent limited partner
interest, was the sole limited partner of the Operating Partnership. The
Operating Partnership accounts for nearly all of the consolidated assets, sales
and operating earnings of Heritage Propane Partners, L.P.

The business of Predecessor Heritage, starting with the formation of
Heritage Holdings, Inc. in 1989, has grown primarily through acquisitions of
retail propane operations and, to a lesser extent, through internal growth.
Since its inception in 1989 through August 9, 2000, Predecessor Heritage
completed 70 acquisitions for a total purchase price of approximately $297
million. Volumes of propane sold to retail customers have increased steadily
from 63.2 million gallons for the fiscal year ended August 31, 1992 to 170.9
million gallons for the period ended August 9, 2000.

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BUSINESS OF PEOPLES GAS

Peoples Gas is a Florida corporation and formerly a wholly owned
subsidiary of TECO. In June 1997, TECO acquired Lykes Energy, Inc. ("Lykes") for
approximately 12.1 million shares of its common stock valued at approximately
$300 million. Prior to the merger between TECO and Lykes, Peoples Gas was a
wholly owned subsidiary of Lykes.

In January 1998, TECO completed its merger with Griffis, Inc.
("Griffis") for approximately 600,000 shares of its common stock valued at
approximately $15 million. This merger was accounted for as a pooling of
interests. Concurrent with the merger, Griffis was merged into Peoples Gas.

GENERAL

At the time of the series of transactions that formed U.S. Propane and
combined the operations of Predecessor Heritage and U.S. Propane, Peoples Gas
was serving more than 70,000 active residential, commercial and wholesale
customers located in the Florida peninsula. Peoples Gas has grown by expanding
existing markets as well as through acquisitions of independent propane
operations located in northeast and southwest Florida. Prior to the series of
transactions, Peoples Gas believes it was among the top 25 independent propane
distributors nationally and was the largest independent propane distributor in
Florida.

Peoples Gas believes it has held competitive advantages in both the
residential and commercial markets through its focus on customer service and
product reliability. Following is a summary of retail sales volumes per fiscal
year for Peoples Gas. The transition period ended August 31, 2000 represents
seven months of Peoples Gas stand-alone and one month of Heritage.

For the
RETAIL PROPANE GALLONS Eight-months Ended
SOLD (IN MILLIONS) : For the Year Ended December 31, August 31,
----------------------------------------- ------------------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
24.7 26.7 29.1 30.9 33.6 38.3
</TABLE>

As a result of the implementation of the strategy described
below, Predecessor Heritage has achieved the following retail sales volumes per
fiscal year and for the period ended August 9, 2000:

For the
Period
RETAIL PROPANE GALLONS Ended
SOLD (IN MILLIONS) : For the Year Ended August 31, August 9,
--------------------------------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
48.2 63.2 73.4 79.7 98.3 118.2 125.6 146.7 159.9 170.9
</TABLE>

Heritage believes that its competitive strengths include: (i)
experience in identifying, evaluating and completing acquisitions, (ii)
operations that are focused in areas experiencing higher-than-average population
growth, (iii) a low cost administrative infrastructure and (iv) a decentralized
operating structure and entrepreneurial workforce. These competitive strengths
have enabled Predecessor Heritage to achieve levels of EBITDA per retail propane
gallon sold that Heritage believes are among the highest of any publicly traded
propane partnership. Heritage believes that as a result of its geographic
diversity and district-level incentive compensation program, it has been able to
reduce the effect of adverse weather conditions on EBITDA, including those
experienced by Predecessor Heritage during the warmer-than-normal winters of the
past five years with the winters of 1998 - 1999 and 1999 - 2000 recorded as two
of the warmest winters of this century. Heritage believes that its concentration
in higher-than-average population growth areas provides a strong economic
foundation for expansion through acquisitions and internal growth. Heritage does
not believe that it is significantly more vulnerable than its competitors to
displacement by natural gas distribution systems.

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BUSINESS STRATEGY

Heritage's strategy is to expand operations and increase retail market
share in order to increase the funds available for distribution to its
Unitholders. The three critical elements to this strategy are described below.

Acquisitions. Acquisitions will be the principal means of growth for
Heritage, as the retail propane industry is mature and overall demand for
propane is expected to experience limited growth in the foreseeable future.
Management believes that the fragmented nature of the propane industry provides
significant opportunities for growth through acquisition. Industry sources
indicate that there are over 8,000 retail propane operations, of which the 10
largest retailers, including Heritage, account for approximately 37 percent of
the total retail sales. Heritage follows a disciplined acquisition strategy that
concentrates on companies (i) in geographic areas experiencing
higher-than-average population growth, (ii) with a high percentage of sales to
residential customers, (iii) with local reputations for quality service and (iv)
with a high percentage of tank ownership. In addition Heritage attempts to
capitalize on the reputations of the companies it acquires by maintaining local
brand names, billing practices and employees, thereby creating a sense of
continuity and minimizing customer loss. Management believes that this strategy
has helped to make Heritage an attractive buyer for many acquisition candidates
from the seller's viewpoint.

Through August 9, 2000, Predecessor Heritage completed 70 acquisitions
for a total purchase price of approximately $297 million. On August 10, 2000
Predecessor Heritage completed the merger with U.S. Propane. During the period
between August 10, 2000 through August 31, 2000, Heritage completed two
additional acquisitions. Of these 70 companies acquired by Predecessor Heritage,
19 represent "core acquisitions" with multiple plants in a specific geographic
area, with the balance representing "blend-in companies" which operate in an
existing region. Heritage will focus on acquisition candidates in its existing
areas of operations, but will consider core acquisitions in other
higher-than-average population growth areas in order to further reduce the
impact of adverse weather patterns in any one region of Heritage's operations.
While Heritage is currently evaluating numerous acquisition candidates, there
can be no assurance that Heritage will identify attractive acquisition
candidates in the future, that Heritage will be able to acquire such businesses
on economically acceptable terms or successfully integrate them into existing
operations and make cost-saving changes, that any acquisition will not dilute
earnings and distributions to Unitholders or that any additional debt incurred
to finance an acquisition will not adversely affect the ability of Heritage to
make distributions to Unitholders.

In order to facilitate Heritage's acquisition strategy, the Operating
Partnership maintains a Bank Credit Facility. Heritage recently amended its Bank
Credit Facility to increase the total amount available for borrowings from $85
million to $100 million. The Bank Credit Facility consists of a $50 million
Acquisition Facility to be used for acquisitions and improvements and a $50
million Working Capital Facility to be used for working capital and other
general partnership purposes. Heritage also has the ability to fund acquisitions
through the issuance of additional partnership interests and through the Medium
Term Note Program and Senior Secured Notes if certain conditions are met. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Description of Indebtedness."

Internal Growth. In addition to pursuing expansion through
acquisitions, Predecessor Heritage has aggressively focused on internal growth
at its existing district locations. Heritage believes that, by concentrating its
operations in areas experiencing higher-than-average population growth, it is
well positioned to achieve internal growth by adding new customers. Heritage
also believes that its decentralized structure, in which operational decisions
are made at the district and regional level, together with a bonus system that
allocates a significant portion of a district's EBITDA in relation to budgeted
objectives to district employees, has fostered an entrepreneurial environment
that has allowed Heritage to achieve its high rates of internal growth. Heritage
believes that Predecessor Heritage's rate of internal growth has exceeded the
average internal growth rate in the industry.

Low Cost, Decentralized Operations. Heritage focuses on controlling
costs at the corporate and district levels. While Predecessor Heritage has
realized certain economies of scale as a result of its acquisitions, it
attributes its low operating costs primarily to its decentralized structure,
which Heritage plans to continue. By delegating all customer billing and
collection activities to the district level, Predecessor Heritage has been able
to operate without a large corporate staff. Of Heritage's 1,889 full-time
employees as of August 31, 2000, only 66, or approximately 4

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percent, were general and administrative. In addition Heritage's district level
incentive compensation program encourages district employees at all levels to
control costs and expand revenues.

INDUSTRY BACKGROUND AND COMPETITION

Propane, a by-product of natural gas processing and petroleum refining,
is a clean-burning energy source recognized for its transportability and ease of
use relative to alternative forms of stand-alone energy sources. Retail propane
use falls into three broad categories: (i) residential applications, (ii)
industrial, commercial, and agricultural applications, and (iii) other retail
applications, including motor fuel sales. Residential customers use propane
primarily for space and water heating. Industrial customers use propane
primarily as fuel for forklifts and stationary engines, to fire furnaces, as a
cutting gas, in mining operations and in other process applications. Commercial
customers, such as restaurants, motels, laundries and commercial buildings, use
propane in a variety of applications, including cooking, heating and drying. In
the agricultural market, propane is primarily used for tobacco curing, crop
drying, poultry brooding and weed control. Other retail uses include motor fuel
for cars and trucks, outdoor cooking and other recreational uses, propane
resales and sales to state and local governments. In its wholesale operations,
Heritage sells propane principally to large industrial end-users and other
propane distributors.

Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless: an odorant is added to allow
its detection. Like natural gas, propane is a clean burning fuel and is
considered an environmentally preferred energy source.

Propane competes with other sources of energy, some of which are less
costly for equivalent energy value. Heritage competes for customers against
suppliers of electricity, natural gas and fuel oil. Competition from alternative
energy sources has been increasing as a result of reduced regulation of many
utilities including natural gas and electricity. Except for certain industrial
and commercial applications, propane is generally not competitive with natural
gas in areas where natural gas pipelines already exist because natural gas is a
significantly less expensive source of energy than propane. The gradual
expansion of the nation's natural gas distribution systems has resulted in the
availability of natural gas in many areas that previously depended upon propane.
Although the extension of natural gas pipelines tends to displace propane
distribution in areas affected, Heritage believes that new opportunities for
propane sales arise as more geographically remote neighborhoods are developed.
Although propane is similar to fuel oil in certain applications and market
demand, propane and fuel oil compete to a lesser extent primarily because of the
cost of converting from one to another. Based upon information provided by the
Energy Information Agency, propane accounts for approximately three to four
percent of household energy consumption in the United States.

In addition to competing with alternative energy sources, Heritage
competes with other companies engaged in the retail propane distribution
business. Competition in the propane industry is highly fragmented and generally
occurs on a local basis with other large full-service multi-state propane
marketers, thousands of smaller local independent marketers and farm
cooperatives. Based on industry publications, Heritage believes that the
domestic retail market for propane is approximately 8.6 billion gallons annually
and that the 10 largest retailers, including Heritage, account for approximately
37 percent of the total retail sales of propane in the United States. Most of
Heritage's retail distribution branches compete with five or more marketers or
distributors. Each retail distribution outlet operates in its own competitive
environment because retail marketers tend to locate in close proximity to
customers. The typical retail distribution outlet generally has an effective
marketing radius of approximately 50 miles although in certain rural areas the
marketing radius may be extended by a satellite location.

The ability to compete effectively further depends on the reliability
of service, responsiveness to customers and the ability to maintain competitive
prices. Heritage believes that its safety programs, policies and procedures are
more comprehensive than many of its smaller, independent competitors and give it
a competitive advantage over such retailers. Heritage also believes that its
service capabilities and customer responsiveness differentiate it from many of
these smaller competitors. Heritage's employees are on call 24-hours-a-day,
7-days-a-week for emergency repairs and deliveries.

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<PAGE> 8

The wholesale propane business is highly competitive. For the period
ended August 9, 2000, Predecessor Heritage's domestic wholesale operations
(excluding M-P Energy Partnership) accounted for only 4.0 percent of total
volumes and less than 1 percent of its gross profit. Heritage does not emphasize
wholesale operations, but it believes that limited wholesale activities enhance
its ability to supply its retail operations.

PRODUCTS, SERVICES AND MARKETING

Heritage distributes propane through a nationwide retail distribution
network consisting of over 225 customer service locations in 28 states.
Heritage's operations are concentrated in large part in the western, upper
midwestern and southeastern regions of the United States. Heritage serves almost
485,000 active customers. Historically, approximately two-thirds of Predecessor
Heritage's retail propane volumes and in excess of 80 percent of its EBITDA were
attributable to sales during the six-month peak heating season from October
through March, as many customers use propane for heating purposes. Consequently,
sales and operating profits were normally concentrated in Predecessor Heritage's
first and second fiscal quarters. Cash flows from operations however, were
generally greatest during the second and third fiscal quarters when customers
pay for propane purchased during the six-month peak season. Historically,
approximately half of Peoples Gas's propane volumes have been attributable to
sales during the five-month peak season from November through March, as Florida
realizes temporary growth from numerous seasonal residents. Consequently, sales
and operating profits were normally concentrated in the Peoples Gas' first and
fourth calendar quarters. Cash flows from operations for Peoples Gas, however,
were generally greatest during the first and second calendar quarters when
customers pay for propane purchased during the five-month peak season. To the
extent necessary, Heritage will reserve cash from peak periods for distribution
to Unitholders during the warmer seasons.

Typically, district locations are found in suburban and rural areas
where natural gas is not readily available. Generally, such locations consist of
a one to two acre parcel of land, an office, a small warehouse and service
facility, a dispenser and one or more 18,000 to 30,000 gallon storage tanks.
Propane is generally transported from refineries, pipeline terminals, leased
storage facilities and coastal terminals by rail or truck transports to
Heritage's district locations where it is unloaded into storage tanks. In order
to make a retail delivery of propane to a customer, a bobtail truck is loaded
with propane from the storage tank. Propane is then pumped from the bobtail
truck, which generally holds 2,500 to 3,000 gallons of propane, into a
stationary storage tank on the customer's premises. The capacity of these
customer tanks ranges from approximately 100 gallons to 1,200 gallons, with a
typical tank having a capacity of 100 to 300 gallons in milder climates and from
500 to 1,000 gallons in colder climates. Heritage also delivers propane to
retail customers in portable cylinders, which typically have a capacity of 5 to
35 gallons. When these cylinders are delivered to customers, empty cylinders are
picked up for refilling at Heritage's distribution locations or are refilled in
place. Heritage also delivers propane to certain other bulk end users of propane
in tractor-trailers known as transports, which typically have an average
capacity of approximately 10,500 gallons. End users receiving transport
deliveries include industrial customers, large-scale heating accounts, mining
operations, and large agricultural accounts.

Heritage encourages its customers to implement a regular delivery
schedule by, in some cases, charging extra for non-scheduled deliveries. Many of
Heritage's residential customers receive their propane supply pursuant to an
automatic delivery system which eliminates the customer's need to make an
affirmative purchase decision and allows for more efficient route scheduling and
maximization of volumes delivered. From its district locations, Heritage also
sells, installs and services equipment related to its propane distribution
business, including heating and cooking appliances.

Propane use falls into three broad categories: (i) residential
applications, (ii) industrial, commercial and agricultural applications and
(iii) other retail applications, including motor fuel sales. Approximately 22
percent of the gallons sold by Peoples Gas in calendar 2000 were to retail
customers and 78 percent to commercial customers. Approximately 96 percent of
the domestic gallons sold by Predecessor Heritage in the period ended August 9,
2000 were to retail customers and approximately 4 percent were to wholesale
customers. Of the retail gallons sold by Predecessor Heritage in the period
ended August 9, 2000, 59 percent were to residential customers, 32 percent were
to industrial, commercial and agricultural customers, and 9 percent were to
other retail users. Sales to residential customers in the period ended August 9,
2000 for Predecessor Heritage accounted for 56 percent of total domestic gallons
sold inclusive of domestic wholesale but 71 percent of Predecessor Heritage's
gross profit from propane sales. Residential sales have a greater profit margin
and a more stable customer base than other markets served by

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<PAGE> 9

Heritage. Industrial, commercial and agricultural sales accounted for 21 percent
of Predecessor Heritage's gross profit from propane sales for the period ended
August 9, 2000, with all other retail users accounting for 7 percent. Additional
volumes sold to wholesale customers contributed the remaining 1 percent of gross
profit from propane sales. No single customer accounts for 10 percent or more of
revenues.

The propane business is very seasonal with weather conditions
significantly affecting demand for propane. Heritage believes that the
geographic diversity of its operations helps to minimize its nationwide exposure
to regional weather. Although overall demand for propane is affected by climate,
changes in price and other factors, Heritage believes its residential and
commercial business to be relatively stable due to the following
characteristics: (i) residential and commercial demand for propane has been
relatively unaffected by general economic conditions due to the largely
non-discretionary nature of most propane purchases, (ii) loss of customers to
competing energy sources has been low, (iii) the tendency of Heritage 's
customers to remain with Heritage due to the product being delivered pursuant to
a regular delivery schedule and to Heritage's ownership of over 87 percent of
the storage tanks utilized by its customers, and (iv) the historic ability of
Heritage to more than offset customer losses through internal growth of its
customer base in existing markets. Since home heating usage is the most
sensitive to temperature, residential customers account for the greatest usage
variation due to weather. Variations in the weather in one or more regions in
which Heritage operates can significantly affect the total volumes of propane
sold by Heritage and the margins realized thereon and, consequently, Heritage's
results of operations. Heritage believes that sales to the commercial and
industrial markets, while affected by economic patterns, are not as sensitive to
variations in weather conditions as sales to residential and agricultural
markets.

PROPANE SUPPLY AND STORAGE

Heritage's propane supply is purchased from over 50 oil companies and
natural gas processors at numerous supply points located in the United States
and Canada. Heritage typically enters into one-year supply agreements subject to
annual renewal. The percentage of contract purchases may vary from year to year
as determined by Heritage. Supply contracts generally provide for pricing in
accordance with posted prices at the time of delivery or the current prices
established at major delivery points. Most of these agreements provide maximum
and minimum seasonal purchase guidelines. Heritage receives its supply of
propane predominately through railroad tank cars and common carrier transport.

Supplies of propane from Peoples Gas' sources historically have been
readily available. During the eight months ended August 31, 2000, Dynegy Liquids
Marketing and Trade ("Dynegy") provided approximately 35 percent of Heritage's
total propane supply.

Supplies of propane from Predecessor Heritage's sources historically
have been readily available. In the period ended August 9, 2000, Dynegy provided
approximately 15 percent of Predecessor Heritage's total domestic propane
supply. Heritage believes that, if supplies from Dynegy were interrupted, it
would be able to secure adequate propane supplies from other sources without a
material disruption of its operations. Aside from Dynegy, no single supplier
provided more than 10 percent of Heritage's or Predecessor Heritage's total
domestic propane supply. Although no assurances can be given that supplies of
propane will be readily available in the future, Heritage expects a sufficient
supply to continue to be available. However, increased demand for propane in
periods of severe cold weather, or otherwise, could cause future propane supply
interruptions or significant volatility in the price of propane.

During the period ended August 9, 2000, Predecessor Heritage purchased
approximately 77 percent of its propane supplies from domestic suppliers with
the remainder being procured through M-P Oils, Ltd., a wholly owned subsidiary
of Heritage. M-P Oils, Ltd. holds a 60 percent interest in a Canadian
partnership, M-P Energy Partnership, which buys and sells propane for its own
account as well as supplies Heritage's volume requirements in the northern
states. Those volumes are included in the sources of propane set forth in the
immediately preceding paragraph.

The market price of propane is subject to volatile changes as a result
of supply or other market conditions over which Heritage will have no control.
Since rapid increases in the wholesale cost of propane may not be immediately
passed on to customers, such increases could reduce Heritage's gross profits.
Predecessor Heritage has generally been successful in maintaining retail gross
margins on an annual basis despite changes in the wholesale cost of propane. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--

7
<PAGE> 10

General." However, there may be times when Heritage will be unable to pass on
fully such price increases to its customers. Consequently, Heritage's
profitability will be sensitive to changes in wholesale propane prices.

Heritage leases space in storage facilities in Michigan, Mississippi,
North Carolina and Arizona and smaller storage facilities in other locations and
has rights to use storage facilities in additional locations when it "pre-buys"
product from these sources. Heritage believes that it has adequate third party
storage to take advantage of supply purchasing advantages as they may occur from
time to time. Access to storage facilities allows Heritage to buy and store
large quantities of propane during periods of low demand, which generally occur
during the summer months, thereby helping to ensure a more secure supply of
propane during periods of intense demand or price instability.

PRICING POLICY

Pricing policy is an essential element in the marketing of propane.
Heritage relies on regional management to set prices based on prevailing market
conditions and product cost, as well as local management input. All regional
managers are advised regularly of any changes in the posted price of the
district's propane suppliers. In most situations, Heritage believes that its
pricing methods will permit Heritage to respond to changes in supply costs in a
manner that protects Heritage's gross margins and customer base, to the extent
possible. In some cases, however, Heritage's ability to respond quickly to cost
increases could occasionally cause its retail prices to rise more rapidly than
those of its competitors, possibly resulting in a loss of customers.

BILLING AND COLLECTION PROCEDURES

Customer billing and account collection responsibilities are retained
at the district level. Heritage believes that this decentralized approach is
beneficial for several reasons: (i) the customer is billed on a timely basis;
(ii) the customer is more apt to pay a "local" business; (iii) cash payments are
received faster, and; (iv) district personnel have a current account status
available to them at all times to answer customer inquiries.

GOVERNMENT REGULATION

Heritage is subject to various federal, state and local environmental,
health and safety laws and regulations. Generally, these laws impose limitations
on the discharge of pollutants and establish standards for the handling of solid
and hazardous wastes. These laws include without limitation, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the Clean Air Act, the Occupational
Safety and Health Act, the Emergency Planning and Community Right-to-Know Act,
the Clean Water Act, and comparable state statutes. CERCLA, also known as the
"Superfund" law, imposes joint and several liability in most instances, without
regard to fault or the legality of the original conduct on certain classes of
persons that are considered to have contributed to the release or threatened
release of a "hazardous substance" into the environment. Propane is not a
hazardous substance within the meaning of CERCLA. However, certain automotive
waste products generated by Heritage's truck fleet, as well as "hazardous
substances" or "hazardous waste" disposed of during past operations by third
parties on Heritage's properties, could subject Heritage to liability under
CERCLA. Such laws and regulations could result in civil or criminal penalties in
cases of non-compliance and impose liability for remediation costs. In addition,
third parties may make claims against owners or operators of properties for
personal injuries and property damage associated with releases of hazardous or
toxic substances or waste.

In connection with all acquisitions of retail propane businesses that
involve the acquisition of any interest in real estate, Heritage conducts an
environmental review in an attempt to determine whether any substance other than
propane has been sold from, or stored on, any such real estate prior to its
purchase. Such review includes questioning the seller, obtaining representations
and warranties concerning the seller's compliance with environmental laws and
conducting inspections of the properties. Where warranted, independent
environmental consulting firms are hired to look for evidence of hazardous
substances or the existence of underground storage tanks.

Petroleum-based contamination or environmental wastes are known to be
located on or adjacent to six sites, which Heritage presently or formerly
operates. These sites were evaluated at the time of their acquisition. In all
cases, remediation operations have been or will be undertaken by others, and in
all six cases, Heritage obtained indemnification for expenses associated with
any remediation from the former owners or related entities. Based on

8
<PAGE> 11

information currently available to Heritage, such projects are not expected to
have a material adverse effect on Heritage's financial condition or results of
operation.

National Fire Protection Association Pamphlets No. 54 and No. 58, which
establish rules and procedures governing the safe handling of propane, or
comparable regulations, have been adopted as the industry standard in all of the
states in which Heritage operates. In some states these laws are administered by
state agencies, and in others they are administered on a municipal level. With
respect to the transportation of propane by truck, Heritage is subject to
regulations promulgated under the Federal Motor Carrier Safety Act. These
regulations cover the transportation of hazardous materials and are administered
by the United States Department of Transportation. Heritage conducts ongoing
training programs to help ensure that its operations are in compliance with
applicable regulations. Heritage maintains various permits that are necessary to
operate some of its facilities, some of which may be material to its operations.
Heritage believes that the procedures currently in effect at all of its
facilities for the handling, storage and distribution of propane are consistent
with industry standards and are in compliance in all material respects with
applicable laws and regulations.

Heritage has implemented environmental programs and policies designed
to avoid potential liability and cost under applicable environmental laws. It is
possible, however, that Heritage will have increased costs due to stricter
pollution control requirements or liabilities resulting from non-compliance with
operating or other regulatory permits. It is not anticipated that Heritage's
compliance with or liabilities under environmental, health and safety laws and
regulations, including CERCLA, will have a material adverse effect on Heritage.
To the extent that there are any environmental liabilities unknown to Heritage
or environmental, health or safety laws or regulations are made more stringent,
there can be no assurance that Heritage's results of operations will not be
materially and adversely affected.

EMPLOYEES

As of August 31, 2000, Heritage had 1,889 full time employees, of whom
66 were general and administrative and 1,823 were operational employees. None of
Heritage's employees are represented by a labor union. Heritage believes that
its relations with its employees are satisfactory. Predecessor Heritage has
hired as many as 100 seasonal workers to meet peak winter demands.

ITEM 2. PROPERTIES

Heritage operates bulk storage facilities at over 250 customer service
locations, of which approximately 80 percent are owned or under long-term lease
and the balance are subject to renewal in the ordinary course of business during
the next ten years. Heritage believes that the increasing difficulty associated
with obtaining permits for new propane distribution locations makes its high
level of site ownership and control a competitive advantage. Heritage owns
approximately thirty million gallons of above ground storage capacity at its
various plant sites. In addition, Heritage has leased approximately 30.8 million
gallons of underground storage facilities in four states (5.0 million gallons of
storage in Alto, Michigan, 12.8 million gallons in Hattiesburg, Mississippi, 9.0
million gallons in Tirzah, North Carolina and 4.0 million gallons in Bumstead,
Arizona). Heritage does not own or operate any underground storage facilities
(excluding customer and local distribution tanks) or pipeline transportation
assets (excluding local delivery systems).

Heritage also owns 50 percent of Bi-State Propane, a California general
partnership that conducts business in South Lake Tahoe, Truckee, Mammoth Lakes
and other locations in California and in Reno and other Nevada locations. The
Bi-State Propane locations are included in Heritage's site counts and all site,
customer and other property descriptions contained herein include all Bi-State
Propane information on a gross basis.

The transportation of propane requires specialized equipment. The
trucks and railroad tank cars utilized for this purpose carry specialized steel
tanks that maintain the propane in a liquefied state. As of August 31, 2000,
Heritage had 36 transport truck tractors, 34 transport trailers and 7 railroad
tank cars, all of which are owned by Heritage. In addition, Heritage utilizes
approximately 880 bobtails and 1,300 other delivery and service vehicles, all of
which are owned by Heritage. As of August 31, 2000, Heritage owned approximately
340,000 customer storage tanks with typical capacities of 120 to 1,000 gallons.
These customer storage tanks are collateral to secure the obligations of
Heritage under its borrowings from its banks and noteholders.

9
<PAGE> 12

Heritage believes that it has satisfactory title to or valid rights to
use all of its material properties. Although some of such properties are subject
to liabilities and leases, liens for taxes not yet due and payable, encumbrances
securing payment obligations under non-competition agreements entered in
connection with acquisitions and immaterial encumbrances, easements and
restrictions, Heritage does not believe that any such burdens will materially
interfere with the continued use of such properties by Heritage in its business,
taken as a whole. In addition, Heritage believes that it has, or is in the
process of obtaining, all required material approvals, authorizations, orders,
licenses, permits, franchises and consents of, and has obtained or made all
required material registrations, qualifications and filings with, the various
state and local government and regulatory authorities which relate to ownership
of Heritage's properties or the operations of its business.

Heritage utilizes a variety of trademarks and tradenames that it owns,
including "Heritage Propane." Heritage believes that its strategy of retaining
the names of the acquired companies has maintained the local identification of
such companies and has been important to the continued success of these
businesses. Heritage's most significant trade names are AGL Propane, Balgas,
Bi-State Propane, Blue Flame Gas of Charleston, Blue Flame Gas of Mt. Pleasant,
Blue Flame Gas of Vermont, Carolane Propane Gas, Gas Service Company, Holton's
L. P. Gas, Ikard & Newsom, Northern Energy, Pardee Gas, Sawyer Gas, Keen
Propane, Gibson Propane, Peoples Gas Company, Piedmont Propane Company, Rural
Bottled Gas and Appliance, ServiGas and United Cities Propane Gas. Heritage
regards its trademarks, tradenames and other proprietary rights as valuable
assets and believes that they have significant value in the marketing of its
products.

