<PAGE>
RULE NO. 424(b)(1)
REGISTRATION NO. 33-40855
PROSPECTUS
832,727 COMMON UNITS
STAR GAS PARTNERS, L.P.
LIMITED PARTNER INTERESTS
--------------
All of the common units ("Common Units") offered hereby represent limited
partner interests in Star Gas Partners, L.P., a Delaware limited partnership
(the "Partnership"). Of the 832,727 Common Units offered hereby, 809,000 Common
Units are being offered by the Partnership and 23,727 Common Units are being
offered by Star Gas Corporation ("Star Gas"), the selling unitholder (the
"Selling Unitholder"). See "Underwriting." The Partnership will not receive any
of the proceeds from