ITEM 3. LEGAL PROCEEDINGS.

Heritage is threatened with or is named as a defendant in various
personal injury, property damage and product liability suits. In general, these
lawsuits have arisen in the ordinary course of Heritage's business since the
formation of Heritage and involve claims for actual damages arising from the
alleged negligence of Heritage or as a result of product defects or similar
matters. Of the pending or threatened matters, the suits currently involve
property damage and serious personal injuries. Although any litigation is
inherently uncertain, based on past experience, the information currently
available to it and the availability of insurance coverage, Heritage does not
believe that these pending or threatened litigation matters will have a material
adverse effect on its results of operations or its financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of the security holders of Heritage
Propane Partners, L.P. during the fiscal year ended August 31, 2000.

10
<PAGE> 13

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS.

MARKET PRICE OF AND DISTRIBUTIONS ON THE COMMON UNITS AND RELATED UNITHOLDER
MATTERS

The Common Units representing limited partners interests ("Common
Units") are listed on the New York Stock Exchange, which is the principal
trading market for such securities, under the symbol "HPG". The following table
sets forth, for the periods indicated, the high and low sales prices per Common
Unit, as reported on the New York Stock Exchange Composite Tape, and the amount
of cash distributions paid per Common Unit.

Price Range Cash
High Low Distribution(1)
----- ---- ----------------
<S> <C> <C> <C>
2000 FISCAL YEAR
First Quarter Ended November 30, 1999 $23.000 $18.688 $0.5625
Second Quarter Ended February 29, 2000 $19.500 $16.750 $0.5625
Third Quarter Ended May 31, 2000 $19.125 $16.500 $0.5625
Fourth Quarter Ended August 31, 2000 $21.250 $18.563 $0.5750

1999 FISCAL YEAR
First Quarter Ended November 30, 1998 $23.750 $20.813 $0.5000
Second Quarter Ended February 28, 1999 $24.000 $20.875 $0.5125
Third Quarter Ended May 31, 1999 $23.375 $21.500 $0.5625
Fourth Quarter Ended August 31, 1999 $23.375 $21.875 $0.5625
</TABLE>

(1) Distributions are shown in the quarter with respect to which they were
declared. For each of the indicated quarters for which distributions have
been made, an identical per unit cash distribution was paid on the
Subordinated Units.

As of November 6, 2000 there were approximately 281 holders of record
of Heritage's Common Units, including Common Units held in street name,
representing approximately seven thousand individual common unitholders.
Heritage also has 1,851,471 Subordinated Units, all of which are held by the
General Partner and 1,382,514 Class B Subordinated Units, all of which are held
by former Heritage Holdings, Inc. shareholders for which there is no established
public trading market. Heritage will distribute to its partners on a quarterly
basis, all of its Available Cash in the manner described herein. Available Cash
generally means, with respect to any quarter of Heritage, all cash on hand at
the end of such quarter less the amount of cash reserves that are necessary or
appropriate in the reasonable discretion of the General Partner to (i) provide
for the proper conduct of the Heritage's business, (ii) comply with applicable
law or any Heritage debt instrument or other agreement, or (iii) provide funds
for distributions to Unitholders and the General Partner in respect of any one
or more of the next four quarters. Available Cash is more fully defined in the
Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P. previously filed as an exhibit. Distributions of Available Cash
to the holders of the Subordinated Units and the Class B Subordinated Units are
subject to the prior rights of the holders of the Common Units to receive the
Minimum Quarterly Distributions of $.50 per unit for each quarter during the
subordination period, and to receive any arrearages in the distribution of
Minimum Quarterly Distributions on the Common Units for prior quarters during
the subordination period. The subordination period will not end earlier than
June 1, 2001 ("Subordination Period"). Restrictions on Heritage's distributions
required by Item 5 is incorporated herein by reference to Note 7 of Heritage's
Consolidated Financial Statements which begin on page F-1 of this Report, and to
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Description of Indebtedness.

CHANGES IN SECURITIES AND RECENT SALES OF UNREGISTERED SECURITIES

On August 10, 2000, 372,392 Common Units of Heritage Propane Partners,
L.P. were issued to U.S. Propane, L.P. in partial consideration for its
ownership interest in four separate limited liability companies holding

11
<PAGE> 14

the propane operations of AGL Propane, L.L.C., Peoples Gas Company, L.L.C.,
United Cities Propane Gas, L.L.C. and Retail Propane Company, L.L.C. (former
Piedmont operations). These Units were not registered with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"), by
virtue of an exemption under Section 4(2) thereof. These Units carry a
restrictive legend with regard to transfer of the Units.

Also, on August 10, 2000, 1,161,814 Common Units and 1,382,514 Class B
Subordinated Units of Heritage Propane Partners, L.P. were sold to the former
shareholders of Heritage Holdings, Inc. for $50.2 million. None of these Units
were registered with the Securities and Exchange Commission under the Act, by
virtue of an exemption under Section 4(2) thereof. These Units carry a
restrictive legend with regard to transfer of the Units. The Class B
Subordinated Units are convertible to Common Units on a one-for-one basis only
upon approval by the requisite vote or consent of unit holders required under
the Partnership Agreement and New York Stock Exchange rules or staff
interpretations for listing of the Common Units issued upon conversion.

On August 10, 2000, as a result of the acquisition of the General
Partner by U.S. Propane, 71,300 Common Units of Heritage Propane Partners, L.P.
were issued to participants in Heritage's Restricted Unit Plan. Subsequent to
August 31, 2000, 750 Common Units of Heritage Propane Partners, L.P. were issued
to participants in Heritage's Restricted Unit Plan in accordance with the
vesting rights of the Restricted Unit Plan. None of the Common Units were
registered with the Securities and Exchange Commission under the Act, by virtue
of an exemption under Section 4(2). These Units carry a restricted legend with
regard to their transfer.

On March 3, 2000 and March 17, 2000, Predecessor Heritage issued 19,899
and 38,419 Common Units of Heritage Propane Partners, L.P., respectively, to
Heritage Holdings, Inc., the General Partner, in connection with the assumption
of certain liabilities by the General Partner from Heritage's acquisition of
certain assets of two propane companies. The General Partner's Units were not
registered with the Securities and Exchange Commission under the Act, by virtue
of an exemption under Section 4(2) thereof. These Units carry a restrictive
legend with regard to transfer of the Units.

During fiscal 2000, Predecessor Heritage issued 76,152 Common Units of
Heritage Propane Partners, L.P. in exchange for certain assets in connection
with the acquisitions of certain propane businesses, for a total value of $1.7
million. The Units issued in connection with the acquisitions were issued
utilizing Heritage's Registration Statement No. 333-40407 on Form S-4.

On October 28, 1999, Predecessor Heritage sold 1,200,000 Common Units
in an underwritten public offering at a public offering price of $22.00 per
Common Unit. The net proceeds of approximately $24 million were used to repay a
portion of the outstanding indebtedness under the acquisition facility that was
incurred to acquire propane businesses.

ITEM 6. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following table sets forth, for the periods and as of the dates
indicated, selected historical financial and operating data for Heritage Propane
Partners, L.P. (formerly Peoples Gas and surviving legal entity in the series of
transactions with U.S. Propane). The selected historical financial and operating
data should be read in conjunction with the financial statements of Heritage
Propane Partners, L.P. (formerly Peoples Gas Company) included elsewhere in this
Report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" also included elsewhere in this Report. The amounts in
the table below, except per unit data, are in thousands.

12
<PAGE> 15

Eight Months
Years ended December 31, Ended August 31,
---------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
(Unaudited)(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operating Data:
Revenues $ 32,194 $ 37,508 $ 32,874 $ 30,187 $ 34,045 $ 21,766 $ 63,072
Gross profit (a) 14,434 16,139 15,811 17,904 19,196 13,299 33,110
Depreciation and amortization 2,251 2,234 2,514 2,855 3,088 2,037 4,686
Operating income (loss) 3,028 4,611 1,370 3,961 2,885 2,666 (714)
Interest expense -- -- -- -- -- -- (2,409)
Income (loss) before income taxes and
minority interest 2,421 3,962 980 3,483 2,895 2,677 (3,547)
Provision for income taxes 776 1,323 378 1,412 1,127 1,035 379
Net income (loss) 1,645 2,639 602 2,071 1,768 1,642 (3,846)
Net Income (loss) per Unit (b) .95 1.52 .35 1.19 1.02 .92 (.37)
Cash dividends per Unit -- -- -- 1.13 1.30 1.30 --
</TABLE>

As of December 31, As of August 31,
---------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
(Unaudited) (Unaudited)(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (end of period):
Current assets $ 4,645 $ 6,829 $ 5,278 $ 4,310 $ 6,643 $ 4,326 $ 81,420
Total assets 28,579 33,455 33,982 37,206 43,724 39,481 615,779
Current liabilities 2,139 12,619 8,204 13,671 19,636 15,716 107,033
Long-term debt -- -- -- -- -- -- 361,990
Partner's capital-General Partner (b) 31 37 39 39 37 41 1,409
Partners' capital-Limited Partner (b) 12,244 14,857 15,457 15,557 15,070 16,670 146,756
(d)
</TABLE>

Eight Months
Years ended December 31, Ended August 31,
---------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data (Unaudited):
EBITDA (c) $ 5,279 $ 6,845 $ 3,884 $ 6,816 $ 5,973 $ 4,703 $ 4,507
Capital expenditures (e)
Maintenance and growth 2,437 3,560 4,239 2,877 4,791 2,537 3,708
Acquisition -- -- -- 1,719 1,015 1,015 123,300
Retail propane gallons sold 24,659 26,654 29,077 30,921 33,608 22,118 38,268
</TABLE>

(a) Gross profit is computed by reducing total revenues by the direct cost
of the products sold.

(b) Net income (loss) per unit is computed by dividing the net income by
the weighted average number of units outstanding. Although equity
accounts of Peoples Gas survive the merger, Predecessor Heritage's
partnership structure and partnership units survive. Accordingly, the
equity accounts of Peoples Gas have been restated based on general
partner interest and Common Units received by Peoples Gas in the
merger.

(d) Partners' Capital is anticipated to decrease to the extent depreciation
and amortization exceeds maintenance capital expenditure requirements.

(e) Capital expenditures fall generally into three categories: (i)
maintenance capital expenditures which include expenditures for repairs
that extend the life of the assets and replacement of property, plant
and equipment, (ii) growth capital expenditures, which include
expenditures for purchase of new propane tanks and other equipment to
facilitate retail customer base expansion, and (iii) acquisition
expenditures which include expenditures related to the acquisition of
retail propane operations and the portion of the purchase price
allocated to intangibles associated with such acquired businesses.

13
<PAGE> 16

The following table sets forth, for the periods and as of the dates
indicated, selected historical financial and operating data for Predecessor
Heritage. The selected historical financial and operating data of Predecessor
Heritage should be read in conjunction with the financial statements of
Predecessor Heritage included elsewhere in this Report and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" also
included elsewhere in this Report. The amounts in the table below, except per
Unit data, are in thousands.

Ten Two
Months Months Years Ended Period
Year Ended Ended Ended August 31, Ended
August 31, June 30, August 31, -------------------------------- August 9,
1995 (e) 1996 (e) 1996 1997 1998 1999 2000
----------- ----------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operating Data:
Revenues $ 131,508 $ 144,623 $ 18,477 $ 199,785 $ 185,987 $ 184,020 $ 242,491
Gross Profit(a) 55,841 55,634 6,314 73,838 89,103 96,753 101,746
Depreciation and amortization 8,896 7,581 1,733 11,124 13,680 14,749 17,143
Operating income (loss) 12,675 15,755 (1,956) 16,919 22,929 24,567 23,475
Interest expense 12,201 10,833 1,962 12,063 14,599 15,915 17,664
Income (loss) before income taxes
and minority interest 759 6,084 (4,087) 5,625 9,266 10,116 6,936
Provision for income taxes 666 2,735 -- -- -- -- --
Net income (loss) (211) 2,921 (8,423) 5,177 8,790 9,662 6,504
Basic and Diluted Net Income (loss)
per Unit(b) -- -- (1.06) 0.64 1.04 1.11 .66
</TABLE>

August 31,
-----------------------------------------------------------
1995(e) 1996 1997 1998 1999
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (end of period):
Current Assets $ 21,293 $ 24,014 $ 27,951 $ 26,185 $ 29,267
Total Assets 163,423 187,850 203,799 239,964 262,958
Current Liabilities 35,825 24,728 34,426 35,444 47,680
Long-term debt 103,412 132,521 148,453 177,431 196,216
Redeemable preferred stock 12,337 -- -- -- --
Stockholders' deficit (6,975) -- -- -- --
Partner's capital-General Partner -- 307 208 273 176
Partners' capital-Limited Partner(g) -- 30,294 20,712 26,816 18,886

</TABLE>

Period
Years ended December 31, Ended
----------------------------------------------------------- August 9,
1995 (e) 1996 (f) 1997 1998 1999 2000
----------------------------------------------------------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Data (unaudited):
EBITDA(c) $ 21,672 $ 24,365 $ 28,718 $ 37,792 $ 41,047 $ 42,373
Capital Expenditures(d)
Maintenance and growth 8,634 7,244 7,170 9,359 14,974 12,931
Acquisition 27,879 16,665 14,549 23,276 17,931 46,801
Retail propane gallons sold 98,318 118,200 125,605 146,747 159,938 170,891
</TABLE>

(a) Gross profit is computed by reducing total revenues by the direct cost
of the products sold.

(b) Net income (loss) per Unit is computed by dividing the limited
partners' interest in net income (loss) by the limited partners'
weighted average number of units outstanding.

(c) EBITDA is defined as operating income plus non-cash compensation,
depreciation and amortization (including the EBITDA of investees).
EBITDA should not be considered as an alternative to net income (as an
indicator of operating performance) or as an alternative to cash flow
(as a measure of liquidity or ability to service debt obligations), but
provides additional information for evaluating Heritage's ability to
make the Minimum Quarterly Distribution. EBITDA for the year ended
August 31, 1998 was restated to account for non-cash compensation. The
minority interest of MP Energy Partnership, a majority owned
partnership, is deducted from the EBITDA calculation.

14
<PAGE> 17

(d) Capital expenditures fall generally into three categories: (i)
maintenance capital expenditures of approximately $5.1 million for the
period ended August 9, 2000 and $4.6 million, $3.6 million and $2.3
million in fiscal 1999, 1998 and 1997, respectively, which include
expenditures for repairs that extend the life of the assets and
replacement of property, plant and equipment, (ii) growth capital
expenditures, which include expenditures for purchases of new propane
tanks and other equipment to facilitate retail customer base expansion,
and (iii) acquisition capital expenditures, which include expenditures
related to the acquisition of retail propane operations and the portion
of the purchase price allocated to intangibles associated with such
acquired businesses.

(e) Information for Heritage Propane Partners, L.P.'s predecessor, Heritage
Holdings, Inc.

(f) Reflects unaudited pro forma information for Predecessor Heritage as if
Heritage Propane Partners, L.P. formation had occurred as of the
beginning of the period presented.

(g) Partners' Capital is anticipated to decrease to the extent depreciation
and amortization exceeds maintenance capital expenditure requirements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

FORWARD-LOOKING STATEMENTS

THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS:

o CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE UNITED STATES AS
WELL AS CHANGES IN GENERAL ECONOMIC CONDITIONS AND CURRENCIES
IN FOREIGN COUNTRIES;

o WEATHER CONDITIONS THAT VARY SIGNIFICANTLY FROM HISTORICALLY
NORMAL CONDITIONS;

o THE GENERAL LEVEL OF PETROLEUM PRODUCT DEMAND, AND THE
AVAILABILITY OF PROPANE SUPPLIES;

o ENERGY PRICES GENERALLY AND SPECIFICALLY, THE PRICE OF PROPANE
TO THE CONSUMER COMPARED TO THE PRICE OF ALTERNATIVE AND
COMPETING FUELS;

o COMPETITION FROM OTHER PROPANE DISTRIBUTORS AND ALTERNATE
FUELS;

o THE AVAILABILITY AND COST OF CAPITAL;

o CHANGES IN LAWS AND REGULATIONS TO WHICH HERITAGE IS SUBJECT,
INCLUDING TAX, ENVIRONMENTAL AND EMPLOYMENT REGULATIONS;

o THE COSTS AND EFFECTS OF LEGAL AND ADMINISTRATIVE PROCEEDINGS
AGAINST HERITAGE OR WHICH MAY BE BROUGHT AGAINST HERITAGE;

o THE ABILITY OF HERITAGE TO SUSTAIN ITS HISTORICAL LEVELS OF
INTERNAL GROWTH; AND

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<PAGE> 18

o THE ABILITY OF HERITAGE TO CONTINUE TO LOCATE AND ACQUIRE
OTHER PROPANE COMPANIES AT PURCHASE PRICES THAT ARE ACCRETIVE
TO ITS FINANCIAL RESULTS.

WEATHER AND SEASONALITY

Heritage's propane distribution business is seasonal and dependent upon
weather conditions in its service areas. Propane sales to residential and
commercial customers are affected by winter heating season requirements, which
generally results in higher operating revenues and net income during the period
from October through March of each year and lower operating revenues and either
net losses or lower net income during the period from April through September of
each year. Sales to industrial and agricultural customers are much less weather
sensitive.

Gross profit margins are not only affected by weather patterns but also
by changes in customer mix. For example, sales to residential customers
ordinarily generate higher margins than sales to other customer groups, such as
commercial or agricultural customers. In addition, gross profit margins vary by
geographic region. Accordingly, gross profit margins could vary significantly
from year to year in a period of identical sales volumes.

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY AND SURVIVING LEGAL ENTITY IN THE SERIES OF
TRANSACTIONS WITH U.S. PROPANE)

GENERAL

Peoples Gas engaged in the sale, distribution and marketing of propane
and other related products. Revenues are derived primarily from the retail
propane marketing business. Peoples Gas believes that prior to the series of
transactions with Atmos, AGL, Piedmont and Predecessor Heritage, it was among
the top 25 retail propane marketers nationally and was the largest independent
propane distributor in Florida. At the time of the merger, Peoples Gas was
serving more than 70,000 residential, commercial and industrial customers
located in the Florida peninsula.

In August 2000, TECO Energy, Inc., Atmos Energy Corporation, Piedmont
Natural Gas Company, Inc. and AGL Resources, Inc. contributed each company's
propane operations, Peoples Gas Company ("Peoples Gas"), United Cities Propane
Gas, Inc. ("United Cities"), Piedmont Propane Company ("Piedmont"), and AGL
Propane, Inc. ("AGL"), respectively, to U.S. Propane, L.P. ("U.S. Propane") in
exchange for equity interests in U.S. Propane. The merger was accounted for as
an acquisition using the purchase method of accounting with Peoples Gas being
the accounting acquirer.

In August 2000, U.S. Propane acquired all of the outstanding common
stock of Heritage Holdings, Inc., Heritage Propane Partner, L.P.'s General
Partner, for $120 million. By virtue of Heritage Holdings, Inc.'s general
partner and limited partner interests in Heritage Propane Partners, L.P., U.S.
Propane gained control of Heritage Propane Partners, L.P. Simultaneously, U.S.
Propane transferred its propane operations, consisting of its interest in four
separate limited liability companies, AGL Propane, L.L.C., Peoples Gas Company,
L.L.C., United Cities Propane Gas, L.L.C. and Retail Propane Company, L.L.C.
(former Piedmont operations) to Heritage Propane Partners, L.P. for $181.4
million plus working capital. The $181.4 million was payable $139.5 million in
cash, $31.8 million of assumed debt, and the issuance of 372,392 Common Units of
Heritage Propane Partners, L.P. valued at $7.3 million and a 1.0101 percent
limited partnership interest in Heritage Operating, L.P. valued at $2.7 million.
The purchase price and the issuance price for the Common Units were approved by
an independent committee of the Board of Directors of Heritage Holdings, Inc.
The issuance price for the Common Units was $19.73125 per unit under a formula
based on the average closing price of Heritage Propane Partners, L.P.'s Common
Units on the New York Stock Exchange for the twenty (20) day period beginning
ten (10) days prior to the public announcement of the transaction on June 15,
2000. The working capital adjustment is anticipated to be settled in December
2000

The formation of U.S. Propane and the merger with Predecessor Heritage
affect the comparability of the eight months ended August 31, 2000 and August
31, 1999, because the volumes and results of operations for the period from
August 10, 2000 through August 31, 2000 include the volumes and results of
operations of AGL, United

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<PAGE> 19

Cities, Piedmont and Predecessor Heritage. The increases in the line items
discussed below are a result of these transactions. Amounts discussed below
reflect 100 percent of the results of M-P Energy Partnership during the period
from August 10, 2000 through August 31, 2000. M-P Energy Partnership is a
general partnership in which Heritage owns a 60 percent interest. Because M-P
Energy Partnership is primarily engaged in lower-margin wholesale distribution,
its contribution to Heritage's net income is not significant and the minority
interest of this partnership is excluded from the EBITDA calculation.

ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS - HERITAGE PROPANE PARTNERS, L.P.
(FORMERLY PEOPLES GAS)

The following discussion of the historical financial condition and
results of operations of Peoples Gas should be read in conjunction with the
Selected Historical Financial and Operating Data and notes thereto, and the
historical financial statements and notes thereto included elsewhere herein.

EIGHT MONTHS ENDED AUGUST 31, 2000 COMPARED TO THE EIGHT MONTHS ENDED AUGUST 31,
1999 (UNAUDITED)

Volume. Total retail gallons sold in the eight months ended August 31,
2000 were 38.3 million, an increase of 16.2 million over the 22.1 million
gallons sold in the eight months ended August 31, 1999. Heritage sold 16.3
million retail gallons in the period from August 10, 2000 through August 31,
2000, thus the increase in retail gallons is primarily attributable to the
transactions referred to above.

Revenues. Total revenues for the eight months ended August 31, 2000
were $63.1 million, an increase of $41.3 million as compared to $21.8 million in
the eight months ended August 31, 1999. Revenues for Heritage for the period
from August 10, 2000 through August 31, 2000 were $36.4 million, of which $11.7
million was due to trading activity conducted through Heritage Energy Resources
and the remainder related to increased volumes. The increase in revenue is
primarily attributable to the transactions referred to above.

Cost of Products Sold. Total cost of products sold increased $33.0
million to $41.5 million for the eight months ended August 31, 2000. Of this
increase, $11.5 million is the result of trading activity for the period from
August 10, 2000 through August 31, 2000, with the remainder relating to the
increased volumes described above.

Operating Expenses. Operating expenses were $16.6 million for the
eight-month period ended August 31, 2000 as compared to $8.6 million for the
eight months ended August 31, 1999. The increase of $8.0 million is the result
of the additional operating expense related to the merger.

Depreciation and Amortization. Depreciation and amortization was $4.7
million in the eight months ended August 31, 2000 as compared to $2.0 million in
the eight months ended August 31, 1999. The increase is attributable to the
transactions referred to above.

Operating Income (Loss). Heritage had an operating loss of $.7 million
for the eight months ended August 31, 2000 as compared to operating income of
$2.7 million for the eight months ended August 31, 1999. The decrease is the
result of the additional operating expenses and depreciation and amortization
resulting from the merger.

Provision for Income Taxes. Provision for income taxes decreased $.6
million, to $.4 million in the eight months ended August 31, 2000 as compared to
$1.0 million for the eight months ended August 31, 1999. This decrease is a
result of the decrease in income before provision for income taxes in the
comparable eight-month period of Peoples Gas. Prior to the transaction with
Predecessor Heritage, Peoples Gas filed a consolidated federal income tax return
with TECO and, based on a tax sharing agreement, included, in its statements of
operations, a provision for income taxes calculated on a separate return basis.

Net Income (Loss). For the eight-month period ended August 31, 2000,
Heritage had a net loss of $3.8 million, a decrease of $5.4 million as compared
to net income for the eight months ended August 31, 1999 of $1.6 million. This
decrease is the result of decreased operating income described above.

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<PAGE> 20

FISCAL YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO FISCAL YEAR 1998

Volume. Peoples Gas sold 33.6 million gallons in fiscal 1999, an
increase of 2.7 million gallons, or 9 percent from the 30.9 million gallons sold
in fiscal 1998, primarily as a result of the July 1999 acquisition of Commercial
Propane, Inc. The increase in volumes was net of the effects of unseasonably
warm weather.

Revenues. Total revenues for Peoples Gas increased $3.8 million, or 12.6
percent to $34.0 million from fiscal 1998's total revenues of $30.2 million. The
increase is primarily the result of increased volumes associated with the July
1999 acquisition of Commercial Propane, Inc. and the effects of higher cost of
fuel.

Cost of Products Sold. Total cost of product sold increased $2.5
million, or 20.3 percent to $14.8 million for fiscal 1999 as compared to $12.3
million for fiscal 1998. The increase is primarily the result of increased
volumes associated with the July 1999 acquisition of Commercial Propane, Inc.
and the effects of higher cost of propane that was passed through to customers.

Operating Expenses. Operating expenses for fiscal 1999 increased $2.1
million, or 18.9 percent to $13.2 million as compared to $11.1 million in fiscal
1998. This increase is primarily the result of increased costs related to
additional marketing efforts and costs related to the July 1999 acquisition of
Commercial Propane, Inc.

Depreciation and Amortization. Depreciation and amortization was $3.1
million for fiscal 1999, a $0.2 million increase over fiscal 1998's $2.9
million. This increase is the result of additional depreciation on maintenance
and growth capital expenditures and fixed assets recorded in relation to
acquisitions.

Operating Income. Operating income decreased $1.1 million, or 27.5
percent to $2.9 million as compared to $4.0 million in fiscal 1998. The
increased revenues described above were more than offset by the increases in
operating expenses, depreciation and amortization, also described above, which
resulted in this decrease.

Provision for Income Taxes. Provision for income taxes decreased $0.3
million, or 21.4 percent to $1.1 million as compared to $1.4 million for 1998.
This decrease is a result of the decrease in income before provision for income
taxes.

Net Income. Net income for fiscal year 1999 decreased $0.3 million, or
14.3 percent to $1.8 million as compared to fiscal 1998's net income of $2.1
million. This decrease is the result of decreased operating income being
somewhat offset by lower taxes, as discussed above.

FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997

Volume. Peoples Gas sold 30.9 million gallons in fiscal 1998, an
increase of 1.8 million gallons, or 6 percent from the 29.1 million gallons sold
in fiscal 1997, primarily as a result of the January 1998 acquisition of Ankney
Gas, Inc. and the July 1998 acquisition of Florida Gas Service Corp.

Revenues. Total revenues for Peoples Gas decreased $2.7 million, or 8.2
percent to $30.2 million from fiscal 1997's total revenues of $32.9 million. The
decrease is primarily the result of higher volumes sold being more than offset
by lower costs of propane that was passed through to customers.

Cost of Products Sold. Total cost of product sold decreased $4.8
million, or 28.1 percent to $12.3 million for fiscal 1998 as compared to $17.1
for fiscal 1997. The decrease in cost of products sold directly relates to a
decrease in the cost per gallon of propane.

Operating Expenses. Operating expenses for fiscal 1998 decreased $0.8
million, or 6.7 percent to $11.1 million as compared to $11.9 million in fiscal
1997. The decrease was attributable to synergies leading to lower operating
costs realized from the January 1998 acquisition of Griffis Inc.

Depreciation and Amortization. Depreciation and amortization was $2.9
million for fiscal 1998, a $0.4 million increase over fiscal 1997's $2.5
million. This increase was primarily the result of additional depreciation and
amortization associated with the Griffis Inc. acquisition.

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<PAGE> 21

Operating Income. Operating income increased $2.6 million, or 185.7
percent to $4.0 million as compared to $1.4 million in fiscal 1997. This
increase was the result of the increase in gross profit and decreases in
operating expenses.

Provision for Income Taxes. Provision for income taxes increased $1.0
million, or 250.0 percent to $1.4 million as compared to $0.4 million for 1997.
This increase is a result of the increase in income before provision for income
taxes.

Net income. Net income for fiscal year 1998 increased $1.5 million, or
250.0 percent to $2.1 million as compared to fiscal 1997's net income of $0.6
million. This increase is due to higher operating income for the fiscal year
1998 as compared to 1997, partially offset by increased provision for income
taxes.

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES (PREDECESSOR HERITAGE)
(THE PROPANE OPERATIONS OF HERITAGE PROPANE PARTNERS, L.P., PRIOR TO THE SERIES
OF TRANSACTIONS WITH U.S. PROPANE)

GENERAL

Predecessor Heritage engaged in the sale, distribution and marketing of
propane and other related products. Predecessor Heritage derived its revenue
primarily from the retail propane marketing business. The General Partner
believes that Predecessor Heritage was the seventh largest retail marketer of
propane in the United States, based on retail gallons sold prior to the series
of transactions with U.S. Propane, serving almost 286,000 residential,
industrial/commercial and agricultural customers in 27 states through over 170
retail outlets. The General Partner believes that after the U.S. Propane
transactions, Heritage is the fourth largest retail marketer of propane in the
United States, based on retail gallons sold, serving almost 485,000 residential,
industrial/commercial and agricultural customers in 28 states through over 250
retail outlets.

Since its formation in 1989, Predecessor Heritage grew primarily
through acquisitions of retail propane operations and, to a lesser extent,
through internal growth. Through August 9, 2000, Predecessor Heritage completed
70 acquisitions for an aggregate purchase price of approximately $297 million.
Predecessor Heritage completed 42 of these acquisitions since its initial public
offering on June 25, 1996. During the period between August 9, 2000 and August
31, 2000, Heritage completed two additional acquisitions. Annual retail propane
sales volumes in gallons for Predecessor Heritage were 170.9 million for the
period ended August 9, 2000 and 159.9 million and 146.7 million for the fiscal
years ended August 31, 1999 and 1998, respectively.

The retail propane business of Predecessor Heritage consisted
principally of transporting propane purchased in the contract and spot markets,
primarily from major oil companies, to its retail distribution outlets and then
to tanks located on the customers' premises, as well as to portable propane
cylinders. In the residential and commercial markets, propane is primarily used
for space heating, water heating and cooking. In the agricultural market,
propane is primarily used for crop drying, tobacco curing, poultry brooding and
weed control. In addition, propane is used for certain industrial applications,
including use as an engine fuel that burns in internal combustion engines that
power vehicles and forklifts and as a heating source in manufacturing and mining
processes.

The retail propane distribution business is largely seasonal due to
propane's use as a heating source in residential and commercial buildings.
Historically, approximately two-thirds of Predecessor Heritage's retail propane
volume and in excess of 80 percent of Predecessor Heritage's EBITDA was
attributable to sales during the six-month peak heating season of October
through March. Consequently, sales and operating profits were concentrated in
Predecessor Heritage's first and second fiscal quarters. Cash flow from
operations, however, was generally greatest during the second and third fiscal
quarters when customers pay for propane purchased during the six-month
peak-heating season.

A substantial portion of Predecessor Heritage's propane was used in the
heating-sensitive residential and commercial markets causing the temperatures
realized in Predecessor Heritage's areas of operations, particularly during the
six-month peak heating season, to have a significant effect on their financial
performance. In any given

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<PAGE> 22

area, sustained warmer-than-normal temperatures will tend to result in reduced
propane use, while sustained colder-than-normal temperatures will tend to result
in greater propane use. Heritage therefore uses information on normal
temperatures in understanding how temperatures that are colder or warmer than
normal affect historical results of operations and in preparing forecasts of
future operations, which assumes that normal weather will prevail in each of the
regions in which it operates.

The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales price over propane supply costs. The
market price of propane is often subject to volatile changes as a result of
supply or other market conditions over which Heritage will have no control.
Product supply contracts are one-year agreements subject to annual renewal and
generally permit suppliers to charge posted prices (plus transportation costs)
at the time of delivery or the current prices established at major delivery
points. Since rapid increases in the wholesale cost of propane may not be
immediately passed on to retail customers, such increases could reduce gross
profits. In the past, Predecessor Heritage generally attempted to reduce price
risk by purchasing propane on a short-term basis. Predecessor Heritage had on
occasion purchased significant volumes of propane during periods of low demand,
which generally occur during the summer months, at the then current market
price, for storage both at its service centers and in major storage facilities
for future resale.

Gross profit margins vary according to customer mix. For example, sales
to residential customers generate higher margins than sales to certain other
customer groups, such as agricultural customers. Wholesale margins are
substantially lower than retail margins. In addition, gross profit margins vary
by geographical region. Accordingly, a change in customer or geographic mix can
affect gross profit without necessarily affecting total revenues.

ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS - PREDECESSOR HERITAGE

The following discussion of the historical financial condition and
results of operations of Predecessor Heritage should be read in conjunction with
the Selected Historical Financial and Operating Data and notes thereto, and the
historical financial statements and notes thereto included elsewhere herein.

The following discussion reflects for the periods indicated the results
of operations and operating data for Predecessor Heritage. Most of the increases
in the line items discussed below result from the acquisitions made by
Predecessor Heritage during the periods discussed. During the period ended
August 9, 2000, Predecessor Heritage completed 11 acquisitions for a total
purchase price of $54.9 million. In fiscal 1999, Predecessor Heritage
consummated six acquisitions for a total purchase price of $22.7 million. In
fiscal 1998, Predecessor Heritage consummated seven acquisitions for a total
purchase price of $37.1 million. These acquisitions affect the comparability of
prior period financial matters, as the volumes are not included in the prior
period's results of operations. Amounts discussed below reflect 100 percent of
the results of M-P Energy Partnership, a general partnership in which
Predecessor Heritage owns a 60 percent interest. Because M-P Energy Partnership
is primarily engaged in lower-margin wholesale distribution, its contribution to
Predecessor Heritage's net income is not significant and the minority interest
of this partnership is excluded from the EBITDA calculation. As a result of the
series of transactions between Predecessor Heritage and U.S Propane, the results
of Predecessor Heritage are included in the results of Heritage beginning August
10, 2000.

THE PERIOD SEPTEMBER 1, 1999 TO AUGUST 9, 2000 COMPARED TO FISCAL YEAR 1999

The following discussion compares the period September 1, 1999 to
August 9, 2000, an approximate eleven-month period for Predecessor Heritage to
its full fiscal year ended August 31, 1999. The pro forma amounts include the
"stand alone" results of Predecessor Heritage without the effect of the series
of transactions with U.S. Propane.

Volume. Predecessor Heritage sold 170.9 million retail gallons during
the period ended August 9, 2000, an increase of 11.0 million gallons or 6.9
percent from the 159.9 million gallons sold in fiscal 1999 primarily as a result
of acquisitions. The increases in volumes were net of the effects of one of the
warmest winters this century. The pro forma retail gallons for Predecessor
Heritage sold through August 31, 2000 were approximately 180.6 million, an
increase of 20.7 million gallons or 12.9 percent as compared to fiscal 1999.

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Predecessor Heritage also sold approximately 82.6 million wholesale
gallons during the period ended August 9, 2000, a increase of 1.5 million
gallons from fiscal 1999's 81.1 million gallons. The increase in the wholesale
volumes was attributable to the net of an increase of 2.2 million gallons in the
foreign operations of M-P Energy Partnership and the decline of .7 million
gallons in the U.S. wholesale operations.

Revenues. Total revenues for Predecessor Heritage increased $58.5
million or 31.8 percent to $242.5 million for the period ended August 9, 2000 as
compared to $184.0 million for fiscal 1999. The current period's domestic retail
propane revenues increased $41.5 million or 30.2 percent to $178.9 million as
compared to fiscal 1999's results of $137.4 million due to increased volumes and
higher selling prices. The U.S. wholesale revenues increased slightly in this
comparison to $4.3 million as compared to $3.4 million for fiscal 1999, due to
higher selling prices. Other revenues increased $1.5 million or 6.6 percent to
$24.1 million as a result of acquisitions and internal growth. Foreign revenues
increased $10.2 million for the period ended August 9, 2000, to $30.8 million as
compared to $20.6 million for the fiscal year ended August 31, 1999, primarily
as a result of higher selling prices and to a lesser degree, increased volume.
Sales price per gallon during the period ended August 9, 2000 continued to
remain above last year's level due to the higher cost of propane, which was
passed through to customers, as compared to the same period last year. Total
revenues included $4.3 million of trading activity for the period ended August
9, 2000, which Predecessor Heritage did not have last fiscal year. The pro forma
results for Predecessor Heritage for the period ended August 31, 2000, would
reflect total revenues of approximately $271.1 million, an $87.1 million
increase or 47.3 percent as compared to fiscal 1999. This pro forma amount
includes $15.9 million of trading revenues, which are new to Predecessor
Heritage as of July 1, 2000.

Cost of Sales. Total cost of sales increased $53.5 million or 61.3
percent to $140.8 million for the period ended August 9, 2000 as compared to
$87.3 million for the fiscal year ended August 31, 1999. This increase is the
result of a significant increase in the wholesale propane prices which began
increasing during the first fiscal quarter as compared to the low wholesale
costs experienced in the fiscal year ended August 31, 1999, the increase in
gallons sold and $4.3 million of trading cost of sales which were not included
in fiscal 1999 cost of sales. Retail fuel cost of sales increased $37.5 million
or 65.1 percent to $95.1 million during the period ended August 9, 2000,
compared to $57.6 million for the fiscal year ended August 31, 1999. Foreign
wholesale cost of sales also reflected an increase, increasing from $19.1
million for the fiscal year ended August 31, 1999 to $29.3 million for the
period ended August 9, 2000 due to the impact of the increase in the cost of
propane and increased volumes in this area. U. S. wholesale cost of sales
increased $.9 million as a result of the higher cost of fuel. Other cost of
sales also increased $.7 million due to an increase in other revenues. The pro
forma cost of sales for the period ended August 31, 2000, for Predecessor
Heritage is approximately $162.8 million, of which $15.8 million represents
trading cost of sales that are not included in fiscal 1999 cost of sales.

Gross Profit. Total gross profit increased $4.9 million or 5.1 percent
to $101.7 million for the period ended August 9, 2000, as compared to $96.8
million for the fiscal year ended August 31, 1999 due to the increases in
volumes sold and revenues discussed above, offset by the increase in product
costs. The pro forma gross profit for Predecessor Heritage for the twelve months
ended August 31, 2000 is approximately $108.3 million as compared to $96.8
million for the fiscal year ended August 31, 1999, an increase of $11.5 million
or 11.9 percent.

Operating Expenses. Operating expenses increased $3.9 million or 7.6
percent to $55.1 million in the period ended August 9, 2000 as compared to $51.2
million in the fiscal year ended August 31, 1999 primarily due to acquisition
related operating expenses. Pro forma operating expenses for Predecessor
Heritage for the period ended August 31, 2000 were approximately $61.3 million,
a 19.7 percent increase over fiscal 1999.

Selling, General and Administrative. Selling, general and
administrative expenses were $6.0 million for the period ended August 9, 2000, a
decrease of $.2 million from the $6.2 million reported for the fiscal year ended
August 31, 1999. Selling, general and administrative expenses for the pro forma
period ended August 31, 2000 for Predecessor Heritage were approximately $6.5
million, a $.3 million increase over fiscal 1999.

Depreciation and Amortization. Depreciation and amortization increased
$2.4 million for the period ended August 9, 2000 to $17.1 million as compared to
$14.7 million for the same period last year. This increase is primarily the
result of additional depreciation and amortization cost on the fixed assets and
intangible assets recorded in connection with acquisitions. Pro forma
depreciation and amortization for the period ended August 31, 2000 was
approximately $19.0 million.

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Operating Income. Operating income for the period ended August 9, 2000
decreased $1.1 million to $23.5 million as compared to $24.6 million for the
fiscal year ended August 31, 1999. The pro forma operating income for
Predecessor Heritage for the period ended August 31, 2000 was $21.5 million.
This decrease is primarily attributable to the increased operating expenses and
depreciation and amortization related to acquisitions, as well as lower volumes
in existing operations as a result of unusually warm weather.

Interest Expense. Interest expense increased $1.8 million or 11.3
percent to $17.7 million for the period ended August 9, 2000 as compared to
$15.9 million for the twelve-month ended August 31, 1999. The increase was
primarily due to borrowings related to acquisitions and to lesser extent,
increased borrowings as a result of higher product costs. Interest expense for
the pro forma twelve month period ended August 31, 2000, was approximately $19.5
million, a $3.6 million increase over fiscal 1999's interest expense.

Net Income. Net income for the period ended August 9, 2000 was $6.5
million as compared to the net income of $9.7 million for the fiscal year ended
August 31, 1999. The $3.2 million decrease is the result of the decrease in
operating income described above together with an increase in interest costs.
Net income for the pro forma period ended August 31, 2000 for Predecessor
Heritage was approximately $3.2 million, a $6.5 million decrease from fiscal
1999.

EBITDA. Earnings before interest, taxes, depreciation and amortization
increased $1.4 million to $42.4 million for the period ended August 9, 2000, as
compared to fiscal 1999's EBITDA of $41.0 million. The pro forma EBITDA for
Predecessor Heritage for the twelve months ended August 31, 2000 was $42.3
million. Heritage's EBITDA includes the EBITDA of investees, but does not
include the EBITDA of the minority interest of M-P Energy Partnership. EBITDA
should not be considered as an alternative to net income (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations), but provides additional
information for evaluating Heritage's ability to make the Minimum Quarterly
Distribution.

FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998

Volume. Predecessor Heritage sold 159.9 million retail gallons in
fiscal 1999, an increase of 13.2 million gallons or 9.0 percent from the 146.7
million gallons sold in fiscal 1998 primarily as a result of acquisitions. The
increases in volumes were net of the effects of one of the warmest winters this
century.

Predecessor Heritage also sold approximately 81.1 million wholesale
gallons during fiscal 1999, a decrease of 5.1 million gallons from fiscal 1998's
86.2 million gallons. The decrease in the wholesale volumes was attributable to
a decline of 1.5 million gallons in the foreign operations of M-P Energy
Partnership and the decline of 3.6 million gallons in the U.S. wholesale
operations. The warm weather this past heating season was the main factor in the
decline in these volumes.

Revenues. Total revenues for Predecessor Heritage decreased $2.0
million to $184.0 million from fiscal 1998 total revenues of $186.0 million.
Retail fuel revenues increased $1.1 million to $137.4 million while domestic
wholesale fuel revenues decreased $1.9 million and foreign wholesale revenues
decreased $4.3 million. The increase in retail fuel revenues due to increased
volumes was partially offset by the effects of lower cost of fuel in fiscal year
1999. The decreases in the U.S. and foreign wholesale revenues correspond
primarily to the decrease in volumes. Other revenues increased $3.2 million
primarily as a result of acquisitions and to a lesser extent internal growth.

Cost of Sales. Total cost of sales decreased $9.7 million, or 10.0
percent to $87.2 million for the fiscal year ended August 31, 1999 as compared
to $96.9 million for fiscal year ended August 31, 1998. Domestic cost of sales
decreased $5.0 million, or 6.8 percent to $68.1 million and foreign cost of
sales decreased $4.7 million, or 19.7 percent to $19.1 million. Retail fuel cost
of sales decreased $4.4 million to $57.6 million in fiscal 1999 due to the lower
cost of propane realized in 1999, which offset the increase in volumes. Domestic
wholesale and foreign cost of sales both decreased due to the lower cost of fuel
realized in fiscal 1999 and the decrease in volumes.

Gross Profit. Total gross profit for fiscal 1999 was $96.8 million, a
$7.7 million increase or 8.6 percent over fiscal 1998's gross profit of $89.1
million. The reduction in the cost of fuel in fiscal year 1999 was the primary
contributing factor in the increase in gross profit along with the increase in
other revenues.

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Operating Expenses. Operating expenses for fiscal 1999 increased $4.2
million or 8.9 percent to $51.2 million as compared to $47.0 million in fiscal
1998. This increase is primarily the result of increased costs related to
acquisitions.

Selling, General and Administrative. Selling, general and
administrative expense increased $.7 million or 12.7 percent to $6.2 million for
fiscal 1999 as compared to $5.5 million for fiscal 1998. The increase was the
result of additional expenses to support business growth.

Depreciation and Amortization. Depreciation and amortization was $14.7
million for fiscal 1999, a $1.0 million increase over fiscal 1998's $13.7
million. This increase is the result of additional depreciation and amortization
costs on the fixed assets and intangibles recorded in relation to acquisitions.

Operating Income. Operating income increased 7.4 percent to $24.6
million in fiscal 1999, a $1.7 million increase over fiscal 1998's $22.9
million. The increased gross profit described above offset by the increases in
operating and other expenses, also described above, resulted in this increase.

Net Income. Net income for the fiscal year ended August 31, 1999,
increased $.9 million, or 10.2 percent to $9.7 million as compared to fiscal
1998's net income of $8.8 million. This increase is the result of increased
operating income partially offset by increased interest costs related to
acquisition debt.

EBITDA. Earnings before interest, taxes, depreciation and amortization
increased $3.2 million or 8.5 percent to $41.0 million for fiscal 1999 as
compared to the restated 1998 EBITDA of $37.8 million. Fiscal 1998's EBITDA was
restated to account for the non-cash compensation expense that was previously
included. Predecessor Heritage's EBITDA includes the EBITDA of investees, but
does not include the EBITDA of the minority interest of M-P Energy Partnership.
EBITDA should not be considered as an alternative to net income (as an indicator
of operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligation), but provides additional
information for evaluating Heritage's ability to make the Minimum Quarterly
Distribution.

LIQUIDITY AND CAPITAL RESOURCES

The ability of Heritage to satisfy its obligations will depend on its
future performance, which will be subject to prevailing economic, financial,
business and weather conditions and other factors, many of which are beyond its
control. Future capital requirements of Heritage are expected to be provided by
cash flows from operating activities. To the extent future capital requirements
exceed cash flows from operating activities:

a) working capital will be financed by the working capital line of
credit and repaid from subsequent seasonal reductions in inventory
and accounts receivable

b) growth capital, mainly for customer tanks, expended will be
financed by the revolving acquisition bank line of credit; and

c) acquisition capital expenditures will be financed by revolving
acquisition bank line of credit; other lines of credit, long term
debt, issues of additional Common Units or a combination thereof.

Cash Flows - Heritage Propane Partners, L.P. (Formerly Peoples Gas)

Operating Activities. Cash provided by operating activities during the
period ended August 31, 2000, was $14.5 million compared to cash provided by
operating activities of $9.4 million in the twelve months ended December 31,
1999. The net cash provided from operations for the period ended August 31, 2000
consisted of a net loss of $3.8 million offset by the impact of working capital
provided of $12.5 million and noncash charges of $5.8 million, principally
depreciation and amortization. Working Capital items have increased over the
period ended August 31, 2000 as a result of the net effect of the formation of
U.S. Propane and the merger with Predecessor Heritage.

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<PAGE> 26
Investing Activities. Cash used in investing activities is primarily
the result of the $171.4 million spent in the formation of U.S. Propane.
Heritage completed two acquisitions during the period from August 10, 2000 and
August 31, 2000 spending $1.9 million, net of cash received, to purchase the two
propane companies. In January 2000, Peoples Gas purchased substantially all of
the assets of a company for approximately $3.8 million. These capital
expenditure amounts are reflected in the cash used in investing activities of
$183.0 million along with $3.5 million spent for maintenance needed to sustain
operations at current levels and customer tanks to support growth of operations
and other investing activities of $2.4 million.

Financing Activities. Cash provided by financing activities during the
period ended August 31, 2000 of $173.4 million was primarily from the $180.0
million received from the issuance of Senior Secured Promissory Notes in
conjunction with the merger with U.S. Propane. (See Description of
Indebtedness). The proceeds were used in conjunction with the merger with U.S.
Propane and to repay the outstanding indebtedness under the Acquisition Facility
and a portion of the Working Capital Facility assumed in the transaction with
Predecessor Heritage. Proceeds of $50.2 million were received from the sale of
Common and Subordinated Units to the former shareholders of the General Partner.
These increases were offset by debt issuance costs of $1.1 million and dividends
paid by Peoples Gas to their parent company of $1.5 million.

Cash Flows - Predecessor Heritage

Operating Activities. Cash provided by operating activities during the
period ended August 9, 2000, was $14.1 million compared to cash provided of
$23.6 million in the twelve months ended August 31, 1999. The net cash provided
from operations for the period ended August 9, 2000 consisted of net income of
$6.5 million and the impact of working capital used of $9.1 million offset by
noncash charges of $16.8 million, principally depreciation and amortization.
Accounts receivable have increased over last year as a result of the net effect
of the increase in propane costs which in part was passed on to the customers
and a larger customer base due to acquisitions. Accounts payable has also
increased due to the same related reasons of increased cost of propane and
acquisitions.

Investing Activities. Predecessor Heritage completed eleven
acquisitions during the period ended August 9, 2000 spending $46.8 million, net
of cash received, to purchase propane companies. This capital expenditure amount
is reflected in the cash used in investing activities of $58.3 million along
with $12.9 million spent for maintenance needed to sustain operations at current
levels and customer tanks to support growth of operations.

Financing Activities. Cash provided by financing activities during the
period ended August 9, 2000 of $44.6 million is primarily the result of net
proceeds received in a public offering of 1,200,000 Common Units of Heritage
Propane Partners, L.P. The net proceeds of approximately $24 million were used
to repay a portion of the outstanding indebtedness under the Acquisition
Facility that was incurred to acquire propane businesses. Other cash provided by
financing activities of $20.6 million was mainly from a net increase in the
working capital facility of $13.4 million and a net increase in the Acquisition
Facility of $31.0 million used to acquire other propane businesses. These
increases were offset by cash distributions to unitholders of $21.9 million,
payments on other long-term debt of $2.2 million and contributions by the
General Partner of $.3 million.

Financing and Sources of Liquidity

Heritage has a Bank Credit Facility, which includes a Working Capital
Facility, a revolving credit facility providing for up to $50.0 million of
borrowings to be used for working capital and other general partnership
purposes, and an Acquisition Facility, a revolving credit facility providing for
up to $50.0 million of borrowings to be used for acquisitions and improvements.
See page F-14, "Notes to Consolidated Financial Statements - 5. Working Capital
Facilities and Long-Term Debt."

Predecessor Heritage used its cash provided by operating and financing
activities to provide distributions to unitholders and to fund acquisition,
maintenance and growth capital expenditures. Acquisition capital expenditures,
which include expenditures related to the acquisition of retail propane
operations and intangibles associated with such acquired businesses, were $46.8
million for the period ended August 9, 2000 as compared to $17.9 million for
fiscal year 1999 and $23.3 million during fiscal 1998. In addition to the $46.8
million of cash expended for acquisitions during the period ended August 9,
2000, $4.1 million of Common Units and $3.6 million for notes payable on
non-compete agreements were issued in connection with certain acquisitions. In
addition to the $17.9

24
<PAGE> 27

million of cash expended for acquisitions during fiscal 1999, $1.0 million of
Common Units and $3.3 million for notes payable on non-compete agreements were
issued in connection with certain acquisitions.

Under its Partnership Agreement, Heritage will distribute to its
partners, 45 days after the end of each fiscal quarter, an amount equal to all
of its Available Cash for such quarter. Available Cash generally means, with
respect to any quarter of Heritage, all cash on hand at the end of such quarter
less the amount of cash reserves that are necessary or appropriate in the
reasonable discretion of the General Partner to (i) provide for the proper
conduct of the Heritage's business, (ii) comply with applicable law or any
Heritage debt instrument or other agreement, or (iii) provide funds for
distributions to Unitholders and the General Partner in respect of any one or
more of the next four quarters. Available Cash is more fully defined in the
Amended and Restated Agreement of Limited Partnership of Heritage Propane
Partners, L.P. previously filed as an exhibit. Distributions of Available Cash
to the holders of the Subordinated Units and the Class B Subordinated Units are
subject to the prior rights of the holders of the Common Units to receive the
Minimum Quarterly Distributions of $.50 per unit for each quarter during the
subordination period, and to receive any arrearages in the distribution of
Minimum Quarterly Distributions on the Common Units for prior quarters during
the subordination period. . The subordination period will not end earlier than
June 1, 2001 ("Subordination Period"). Heritage's commitment to its unitholders
is to distribute the increase in its cash flow while maintaining prudent
reserves for operations. Heritage raised the quarterly distribution paid on
October 16, 2000 for the fourth quarter ended August 31, 2000, to $.575 per unit
(or $2.30 annually) from the quarterly distribution of $.5625 (or $2.25
annually). The decision to increase the quarterly distribution resulted from a
review of Predecessor Heritage's past financial performance and current
projections for available cash due to the merger between U.S. Propane and
Heritage. The current distribution level includes incentive distributions
payable to the General Partner to the extent the quarterly distribution exceeds
$.55 per unit ($2.20 annually).

The assets utilized in the propane business do not typically require
lengthy manufacturing process time nor complicated, high technology components.
Accordingly, Heritage does not have any significant financial commitments for
capital expenditures. In addition, Heritage has not experienced any significant
increases attributable to inflation in the cost of these assets or in its
operations.

DESCRIPTION OF INDEBTEDNESS

Predecessor Heritage assumed $120 million principal amount of 8.55
percent Senior Secured Notes (the "Notes") at its formation in a private
placement with institutional investors. Interest is payable semi-annually in
arrears on each December 31 and June 30. The Notes have a final maturity of 15
years, with ten equal mandatory repayments of principal beginning on June 30,
2002.

On November 19, 1997, Predecessor Heritage entered into a Note Purchase
Agreement ("Medium Term Note Program"), that provides for the issuance of up to
$100 million of senior secured promissory notes if certain conditions are met.
An initial placement of $32 million (Series A and B) at an average interest rate
of 7.23 percent with an average 10 year maturity was completed at the closing of
the Medium Term Note Program. Interest is payable semi-annually in arrears on
each November 19 and May 19. An additional placement of $15 million (Series C, D
and E) at an average interest rate of 6.59 percent with an average 12 year
maturity was completed in March 1998. Interest is payable on Series C, D and E
semi-annually in arrears on each September 13 and March 13. The proceeds of the
placements were used to refinance amounts outstanding under the Acquisition
Facility.

On August 10, 2000, Heritage entered into a Note Purchase Agreement
("Senior Secured Promissory Notes") that provides for the issuance of up to $250
million of senior secured promissory notes if certain conditions are met. An
initial placement of $180 million (Series A through F) at an average rate of
8.66 percent with an average 13 year maturity was completed in conjunction with
the merger with U.S. Propane. Interest is payable quarterly commencing November
15, 2000. The proceeds were used to finance the transaction with U.S. Propane
and retire a portion of existing debt.

The agreements for each of the Notes, Medium Term Note Program, Senior
Secured Promissory Notes and Bank Credit Facility contain customary restrictive
covenants applicable to the Operating Partnership including limitations on the
level of additional indebtedness, creation of liens and sale of assets. In
addition, the Operating Partnership must maintain certain ratios of Consolidated
Funded Indebtedness to Consolidated EBITDA and Consolidated EBITDA to
Consolidated Interest Expense. These agreements also provide that the Operating

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<PAGE> 28

Partnership may declare, make or incur a liability to make a Restricted Payment
during each fiscal quarter, if: (a) the amount of such Restricted Payment,
together with all other Restricted Payments during such quarter, do not exceed
Available Cash with respect to the immediately preceding quarter; and (b) no
default or event of default exists before such Restricted Payment and after
giving effect thereto. The agreements provide that cash is required to reflect a
reserve equal to 50 percent of the interest to be paid on the notes. In
addition, in the third, second and first quarters preceding a quarter in which a
scheduled principal payment is to be made on the notes, Available Cash is
required to reflect a reserve equal to 25 percent, 50 percent and 75 percent,
respectively, of the principal amount to be repaid on such payment dates.

The Operating Partnership is in compliance with all requirements,
tests, limitations and covenants related to the Notes, Medium Term Note Program,
Senior Secured Promissory Notes and Bank Credit Facility.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Heritage has very little cash flow exposure due to rate changes for
long-term debt obligations. Predecessor Heritage primarily entered into debt
obligations to support general corporate purposes including capital expenditures
and working capital needs. Predecessor Heritage's long-term debt instruments
were typically issued at fixed interest rates. When these debt obligations
mature, Heritage may refinance all or a portion of such debt at then-existing
market interest rates which may be more or less than the interest rates on the
maturing debt.

Commodity price risk arises from the risk of price changes in the
propane inventory that Heritage buys and sells. The market price of propane is
often subject to volatile changes as a result of supply or other market
conditions over which Heritage will have no control. In the past, price changes
have generally been passed along to Predecessor Heritage's customers to maintain
gross margins, mitigating the commodity price risk. In order to help ensure
adequate supply sources are available to Heritage during periods of high demand,
Predecessor Heritage in the past has on occasion purchased significant volumes
of propane during periods of low demand, which generally occur during the summer
months, at the then current market price, for storage both at its service
centers and in major storage facilities. Heritage also attempts to minimize the
effects of market price fluctuations for its propane supply through its trading
activities and by entering into certain financial contracts. Heritage's trading
activities include both purchases and sales of product supply. Trading activity
is recorded at fair value on Heritage's balance sheet, with the changes in fair
value included in earnings.

The financial contracts entered into by Heritage are often referred to
as swap instruments. The swap instruments are a contractual agreement to
exchange obligations of money between the buyer and seller of the instruments as
propane volumes during the pricing period are purchased. The swaps are tied to a
fixed price bid by the buyer and a floating price determination for the seller
based on certain indices at the end of the relevant trading period. Heritage
enters into these swap instruments to hedge the projected propane volumes to be
purchased during each of the one-month periods during the projected heating
season.

At August 31, 2000, Heritage had outstanding propane hedges ("swap
agreements") for a total of 54.2 million gallons of propane at a weighted
average price of $.505 per gallon. The fair value of the swap agreement is the
amount at which they could be settled, based on quoted market prices. At August
31, 2000, Heritage would have received approximately $9.1 million to terminate
the swap agreements then in place. Heritage continues to monitor propane prices
and may enter into additional propane hedges in the future. Inherent in the
portfolio from the trading activities are certain business risks, including
market risk and credit risk. Market risk is the risk that the value of the
portfolio will change, either favorably or unfavorably, in response to changing
market conditions. Credit risk is the risk of loss from nonperformance by
suppliers, customers, or financial counterparties to a contract. Heritage takes
an active role in managing and controlling market and credit risk and has
established control procedures, which are reviewed on an ongoing basis. Heritage
monitors market risk through a variety of techniques, including routine
reporting to senior management. Heritage attempts to minimize credit risk
exposure through credit policies and periodic monitoring procedures.

TRADING ACTIVITIES

Heritage trades financial instruments for its own account through its
wholly owned subsidiary, Heritage Energy Resources ("Resources"). Financial
instruments utilized in connection with trading activities are accounted

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<PAGE> 29

for using the mark-to-market method. Under the mark-to-market method of
accounting, forwards, swaps, options and storage contracts are reflected at fair
value, and are shown in the consolidated balance sheet as assets and liabilities
from trading activities. Unrealized gains and losses from the financial
contracts and the impact of price movements are recognized in the income
statement, as other income (expense). Changes in the assets and liabilities from
trading activities result primarily from changes in the market prices, newly
originated transactions and the timing of settlement related to the receipt of
cash for certain contracts. Resources attempts to balance its contractual
portfolio in terms of notional amounts and timing of performance and delivery
obligations. However, net unbalanced positions can exist or are established
based on assessment of anticipated market movements.

Heritage has recorded its trading activities at fair value in
accordance with Emerging Issues Task Force Issue No. 98-10 ("EITF 98-10"),
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities". EITF 98-10 requires energy trading contracts to be recorded at fair
value on the balance sheet, with the changes in fair value included in earnings.

Notional Amounts and Terms -

The notional amounts and terms of these financial instruments as of
August 31, 2000 include fixed price payor for 898 thousand barrels and 285
thousand barrels of propane and butane, respectively and fixed price receiver of
858 thousand barrels and 285 thousand barrels of propane and butane,
respectively. Notional amounts reflect the volume of the transactions, but do
not represent the amounts exchanged by the parties to the financial instruments.
Accordingly, notional amounts do not accurately measure Heritage's exposure to
market or credit risks.

Fair Value -

The fair value of the financial instruments related to trading
activities as of August 31, 2000, were assets of $4.1 million and liabilities of
$3.7 million related to propane and butane. The income related to trading
activities for the period ended August 31, 2000, was $.7 million.

Market and Credit Risk -

Inherent in the resulting contractual portfolio is certain business
risks, including market risk and credit risk. Market risk is the risk that the
value of the portfolio will change, either favorably or unfavorably, in response
to changing market conditions. Credit risk is the risk of loss from
nonperformance by suppliers, customers, or financial counterparties to a
contract. Heritage and Heritage Energy Resources take active roles in managing
and controlling market and credit risk and have established control procedures,
which are reviewed on an ongoing basis. Heritage monitors market risk through a
variety of techniques, including routine reporting to senior management.
Heritage attempts to minimize credit risk exposure through credit policies and
periodic monitoring procedures.

The market prices used to value these transactions reflect management's
best estimate considering various factors including closing average spot prices
for the current and outer months plus a differential to consider time value and
storage costs.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Financial statements set forth on pages F-1 to F-36 of this Report
are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

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<PAGE> 30

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

HERITAGE MANAGEMENT

The Board of Directors of the General Partner appoints members of the
Board to serve on the Independent Committee with the authority to review
specific matters to which the Board of Directors believes there may be a
conflict of interest in order to determine if the resolution of such conflict
proposed by the General Partner is fair and reasonable to Heritage Propane
Partners, L.P. Any matters approved by the Independent Committee will be
conclusively deemed to be fair and reasonable to Heritage Propane Partners,
L.P., approved by all partners of Heritage Propane Partners, L.P. and not a
breach by the General Partner or its Board of Directors of any duties they may
owe Heritage Propane Partners, L.P. or the Unitholders. Bill W. Byrne, Stephen
L. Cropper and J. Charles Sawyer currently serve as the members of the
Independent Committee.

In April 2000, in order to avoid and resolve any potential conflict of
interest between the shareholders of the General Partner and Heritage Propane
Partners, L.P. and its Unitholders in conjunction with the transactions with
U.S. Propane, the Board of Directors of the General Partner appointed
independent directors J.T. Atkins and Stephen L. Cropper to serve as members of
a Special Independent Committee. The Special Independent Committee was granted
the authority to evaluate and negotiate the transactions with U.S. Propane on
behalf of Heritage Propane Partners, L.P., to retain independent counsel and
other advisors for the purpose of receiving a fairness opinion and to recommend
to the Board of Directors whether the transactions should be completed and the
terms thereof.

The Board of Directors of the General Partner has appointed persons who
are neither officers nor employees of Heritage Propane Partners, L.P. or any
affiliates of Heritage Propane Partners, L.P. to serve on its Audit Committee.
The Audit Committee has the authority and responsibility to review external
financial reporting of Heritage Propane Partners, L.P., to engage Heritage
Propane Partners, L.P.'s independent accountants and to review Heritage Propane
Partners, L.P.'s procedures for internal auditing and the adequacy of Heritage
Propane Partners, L.P.'s internal accounting controls. Any matters approved by
the Audit Committee will be conclusively deemed to be fair and reasonable to
Heritage Propane Partners, L.P., approved by all partners of Heritage Propane
Partners, L.P. and not a breach by the General Partner or its Board of Directors
of any duties they may owe Heritage Propane Partners, L.P. or the Unitholders.
Currently, Bill W. Byrne, Stephen L. Cropper and J. Charles Sawyer serve as
members of the Audit Committee

Heritage does not directly employ any of the persons responsible for
managing or operating the business. At August 31, 2000, the General Partner
employed 1,889 full time individuals.

DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER

The following table sets forth certain information with respect to the
executive officers and members of the Board of Directors of the General Partner.
Executive officers and directors are elected for one-year terms.

Name Position with General Partner
---- -----------------------------

<S> <C>
H. Michael Krimbill(1) President, Chief Executive Officer and Director

James E. Bertelsmeyer Chairman of the Board and Director

R. C. Mills Executive Vice President and Chief Operating
Officer

Larry J. Dagley(3) Vice President, Chief Financial Officer, Secretary &
Treasurer
</TABLE>

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<PAGE> 31

Name Position with General Partner
---- -----------------------------
<S> <C>
Bradley K, Atkinson Vice President of Corporate Development

Mark A. Darr(4) Vice President - Southern Operations

Thomas H. Rose(4) Vice President - Northern Operations

Curtis L. Weishahn(4) Vice President - Western Operations

Bill W. Byrne Director of the General Partner

J. Charles Sawyer Director of the General Partner

Stephen L. Cropper(2) Director of the General Partner

J. Patrick Reddy(1) Director of the General Partner

Tom S. Hawkins, Jr.(1) Director of the General Partner

Royston K. Eustace(1) Director of the General Partner

William N. Cantrell(1) Director of the General Partner

Ware F. Schiefer(1) Director of the General Partner

Clayton H. Preble(1) Director of the General Partner

David J. Dzuricky(1) Director of the General Partner

Paul Shlanta(1) Director of the General Partner
</TABLE>

(1) Elected to the Board of Directors August 2000.
(2) Elected to the Board of Directors April 2000.
(3) Elected Vice President and Chief Financial Officer August 2000.
(4) Elected an Executive Officer July 2000.

H. Michael Krimbill. Before joining Heritage in 1990 as Vice President
and Chief Financial Officer, Mr. Krimbill, age 47, was Treasurer of Total
Petroleum, Inc. ("Total"). Total was a publicly traded, fully integrated oil
company located in Denver, Colorado. Mr. Krimbill was promoted to President of
Heritage April 1999 and to Chief Executive Officer in March 2000. Mr. Krimbill
is a director of the National Propane Gas Association.

James E. Bertelsmeyer. Mr. Bertelsmeyer, age 58, has 25 years of
experience in the propane industry, including six years as President of Buckeye
Gas Products Company, at the time the nation's largest retail propane marketer.
Mr. Bertelsmeyer served as Chief Executive Officer of Heritage since its
formation until the election of H. Michael Krimbill in March 2000. Mr.
Bertelsmeyer began his career with Conoco Inc. where he spent ten years in
positions of increasing responsibility in the pipeline and gas products
departments. Mr. Bertelsmeyer has been a Director of the National Propane Gas
Association for the past 24 years, and is a past president of the National
Propane Gas Association.

R. C. Mills. Mr. Mills, age 63, has 42 years of experience in the
propane industry. Mr. Mills joined Heritage in 1991 as Executive Vice President
and Chief Operating Officer. Before coming to Heritage, Mr. Mills spent 25 years
with Texgas Corporation and its successor, Suburban Propane, Inc. At the time he
left Suburban in 1991, Mr. Mills was Vice President of Supply and Wholesale.

Larry J. Dagley. Mr. Dagley, age 52, became Heritage's Vice President
and Chief Financial Officer in August 2000, following with transactions with
U.S. Propane. Mr. Dagley was Chief Operating Officer of U.S.

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<PAGE> 32

Propane, LLC. Mr. Dagley has also served as Executive Vice President and Chief
Financial Officer of Atmos Energy Corporation, a Dallas-based gas distribution
company; Senior Vice President and Chief Financial Officer of Pacific
Enterprises, a California-based holding company whose primary subsidiary is
Southern California Gas Company; Senior Vice President and Chief Financial
Officer for Transco Energy Company, a Houston-based natural gas pipeline
company; and as Audit Partner with Arthur Andersen & Co., where he supervised
audit and financial consulting engagements in the energy industry.

Bradley K. Atkinson. Mr. Atkinson, age 45 joined Heritage on April 16,
1998 as Vice President of Administration. Prior to joining Heritage, Mr.
Atkinson was with MAPCO/Thermogas for 12 years, eight of which were in the
acquisitions and business development of Thermogas. Mr. Atkinson is a CPA and
received an undergraduate business degree form Pittsburgh State University and
an MBA from Oklahoma State University. Mr. Atkinson was promoted to Vice
President of Corporate Development in August 2000.

Mark A. Darr. Mr. Darr, age 40, has 17 years in the propane industry.
Mr. Darr joined Heritage in 1991 and has held various positions including
District Manager and Vice President and Regional Manager before his election to
Vice President - Southern Operations, in July 2000. Prior to joining Heritage,
Mr. Darr held various positions with Texgas Corporation, and its successor,
Suburban Propane. He is currently serving as President of the Florida Propane
Gas Association and is the Florida Director of the National Propane Gas
Association. Mr. Darr received his undergraduate business degree from the
University of Tennessee.

Thomas H. Rose. Mr. Rose, age 56, joined Heritage in November 1994 as
Vice President and Regional Manager. Mr. Rose has 26 years in the propane
industry including the position of President of a family owned propane business.
Prior to joining Heritage, Mr. Rose held Regional Manager positions with Texgas
Corporation, and its successor, Suburban Propane and later Vision Energy of
Florida. Mr. Rose earned a BBA degree from the University of Miami and spent
four years in the U.S. Navy. Mr. Rose was elected Vice President - Northern
Operations in July 2000.

Curtis L. Weishahn. Mr. Weishahn, age 48, has 23 years experience in
the propane industry. Mr. Weishahn joined Heritage in 1995 as Vice President and
Regional Manager and was elected Vice President - Western Operations in July
2000. Prior to joining Heritage, Mr. Weishahn owned his own propane business and
previously spent 12 years with AmeriGas/CalGas when at the time of departing, he
was Director of Marketing/Strategic Development for the Western United States.

Bill W. Byrne. Mr. Byrne, age 70, served as Vice President of Warren
Petroleum Company, the gas liquids division of Chevron Corporation, from
1982-1992. Since that time Mr. Byrne has served as the principal of Byrne &
Associates, L.L.C., a gas liquids consulting group based in Tulsa, Oklahoma. Mr.
Byrne has been a Director of Heritage since 1992 and is Chairman of the Audit
Committee and a member of the Independent Committee. Mr. Byrne is a past
president and Director of the National Propane Gas Association.

J. Charles Sawyer. Mr. Sawyer, age 63, has served as President and
Chief Executive Officer of Computer Energy, Inc., a provider of software of the
propane industry, since 1981. Mr. Sawyer was formerly Chief Executive Officer of
Sawyer Gas Co., a regional propane distributor that was purchased by Heritage in
1991. Mr. Sawyer has served as a director of Heritage since 1991 and is a member
of the Audit Committee and the Independent Committee. Mr. Sawyer is a past
president and Director of the National Propane Gas Association.

Stephen L. Cropper. Mr. Cropper, age 50 was elected to the Board of
Directors of Heritage in April 2000. Mr. Cropper spent 25 years with The
Williams Companies before retiring in 1998. At the time of his retirement, Mr.
Cropper was President and Chief Executive Officer of Williams Energy Services.
Mr. Cropper is currently involved in consulting and investing in the energy
field. Mr. Cropper is a member of both the Independent and the Audit Committee.

J. Patrick Reddy. Mr. Reddy, age 48, is currently the Senior Vice
President and Chief Financial Officer of Atmos Energy Corporation ("Atmos").
Prior to being named to that position, Mr. Reddy served as Atmos' Senior Vice
President, Chief Financial Officer and Treasurer from April 2000 to September
2000, and prior to that time he served as Atmos' Vice President and Treasurer.
Prior to joining Atmos in August 1998 as Vice President, Corporate Development,
Mr. Reddy held a number of management positions with Pacific Enterprises, Inc.
Mr. Reddy was elected a Director of Heritage in August 2000.

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<PAGE> 33
Tom S. Hawkins, Jr. Mr. Hawkins, age 44, is currently the President of
Energas Company, a division of Atmos Energy Corporation. Prior thereto, he was
Vice President - Planning of Atmos Energy Corporation from September 1997
through October 2000, and prior to that time he served as the Vice President -
Finance of United Cities Gas Company from June 1988 through September 1997. Mr.
Hawkins was elected a Director of Heritage in August 2000.

Royston K. Eustace. Mr. Eustace, age 59, has been the Senior Vice
President of Business Development for TECO Energy, Inc. ("TECO") since 1998. Mr.
Eustace joined TECO in 1987 as its Vice President of Strategic Planning and
Business Development. Mr. Eustace also serves as President of TECO Coalbed
Methane and TECO Oil & Gas. Mr. Eustace was elected a Director of Heritage in
August 2000.

William N. Cantrell. Mr. Cantrell, age 48, currently serves as the
President of TECO Solutions. Prior thereto, he served as the President of Bosek,
Gibson & Associates. Mr. Cantrell also serves as the President of Peoples Gas
and Peoples Gas System, having been named to each of those positions in 1997.
Mr. Cantrell began his association with the TECO companies in 1995 when he was
named Vice President Energy Supply of Tampa Electric Company. Mr. Cantrell was
elected a Director of Heritage in August 2000.

Ware F. Schiefer. Mr. Schiefer, age 63, has been the President and
Chief Executive Officer of Piedmont Natural Gas Company, Inc. ("Piedmont") since
February 2000. Mr. Schiefer also serves as a director of Piedmont. From February
1999 to February 2000, her served as Piedmont's Chief Operating Officer. From
1995 to 1999, Mr. Schiefer served as Executive Vice President, and prior to that
time her served as Piedmont's Vice President - Marketing and Gas Supply. Mr.
Schiefer was elected a Director of Heritage in August 2000.

Clayton H. Preble. Mr. Preble, age 53 has been the Senior Vice
President of AGL Resources, Inc. ("AGL") since June 1999. Prior to his current
position, Mr. Preble served as the Senior Vice President - Direct Marketing of
SouthStar Energy Services, L.L.C. and as the President of The Energy Spring,
Inc., both affiliates of AGL. Mr. Preble joined AGL in 1970 and served in
various executive capacities prior to these positions. Mr. Preble was elected a
Director of Heritage in August 2000.

David J. Dzuricky. Mr. Dzuricky age 49, is the Senior Vice President
and Chief Financial Officer of Piedmont Natural Gas Company and has served in
that capacity since May 1995. Prior thereto, Mr. Dzuricky held a variety of
executive officer positions with Consolidated Natural Gas Company during the
period from 1982 to 1995. Mr. Dzuricky was elected a Director of Heritage in
August 2000.

Paul Shlanta. Mr. Shlanta, age 43, is Senior Vice President and General
Counsel of AGL Resources, Inc., and has held that position since September 1998.
Prior thereto, he was a partner in the law firm of Rowe, Fultz & Martin, P.C. in
Atlanta, Georgia. Mr. Shlanta also serves as a director of SouthStar Energy
Services, L.L.C.

COMPENSATION OF THE GENERAL PARTNER.

The General Partner does not receive any management fee or other
compensation in connection with its management of Heritage. The General Partner
and its affiliates performing services for Heritage are reimbursed at cost for
all expenses incurred on behalf of Heritage, including the costs of compensation
allocable to Heritage, and all other expenses necessary or appropriate to the
conduct of the business of, and allocable to, Heritage.

The General Partner has a 1.9899 percent general partner interest in
the combined operations of Heritage and the OLP.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES AND EXCHANGE ACT

Section 16(a) of the Securities and Exchange Act of 1934 requires the
General Partner's officers and directors, and persons who own more than 10
percent of a registered class of Heritage's equity securities, to file reports
of beneficial ownership and changes in beneficial ownership with the Securities
and Exchange Commission ("SEC"). Officers, directors and greater than 10 percent
unitholders are required by SEC regulations to furnish the General Partner with
copies of all Section 16(a) forms.

31
<PAGE> 34

Based solely on its review of the copies of such forms received by the
General Partner, or written representations from certain reporting persons that
no Form 5's were required for those persons, the General Partner believes that
during fiscal year ending August 31, 2000, all filing requirements applicable to
its officers, directors, and greater than 10 percent beneficial owners were met
in a timely manner other than one late filing for each of Bradley K. Atkinson,
Bill W. Byrne, Stephen L. Cropper, G.A. Darr, Mark A. Darr, Thomas H. Rose,
Curtis L. Weishahn, and two late filings for Heritage Holdings, Inc. J.T. Atkins
made one corrective filing for the previous year and J. Charles Sawyer made one
corrective filing for the current fiscal year.

ITEM 11. EXECUTIVE COMPENSATION.

The following table sets forth the annual salary, bonus and all other
compensation awards and payouts for each of the past three fiscal years earned
by: (i) all persons serving as the General Partner's Chief Executive Officer
during fiscal year 2000; (ii) the four next highly compensated executive
officers other than the Chief Executive Officer, who served as executive
officers of the General Partner during the 2000 fiscal year; and (iii) any
persons who would have been reported had they been an executive officer of the
General Partner at the end of the 2000 fiscal year.

Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation(5) Compensation(6)
----------------------------------- ---------- ------------- ------------ ----------------- -----------------

<S> <C> <C> <C> <C> <C>
James E. Bertelsmeyer 2000 $ 387,297 $ -- $ 695 $ 129,306
Chairman of the Board(1) 1999 356,150 -- 1,078 --
1998 355,756 -- 2,048 --

H. Michael Krimbill 2000 $ 251,678 $ -- $ 193 $ 214,838
President and Chief 1999 211,255 -- 267 --
Executive Officer(2) 1998 185,000 -- 357 --

R. C. Mills 2000 $ 244,732 $ -- $ 822 $ 129,306
Executive Vice President 1999 234,770 -- 1,257 --
and Chief Operating Officer 1998 225,000 -- 2,201 --

G.A. Darr(3) 2000 $ 123,994 $ -- $ 604 $ 137,859
Former Vice President - 1999 136,570 -- 1,071 --
Corporate Development 1998 150,756 -- 1,933 --

Bradley K. Atkinson 2000 $ 134,836 $ 125,000 $ 72 $ 131,718
Vice President - 1999 128,910 -- 125 --
Corporate Development 1998 125,000 -- -- --

Curtis Weishahn(4) 2000 $ 115,334 $ 25,000 $ 63 $ 94,337
Vice President - 1999 109,769 29,508 101 --
Western Operations 1998 92,244 8,518 119 --

Thomas H. Rose(4) 2000 $ 103,892 $ 40,980 $ 139 $ 31,044
Vice President - 1999 100,000 166 189 --
Northern Operations 1998 94,272 17,323 241 --
</TABLE>

(1) Mr. Bertelsmeyer served as Chief Executive Officer of Heritage until
March 2000.

(2) Mr. Krimbill was named Chief Executive Officer of Heritage in March
2000.

32
<PAGE> 35

(3) Mr. Darr is a former executive officer. He resigned as Vice President
of Corporate Development in June 2000.

(4) Mr. Weishahn and Mr. Rose were named executive officers in July 2000.

(5) Consists of life insurance premiums.

(6) Consists of the value of Common Units issued pursuant to the vesting
rights of the Restricted Unit Plan.

EMPLOYMENT AGREEMENTS

The General Partner has entered into employment agreements (the
"Employment Agreements") with Messrs. Bertelsmeyer, Krimbill, Mills, Dagley,
Atkinson, Weishahn, Rose and M. Darr. The summary of such Employment Agreements
contained herein does not purport to be complete and is qualified in its
entirety by reference to the Employment Agreements, which have been filed as
exhibits to this Report.

The Employment Agreement for Mr. Bertelsmeyer has an initial term of
two years. The Employment Agreements for Messrs. Krimbill, Mills, Dagley,
Atkinson, Weishahn, Rose and M. Darr (each an "Executive") have an initial term
of three years. However, for each Executive with the three year Employment
Agreement, beginning on the second anniversary of the effective date and on each
day thereafter the expiration date shall be automatically extended one
additional day unless either party (i) shall give written notice to the other
that the Term shall cease to be so extended beginning immediately after the date
of such notice or (ii) shall give a Notice of Termination to the other by
delivering notice to the Chairman of the Board, or in the event of the
Executive's death. The Employment Agreements provide for an annual base salary
of $193,500, $350,000, $335,000, $325,000, $200,000, $150,000, $135,000 and
$135,000 ("Base Salary") for each of Messrs. Bertelsmeyer, Krimbill, Mills,
Dagley, Atkinson, Weishahn, Rose and Darr, respectively. The Board shall review
the Base Salary at least annually and may adjust the amount of the Base Salary
at any time as the Board may deem appropriate in its sole discretion; provided,
however, that in no event may the Base Salary be decreased below the above
stated amount without the prior written consent of the employee. The Employment
Agreements provide the Executives to participate in bonus and incentive plans.
The Employment Agreements also provide for the Executive and, where applicable,
the Executive's dependents, to have the right to participate in benefit plans
made available to other executives of Heritage including the Restricted Unit
Plan described below.

The Employment Agreements provide that in the event of a change of
control of the ownership of the General Partner or in the event an Executive (i)
is involuntarily terminated (other than for "misconduct" or "disability") or
(ii) voluntarily terminates employment for "good reason" (as defined in the
agreements), such Executive will be entitled to continue receiving his base
salary and to participate in all group health insurance plans and programs that
may be offered to executives of the General Partner for the remainder of the
term of the Employment Agreement or, if earlier, the Executive's death, all
restrictions on the transferability of the Units (as defined in the Subscription
Agreement dated as of June 15, 2000, previously filed as an exhibit) purchased
by such employee on the Closing shall automatically lapse in full on such date,
and the Executive will vest immediately in the Minimum Award of the number of
Common Units to which the Executive is entitled under the Long Term Incentive
Plan to the extent not previously awarded. Each Employment Agreement also
provides that if any payment received by an Executive is subject to the 20
percent federal excise tax under Section 4999(a) of the Code of the Internal
Revenue Service, the Payment will be grossed up to permit the Executive to
retain a net amount on an after-tax basis equal to what he would have received
had the excise tax and all other federal and state taxes on such additional
amount not been payable. In addition, each Employment Agreement contains
non-competition and confidentiality provisions.

RESTRICTED UNIT PLAN

The General Partner has adopted the Amended and Restated Restricted
Unit Plan dated August 10, 2000 (the "Restricted Unit Plan"), filed as an
exhibit hereto, for certain directors and key employees of the General Partner
and its affiliates. The Restricted Unit Plan covers rights to acquire 146,000
Common Units. The right to acquire the Common Units under the Restricted Unit
Plan, including any forfeiture or lapse of rights are available for grant to key
employees on such terms and conditions (including vesting conditions) as the
Compensation Committee of the General Partner shall determine. Each director
shall automatically receive a Director's grant with respect to 500

33
<PAGE> 36

Common Units on each September 1 that such person continues as a director. Newly
elected directors are also entitled to receive a grant with respect to 2,000
Common Units upon election or appointment to the Board. Messrs. Bertelsmeyer and
Krimbill are not entitled to receive a Director's Grant of Common Units but may
receive Common Units as employees. Directors who are employees of TECO, Atmos,
Piedmont or AGL or their affiliates are not entitled to receive a Director's
grant of Common Units. Generally, the rights to acquire the Common Units will
vest upon the later to occur of (i) the three-year anniversary of the grant
date, or (ii) the conversion of the Subordinated Units to Common Units. Grants
made after the conversion of all of the Subordinated Units to Common Units shall
vest on such terms as the Committee may establish, which may include the
achievement of performance objectives. In the event of a "change of control" (as
defined in the Restricted Unit Plan), all rights to acquire Common Units
pursuant to the Restricted Unit Plan will immediately vest.

Common Units to be delivered upon the "vesting" of rights may be Common
Units acquired by the General Partner in the open market, Common Units already
owned by the General Partner, Common Units acquired by the General Partner
directly from Heritage, or any other person, or any combination of the
foregoing. Although the Restricted Unit Plan permits the grant of distribution
equivalent rights to key employees, it is anticipated that until such Common
Units have been delivered to a participant, such participant shall not be
entitled to any distributions or allocations of income or loss and shall not
have any voting or other rights in respect of such Common Units.

The Board of Heritage in its discretion may terminate the Restricted
Unit Plan at any time with respect to any Common Units for which a grant has not
therefore been made. The Board will also have the right to alter or amend the
Restricted Unit Plan or any part thereof from time to time; provided, however,
that no change in any Restricted Unit may be made that would impair the rights
of the participant without the consent of such participant; and provide further,
that, during the Subordination Period, without the approval of a majority of the
Unitholders no amendment or alteration will be made that would (i) increase the
total number of Units available for awards under the Restricted Unit Plan; (ii)
change the class of individuals eligible to receive Restricted Unit awards;
(iii) extend the maximum period which Restricted Units may be granted under the
Restricted Unit Plan; or (iv) materially increase the cost of the Restricted
Unit Plan.

The issuance of the Common Units pursuant to the Restricted Unit Plan
is intended to serve as a means of incentive compensation for performance and
not primarily as an opportunity to participate in the equity appreciation in
respect of the Common Units. Therefore, no consideration will be payable by the
plan participants upon vesting and issuance of the Common Units. As of August
31, 2000, 80,800 Restricted Units had been granted to non-employee directors and
key employees. All of these units vested pursuant to the change of control
provision of the Restricted Unit Plan as the result of U.S. Propane acquiring
all of the outstanding common stock of Heritage Holdings, Inc., with the
exception of 5,000 units of members of the Special Independent Committee who
waived their vesting rights. Compensation expense of $549,000 was recognized in
the financial statements for the period ended August 31, 2000, which recorded
the remaining deferred expense related to the vested units. See Note 7 of the
Consolidated Financial Statements, which begin on page F-1 of this Report.
Compensation expense of $365,808 was recognized in Predecessor Heritage's
financial statements for the period ended August 9, 2000 and $358,000 and
$215,000 for fiscal years 1999 and 1998, respectively. See Note 6 of Predecessor
Heritage's Consolidated Financial Statements that begin on page F-20 of this
Report.

The following table sets forth the number of grants awarded to persons
serving as executive officers of the Company in the last fiscal year that
resulted in the issuance of Common Units pursuant to the change of control
provision under the Restricted Unit Plan:

Number of Performance or
Shares, Units or Other Period Until
Name Other Rights(#) Maturation or Payout
---- ---------------- --------------------

<S> <C> <C>
James E. Bertelsmeyer 2,000 (1)
H. Michael Krimbill 2,000 (1)
R.C. Mills 2,000 (1)
G.A. Darr(2) 2,000 (1)
Bradley K. Atkinson 2,000 (1)
Curtis Weishahn 1,000 (1)
Thomas H. Rose 500 (1)
Mark A. Darr 500 (1)
</TABLE>

34
<PAGE> 37

(1) In accordance with the change in control provision of the Restricted Unit
Plan, these Units and the Units representing grants awarded in previous
years vested on August 10, 2000 when U.S. Propane acquired all of the
outstanding stock of Heritage Holdings, Inc.

(2) Mr. Darr is not an executive officer as of August 31, 2000, having
resigned as such in June 2000.

COMPENSATION OF DIRECTORs

Heritage currently pays no additional remuneration to its employees for
serving as directors. Under the Restricted Unit Plan, directors other than
directors who are employees of Heritage Holdings, Inc., Atmos, AGL, TECO and
Piedmont, or their affiliates, will be awarded 500 of these Restricted Units
annually, and newly elected directors receive an initial award of 2,000
Restricted Units. The General Partner will pay each of its non-employee and
nonaffiliated directors $10,000 annually, plus $1,000 per Board meeting attended
and $500 per committee meeting attended. All expenses associated with
compensation of directors will be reimbursed to the General Partner by Heritage.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Compensation of the executive officers of Heritage is determined by the
Compensation Committee of the Board of Directors of the General Partner. J.T.
Atkins, James E. Bertelsmeyer, Bill W. Byrne and J. Charles Sawyer served as
members of the Compensation Committee. Mr. Bertelsmeyer, Heritage's Chairman of
the Board, participated in deliberations of the compensation Committee
concerning executive officer compensation, but did not participate in
deliberations concerning his own compensation.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of November 3,
2000, regarding the beneficial ownership by certain beneficial owners, all
directors and named executive officers of the General Partner and Heritage, each
of the named executive officers and all directors and executive officers of the
General Partner as a group, of (i) the Common and Subordinated Units of Heritage
Propane Partners, L.P., and (ii) the Common Stock of the General Partner. The
General Partner knows of no other person beneficially owning more than 5 percent
of the Common Units.

HERITAGE PROPANE PARTNERS, L.P. UNITS

Name and Address(5) Beneficially Percent of
Title of Class of Beneficial Owner Owned(1) Class
-------------- ---------------------- ----------------- ----------
<S> <C> <C> <C>
Common Units James E. Bertelsmeyer(2) 133,001 1.36%
H. Michael Krimbill(2) 101,500 1.04%
R.C. Mills(2) 94,000 *
G.A. Darr(6) 170,210 1.74%
Larry J. Dagley 5,000 *
Bradley K. Atkinson 13,100 *
Thomas H. Rose 23,230 *
Curtis Weishahn 29,230 *
Mark A. Darr 20,530 *
Bill W. Byrne 66,157 *
J. Charles Sawyer 66,282 *
Stephen L. Cropper 5,000 *
J. Patrick Reddy -- *
Tom S. Hawkins, Jr. -- *
Royston K. Eustace -- *
William N. Cantrell -- *
Ware F. Schiefer -- *
David J. Dzuricky -- *
Clayton H. Preble -- *
Paul Shlanta -- *

All Directors and Executive
Officers as a group
(20 persons) 727,240 7.46%

Heritage Holdings, Inc.(3) 2,149,857 22.06%
U.S. Propane L.P.(3) 372,392 3.82%

Subordinated Units(4) Heritage Holdings, Inc.(3) 1,851,471 100%

Class B Subordinated Units James E. Bertelsmeyer 946,946 68.49%
H. Michael Krimbill 211,059 15.27%
R.C. Mills 224,509 16.24%
</TABLE>

35
<PAGE> 38

HERITAGE HOLDINGS, INC. COMMON STOCK

Name and Address Beneficially Percent of
Title of Class of Beneficial Owner Owned(1) Class
-------------- --------------------- ----------------- ----------

<S> <C> <C> <C>
Common Stock U.S. Propane(3) 534,787.84 100%
</TABLE>

* Less than one percent (1 percent)

(1) Beneficial ownership for the purposes of the foregoing table is defined by
Rule 13d-3 under the Securities Exchange Act of 1934. Under that rule, a
person is generally considered to be the beneficial owner of a security if
he has or shares the power to vote or direct the voting thereof ("Voting
Power") or to dispose or direct the disposition thereof ("Investment
Power") or has the right to acquire either of those powers within sixty
(60) days.

(2) Each of Messrs. Bertelsmeyer, Mills and Krimbill shares Voting and
Investment Power on a portion of their respective Units with his spouse.

(3) U.S. Propane, L.P. owns 100 percent of the common stock of Heritage
Holdings, Inc. U.S. Propane, L.L.C. is the general partner of U.S.
Propane, L.P. The members of U.S. Propane L.L.C. and their respective
membership interest is as follows:

<TABLE>

<S> <C>
AGL Energy Corporation 22.36%
United Cities Propane Gas, Inc. 18.97%
TECO Propane Ventures, LLC 37.98%
Piedmont Propane Company 20.69%
</TABLE>

(4) The directors of the General Partner share Voting and Investment Power of
the Subordinated Units.

(5) The address for Heritage Holdings, Inc., Mr. Krimbill, Mr. Dagley and Mr.
Atkinson is 8801 S. Yale, Suite 310, Tulsa, Oklahoma 74137. The address
for U.S. Propane is 702 N. Franklin Street, Tampa, Florida 33602. The
address for each of Messrs. Bertelsmeyer, M. Darr, Rose and Mills is 5000
Sawgrass Village Circle, Suite 4, Ponte Vedra Beach, Florida 32082. The
address for Mr. Weishahn is 70 Autumn Lane, Reno Nevada 89511. The address
for G.A. Darr is 2830 Halle Parkway, Collerville, Tennessee 38017.

(6) G.A. Darr was not an executive officer as of August 31, 2000, having
resigned as such in June 2000.

36
<PAGE> 39

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT OF FORM 8-K.

(a) 1. FINANCIAL STATEMENTS.

See "Index to Financial Statements" set forth on page F-1.

2. FINANCIAL STATEMENT SCHEDULES.

None.

3. EXHIBITS.

See "Index to Exhibits" set forth on page E-1.

(b) REPORTS OF FORM 8-K.

Heritage Propane Partners, L.P. filed two reports on Form 8-K during
the three months ended August 31, 2000 and one report subsequent to
that date. Form 8-K dated August 23, 2000, was filed reporting the
announcement of the transaction with U.S. Propane on August 10, 2000.
The report described the transaction and attached as exhibits, the
First Amendment to Amended and Restated Agreement of Limited
Partnership of Heritage Propane Partners, L.P., the Third Amendment
dated as of August 10, 2000 to First Amended and Restated Credit
Agreement, the Fourth Amendment Agreement dated August 10, 2000 to June
25, 1996 Note Purchase Agreement and November 19, 1997 Note Purchase
Agreement, the Fourth Amendment Agreement dated August 10, 2000 to
November 19, 1997 Note Purchase Agreement and June 25, 1996 Note
Purchase Agreement, the Contribution Agreement dated June 15, 2000
among US Propane, L.P., Heritage Operating, L.P. and Heritage Propane
Partners, L.P., the Amendment dated August 10, 2000 to June 15, 2000
Contribution Agreement, the Subscription Agreement dated June 15, 2000
between Heritage Propane Partners, L.P. and individual investors, the
Amendment dated August 10, 2000 to June 15, 2000 Subscription
Agreement, the Note Purchase Agreement dated as of August 10, 2000 and
the Press Release dated August 10, 2000.

Form 8-K/A to the August 23, 2000 Form 8-K was filed on August 25, 2000
to report the change of control of Heritage Propane Partners, L.P. due
to the transaction with U.S. Propane. On October 24, 2000, Form 8-K/A
was filed to amend the Form 8-K of Heritage Propane Partners, L.P.
dated August 23, 2000 and filed with the Securities and Exchange
Commission on August 23, 2000. That Form 8-K reported under Item 2 the
acquisition of assets from U.S. Propane, L.P. This report provided the
financial statements and the pro forma financial information as
required under Item 7. This Form 8-K/A also amended the Date of Report
(Date of earliest event reported) to be August 10, 2000.

37
<PAGE> 40

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

HERITAGE PROPANE PARTNERS, L.P.

By Heritage Holdings, Inc.
(General Partner)

By: /s/ H. Michael Krimbill
--------------------------------
H. Michael Krimbill
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:

Signature Title Date
<S> <C> <C>
/s/ H. Michael Krimbill President and Chief November 28, 2000
----------------------------- Executive Officer and Director
H. Michael Krimbill (Principal Executive Officer)

/s/ James E. Bertelsmeyer Chairman of the Board and November 28, 2000
----------------------------- Director
James E. Bertelsmeyer

/s/ Larry J. Dagley Vice President and Chief November 28, 2000
----------------------------- Financial Officer (Principal Financial
Larry J. Dagley and Accounting Officer)

/s/ Bill W. Byrne Director November 28, 2000
-----------------------------
Bill W. Byrne

/s/ J. Charles Sawyer Director November 28, 2000
-----------------------------
J. Charles Sawyer

/s/ Stephen L. Cropper Director November 28, 2000
-----------------------------
Stephen L. Cropper

/s/ J. Patrick Reddy Director November 28, 2000
-----------------------------
J. Patrick Reddy

/s/ Tom S. Hawkins, Jr. Director November 28, 2000
-----------------------------
Tom S. Hawkins, Jr.

/s/ Royston K. Eustace Director November 28, 2000
-----------------------------
Royston K. Eustace

/s/ William N. Cantrell Director November 28, 2000
-----------------------------
William N. Cantrell

/s/ Ware F. Schiefer Director November 28, 2000
-----------------------------
Ware F. Schiefer
</TABLE>

<PAGE> 41

Signature Title Date
<S> <C> <C>
/s/ David J. Dzuricky Director November 28, 2000
-----------------------------
David J. Dzuricky

/s/ Clayton H. Preble Director November 28, 2000
-----------------------------
Clayton H. Preble

/s/ Paul Shlanta Director November 28, 2000
-----------------------------
Paul Shlanta
</TABLE>

<PAGE> 42

INDEX TO EXHIBITS

The exhibits listed on the following Exhibit Index are filed as part of
this Report. Exhibits required by Item 601 of Regulation S-K, but which are not
listed below, are not applicable.

EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
(1) 3.1 Agreement of Limited Partnership of Heritage Propane
Partners, L.P.

(10) 3.1.1 Amendment No. 1 to Amended and Restated Agreement of
Limited Partnership of Heritage Propane Partners, L.P.

(1) 3.2 Agreement of Limited Partnership of Heritage Operating,
L.P.

(*) 3.2.1 Amendment No. 1 to Amended and Restated Agreement of
Limited Partnership of Heritage Operating, L.P.

(7) 10.1 First Amended and Restated Credit Agreement with Banks
Dated May 31, 1999

(8) 10.1.1 First Amendment to the First Amended and Restated Credit
Agreement dated as of October 15, 1999

(9) 10.1.2 Second Amendment to First Amended and Restated Credit
Agreement dated as of May 31, 2000

(10) 10.1.3 Third Amendment dated as of August 10, 2000 to First
Amended and Restated Credit Agreement

(1) 10.2 Form of Note Purchase Agreement (June 25, 1996)

(3) 10.2.1 Amendment of Note Purchase Agreement (June 25, 1996)
dated as of July 25, 1996

(4) 10.2.2 Amendment of Note Purchase Agreement (June 25, 2996)
dated as of March 11, 1997

(6) 10.2.3 Amendment of Note Purchase Agreement (June 25, 1996)
dated as of October 15, 1998

(8) 10.2.4 Second Amendment Agreement dated September 1, 1999 to
June 25, 1996 Note Purchase Agreement

(11) 10.2.5 Third Amendment Agreement dated May 31, 2000 to June 25,
1996 Note Purchase Agreement and November 19, 1997 Note
Purchase Agreement

(10) 10.2.6 Fourth Amendment Agreement dated August 10, 2000 to June
25, 1996 Note Purchase Agreement and November 19, 1997
Note Purchase Agreement

(1) 10.3 Form of Contribution, Conveyance and Assumption
Agreement among Heritage Holdings, Inc., Heritage
Propane Partners, L.P. and Heritage Operating, L.P.

(1) 10.6 Restricted Unit Plan

(4) 10.6.1 Amendment of Restricted Unit Plan dated as of October
17, 1996

(*) 10.6.2 Amended and Restated Restricted Unit Plan dated as of
August 10, 2000
</TABLE>

E-1
<PAGE> 43
<TABLE>
<CAPTION>

EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
(*) 10.7 Employment Agreement for James E. Bertelsmeyer dated as
of August 10, 2000

(*) 10.8 Employment Agreement for R. C. Mills dated as of August
10, 2000

(*) 10.9 Employment Agreement for Larry J. Dagley dated as of
August 10, 2000

(*) 10.10 Employment Agreement for H. Michael Krimbill dated as of
August 10, 2000

(*) 10.11 Employment Agreement for Bradley K. Atkinson dated as of
August 10, 2000

(7) 10.12 First Amended and Restated Revolving Credit Agreement
between Heritage Service Corp. and Banks Dated May 31,
1999

(*) 10.13 Employment Agreement for Mark A. Darr dated as of August
10, 2000

(*) 10.14 Employment Agreement for Thomas H. Rose dated as of
August 10, 2000

(*) 10.15 Employment Agreement for Curtis L. Weishahn dated as of
August 10, 2000

(5) 10.16 Note Purchase Agreement dated as of November 19, 1997

(6) 10.16.1 Amendment dated October 15, 1998 to November 19, 1997
Note Purchase Agreement

(8) 10.16.2 Second Amendment Agreement dated September 1, 1999 to
November 19, 1997 Note Purchase Agreement and June 25,
1996 Note Purchase Agreement

(9) 10.16.3 Third Amendment Agreement dated May 31, 2000 to November
19, 1997 Note Purchase Agreement and June 25, 1996 Note
Purchase Agreement

(10) 10.16.4 Fourth Amendment Agreement dated August 10, 2000 to
November 19, 1997 Note Purchase Agreement and June 25,
1996 Note Purchase Agreement

(10) 10.17 Contribution Agreement dated June 15, 2000 among U.S.
Propane, L.P., Heritage Operating, L.P. and Heritage
Propane Partners, L.P.

(10) 10.17.1 Amendment dated August 10, 2000 to June 15, 2000
Contribution Agreement

(10) 10.18 Subscription Agreement dated June 15, 2000 between
Heritage Propane Partners, L.P. and individual investors

(10) 10.18.1 Amendment dated August 10, 2000 to June 15, 2000
Subscription Agreement

(10) 10.19 Note Purchase Agreement dated as of August 10, 2000

(*) 21.1 List of Subsidiaries

(*) 23.3 Consent of Arthur Andersen LLP

27.1 Financial Data Schedule - Heritage Propane Partners,
L.P. (formerly Peoples Gas) for the eight months ended
August 31, 2000 - Filed with EDGAR version only

27.2 Financial Data Schedule - Heritage Propane Partners,
L.P. (Predecessor Heritage) for the period ended
August 9, 2000 - Filed with EDGAR version only

27.3 Financial Data Schedule - Heritage Propane Partners,
L.P. (formerly Peoples Gas) for the year ended
December 31, 1997 - Filed with EDGAR version only

27.4 Financial Data Schedule - Heritage Propane Partners,
L.P. (formerly Peoples Gas) for the year ended
December 31, 1998 - Filed with EDGAR version only

27.5 Financial Data Schedule - Heritage Propane Partners,
L.P. (formerly Peoples Gas) for the year ended
December 31, 1999 - Filed with EDGAR version only

(*) 99.1 Balance Sheet of Heritage Holdings, Inc. as of August
31, 2000
</TABLE>

----------

E-2
<PAGE> 44

(1) Incorporated by reference to the same numbered Exhibit to Registrant's
Registration Statement of Form S-1, File No. 333-04018, filed with the
Commission on June 21, 1996.

(2) Incorporated by reference to Exhibit 10.11 to Registrant's Registration
Statement on Form S-1, File No. 333-04018, filed with the Commission on
June 21, 1996.

(3) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 1996.

(4) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended February 28, 1997.

(5) Incorporated by reference to the same numbered Exhibit to Registrant's
Form 10-Q for the quarter ended May 31, 1998.

(6) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1998.

(7) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 1999.

(8) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-K for the year ended August 31, 1999.

(9) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 10-Q for the quarter ended May 31, 2000.

(10) Incorporated by reference to the same numbered Exhibit to the
Registrant's Form 8-K dated August 10, 2000.

(11) File as Exhibit 10.16.3.

(*) Filed Herewith.

E-3
<PAGE> 45

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY AND SURVIVING LEGAL ENTITY IN THE SERIES OF TRANSACTIONS WITH U.S. PROPANE)

PAGE
<S> <C>
Report of Independent Public Accountants................................................................F-2

Consolidated Balance Sheets --
August 31, 2000 and December 31, 1999..................................................................F-3

Consolidated Statements of Operations --
Eight Months Ended August 31, 2000 and 1999 (unaudited) and
Years Ended December 31, 1999, 1998 and 1997...........................................................F-4

Consolidated Statements of Partners' Capital --
Eight Months Ended August 31, 2000 and
Years Ended December 31, 1999, 1998 and 1997...........................................................F-5

Consolidated Statements of Cash Flows --
Eight Months Ended August 31, 2000 and
Years Ended December 31, 1999, 1998 and 1997...........................................................F-6

Notes to Consolidated Financial Statements..............................................................F-7

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES (PREDECESSOR HERITAGE)
(THE PROPANE OPERATIONS OF HERITAGE PROPANE PARTNERS, L.P.,
PRIOR TO THE SERIES OF TRANSACTIONS WITH U.S. PROPANE)

Report of Independent Public Accountants...............................................................F-20

Consolidated Balance Sheet --
August 31, 1999.......................................................................................F-21

Consolidated Statements of Operations --
Period Ended August 9, 2000 and
Years Ended August 31, 1999 and 1998..................................................................F-22

Consolidated Statements of Partners' Capital --
Period Ended August 9, 2000 and
Years Ended August 31, 1999 and 1998..................................................................F-23

Consolidated Statements of Cash Flows --
Period Ended August 9, 2000 and
Years Ended August 31, 1999 and 1998..................................................................F-24

Notes to Consolidated Financial Statements.............................................................F-25
</TABLE>

F-1

<PAGE> 46

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
Heritage Propane Partners, L.P.:

We have audited the accompanying consolidated balance sheets of
Heritage Propane Partners, L.P. (a Delaware limited partnership) and
subsidiaries, formerly Peoples Gas Company, as of August 31, 2000 and
December 31, 1999 and the related consolidated statements of
operations, partners' capital and cash flows for the eight month period
ended August 31, 2000, and for each of the three years in the period
ended December 31, 1999. These financial statements are the
responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Heritage
Propane Partners, L.P. and subsidiaries, formerly Peoples Gas Company,
as of August 31, 2000 and December 31, 1999, and the results of their
operations and their cash flows for the eight month period ended August
31, 2000, and for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted
in the United States.

/s/ Arthur Andersen LLP

Tulsa, Oklahoma
October 26, 2000

F-2

<PAGE> 47

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)

CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)

<TABLE>
<CAPTION>
August 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash $ 4,845 $ 21
Accounts receivable 31,855 5,224
Inventories 39,045 1,384
Assets from trading activities 4,133 --
Prepaid expenses and other 4,991 14
------------ ------------
Total current assets 84,869 6,643

PROPERTY, PLANT AND EQUIPMENT, net 339,366 36,063
INVESTMENT IN AFFILIATE 5,795 --
INTANGIBLES AND OTHER ASSETS, net 185,749 1,018
------------ ------------

Total assets $ 615,779 $ 43,724
============ ============

LIABILITIES AND PARTNERS' CAPITAL

CURRENT LIABILITIES:
Working capital facility $ 24,200 $ --
Accounts payable 43,244 2,072
Accounts payable to related companies 3,814 16,315
Accrued and other current liabilities 24,682 1,249
Liabilities from trading activities 3,684 --
Current maturities of long-term debt 2,588 --
------------ ------------
Total current liabilities 102,212 19,636

LONG-TERM DEBT, less current maturities 361,990 525
MINORITY INTEREST 4,821 --
DEFERRED TAX LIABILITIES -- 8,456
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------

Total liabilities 469,023 28,617
------------ ------------

PARTNERS' CAPITAL:
Common unitholders (9,674,146 and 1,294,873
units issued and outstanding at August 31, 2000
and December 31, 1999, respectively) 106,221 11,294
Subordinated unitholders (1,851,471 and 437,398
issued and outstanding at August 31, 2000 and
December 31, 1999, respectively) 23,130 3,776
Class B subordinated unitholders (1,382,514 units
issued and outstanding at August 31, 2000) 16,464 --
General partner 941 37
------------ ------------
Total partners' capital 146,756 15,107
------------ ------------

Total liabilities and partners' capital $ 615,779 $ 43,724
============ ============
</TABLE>

The accompanying notes are an integral part of
these consolidated financial statements.

F-3

<PAGE> 48

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)

<TABLE>
<CAPTION>
For the Eight Months
Ended August 31, For the Years Ended December 31,
---------------------------- -------------------------------------------
2000 1999 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Retail fuel $ 43,815 $ 21,766 $ 34,045 $ 30,187 $ 32,874
Wholesale fuel 3,807 -- -- -- --
Trading activities 12,262 -- -- -- --
Other 3,188 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total revenues 63,072 21,766 34,045 30,187 32,874
------------ ------------ ------------ ------------ ------------

COSTS AND EXPENSES:
Cost of products sold 29,962 8,467 14,849 12,283 17,063
Trading activities 11,538 -- -- -- --
Operating expenses 16,581 8,596 13,223 11,088 11,927
Depreciation and amortization 4,686 2,037 3,088 2,855 2,514
Selling, general and administrative 1,019 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total costs and expenses 63,786 19,100 31,160 26,226 31,504
------------ ------------ ------------ ------------ ------------

OPERATING INCOME (LOSS) (714) 2,666 2,885 3,961 1,370

OTHER INCOME (EXPENSE):
Interest expense (2,409) -- -- -- --
Equity in earnings (losses) of affiliates (67) -- -- -- --
Gain on disposal of assets 121 -- -- -- --
Other (478) 11 10 (478) (390)
------------ ------------ ------------ ------------ ------------

INCOME (LOSS) BEFORE MINORITY INTEREST
AND INCOME TAXES (3,547) 2,677 2,895 3,483 980

Minority interest 80 -- -- -- --
------------ ------------ ------------ ------------ ------------

INCOME (LOSS) BEFORE INCOME TAXES (3,467) 2,677 2,895 3,483 980

Income taxes 379 1,035 1,127 1,412 378
------------ ------------ ------------ ------------ ------------

NET INCOME (LOSS) (3,846) 1,642 1,768 2,071 602

GENERAL PARTNER'S INTEREST IN NET INCOME
(LOSS) (46) 4 4 5 2
------------ ------------ ------------ ------------ ------------

LIMITED PARTNERS' INTEREST IN NET INCOME
(LOSS) $ (3,800) $ 1,638 $ 1,764 $ 2,066 $ 600
============ ============ ============ ============ ============

BASIC AND DILUTED NET INCOME (LOSS) PER
LIMITED PARTNER UNIT $ (.37) $ .94 $ 1.02 $ 1.19 $ .35
============ ============ ============ ============ ============

BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
UNITS OUTSTANDING 10,225,387 1,732,271 1,732,271 1,732,271 1,732,271
============ ============ ============ ============ ============
</TABLE>

The accompanying notes are an integral part of
these consolidated financial statements.

F-4

<PAGE> 49

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit data)

<TABLE>
<CAPTION>
Number of Units
--------------------------------------------
Class B
Common Subordinated Subordinated Common Subordinated
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 1,294,873 437,398 -- $ 11,135 $ 3,722

Net income -- -- -- 450 150
------------ ------------ ------------ ------------ ------------

BALANCE, DECEMBER 31, 1997 1,294,873 437,398 -- 11,585 3,872

Net income -- -- -- 1,549 517
Dividends paid to parent -- -- -- (1,475) (491)
------------ ------------ ------------ ------------ ------------

BALANCE, DECEMBER 31, 1998 1,294,873 437,398 -- 11,659 3,898

Net income -- -- -- 1,323 441
Dividends paid to parent -- -- -- (1,688) (563)
------------ ------------ ------------ ------------ ------------

BALANCE, DECEMBER 31, 1999 1,294,873 437,398 -- 11,294 3,776

Dividends paid to parent -- -- -- (1,132) (377)
Liabilities retained by parent -- -- -- 21,080 7,051
Merger with AGL, Atmos, and Piedmont -- -- -- 83,410 28,085
Merger with Predecessor Heritage 8,379,273 1,414,073 1,382,514 (4,080) (14,657)
General Partner capital contribution -- -- -- -- --
Other -- -- -- (1,502) (285)
Net loss -- -- -- (2,849) (463)
------------ ------------ ------------ ------------ ------------

BALANCE, AUGUST 31, 2000 9,674,146 1,851,471 1,382,514 $ 106,221 $ 23,130
============ ============ ============ ============ ============
</TABLE>

Class B General
Subordinated Partner Total
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ -- $ 37 $ 14,894

Net income -- 2 602
------------ ------------ ------------

BALANCE, DECEMBER 31, 1997 -- 39 15,496

Net income -- 5 2,071
Dividends paid to parent -- (5) (1,971)
------------ ------------ ------------

BALANCE, DECEMBER 31, 1998 -- 39 15,596

Net income -- 4 1,768
Dividends paid to parent -- (6) (2,257)
------------ ------------ ------------

BALANCE, DECEMBER 31, 1999 -- 37 15,107

Dividends paid to parent -- (4) (1,513)
Liabilities retained by parent -- 71 28,202
Merger with AGL, Atmos, and Piedmont -- 843 112,338
Merger with Predecessor Heritage 17,167 (523) (2,093)
General Partner capital contribution -- 581 581
Other (213) (20) (2,020)
Net loss (490) (44) (3,846)
------------ ------------ ------------

BALANCE, AUGUST 31, 2000 $ 16,464 $ 941 $ 146,756
============ ============ ============
</TABLE>

The accompanying notes are an integral part of
these consolidated financial statements.

F-5

<PAGE> 50

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
For the
Eight
Months
Ended For the Years Ended December 31,
August 31, --------------------------------------
2000 1999 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,846) $ 1,768 $ 2,071 $ 602
Reconciliation of net income (loss) to net cash provided by
operating activities-
Depreciation and amortization 4,686 3,088 2,855 2,514
Gain on disposal of assets (121) -- -- --
Deferred compensation on restricted units 509 -- -- --
Undistributed earnings of affiliates 67 -- -- --
Minority interest 700 -- -- --
Deferred income taxes -- 517 444 326
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (5,109) (2,051) 698 869
Trading asset (3,909)
Inventories (7,274) (413) 255 443
Prepaid expenses 142 51 22 (87)
Intangibles and other assets -- (97) -- (95)
Accounts payable to related parties 5,057 6,064 4,226 4,546
Accounts payable 17,976 511 (300) (194)
Accrued and other current liabilites 5,630 (85) (1,052) (1,242)
---------- ---------- ---------- ----------
Net cash provided by operating activities 14,508 9,353 9,219 7,682
---------- ---------- ---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (177,067) (1,015) (1,719) --
Capital expenditures (3,559) (6,176) (5,328) (4,497)
Other (2,411) -- -- --
---------- ---------- ---------- ----------
Net cash used in investing activities (183,037) (7,191) (7,047) (4,497)
---------- ---------- ---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 193,032 -- -- --
Principal payments on debt (67,898) -- (346) (7,811)
Net proceeds from issuance of common units 22,924 -- -- --
Net proceed from issuance of subordinated units 27,279
Debt issuance costs (1,052)
Capital contributions 581 -- -- 4,250
Dividends paid to parent (1,513) (2,257) (1,971) --
---------- ---------- ---------- ----------
Net cash provided by (used in ) financing activities 173,353 (2,257) (2,317) (3,561)
---------- ---------- ---------- ----------

INCREASE (DECREASE) IN CASH 4,824 (95) (145) (376)

CASH, beginning of period 21 116 261 637
---------- ---------- ---------- ----------

CASH, end of period $ 4,845 $ 21 $ 116 $ 261
========== ========== ========== ==========

NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 809 $ 200 $ 253 $ 500
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 581 $ -- $ -- $ --
========== ========== ========== ==========
Cash paid to parent for income taxes under tax sharing
agreement, net $ 1,028 $ 851 $ 582 $ 403
========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of
these financial statements.

F-6
<PAGE> 51

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(FORMERLY PEOPLES GAS COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Dollar amounts in thousands, except unit and per unit data)
(Unaudited as to August 31, 1999 data)

1. OPERATIONS AND ORGANIZATION:

In August 2000, TECO Energy, Inc., Atmos Energy Corporation, Piedmont Natural
Gas Co., Inc., and AGL Resources, Inc. contributed each company's propane
operations, Peoples Gas Company ("Peoples Gas"), United Cities Propane Gas, Inc.
("United Cities"), Piedmont Propane Company ("Piedmont") and AGL Propane, Inc.,
("AGL") respectively, to U.S. Propane L.P., ("U.S. Propane") in exchange for
equity interests in U.S. Propane. The merger was accounted for as an acquisition
using the purchase method of accounting with Peoples Gas being the acquirer.
Accordingly, Peoples Gas' assets and liabilities were recorded at historical
cost and the assets and liabilities of United Cities, Piedmont and AGL were
recorded at fair market value, as determined based on a valuation and appraisal.
The purchase allocations were as follows:

<TABLE>
<S> <C>
Purchase price of Piedmont, AGL and United Cities $ 112,338
Net book value of Piedmont, AGL and United Cities 82,765
----------
Step-up of net book value, allocated to property,
plant and equipment $ 29,573
==========
</TABLE>

In August 2000, U.S. Propane acquired all of the outstanding common stock of
Heritage Holdings, Inc., ("General Partner"), the General Partner of Heritage
Propane Partners, L.P. for $120,000. By virtue of Heritage Holdings, Inc.'s
general partner and limited partner interests in Heritage Propane Partners,
L.P., U.S. Propane gained control of Heritage Propane Partners, L.P.
Simultaneously, U.S. Propane transferred its propane operations, consisting of
its interest in four separate limited liability companies, AGL Propane, L.L.C.,
Peoples Gas Company, L.L.C., United Cities Propane Gas, L.L.C. and Retail
Propane Company, L.L.C. (former Piedmont operations), (collectively the "Propane
LLCs"), to Heritage Propane Partners, L.P. for $181,395 plus working capital.
The $181,395 was payable $139,552 in cash, $31,843 of assumed debt, and the
issuance of 372,392 Common Units of Heritage Propane Partners, L.P. valued at
$7,348 and a 1.0101 percent limited partnership interest in Heritage Propane
Partners, L.P.'s operating partnership, Heritage Operating, L.P., valued at
$2,652. The purchase price and the exchange price for the Common Units were
approved by an independent committee of the Board of Directors of Heritage
Holdings, Inc. The exchange price for the Common Units was $19.73125 per unit
under a formula based on the average closing price of Heritage Propane Partners
L.P.'s Common Units on the New York Stock Exchange for the twenty (20) day
period beginning ten (10) days prior to the public announcement of the
transaction on June 15, 2000 (the "Formula Price"). The working capital
adjustment is anticipated to be settled in December 2000. An additional payment
of $5,000 has been accrued at August 31, 2000 for the working capital
adjustment. To the extent the final payment is more or less than $5,000,
goodwill recorded in the transaction will be adjusted.

Concurrent with the acquisition, Heritage Propane Partners, L.P. borrowed
$180,000 from several institutional investors and sold 1,161,814 Common Units
and 1,382,514 Class B Subordinated Units in a private placement to the former
shareholders of Heritage Holdings, Inc. based on the Formula Price resulting in
net proceeds of $50,203. The total of these proceeds were utilized to finance
the transaction and retire a portion of existing debt.

The merger was accounted for as a reverse acquisition in accordance with
Accounting Principles Board Opinion No. 16. The propane operations of Heritage
Propane Partners, L.P. prior to the series of transactions with U.S. Propane are
referred to as Predecessor Heritage. Although Predecessor Heritage is the
surviving entity for legal purposes, U.S. Propane's propane operations is the
acquirer for accounting purposes. The assets and liabilities of Predecessor
Heritage have been recorded at fair value to the extent acquired by U.S.
Propane's propane operations, approximately 36 percent, in accordance with
Emerging Issues Task Force Issue No. 90-13, "Accounting for Simultaneous Common
Control Mergers." The assets and liabilities of U.S. Propane have been recorded
at historical cost, as recorded in the U.S. Propane transaction described above.
The combined operations of Predecessor Heritage and U.S. Propane are referred to
herein as "Heritage." Although the equity accounts of Peoples Gas survive the
merger, Predecessor Heritage's partnership structure and partnership units
survive. Accordingly, the equity accounts of Peoples Gas have been restated
based on the general partner interest and common units received by Peoples Gas
in the merger.

F-7
<PAGE> 52

The excess purchase price over Predecessor Heritage's cost was determined as
follows:

<TABLE>
<S> <C> <C>
Net book value of Predecessor Heritage at August 9, 2000 $ 35,716
Equity investment 50,203
----------
85,919
Percent of Predecessor Heritage acquired by U.S. Propane 36%
----------
Equity interest acquired $ 30,931
==========

Purchase price $ 120,000
Equity interest acquired 30,931
----------
Excess purchase price over Predecessor Heritage cost $ 89,069
==========
</TABLE>

The excess purchase price over Predecessor Heritage cost was allocated as
follows:

<TABLE>
<S> <C>
Property, plant and equipment (25 year life) $ 11,180
Customer lists (15 year life) 5,935
Goodwill (30 year life) 71,954
----------
$ 89,069
==========
</TABLE>

The accompanying financial statements for the eight month period ended August
31, 2000 include the results of operations for Peoples Gas and the results of
operations of Predecessor Heritage, Piedmont, AGL and United Cities beginning
August 10, 2000. The financial statements of Peoples Gas are the financial
statements of the registrant as Peoples Gas was the acquirer in the transaction
in which U.S. Propane was formed. The accompanying financial statements for the
periods ended December 31, 1999, 1998 and 1997 have been presented on a
carve-out basis and reflect the historical results of operations, financial
position and cash flows of Peoples Gas. As discussed further in Note 9, certain
expenses in the financial statements include allocations from TECO Energy, Inc.
("TECO" or "Parent Company") and other wholly-owned subsidiaries of the Parent
Company (individually, a "Related Company" and collectively, the "Related
Companies"). Management believes that the allocations were made on a reasonable
basis; however, the allocations of costs and expenses do not necessarily
indicate the costs that would have been incurred by Peoples Gas on a stand-alone
basis. Also, the financial statements may not necessarily reflect what the
financial position, results of operations and cash flows of Peoples Gas would
have been if Peoples Gas had been a separate, stand-alone company during the
periods presented.

The following unaudited pro forma consolidated results of operations are
presented as if the series of transactions with U.S. Propane and Predecessor
Heritage had been made at the beginning of the periods presented.

<TABLE>
<CAPTION>
8-months 12-months
Ended Ended
August 31, 2000 December 31, 1999
--------------- -----------------
<S> <C> <C>
Net revenues $ 316,555 $ 299,600
Net income (loss) $ 4,712 $ (1,662)
Basic and diluted earnings (loss) per common unit $ .36 $ (.14)
</TABLE>

The pro forma consolidated results of operations include adjustments to give
effect to amortization of goodwill, interest expense on acquisition and assumed
debt and certain other adjustments, including the elimination of income taxes.
The unaudited pro forma information is not necessarily indicative of the results
of operations that would have occurred had the transactions been made at the
beginning of the periods presented or the future results of the combined
operations.

Peoples Gas had a fiscal year-end of December 31, however, Heritage will
continue to have Predecessor Heritage's August 31 year-end. Accordingly, the
eight-month period ended August 31, 2000 is a transition period under the rules
of the Securities and Exchange Commission.

In order to simplify Heritage's obligation under the laws of several
jurisdictions in which Heritage conducts business, Heritage's activities are
conducted through a subsidiary operating partnership, Heritage Operating, L.P.
(the "Operating Partnership"). Heritage holds a 97.9798 percent limited partner
interest in the Operating Partnership. In addition, the General Partner and U.S.
Propane each hold a 1.0101 percent limited partner interest in the Operating
Partnership.

F-8
<PAGE> 53

The Operating Partnership sells propane and propane-related products to more
than 485,000 retail customers in 28 states throughout the United States.
Heritage is also a wholesale propane supplier in the southwestern and
southeastern United States and in Canada, the latter through participation in
M-P Energy Partnership. M-P Energy Partnership is a Canadian partnership
primarily engaged in lower-margin wholesale distribution in which Heritage owns
a 60 percent interest. Heritage grants credit to its customers for the purchase
of propane and propane-related products.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of Heritage include the accounts of its
subsidiaries, including Heritage Operating, L.P. ("Operating Partnership"), M-P
Energy Partnership, Heritage Energy Resources, L.L.C. ("Resources") and the
Propane LLCs. Heritage accounts for its 50 percent partnership interest in
Bi-State Partnership, another propane retailer, under the equity method. All
significant intercompany transactions and accounts have been eliminated in
consolidation. The General Partner's 1.0101 percent general partner interest and
U.S. Propane's 1.0101 percent limited partner interest in the Operating
Partnership are accounted for in the consolidated financial statements as
minority interests.

REVENUE RECOGNITION

Sales of propane, propane appliances, parts and fittings are recognized at the
later of the time of delivery of the product to the customer or the time of sale
or installation. Revenue from service labor is recognized upon completion of the
service, and tank rent is recognized ratably over the period it is earned.

INVENTORIES

Inventories are valued at the lower of cost or market. The cost of fuel
inventories is determined using weighted-average cost, while the cost of
appliances, parts and fittings is determined by the first-in, first-out method.
Inventories consisted of the following:

<TABLE>
<CAPTION>
August 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>

Fuel $ 30,882 $ 1,315
Appliances, parts and fittings 8,163 69
---------- ----------
$ 39,045 $ 1,384
========== ==========
</TABLE>

F-9
<PAGE> 54

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the assets. Expenditures for maintenance and repairs
are expensed as incurred. Additionally, Heritage capitalizes certain costs
directly related to the installation of company-owned tanks, including internal
labor costs. Components and useful lives of property, plant and equipment were
as follows:

<TABLE>
<CAPTION>
August 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Land and improvements $ 16,648 $ 719
Buildings and improvements (10 to 30 years) 22,483 1,673
Bulk storage, equipment and facilities (3 to 30 years) 28,210 2,393
Tanks and other equipment (5 to 30 years) 241,934 42,206
Vehicles (5 to 10 years) 41,125 6,248
Furniture and fixtures (5 to 10 years) 5,262 1,391
Other 2,995 522
------------ ------------
358,657 55,152
Less -- Accumulated depreciation (23,948) (20,657)
------------ ------------
334,709 34,495
Plus -- Construction work-in-process 4,657 1,568
------------ ------------
Property, plant and equipment, net $ 339,366 $ 36,063
============ ============
</TABLE>

INTANGIBLES AND OTHER ASSETS

Intangibles and other assets are stated at cost net of amortization computed on
the straight-line method. Heritage eliminates from its balance sheet any fully
amortized intangibles and the related accumulated amortization. Components and
useful lives of intangibles and other assets were as follows:

August 31, December 31,
2000 1999
---------- ------------

Goodwill (30 years) $ 119,588 $ --
Noncompete agreements (10 to 15 years) 30,665 1,295
Customer lists (15 years) 32,678 200
Other 4,808 81
---------- ----------
187,739 1,576
Less - Accumulated amortization (1,990) (558)
---------- ----------
Intangibles and other assets, net $ 185,749 $ 1,018
========== ==========

LONG-LIVED ASSETS

Heritage reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If such a review should indicate that the carrying amount of
long-lived assets is not recoverable, Heritage reduces the carrying amount of
such assets to fair value. No impairment of long-lived assets was required
during the period ended August 31, 2000 or the years ended December 31, 1999,
1998 and 1997.

F-10
<PAGE> 55

ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and other current liabilities consisted of the following:

<TABLE>
<CAPTION>
August 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Interest payable $ 4,647 $ --
Wages and payroll taxes 3,337 90
Deferred tank rent 2,568 278
Customer deposits 2,220 800
Taxes other than income 2,523 --
U.S. Propane working capital payable 5,000 --
Other 4,387 81
------------ ------------
Accrued and other current liabilities $ 24,682 $ 1,249
============ ============
</TABLE>

INCOME TAXES

For the years ended December 31, 1999, 1998 and 1997, Peoples Gas followed the
liability method of accounting for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"
("SFAS 109"). Under SFAS 109, deferred income taxes are recorded based upon
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the underlying assets are received and liabilities are settled.
TECO has retained all tax liabilities related to Peoples Gas that may have
existed as of August 9, 2000.

Heritage is a limited partnership. As a result, Heritage's earnings or loss for
federal income tax purposes is included in the tax returns of the individual
partners. Accordingly, because of the merger, no recognition has been given to
income taxes in the accompanying financial statements of Heritage for the period
ended August 31, 2000 except those incurred by Peoples Gas prior to the
transaction with Predecessor Heritage. Net earnings for financial statement
purposes may differ significantly from taxable income reportable to unit holders
as a result of differences between the tax basis and financial reporting basis
of assets and liabilities and the taxable income allocation requirements under
the partnership agreement.

INCOME (LOSS) PER LIMITED PARTNER UNIT

Basic net income (loss) per limited partner unit is computed by dividing net
income (loss), after considering the General Partner's one percent interest, by
the weighted average number of Common and Subordinated Units outstanding. For
the transition period ended August 31, 2000, diluted net loss per limited
partner unit is the same as basic net loss per limited partner unit because the
5,000 Restricted Units ("Phantom Units") granted that remain unvested under the
Restricted Unit Plan (see Note 7) were anti-dilutive due to the net loss for the
period.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain 1999, 1998, and 1997 amounts have been reclassified to conform with the
2000 presentation. These reclassifications have no impact on net income.

F-11
<PAGE> 56

FAIR VALUE

The carrying amount of accounts receivable and accounts payable approximates
their fair value. Based on the estimated borrowing rates currently available to
Heritage for long-term loans with similar terms and average maturities, the
aggregate fair value at August 31, 2000 of long-term debt approximates the
aggregate carrying amount.

RECENTLY ISSUED ACCOUNTING STANDARD NOT YET ADOPTED

At the date of acquisition of Predecessor Heritage, TECO and Peoples Gas had not
yet adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, and for hedging activities,
be recorded on the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement
and requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. Predecessor
Heritage previously applied the provisions of SFAS 133. Accordingly, since
Peoples Gas is the accounting acquirer, Predecessor Heritage discontinued
applying the provisions of SFAS 133 as of August 10, 2000.

SFAS 133 is effective for fiscal years beginning after June 15, 2000, which
would be Heritage's fiscal year 2001 beginning September 1, 2000. Heritage has
evaluated the impact of adopting SFAS 133 and does not expect it to have a
significant impact on its reported financial condition, results of operations
and cash flows. Heritage entered into certain financial swap instruments during
the period ended August 31, 2000 that have been designated as cash flow hedging
instruments in accordance with SFAS 133. Financial swaps are a contractual
agreement to exchange obligations of money between the buyer and seller of the
instruments as propane volumes during the pricing period are purchased. The
swaps are tied to a set fixed price for the buyer and floating price
determinants for the seller priced on certain indices. Heritage entered into
these instruments to hedge the forecasted propane volumes to be purchased during
each of the one-month periods ending October 2000 through March 2001. Heritage
utilizes hedging transactions to provide price protection against significant
fluctuations in propane prices. These instruments had an unrecorded fair value
of $5,659 as of August 31, 2000. Upon adoption of SFAS 133, Heritage will
recognize the fair value of these instruments on the balance sheet through other
comprehensive income. Heritage will then reclassify into earnings the gain or
loss that is reported in accumulated other comprehensive income as the related
physical transactions occur.

TRADING ACTIVITIES

Heritage trades financial instruments for its own account through Heritage
Energy Resources ("Resources"). Financial instruments utilized in connection
with trading activities are accounted for using the mark-to-market method. Under
the mark-to-market method of accounting, forwards, swaps, options and storage
contracts are reflected at fair value, and are shown in the consolidated balance
sheet as assets and liabilities from trading activities. Unrealized gains and
losses from the financial contracts and the impact of price movements are
recognized in the income statement as other income (expense). Changes in the
assets and liabilities from trading activities result primarily from changes in
the market prices, newly originated transactions and the timing of settlement.
Resources attempts to balance its contractual portfolio in terms of notional
amounts and timing of performance and delivery obligations. However, net
unbalanced positions can exist or are established based on assessment of
anticipated market movements.

Heritage has recorded its trading activities at fair value in accordance with
Emerging Issues Task Force Issue No. 98-10, "Accounting for Contracts Involved
in Energy Trading and Risk Management Activities" ("EITF 98-10"). EITF 98-10
requires energy trading contracts to be recorded at fair value on the balance
sheet, with the changes in fair value included in earnings.

Notional Amounts and Terms -

F-12
<PAGE> 57

of the transactions, but do not represent the amounts exchanged by the parties
to the financial instruments. Accordingly, notional amounts do not accurately
measure Heritage's exposure to market or credit risks.

Fair Value --

The fair value of the financial instruments related to trading activities as of
August 31, 2000, was assets of $4,133 and liabilities of $3,684. The income
related to trading activities for the period ended August 31, 2000, was $724.

Market and Credit Risk --

Inherent in the resulting contractual portfolio is certain business risks,
including market risk and credit risk. Market risk is the risk that the value of
the portfolio will change, either favorably or unfavorably, in response to
changing market conditions. Credit risk is the risk of loss from nonperformance
by suppliers, customers, or financial counterparties to a contract. Heritage and
Resources take active roles in managing and controlling market and credit risk
and have established control procedures, which are reviewed on an ongoing basis.
Heritage monitors market risk through a variety of techniques, including routine
reporting to senior management. Heritage attempts to minimize credit risk
exposure through credit policies and periodic monitoring procedures.

The market prices used to value these transactions reflect management's best
estimate considering various factors including closing average spot prices for
the current and outer months plus a differential to consider time value and
storage costs.

3. ACQUISITIONS:

In August 2000, Heritage purchased substantially all of the assets of two
companies for $1,887 in cash and noncompete agreements with the prior owners for
$309. In January 2000, Peoples Gas purchased substantially all of the fixed
assets of a company for approximately $3,300 in cash and noncompete agreements
with the prior owners for $500. In July 1999, Peoples Gas purchased
substantially all of the inventory and fixed assets of a company for
approximately $1,015 in cash and noncompete agreements with the prior owners for
$200. In January 1998, Peoples Gas purchased substantially all of the fixed
assets of two companies for $1,719 in cash and noncompete agreements with the
prior owners for $253. The results of operations of the acquired entities have
been included in Heritage's or Peoples Gas' financial statements from the date
of acquisition.

Effective January 1998, TECO completed its merger with Griffis, Inc. and U.S.
Propane, Inc. and issued approximately 600,000 shares of its common stock for
total consideration of approximately $15,000. Concurrent with the merger,
Griffis, Inc. and U.S. Propane, Inc. were merged into Peoples Gas Company. This
merger was accounted for as a pooling of interests and, accordingly, Peoples
Gas' statements of operations and related earnings and cash flows for the period
ended December 31, 1998 and 1997 include the results of Griffis, Inc. and U.S.
Propane, Inc.

4. INCOME TAXES:

Prior to the transaction with Predecessor Heritage, Peoples Gas filed a
consolidated federal income tax return with TECO and included in its statements
of operations, a provision for income taxes calculated on a separate return
basis, based on a tax sharing agreement.

The provision for income taxes for the period ended August 31, 2000 and the
years ended December 31, 1999, 1998, and 1997, was comprised of the following:

<TABLE>
<CAPTION>
2000 1999 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Federal income taxes:
Current $ 326 $ 524 $ 830 $ 45
Deferred -- 443 381 280

State income taxes:
Current 53 86 138 7
Deferred -- 74 63 46
-------- -------- -------- --------
Total provision for income taxes $ 379 $ 1,127 $ 1,412 $ 378
======== ======== ======== ========
</TABLE>

F-13
<PAGE> 58

The income tax effect of temporary differences comprising the deferred tax
liability on the accompanying balance sheet is a result of the following at
December 31, 1999:

<TABLE>
<S> <C>
Depreciation and amortization $ 8,717
Deferred revenue (104)
Other (157)
------------
$ 8,456
============
</TABLE>

Income taxes differ from amounts computed by applying the statutory rates to
pre-tax income as follows:

<TABLE>
<CAPTION>
2000 1999 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Federal income taxes at statutory rate of 35% $ (1,213) $ 1,013 $ 1,219 $ 343
Non-deductible partnership losses 1,484 -- -- --
State income tax, net 34 104 130 35
Other, net 74 10 63 --
-------- -------- -------- --------
Provision for income taxes $ 379 $ 1,127 $ 1,412 $ 378
======== ======== ======== ========
</TABLE>

5. WORKING CAPITAL FACILITY AND LONG-TERM DEBT:

<TABLE>
<CAPTION>
Long-term debt consists of the following: August 31, December 31,
2000 1999
---------- ------------
<S> <C> <C>
8.55% Senior Secured Notes $ 120,000 $ --

Medium Term Note Program:

7.17% Series A Senior Secured Notes 12,000 --
7.26% Series B Senior Secured Notes 20,000 --
6.50% Series C Senior Secured Notes 4,286 --
6.59% Series D Senior Secured Notes 5,000 --
6.67% Series E Senior Secured Notes 5,000 --

Senior Secured Promissory Notes:

8.47% Series A Senior Secured Notes 16,000 --
8.55% Series B Senior Secured Notes 32,000 --
8.59% Series C Senior Secured Notes 27,000 --
8.67% Series D Senior Secured Notes 58,000 --
8.75% Series E Senior Secured Notes 7,000 --
8.87% Series F Senior Secured Notes 40,000 --

Senior Revolving Acquisition Facility 1,900 --

Notes Payable on noncompete agreements
with interest imputed at rates averaging 8%,
due in installments through 2010, collateralized
by a first security lien on certain assets of
Heritage 15,107 525

Other 1,285 --

Current maturities of long-term debt (2,588) --
---------- ----------
$ 361,990 $ 525
========== ==========
</TABLE>

F-14
<PAGE> 59

Maturities of the Senior Secured Notes, the Medium Term Note Program and the
Senior Secured Promissory Notes are as follows:

8.55% Senior Notes: mature at the rate of $12,000 on June 30 in
each of the years 2002 to and including 2011.

Medium Term Note Program:

Series A Notes: mature at the rate of $2,400 on November 19 in
each of the years 2005 to and including 2009.

Series B Notes: mature at the rate of $2,000 on November 19 in
each of the years 2003 to and including 2012.

Series C Notes: mature at the rate of $714 on March 13 in each
of the years 2000 to and including 2003, $357
on March 13, 2004, $1,073 on March 13, 2005,
and $357 in each of the years 2006 and 2007.

Series D Notes: mature at the rate of $556 on March 13 in each
of the years 2002 to and including 2010.

Series E Notes: mature at the rate of $714 on March 13 in each
of the years 2007 to and including 2013.

Senior Secured Promissory Notes:

Series A Notes: mature at the rate of $3,200 on August 15 in
each of the years 2003 to and including 2007.

Series B Notes: mature at the rate of $4,571 on August 15 in
each of the years 2004 to and including 2010.

Series C Notes: mature at the rate of $5,750 on August 15 in
each of the years 2006 to and including 2007,
$4,000 on August 15, 2008 and $5,750 on August
15, 2009 to and including 2010.

Series D Notes: mature at the rate of $12,450 on August 15 in
each of the years 2008 and 2009, $7,700 on
August 15, 2010, $12,450 on August 15, 2011
and $12,950 on August 15, 2012.

Series E Notes: mature at the rate of $1,000 on August 15 in
each of the years 2009 to and including 2015.

Series F Notes: mature at the rate of $3,636 on August 15 in
each of the years 2010 to and including 2020.

The Note Purchase Agreement, the Medium Term Note Program and the Senior Secured
Promissory Notes contain restrictive covenants including limitations on
substantial disposition of assets, changes in ownership of Heritage and
additional indebtedness and require the maintenance of certain financial ratios.
At August 31, 2000, Heritage was in compliance with all covenants. All
receivables, contracts, equipment, inventory, general intangibles, cash
concentration accounts, and the common stock of Heritage's subsidiaries secure
the notes.

Effective August 31, 2000, Heritage entered into the Third Amendment to First
Amended and Restated Credit Agreement, with various financial institutions that
amended existing credit agreements. The terms of the Agreement as amended are as
follows:

A $50,000 Senior Revolving Working Capital Facility, expiring June 30,
2002, with $24,200 outstanding at August 31, 2000. The interest rate
and interest payment dates vary depending on the terms Heritage agrees
to when the money is borrowed. The weighted average interest rate was
8.25 percent for the amount outstanding at August 31, 2000. Heritage
must be free of all working capital borrowings for 30 consecutive days
each fiscal year. The maximum commitment fee payable on the unused
portion of the facility is .375 percent.

F-15
<PAGE> 60

Heritage agrees to when the money is borrowed. The average interest
rate was 8.25 percent on the $1,900 amount outstanding at August 31,
2000. The maximum commitment fee payable on the unused portion of the
facility is .375 percent.

Future maturities of long-term debt for each of the next five fiscal years and
thereafter are $2,588 in 2001; $15,837 in 2002; $19,169 in 2003; $25,965 in
2004; $25,425 in 2005 and $275,594 thereafter.

6. COMMITMENTS AND CONTINGENCIES:

Certain property and equipment is leased under noncancelable leases, which
require fixed monthly rental payments and expire at various dates through 2008.
Rental expense under these leases totaled approximately $245 and $91 for the
eight months ended August 31, 2000 and 1999, respectively, and $184 for fiscal
1999, $119 for fiscal 1998 and $181 for fiscal 1997, and has been included in
operating expenses in the accompanying statements of operations. Fiscal year
future minimum lease commitments for such leases are $1,946 in 2001; $1,349 in
2002; $1,201 in 2003; $892 in 2004; $737 in 2005 and $529 thereafter.

Heritage is a party to various legal proceedings incidental to its business.
Certain claims, suits and complaints arising in the ordinary course of business
have been filed or are pending against Heritage. In the opinion of management,
all such matters are covered by insurance, are without merit or involve amounts,
which, if resolved unfavorably, would not have a significant effect on the
financial position or results of operations of Heritage.

Heritage has entered into several purchase and supply commitments with varying
terms as to quantities and prices, which expire at various dates through March
2001.

7. PARTNERS' CAPITAL:

The Agreement of Limited Partnership of Heritage Propane Partners, L.P.
("Partnership Agreement") contains specific provisions for the allocation of net
earnings and loss to each of the partners for purposes of maintaining the
partner capital accounts. During the Subordination Period (as defined below),
Heritage may issue up to 2,012,500 additional Common Units (excluding Common
Units issued in connection with conversion of Subordinated Units into Common
Units) or an equivalent number of securities ranking on a parity with the Common
Units and an unlimited number of partnership interests junior to the Common
Units without a Unitholder vote. Heritage may also issue additional Common Units
during the Subordination Period in connection with certain acquisitions or the
repayment of certain indebtedness.

QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH

Heritage is expected to make quarterly cash distributions of all of Available
Cash, generally defined as consolidated cash receipts less consolidated
operating expenses, debt service payments, maintenance capital expenditures and
net changes in reserves established by the General Partner for future
requirements. These reserves are retained to provide for the proper conduct of
Heritage business, or to provide funds for distributions with respect to any one
or more of the next four fiscal quarters.

Distributions by Heritage in an amount equal to 100 percent of Available Cash
will generally be made 97 percent to the Common, Subordinated and Class B
Subordinated Unitholders, 1.0101 percent to U.S. Propane for its limited partner
interest in the Operating Partnership and 1.9899 percent to the General Partner,
subject to the payment of incentive distributions to the holders of Incentive
Distribution Rights to the extent that certain target levels of cash
distributions are achieved. To the extent there is sufficient Available Cash,
the holders of Common Units have the right to receive the Minimum Quarterly
Distribution ($.50 per Unit), plus any arrearages, prior to any distribution of
Available Cash to the holders of Subordinated Units. Common Units will not
accrue arrearages for any quarter after the Subordination Period and
Subordinated Units will not accrue any arrearages with respect to distributions
for any quarter.

In general, the Subordination Period will continue indefinitely until the first
day of any quarter beginning after May 31, 2001, in which distributions of
Available Cash equal or exceed the Minimum Quarterly Distribution ("MQD") on the
Common Units and the Subordinated Units for each of the three consecutive
four-quarter periods immediately preceding such date. Pursuant to the terms of
the Partnership Agreement, Predecessor Heritage converted 925,736 Subordinated
Units to Common Units on July 7, 1999 and an additional 925,736 on July 5, 2000.
The conversion of these units was dependent on meeting certain cash performance
and distribution requirements during the period that commenced with Predecessor
Heritage's public offering in June 1996. The subordination

F-16

<PAGE> 61

period applicable to the remaining Subordinated Units will end the first day of
any quarter ending after May 31, 2001, in which certain cash performance and
distribution requirements have been met. Upon expiration of the Subordination
Period, all remaining Subordinated Units will convert to Common Units.

Heritage is expected to make distributions of its Available Cash within 45 days
after the end of each fiscal quarter ending November, February, May and August
to holders of record on the applicable record date. A pro rata MQD of $.353 per
Common and Subordinated Unit was made by Predecessor Heritage on October 15,
1996 for the two month period between Predecessor Heritage's initial public
offering and the fourth quarter ended August 31, 1996. The MQD was made to the
Common and Subordinated Unitholders for the quarters ended November 30, 1996
through August 31, 1998. For the quarter ended November 30, 1998 a quarterly
distribution of $.5125 was paid by Predecessor Heritage to the Common and
Subordinated Unitholders. For each of the quarters ended February 28, 1999
through May 31, 2000 quarterly distributions of $.5625 were paid by Predecessor
Heritage to the Common and Subordinated Unitholders. The distribution of $.575
per Common and Subordinated Unit for the quarter ended August 31, 2000 (based on
Predecessor Heritage's fiscal year-end), was declared on September 28, 2000,
payable on October 16, 2000, to Unitholders of record as of October 9, 2000. The
quarterly distributions for the quarters ended February 28, 1999 through and
together with August 31, 2000 included incentive distributions payable to the
General Partner to the extent the quarterly distribution exceeded $.55 per unit.

RESTRICTED UNIT PLAN

The General Partner adopted a Restricted Unit Plan (the "Restricted Unit Plan")
for certain directors and key employees of the General Partner and Predecessor
Heritage effective June 1996. Rights to acquire 146,000 Common Units ("Phantom
Units") are available under the Restricted Unit Plan and may be granted to
employees from time to time at the discretion of the Restricted Unit Plan
Committee. Commencing on September 1, 1996 and on each September 1 thereafter
that the Restricted Unit Plan is in effect, each director who is in office
automatically receives 500 units except for directors who are employees of
Heritage Holdings, Inc., Atmos, AGL, TECO and Piedmont, or their affiliates. The
Phantom Units vest upon, and in the same proportions as (1) the conversion of
Subordinated Units into Common Units or (2) if later, the third anniversary of
their grant date, and (3) terms and conditions specified by each grant. During
fiscal 2000, 21,300 of these Phantom Units were granted by Predecessor Heritage
to non-employee directors and key employees of Predecessor Heritage. During
fiscal 1999 and 1998, 21,300 and 20,200, respectively, of these Phantom Units
were granted to non-employee directors and key employees of Predecessor
Heritage. As of August 31, 2000, 80,800 Phantom Units have been awarded, of
which 4,500 grants vested pursuant to the vesting rights of the Restricted Unit
Plan and 71,300 vested in accordance with the change of control that occurred
with the General Partner. Compensation expense of $509 was recognized in the
period ended August 31, 2000 on the units, which vested due to the change in
control of the General Partner. Individuals holding the remaining 5,000 grants
waived their rights to vesting under the change of control and compensation cost
related to such units will be recognized over the vesting period of the related
awards. Subsequent to August 31, 2000, 750 additional Phantom Units vested
pursuant to the vesting rights of the Restricted Unit Plan and Common Units were
issued. Heritage applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees". Heritage follows the disclosure only provision of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation". Pro-forma net income and net income per limited partner unit
under the fair value method of accounting for equity instruments under SFAS No.
123 would be the same as reported net income and net income per limited partner
unit.

8. PROFIT SHARING AND 401(k) SAVINGS PLAN:

Heritage sponsors a defined contribution profit sharing and 401(k) savings plan
(the "Plan"), which covers all employees subject to service period requirements.
Contributions are made to the Plan at the discretion of the Board of Directors.
Heritage did not recognize any expense under the profit sharing provision of the
Plan during the period ended August 31, 2000.

9. RELATED PARTY TRANSACTIONS:

Heritage has no employees and is managed by the General Partner. Pursuant to the
Partnership Agreement, the General Partner is entitled to reimbursement for all
direct and indirect expenses incurred or payments it makes on behalf of
Heritage, and all other necessary or appropriate expenses allocable to Heritage
or otherwise reasonably incurred by the General Partner in connection with
operating Heritage's business. These costs, which totaled approximately $5,977
for the period ended August 31, 2000, include compensation and benefits paid to
officers and employees of the General Partner.

F-17
<PAGE> 62

The Parent Company and Related Companies of Peoples Gas performed certain
services for Peoples Gas, which were billed at actual cost. In addition, common
general and administrative salary and other operating costs and expenses were
allocated to Peoples Gas based upon methods considered reasonable by management.
Such charges for employee services amounted to $1,836 and $1,697 for the eight
months ended August 31, 2000 and 1999, respectively, and $2,906, $2,160 and $
1,316 for the years ended 1999, 1998, and 1997, respectively. Accounts payable
to related companies are non-interest bearing. At August 31, 2000, accounts
payable to related parties included amounts payable from Heritage to the General
Partner of $2,675 and $1,139 payable to Bi-State Partnership.

Employees of Peoples Gas participated in the non-contributory defined benefit
retirement plan and postretirement benefit plan of the Parent Company, which
covered substantially all full-time employees. Peoples Gas' share of the Parent
Company's annual pension, postretirement benefit, and medical and dental
expenses amounted to $376 and $588 for the eight months ended August 31, 2000
and 1999, respectively and $1,067, $821 and $820 in fiscal 1999, 1998, and 1997
respectively.

10. REPORTABLE SEGMENTS:

Heritage's financial statements reflect four reportable segments: the domestic
retail operations of Heritage, the domestic wholesale operations of Heritage,
the foreign wholesale operations of M-P Energy Partnership, and the trading
activities of Resources. Heritage's reportable domestic and wholesale fuel
segments are strategic business units that sell products and services to
different types of users; retail and wholesale customers. Intersegment sales by
the foreign wholesale segment to the domestic segment are priced in accordance
with the partnership agreement. Resources is a trading company that buys and
sells financial instruments for their own account. Heritage manages these
segments separately as each segment involves different distribution, sale and
marketing strategies. Heritage evaluates the performance of its operating
segments based on operating income. The operating income below does not reflect
domestic and foreign selling, general, and administrative expenses of $1,019 for
the period ended August 31, 2000. The following table presents financial
information by segment for the following periods:

<TABLE>
<CAPTION>
For the Eight Months Ended
August 31, For Years Ended December 31,
-------------------------- ----------------------------------------
2000 1999 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Gallons:
Domestic retail fuel 38,268 22,118 33,608 30,921 29,077
Domestic wholesale fuel 562 -- -- -- --
Foreign wholesale fuel --
Affiliated 5,118 -- -- -- --
Unaffiliated 6,245 -- -- -- --
Elimination (5,118) -- -- --
---------- ---------- ---------- ---------- ----------
Total 45,075 22,118 33,608 30,921 29,077
========== ========== ========== ========== ==========
</TABLE>

<TABLE>
<CAPTION>
For the Eight Months Ended
August 31, For Years Ended December 31,
-------------------------- ----------------------------------------
2000 1999 1999 1998 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Domestic retail fuel $ 43,815 $ 21,766 $ 34,045 $ 30,187 $ 32,874
Domestic wholesale fuel 415 -- -- -- --
Foreign wholesale fuel -- -- -- -- --
Affiliated 3,132 -- -- -- --
Unaffiliated 3,392 -- -- -- --
Elimination (3,132) -- -- -- --
Trading activities 12,262 -- -- -- --
Other domestic revenues 3,188 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total $ 63,072 $ 21,766 $ 34,045 $ 30,187 $ 32,874
========== ========== ========== ========== ==========
</TABLE>

F-18
<PAGE> 63

<TABLE>
<CAPTION>
For the Eight Months Ended
August 31, For Years Ended December 31,
-------------------------- ----------------------------------------
2000 1999 1999 1998 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating Income:
Domestic retail $ (578) $ 2,666 $ 2,885 $ 3,961 $ 1,370
Domestic wholesale fuel 17 -- -- -- --
Foreign wholesale fuel -- -- -- -- --
Affiliated -- -- -- -- --
Unaffiliated 142 -- -- -- --
Elimination -- -- -- -- --
Trading activities 724 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total $ 305 $ 2,666 $ 2,885 $ 3,961 $ 1,370
========== ========== ========== ========== ==========

Total Assets:
Domestic retail $ 473,725 $ 39,481 $ 43,724 $ 37,206 $ 33,982
Domestic wholesale 12,790 -- -- -- --
Foreign wholesale 7,918 -- -- -- --
Trading 7,747 -- -- -- --
Corporate 113,599 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total $ 615,779 $ 39,481 $ 43,724 $ 37,206 $ 33,982
========== ========== ========== ========== ==========

Depreciation and amortization:
Domestic retail $ 4,673 $ 2,037 $ 3,088 $ 2,855 $ 2,514
Domestic wholesale 8 -- -- -- --
Foreign wholesale 5 -- -- -- --
Trading -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total $ 4,686 $ 2,037 $ 3,088 $ 2,855 $ 2,514
========== ========== ========== ========== ==========
</TABLE>

11. QUARTERLY FINANCIAL DATA (UNAUDITED):

Summarized unaudited quarterly financial data is presented below. The sum of net
income (loss) per unit by quarter may not equal the net income (loss) per unit
for the year due to variations in the weighted average units outstanding used in
computing such amounts. Heritage's business is seasonal due to weather
conditions in its service areas. For further information on its effects on
quarterly results, please see the "Weather and seasonality" discussion included
in the "Management's Discussions and Analysis of Financial Conditions and
Results of Operations" section herein.

<TABLE>
<CAPTION>
Quarter Ended Two-months
Eight Months ended ------------------------- Ended
August 31, 2000: March 31 June 30 August 31
---------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 14,377 $ 9,287 $ 39,408
Operating income (loss) 2,413 (443) (2,684)
Net income (loss) 1,457 (335) (4,968)
Basic and diluted net income
(loss) per limited partner
unit $ .84 $ (.19) $ (.87)
</TABLE>

<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------
Fiscal 1999: March 31 June 30 September 30 December 31
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 9,705 $ 7,295 $ 6,912 $ 10,133
Operating income (loss) 2,070 272 (12) 555
Net income (loss) 1,321 170 (7) 284
Basic and diluted net income
(loss) per limited partner
unit $ .76 $ .10 $ (.00) $ .16
</TABLE>

F-19
<PAGE> 64

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
Heritage Propane Partners, L.P.:

We have audited the accompanying consolidated balance sheet of Heritage Propane
Partners, L.P. ("Predecessor Heritage", a Delaware limited partnership) and
subsidiaries as of August 31, 1999 and the related consolidated statements of
operations, partners' capital and cash flows for the period ended August 9,
2000, and for each of the two years in the period ended August 31, 1999. These
financial statements are the responsibility of Predecessor Heritage's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Heritage Propane Partners, L.P.
("Predecessor Heritage") and subsidiaries, as of August 31, 1999, and the
results of their operations and their cash flows for the period ended August 9,
2000, and for each of the two years in the period ended August 31, 1999, in
conformity with accounting principles generally accepted in the United States.

/s/ Arthur Andersen LLP

Tulsa, Oklahoma
October 26, 2000

F-20
<PAGE> 65

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)

CONSOLIDATED BALANCE SHEET
(in thousands, except unit data)

<TABLE>
<CAPTION>
August 31,
1999
------------
<S> <C>
ASSETS

CURRENT ASSETS:
Cash $ 1,679
Accounts receivable 11,635
Inventories 14,784
Prepaid expenses 1,169
------------
Total current assets 29,267

PROPERTY, PLANT AND EQUIPMENT, net 155,219
INVESTMENT IN AFFILIATES 5,202
INTANGIBLES AND OTHER ASSETS, net 73,270
------------

Total assets $ 262,958
============

LIABILITIES AND PARTNERS' CAPITAL

CURRENT LIABILITIES:
Working capital facility $ 19,900
Accounts payable 17,268
Accrued and other current liabilities 8,302
Current maturities of long-term debt 2,022
------------
Total current liabilities 47,492

LONG-TERM DEBT, less current maturities 196,216
MINORITY INTEREST 188
COMMITMENTS AND CONTINGENCIES --
------------

Total liabilities 243,896
------------

PARTNERS' CAPITAL:
Common unitholders (5,825,674 units issued and outstanding) 17,077
Subordinated unitholders (2,777,207 units issued and
outstanding) 1,809
General partner 176
------------
Total partners' capital 19,062
------------
Total liabilities and partners' capital $ 262,958
============
</TABLE>

The accompanying notes are an integral part of this
consolidated financial statement.

F-21

<PAGE> 66

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit data)

<TABLE>
<CAPTION>
For the Years Ended
For the Period August 31,
Ended August 9, -----------------------------
2000 1999 1998
--------------- ------------ ------------
<S> <C> <C> <C>
REVENUES:
Retail fuel $ 178,906 $ 137,403 $ 136,301
Wholesale fuel 35,145 24,018 30,254
Trading activities 4,300 -- --
Other 24,140 22,599 19,432
------------ ------------ ------------
Total revenues 242,491 184,020 185,987
------------ ------------ ------------

COSTS AND EXPENSES:
Cost of products sold 136,462 87,267 96,884
Cost of trading activities 4,283 -- --
Operating expenses 55,154 51,201 47,010
Depreciation and amortization 17,143 14,749 13,680
Selling, general and administrative 5,974 6,236 5,484
------------ ------------ ------------
Total costs and expenses 219,016 159,453 163,058
------------ ------------ ------------

OPERATING INCOME 23,475 24,567 22,929

OTHER INCOME (EXPENSE):
Interest expense (17,664) (15,915) (14,599)
Equity in earnings of affiliates 614 1,005 707
Gain on disposal of assets 514 722 534
Other (3) (263) (305)
------------ ------------ ------------

INCOME BEFORE MINORITY INTEREST 6,936 10,116 9,266

Minority interest (432) (454) (476)
------------ ------------ ------------

NET INCOME 6,504 9,662 8,790

GENERAL PARTNER'S INTEREST IN
NET INCOME 65 97 88
------------ ------------ ------------

LIMITED PARTNERS' INTEREST IN
NET INCOME $ 6,439 $ 9,565 $ 8,702
============ ============ ============

BASIC NET INCOME PER LIMITED
PARTNER UNIT $ .66 $ 1.11 $ 1.04
============ ============ ============

BASIC WEIGHTED AVERAGE NUMBER OF
UNITS OUTSTANDING 9,712,927 8,589,335 8,332,351
============ ============ ============

DILUTED NET INCOME PER LIMITED
PARTNER UNIT $ .66 $ 1.11 $ 1.04
============ ============ ============

DILUTED WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING 9,788,093 8,645,958 8,365,334
============ ============ ============
</TABLE>

The accompanying notes are an integral part of
these consolidated financial statements.

F-22
<PAGE> 67

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit data)

Number of Units
-------------------------- Common Subordinated
Common Subordinated Unitholders Unitholders
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1997 4,285,000 3,702,943 $ 11,295 $ 9,417

Unit distribution -- -- (9,192) (7,406)
Issuance of restricted Common Units 591,725 -- 13,788 --
General Partner contribution -- -- -- --
Other -- -- 75 137
Net income -- -- 4,809 3,893
---------- ---------- ---------- ----------

BALANCE, AUGUST 31, 1998 4,876,725 3,702,943 20,775 6,041

Unit distribution -- -- (12,428) (5,924)
Issuance of restricted Common Units 23,213 -- 502 --
General Partner contribution -- -- -- --
Conversion of Subordinated Units 925,736 (925,736) 1,510 (1,510)
Other -- -- 240 115
Net income -- -- 6,478 3,087
---------- ---------- ---------- ----------

BALANCE, AUGUST 31, 1999 5,825,674 2,777,207 17,077 1,809

Unit distribution -- -- (15,393) (6,248)
Issuance of restricted Common Units 184,030 -- 4,064 --
Issuance of Common Units 1,200,000 -- 24,054 --
General Partner contribution -- -- -- --
Conversion of Subordinated Units 925,736 (925,736) (1,480) 1,480
Conversion of Phantom Units 4,500 -- 29 (28)
Other -- -- 283 75
Other comprehensive income - net
Gain on hedging instruments -- -- -- --
Net income -- -- 5,246 1,193
---------- ---------- ---------- ----------

BALANCE, AUGUST 9, 2000 8,139,940 1,851,471 $ 33,880 $ (1,719)
========== ========== ========== ==========

Accumulated
Other
Comprehensive Total Partners'
General Partner Income Capital
--------------- ------------- ---------------
<S> <C> <C> <C>
BALANCE, AUGUST 31, 1997 $ 208 $ -- $ 20,920

Unit distribution (167) -- (16,765)
Issuance of restricted Common Units -- -- 13,788
General Partner contribution 141 -- 141
Other 3 -- 215
Net income 88 -- 8,790
---------- ---------- ----------

BALANCE, AUGUST 31, 1998 273 -- 27,089

Unit distribution (202) -- (18,554)
Issuance of restricted Common Units -- -- 502
General Partner contribution 5 -- 5
Conversion of Subordinated Units -- -- --
Other 3 -- 358
Net income 97 -- 9,662
---------- ---------- ----------

BALANCE, AUGUST 31, 1999 176 -- 19,062

Unit distribution (256) -- (21,897)
Issuance of restricted Common Units -- -- 4,064
Issuance of Common Units -- -- 24,054
General Partner contribution 278 -- 278
Conversion of Subordinated Units -- -- --
Conversion of Phantom Units (1) -- --
Other 4 -- 362
Other comprehensive income - net
Gain on hedging instruments -- 3,289 3,289
Net income 65 -- 6,504
---------- ---------- ----------

BALANCE, AUGUST 9, 2000 $ 266 $ 3,289 $ 35,716
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of
these consolidated financial statements.

F-23
<PAGE> 68

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
For the
Period Ended For the Years Ended
August 9, August 31,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,504 $ 9,662 $ 8,790
Reconciliation of net income to net cash provided by
operating activities-
Depreciation and amortization 17,143 14,749 13,680
Provision for losses on accounts receivable 328 338 435
Gain on disposal of assets (514) (722) (534)
Deferred compensation on restricted units 363 358 215
Undistributed earnings of affiliates (654) (534) (642)
Minority interest 91 (92) (15)
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (7,138) (848) 1,476
Inventories (5,627) (1,718) 1,789
Prepaid expenses (541) 310 149
Intangibles and other assets (851) 883 (989)
Accounts payable 5,901 2,947 (1,025)
Accrued and other current liabilites (861) (1,720) 1,203
------------ ------------ ------------
Net cash provided by operating activities 14,144 23,613 24,532
------------ ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired (46,801) (17,931) (23,276)
Capital expenditures (12,931) (14,974) (9,359)
Proceeds from asset sales 1,449 2,106 5,511
------------ ------------ ------------
Net cash used in investing activities (58,283) (30,799) (27,124)
------------ ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 159,070 85,250 129,147
Principal payments on debt (116,918) (59,673) (110,119)
Unit distribution (21,897) (18,554) (16,765)
Net proceeds from issuance of common units 24,054 -- --
Capital contribution from General Partner 278 5 141
------------ ------------ ------------
Net cash provided by financing activities 44,587 7,028 2,404
------------ ------------ ------------

INCREASE (DECREASE) IN CASH 448 (158) (188)

CASH, beginning of period 1,679 1,837 2,025
------------ ------------ ------------

CASH, end of period $ 2,127 $ 1,679 $ 1,837
============ ============ ============

NONCASH FINANCING ACTIVITIES:
Notes payable incurred on noncompete agreements $ 3,575 $ 3,332 $ 6,393
Issuance of restricted common units in connection
with certain acquisitions $ 4,064 $ 502 $ 13,788
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 18,377 $ 15,655 $ 13,045
Other comprehensive income $ 3,289 $ -- $ --
</TABLE>

The accompanying notes are an integral part of these
consolidated financial statements.

F-24
<PAGE> 69

HERITAGE PROPANE PARTNERS, L.P. AND SUBSIDIARIES
(PREDECESSOR)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except unit and per unit data)

1. OPERATIONS AND ORGANIZATION:

Heritage Propane Partners, L.P. ("Predecessor Heritage") was formed April 24,
1996, as a Delaware limited partnership, to acquire, own and operate the propane
business of Heritage Holdings, Inc. In order to simplify Predecessor Heritage's
obligation under the laws of several jurisdictions in which Heritage conducts
business, Predecessor Heritage's activities are conducted through a subsidiary
operating partnership, Heritage Operating, L.P. (the "Operating Partnership").
Predecessor Heritage holds a 98.9899 percent limited partner interest and the
General Partner holds a 1.0101 percent general partner interest in the Operating
Partnership.

The Operating Partnership sells propane and propane-related products to
approximately 286,000 retail customers in 27 states throughout the United
States. Predecessor Heritage is also a wholesale propane supplier in the
southwestern United States and in Canada, the latter through participation in
M-P Energy Partnership. M-P Energy Partnership is a Canadian partnership
primarily engaged in lower-margin wholesale distribution in which Predecessor
Heritage owns a 60 percent interest. Predecessor Heritage grants credit to its
customers for the purchase of propane and propane-related products.

In August 2000, U.S. Propane acquired all of the outstanding common stock of
Heritage Holdings, Inc., ("General Partner"), the General Partner of Heritage
Propane Partners, L.P. By virtue of Heritage Holdings, Inc.'s general partner
and limited partner interests in Heritage Propane Partners, L.P., U.S. Propane
gained control of Heritage Propane Partners, L.P. Simultaneously, U.S. Propane
transferred its propane operations, consisting of its interest in four separate
limited liability companies, AGL Propane, L.L.C., Peoples Gas Company, L.L.C.,
United Cities Propane Gas, L.L.C. and Retail Propane Company, L.L.C. (former
Piedmont operations) to Heritage Propane Partners, L.P. for $181,395 plus
working capital. The $181,395 was payable $139,552 in cash, $31,843 of assumed
debt, and the issuance of 372,392 Common Units of Heritage Propane Partners,
L.P. valued at $7,348 and a 1.0101 percent limited partner interest in the
Operating Partnership valued at $2,652. The purchase price and the exchange
price for the common units were approved by an independent committee of the
Board of Directors of Heritage Holdings, Inc. The exchange price for the common
units was $19.73125 per unit under a formula based on the average closing price
of the Heritage Propane Partners, L.P.'s Common Units on the New York Stock
Exchange for the twenty (20) day period beginning ten (10) days prior to the
public announcement of the transaction on June 15, 2000 (the "Formula Price").
The working capital adjustment is estimated at $5,000 and is anticipated to be
settled in December 2000.

Concurrent with the acquisition, Heritage Propane Partners, L.P. borrowed
$180,000 from several institutional investors and sold 1,161,814 common units
and 1,382,514 Class B subordinated units in a private placement to the former
shareholders of Heritage Holdings, Inc., based on the Formula Price, resulting
in net proceeds of $50,203. The total of these proceeds were utilized to finance
the transaction and retire a portion of existing debt.

The merger was accounted for as a reverse acquisition in accordance with
Accounting Principles Board Opinion No. 16. Although Heritage Propane Partners,
L.P. is the surviving entity for legal purposes, U.S. Propane's propane
operations will be the acquirer for accounting purposes. U.S. Propane retained
the name Heritage Propane Partners, L.P. subsequent to the transactions
("Successor Heritage"). The assets and liabilities and results of operations of
Predecessor Heritage are included in the financial statements of Successor
Heritage as of August 10, 2000.

2. SIGNIFICANT ACCOUNTING POLICIES AND BALANCE SHEET DETAIL:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Predecessor
Heritage, its subsidiaries, including the Operating Partnership, M-P Energy
Partnership, and Heritage Energy Resources, L.L.C. ("Resources"). Predecessor
Heritage accounts for its 50 percent partnership interest in Bi-State
Partnership, another propane retailer, using the equity method. All significant
intercompany transactions and accounts have been eliminated in consolidation.
The General Partner's 1.0101 percent interest in the Operating Partnership is
accounted for in the consolidated financial statements as a minority interest.

F-25
<PAGE> 70

REVENUE RECOGNITION

Sales of propane, propane appliances, parts and fittings are recognized at the
time of delivery of the product to the customer or at the time of sale or
installation. Revenue from service labor is recognized upon completion of the
service and tank rent is recognized ratably over the period it is earned.

INVENTORIES

Inventories are valued at the lower of cost or market. The cost of fuel
inventories is determined using average cost, while the cost of appliances,
parts and fittings is determined by the first-in, first-out method. Inventories
consist of the following:

<TABLE>
<CAPTION>
August 31,
1999
-----------
<S> <C>
Fuel $ 9,341
Appliances, parts and fittings 5,443
-----------
$ 14,784
===========
</TABLE>

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost, less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the assets. Expenditures for maintenance and repairs
are expensed as incurred. Additionally, Predecessor Heritage capitalizes certain
costs directly related to the installation of Predecessor Heritage owned tanks,
including internal labor costs. Components and useful lives of property, plant
and equipment are as follows:

<TABLE>
<CAPTION>
August 31,
1999
------------
<S> <C>
Land and improvements $ 8,778
Buildings and improvements (10 to 30 years) 16,719
Bulk storage, equipment and facilities (3 to 30 years) 19,109
Tanks and other equipment (5 to 30 years) 115,608
Vehicles (5 to 7 years) 32,421
Furniture and fixtures (5 to 10 years) 5,021
Other 1,312
------------
198,968
Less-accumulated depreciation (43,749)
------------
Property, plant, and equipment, net $ 155,219
============
</TABLE>

INTANGIBLES AND OTHER ASSETS

Intangibles and other assets are stated at cost, net of amortization, computed
on the straight-line method. Predecessor Heritage eliminates from its balance
sheet any fully amortized intangibles and the related accumulated amortization.
Components and useful lives of intangibles and other assets are as follows:

<TABLE>
<CAPTION>
August 31,
1999
------------
<S> <C>
Goodwill (30 years) $ 48,672
Noncompete agreements (10 to 15 years) 30,647
Customer lists (15 years) 15,597
Other 5,820
------------
100,736
Less-accumulated amortization (27,466)
------------
Intangibles and other assets, net $ 73,270
============
</TABLE>

F-26
<PAGE> 71

LONG-LIVED ASSETS

Predecessor Heritage reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. If such a review should indicate that the carrying amount of
long-lived assets is not recoverable, Predecessor Heritage reduces the carrying
amount of such assets to fair value. No impairment of long-lived assets was
required during the period ended August 9, 2000 or the years ended August 31,
1999 and 1998.

ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and other current liabilities consist of the following:

<TABLE>
<CAPTION>
August 31,
1999
-----------
<S> <C>
Interest payable $ 3,442
Wages and payroll taxes 1,116
Deferred tank rent 1,450
Customer deposits 826
Other 1,468
-----------
Accrued and other current liabilities $ 8,302
===========
</TABLE>

INCOME TAXES

Predecessor Heritage is a limited partnership. As a result, Predecessor
Heritage's earnings or losses for federal income tax purposes is included in the
tax returns of the individual partners. Accordingly, no recognition has been
given to income taxes in the accompanying financial statements. Net earnings for
financial statement purposes may differ significantly from taxable income
reportable to unitholders as a result of differences between the tax basis and
financial reporting basis of assets and liabilities and the taxable income
allocation requirements under the partnership agreement.

INCOME PER LIMITED PARTNER UNIT

Basic net income per limited partner unit is computed by dividing net income,
after considering the General Partner's one percent interest, by the weighted
average number of Common and Subordinated Units outstanding. Diluted net income
per limited partner unit is computed by dividing net income, after considering
the General Partner's one percent interest, by the weighted average number of
Common and Subordinated Units outstanding and the weighted average number of
Restricted Units ("Phantom Units") granted under the Restricted Unit Plan (see
Note 6). A reconciliation of net income and weighted average units used in
computing basic and diluted earnings per unit is as follows:

<TABLE>
<CAPTION>
Period
Ended Years Ended
August 9, August 31,
------------ -----------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
BASIC NET INCOME PER LIMITED PARTNER UNIT:
Limited partners' interest in net income $ 6,439 $ 9,565 $ 8,702
============ ============ ============

Weighted average limited partner units 9,712,927 8,589,335 8,332,351
============ ============ ============

Basic net income per limited partner unit $ .66 $ 1.11 $ 1.04
============ ============ ============
</TABLE>

F-27
<PAGE> 72

<TABLE>
<S> <C> <C> <C>
DILUTED NET INCOME PER LIMITED PARTNER UNIT:
Limited partners' interest in net income $ 6,439 $ 9,565 $ 8,702
========== ========== ==========

Weighted average limited partner units 9,712,927 8,589,335 8,332,351
Dilutive effect of Phantom Units 75,166 56,623 32,983
---------- ---------- ----------
Weighted average limited partner units, assuming
dilutive effect of Phantom Units 9,788,093 8,645,958 8,365,334
========== ========== ==========

Diluted net income per limited partner unit $ .66 $ 1.11 $ 1.04
========== ========== ==========
</TABLE>

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.

FAIR VALUE

The carrying amount of accounts receivable and accounts payable approximates
their fair value. Based on the estimated borrowing rates then available to
Predecessor Heritage for long-term loans with similar terms and average
maturities, the aggregate fair value at August 31, 1999 of Predecessor
Heritage's long-term debt approximated the aggregate carrying amount.

RECLASSIFICATIONS

Certain 1999 and 1998 amounts have been reclassified to conform with the 2000
presentation. These reclassifications have no impact on net income (loss).

3. ACQUISITIONS:

During the period ended August 9, 2000, Predecessor Heritage acquired certain
assets of W. T. Johnson, Inc. in Yulee, FL, J & J Propane Gas, Inc. in various
locations in Alabama and Tennessee, ServiGas with operations located in Texas,
New Mexico, and Arizona, Petro San Juan Leasing, Inc. and two other small
companies. Heritage Holdings, Inc. purchased all of the outstanding stock of
Eaves Oil Company, Inc. of New Ellenton, SC, Blue Flame Gas Co. Inc. of
Charleston, SC, Lake County Gas of Lower Lake, CA, Cumberland LP Gas, Inc. of
Cookeville, TN and one small company and conveyed the net assets to Predecessor
Heritage. The acquisitions totaled $54,904, which includes notes payable on
noncompete agreements of $3,575 for periods ranging from three to ten years and
liabilities assumed. These acquisitions were financed primarily with the
acquisition facility and the issuance of $4,064 of Common Units.

During fiscal 1999, Predecessor Heritage acquired certain assets of Claredon Gas
Company in Manning, SC, Blue Flame Gas Corporation of Richmond, VT and one other
small company. Heritage Holdings, Inc. also purchased all of the outstanding
stock of S.R. Young, Inc. of Springfield, VT, Pioneer LPG Corporation of Madera,
CA and Foster's Gas, Inc. of Leitchfield, KY, and conveyed the net assets to
Predecessor Heritage. The acquisitions totaled $22,743, which includes notes
payable on noncompete agreements of $3,332 for periods ranging from three to ten
years. These acquisitions were financed primarily with the acquisition facility
and the issuance of $502 of Common Units.

During fiscal 1998, Predecessor Heritage acquired certain assets of Gibson
Propane Co. and Gibson Homegas of Memphis, TN, Fallsburg Gas Service, Inc. of
Fallsburg, NY and six smaller companies. Heritage Holdings, Inc. also purchased
all of the outstanding stock of Tennessee Independent Propane Co. ("TIPCO"),
John E. Foster & Son, of Leitchfield, KY, and Rural Bottle Gas and Appliance,
Inc. of Greenville, MI, and conveyed the net assets to Predecessor Heritage. The
acquisitions totaled $37,401, including noncompete agreements of $6,393 for
periods ranging from five to ten years. These acquisitions were financed
primarily with the acquisition facility, issuance of notes under the Medium Term
Note Program and with the issuance of $13,788 of Common Units.

The acquisitions have been accounted for by the purchase method and,
accordingly, the purchase prices have been allocated to assets acquired and
liabilities assumed based on the fair market values at the date of acquisitions.

F-28
<PAGE> 73

Predecessor Heritage capitalized as part of the purchase price allocation
certain legal and other costs directly related to the acquisitions. The excess
of the purchase price over the fair market values of the net assets acquired has
been recorded as goodwill.

The results of operations of the acquired entities have been included in the
consolidated financial statements from the date of acquisition.

4. WORKING CAPITAL FACILITY AND LONG-TERM DEBT:

Long-term debt consists of the following:

<TABLE>
<CAPTION>
August 31,
1999
----------
<S> <C>
8.55% Senior Secured Notes $ 120,000

Medium Term Note Program:
7.17% Series A Senior Secured Notes 12,000
7.26% Series B Senior Secured Notes 20,000
6.50% Series C Senior Secured Notes 5,000
6.59% Series D Senior Secured Notes 5,000
6.67% Series E Senior Secured Notes 5,000

Senior Revolving Acquisition Facility 18,300

Notes Payable on noncompete agreements with
interest imputed at rates averaging 8%, due
in installments through 2009, collateralized
by a first security lien on certain assets of
Predecessor Heritage 11,486

Other 1,452
---------
198,238
Current maturities of long-term debt (2,022)
---------
$ 196,216
=========
</TABLE>

Maturities of the Senior Secured Notes and the Medium Term Note Program are as
follows:

8.55% Senior Notes: mature at the rate of $12,000 on June 30 in
each of the years 2002 to and including 2011.

Series A Notes: mature at the rate of $2,400 on November 19 in
each of the years 2005 to and including 2009.

Series B Notes: mature at the rate of $2,000 on November 19 in
each of the years 2003 to and including 2012.

Series C Notes: mature at the rate of $714 on March 13 in each
of the years 2000 to and including 2003, $357
on March 13, 2004, $1,073 on March 13, 2005,
and $357 in each of the years 2006 and 2007.

Series D Notes: mature at the rate of $556 on March 13 in each
of the years 2002 to and including 2010.

Series E Notes: mature at the rate of $714 on March 13 in each
of the years 2007 to and including 2013.

The debt agreements contain restrictive covenants including limitations on
substantial disposition of assets, changes in ownership of Predecessor Heritage,
additional indebtedness and require the maintenance of certain financial ratios.
All receivables, contracts, equipment, inventory, general intangibles, cash
concentration accounts, and the common stock of Predecessor Heritage's
subsidiaries secure the notes.

As of June 25, 1996, Predecessor Heritage entered into a credit agreement with
various financial institutions. Subsequent to August 31, 1999, Predecessor
Heritage entered into the First Amendment to the First Amended and Restated
Credit Agreement. Predecessor Heritage entered the Second Amendment ("the
Amendment") to the Agreement as of May 31, 2000, which added defined terms to
the agreement based on the proposed U.S. Propane

F-29
<PAGE> 74

series of transactions. The effectiveness of the Amendment is subject to the
satisfaction of certain conditions in relation to the merger. The terms of the
Agreement as amended are as follows:

A $35,000 Senior Revolving Working Capital Facility, expiring June 30,
2002, with $19,900 outstanding at August 31, 1999. The interest rate
and interest payment dates vary depending on the terms Predecessor
Heritage agrees to when the money is borrowed. The weighted average
interest rate was 6.6875 percent for amounts outstanding at August 31,
1999. Predecessor Heritage must be free of all working capital
borrowings for 30 consecutive days each fiscal year. The maximum
commitment fee payable on the unused portion of the facility is .375
percent.

A $50,000 Senior Revolving Acquisition Facility is available through
December 31, 2001, at which time the outstanding amount must be paid in
ten equal quarterly installments, beginning March 31, 2002. The
interest rate and interest payment dates vary depending on the terms
Predecessor Heritage agrees to when the money is borrowed. The average
interest rate was 7.0 percent for amounts outstanding at August 31,
1999. The maximum commitment fee payable on the unused portion of the
facility is .375 percent.

5. COMMITMENTS AND CONTINGENCIES:

Predecessor Heritage is a party to various legal proceedings incidental to its
business. Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against Predecessor Heritage. In the
opinion of management, all such matters are covered by insurance, are without
merit or involve amounts, which, if resolved unfavorably, would not have a
significant effect on the financial position or results of operations of
Predecessor Heritage.

6. PARTNERS' CAPITAL:

Subsequent to August 31, 1999, Predecessor Heritage issued 76,152 Common Units
under Form S-4 registration statement in connection with the purchase of other
propane businesses, 4,500 Common Units in regards to the vesting rights under
the Restricted Unit Plan, 107,878 to the General Partner in connection with the
assumption of certain liabilities by the General Partner from Predecessor
Heritage's prior acquisition of certain assets of various propane companies and
1,200,000 Common Units under Form S-3 registration statement. On July 5, 2000,
925,736 Subordinated Units held by the General Partner converted to Common Units
pursuant to the terms of the Partnership Agreement.

During the Subordination Period (as defined below), Predecessor Heritage may
issue up to 2,012,500 additional Common Units (excluding Common Units issued in
connection with conversion of Subordinated Units into Common Units) or an
equivalent number of securities ranking on a parity with the Common Units and an
unlimited number of partnership interests junior to the Common Units without a
Unitholder vote. Predecessor Heritage may also issue additional Common Units
during the Subordination Period in connection with certain acquisitions or the
repayment of certain indebtedness. During fiscal 1999, Predecessor Heritage
issued 23,213 Common Units to Heritage Holdings, Inc. These Units were issued in
connection with the assumption of certain liabilities by the General Partner
from Predecessor Heritage's prior acquisition of certain assets of a propane
company. After the Subordination Period, the Partnership Agreement authorizes
the General Partner to cause Predecessor Heritage to issue an unlimited number
of limited partner interests of any type without the approval of any
Unitholders. Pursuant to the terms of the Partnership Agreement, 925,736
Subordinated Units held by the General Partner converted to Common Units on July
7, 1999 and an additional 925,736 converted on July 5, 2000.

F-30
<PAGE> 75

QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH

Predecessor Heritage is expected to make quarterly cash distributions of all of
its Available Cash, generally defined as consolidated cash receipts less
consolidated operating expenses, debt service payments, maintenance capital
expenditures and net changes in reserves established by the General Partner for
future requirements. These reserves are retained to provide for the proper
conduct of Predecessor Heritage business, or to provide funds for distributions
with respect to any one or more of the next four fiscal quarters.

Distributions by Predecessor Heritage in an amount equal to 100 percent of its
Available Cash will generally be made 98 percent to the Common and Subordinated
Unitholders and two percent to the General Partner, subject to the payment of
incentive distributions to the holders of Incentive Distribution Rights to the
extent that certain target levels of cash distributions are achieved. To the
extent there is sufficient Available Cash, the holders of Common Units have the
right to receive the Minimum Quarterly Distribution ($.50 per Unit), plus any
arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. Common Units will not accrue arrearages for any quarter
after the Subordination Period and Subordinated Units will not accrue any
arrearages with respect to distributions for any quarter.

In general, the Subordination Period will continue indefinitely until the first
day of any quarter beginning after May 31, 2001, in which distributions of
Available Cash equal or exceed the Minimum Quarterly Distribution ("MQD") on the
Common Units and the Subordinated Units for each of the three consecutive
four-quarter periods immediately preceding such date. Pursuant to the terms of
the Partnership Agreement, 925,736 Subordinated Units held by the General
Partner converted to Common Units on July 7, 1999 and an additional 925,736
converted on July 5, 2000. The conversion of these units was dependent on
meeting certain cash performance and distribution requirements during the period
that commenced with Predecessor Heritage's public offering in June of 1996. The
subordination period applicable to the remaining Subordinated Units will end the
first day of any quarter ending after May 31, 2001, in which certain cash
performance and distribution requirements have been met. Upon expiration of the
Subordination Period, all remaining Subordinated Units will convert to Common
Units.

Predecessor Heritage is expected to make distributions of its Available Cash
within 45 days after the end of each fiscal quarter ending November, February,
May and August to holders of record on the applicable record date. A pro rata
Minimum Quarterly Distribution of $.353 per Common and Subordinated Unit was
made on October 15, 1996 for the two month period between Predecessor Heritage's
initial public offering and the quarter ended August 31, 1996. The Minimum
Quarterly Distribution was made to the Common and Subordinated Unitholders for
the quarters ended November 30, 1996 through August 31, 1998. For the quarter
ended November 30, 1998, a quarterly distribution of $.5125 was paid to the
Common and Subordinated Unitholders. For each of the quarters ended February 28,
1999 through and including May 31, 2000, quarterly distributions of $.5625,
respectively, were paid to the Common and Subordinated Unitholders. The
quarterly distributions for the quarters ended February 28, 1999 through May 31,
2000 included incentive distributions payable to the General Partner to the
extent the quarterly distribution exceeded $.55 per unit.

RESTRICTED UNIT PLAN

The General Partner adopted a Restricted Unit Plan (the "Restricted Unit Plan")
for its non-employee directors and key employees of the General Partner and its
affiliates effective June 1996. Rights to acquire 146,000 Common Units ("Phantom
Units") are available under the Restricted Unit Plan and may be granted to
employees from time to time at the discretion of the Restricted Unit Plan
Committee. Commencing on September 1, 1996 and on each September 1 thereafter
that the Restricted Unit Plan is in effect, each director who is in office
automatically receives 500 units. The Phantom Units vest upon, and in the same
proportions as (1) the conversion of Predecessor Heritage's Subordinated Units
into Common Units or (2) if later, the third anniversary of their grant date,
and (3) terms and conditions specified by each grant. During fiscal 1999, 21,300
of these Phantom Units were granted to non-employee directors and key employees.
During fiscal 1998, 20,200 of these Phantom Units were granted to non-employee
directors and key employees. As of August 31, 1999, Phantom Units with a value
of $1,346 have been awarded and the compensation cost related to such units will
be recognized over the vesting period of the related awards. Predecessor
Heritage applies APB Opinion No. 25, "Accounting for Stock Issued to Employees".
Compensation cost and directors' fee expense of $366, $358 and $215 was recorded
for the period ended August 9, 2000 and fiscal 1999 and 1998, respectively,
related to the issuance of the units. Subsequent to August 31, 1999, 4,500 of
Phantom Unit grants vested pursuant to the vesting rights of the Restricted Unit
Plan. Predecessor Heritage follows the disclosure only provision of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation". Pro-forma net income and net income per limited partner unit
under

F-31
<PAGE> 76

the fair value method of accounting for equity instruments under SFAS No. 123
would be the same as reported net income and net income per limited partner
unit.

7. REGISTRATION STATEMENTS:

Effective November 19, 1997, Predecessor Heritage registered 2,000,000
additional Common Units on Form S-4 that may be issued from time to time by
Predecessor Heritage by means of a prospectus delivered in connection with its
negotiations for acquisition of other businesses, properties or securities in
business combination transactions. During the period ended August 9, 2000,
76,152 Common Units were issued from this registration statement in connection
with acquisitions.

Effective September 13, 1999, Predecessor Heritage registered $150,000,000 of
Common Units and Debt Securities on Form S-3 that may be offered for sale in one
or more offerings. On October 25, 1999, Predecessor Heritage issued a prospectus
supplement offering 1,200,000 Common Units, representing limited partner
interests in Predecessor Heritage. The underwriters delivered the Common Units
to purchasers on October 28, 1999 at a public offering price of $22.00 per
Common Unit. Predecessor Heritage used the net proceeds of approximately $24.0
million from this offering to repay a portion of the outstanding indebtedness
under its acquisition facility that was incurred to acquire propane businesses.

8. PROFIT SHARING AND 401(k) SAVINGS PLAN:

Predecessor Heritage sponsors a defined contribution profit sharing and 401(k)
savings plan (the "Plan"), which covers all employees subject to service period
requirements. Contributions are made to the Plan at the discretion of the Board
of Directors. Total expense under the profit sharing provision of the Plan
during the period ended August 9, 2000 and the years ended August 31, 1999 and
1998 was $0, $425 and $375, respectively.

9. RELATED PARTY TRANSACTIONS:

Predecessor Heritage has no employees and is managed by the General Partner.
Pursuant to the Partnership Agreement, the General Partner is entitled to
reimbursement for all direct and indirect expenses incurred or payments it makes
on behalf of Predecessor Heritage, and all other necessary or appropriate
expenses allocable to Predecessor Heritage or otherwise reasonably incurred by
the General Partner in connection with operating Predecessor Heritage's
business. These costs, which totaled approximately $40,742, $38,314 and $33,870
for the period ended August 9, 2000 and the years ended August 31, 1999 and
1998, respectively, include compensation and benefits paid to officers and
employees of the General Partner. At August 31, 1999 accounts payable included
amounts payable from Predecessor Heritage to the General Partner of $1,964.

10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

Predecessor Heritage records derivative instruments (including derivative
instruments embedded in other contracts) in the balance sheet as either an asset
or liability measured at fair value. Changes in a derivative's fair value is
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement.
Companies must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.

Predecessor Heritage entered into certain financial swap instruments during the
period ended August 9, 2000 that have been designated as cash flow hedging
instruments in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Financial swaps are a contractual agreement
to exchange obligations of money between the buyer and seller of the instruments
as propane volumes during the pricing period are purchased. The swaps are tied
to a set fixed price for the buyer and floating price determinants for the
seller priced on certain indices. Predecessor Heritage entered into these
instruments to hedge the forecasted propane volumes to be purchased during each
of the one-month periods ending October 2000 through March 2001. Predecessor
Heritage utilizes hedging transactions to provide price protection against
significant fluctuations in propane prices. These instruments had a fair value
of $3,448 as of August 9, 2000, which was recorded as prepaids an other current
assets on the balance sheet through other comprehensive income, exclusive of
$159 of minority interest.

F-32
<PAGE> 77

TRADING ACTIVITIES

Predecessor Heritage has recorded its trading activities at fair value in
accordance with Emerging Issues Task Force Issue No. 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities", ("EITF
98-10"). EITF 98-10 requires energy trading contracts to be recorded at fair
value on the balance sheet, with the changes in fair value included in earnings.

Predecessor Heritage trades financial instruments for its own account through
its wholly owned subsidiary, Heritage Energy Resources ("Resources"). Financial
instruments utilized in connection with trading activities are accounted for
using the mark-to-market method. Under the mark-to-market method of accounting,
forwards, swaps, options and storage contracts are reflected at fair value, and
are shown in the consolidated balance sheet as assets and liabilities from
trading activities. Unrealized gains and losses from the financial contracts and
the impact of price movements are recognized in the income statement, as other
income (expense). Changes in the assets and liabilities from trading activities
results primarily from changes in the market prices, newly originated
transactions and the timing of settlement. Resources attempts to balance its
contractual portfolio in terms of notional amounts and timing of performance and
delivery obligations. However, net unbalanced positions can exist or are
established based on assessment of anticipated market movements.

Notional Amounts and Terms --

The notional amounts and terms of these financial instruments as of August 9,
2000 include fixed price payor for 555 barrels of propane and fixed price
receiver of 608 barrels and 120 barrels of propane and butane, respectively.
Notional amounts reflect the volume of the transactions, but do not represent
the amounts exchanged by the parties to the financial instruments. Accordingly,
notional amounts do not accurately measure Predecessor Heritage's exposure to
market or credit risks.

Fair Value --

The fair value of the financial instruments related to trading activities as of
August 9, 2000, was assets of $224 and liabilities of $249 related to propane
and butane. The income related to trading activities for the period ended August
9, 2000, was immaterial. The market prices used to value these transactions
reflect management's best estimate considering various factors including closing
average spot prices for the current and outer months plus a differential to
consider time value and storage costs.

Market and Credit Risk --

Inherent in the resulting contractual portfolio is certain business risks,
including market risk and credit risk. Market risk is the risk that the value of
the portfolio will change, either favorably or unfavorably, in response to
changing market conditions. Credit risk is the risk of loss from nonperformance
by suppliers, customers, or financial counterparties to a contract. Predecessor
Heritage and Resources take an active role in managing and controlling market
and credit risk and have established control procedures, which are reviewed on
an ongoing basis. Heritage monitors market risk through a variety of techniques,
including routine reporting to senior management. Heritage attempts to minimize
credit risk exposure through credit policies and periodic monitoring procedures.

11. REPORTABLE SEGMENTS:

Predecessor Heritage's financial statements reflect four reportable segments:
the domestic retail operations of Predecessor Heritage, the domestic wholesale
operations of Predecessor Heritage, the foreign wholesale operations of M-P
Energy Partnership, and the trading activities of Resources. Predecessor
Heritage's reportable domestic and wholesale fuel segments are strategic
business units that sell products and services to different types of users;
retail and wholesale customers. Intersegment sales by the foreign wholesale
segment to the domestic segment are priced in accordance with the partnership
agreement. Resources is a trading company that buys and sells financial
instruments for their own account. Predecessor Heritage manages these segments
separately as each segment involves different distribution, sale and marketing
strategies. Predecessor Heritage evaluates the performance of its operating
segments based on operating income. The operating income below does not reflect
domestic and foreign selling, general, and administrative expenses of $5,974,
$6,236 and $5,484 for the period ended August 9, 2000 and for the years ended
August 31, 1999 and 1998, respectively.

F-33
<PAGE> 78

The following table presents financial information by segment for the period
ended August 9, 2000 and the years ended August 31, 1999 and 1998:

<TABLE>
<CAPTION>
August 31,
August 9, --------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Gallons:
Domestic retail fuel 170,891 159,938 146,747
Domestic wholesale fuel 7,113 7,795 11,413
Foreign wholesale fuel
Affiliated 63,390 56,869 44,133
Unaffiliated 75,514 73,337 74,807
Elimination (63,390) (56,869) (44,133)
---------- ---------- ----------
Total 253,518 241,070 232,967
========== ========== ==========

Revenues:
Domestic retail fuel $ 178,906 $ 137,403 $ 136,301
Domestic wholesale fuel 4,342 3,409 5,345
Foreign wholesale fuel
Affiliated 29,038 16,903 14,696
Unaffiliated 30,803 20,628 24,929
Elimination (29,038) (16,903) (14,696)
Trading activity 4,300 -- --
Other domestic revenues 24,140 22,580 19,412
---------- ---------- ----------
Total $ 242,491 $ 184,020 $ 185,987
========== ========== ==========

Operating Income:
Domestic retail $ 27,670 $ 29,659 $ 27,242
Domestic wholesale fuel 259 162 227
Foreign wholesale fuel
Affiliated 541 494 196
Unaffiliated 1,528 982 944
Elimination (541) (494) (196)
Trading activity (8) -- --
---------- ---------- ----------
Total $ 29,449 $ 30,803 $ 28,413
========== ========== ==========
</TABLE>

<TABLE>
<CAPTION>
August 31,
1999
------------
<S> <C>
Total Assets:
Domestic retail $ 236,215
Domestic wholesale 2,803
Foreign wholesale 4,566
Corporate 19,374
------------
Total $ 262,958
============
</TABLE>

<TABLE>
<CAPTION>
August 31,
August 9, -------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Depreciation and amortization:
Domestic retail $ 17,105 $ 14,691 $ 13,603
Domestic wholesale 31 45 59
Foreign wholesale 7 13 18
---------- ---------- ----------
Total $ 17,143 $ 14,749 $ 13,680
========== ========== ==========
</TABLE>

F-34
<PAGE> 79

12. SIGNIFICANT INVESTEE:

At August 31, 1999, Predecessor Heritage held a 50 percent interest in Bi-State
Partnership. Predecessor Heritage accounts for its 50 percent interest in
Bi-State Partnership under the equity method. Predecessor Heritage's investment
in Bi-State Partnership totaled $5,202 at August 31, 1999. Predecessor Heritage
received distributions from Bi-State Partnership in the amount of $200, $470 and
$100 for the period ended August 9, 2000, and for the years ended August 31,
1999 and 1998, respectively.

Bi-State Partnership's financial position is summarized below:

<TABLE>
<CAPTION>
August 31,
1999
------------
<S> <C>
Current assets $ 1,533
Noncurrent assets 14,281
------------
$ 15,814
============

Current liabilities $ 2,333
Long-term debt 4,804
Partners' capital:
Heritage 5,202
Other partner 3,475
------------
$ 15,814
============
</TABLE>

Bi-State Partnership's results of operations for the period ended August 9, 2000
and the fiscal years ended August 31, 1999 and 1998 are summarized below:

<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 12,298 $ 12,627 $ 10,708
Gross profit 6,008 7,356 5,944
Net income:
Heritage 613 1,005 707
Other partner 753 1,149 878
</TABLE>

13. QUARTERLY FINANCIAL DATA (UNAUDITED):

The retail propane distribution business is largely seasonal due to propane's
use as a heating source in residential and commercial buildings. Historically,
approximately two-thirds of Predecessor Heritage's retail propane volume and
more than 80 percent of the EBITDA is attributable to sales during the six-month
peak heating season of October through March. Consequently, sales and operating
profits are concentrated in Predecessor Heritage's first and second fiscal
quarters. Cash flow from operations, however, is greatest during the second and
third fiscal quarters when customers pay for propane purchased during the
six-month peak-heating season.

<TABLE>
<CAPTION>
Fiscal 2000: Quarter Ended
----------------------------------------------- Period Ended
November 30 February 28 May 31 August 9,
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues $ 51,890 $ 102,160 $ 57,224 $ 31,217
Operating income (loss) 3,430 21,253 2,732 (3,940)
Net income (loss) (808) 16,971 (2,198) (7,461)

Net income (loss) per unit-
basic and diluted (0.09) 1.70 (0.22) (.72)
</TABLE>

F-35
<PAGE> 80

<TABLE>
<CAPTION>
Fiscal 1999: Quarter Ended
----------------------------------------------------------------
November 30 February 28 May 31 August 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 41,558 $ 68,498 $ 43,150 $ 30,814
Operating income (loss) 4,563 18,070 5,009 (3,075)
Net income (loss) 1,215 14,404 1,344 (7,301)
Net income (loss) per unit-
basic and diluted 0.14 1.66 0.15 (0.84)
</TABLE>

F-36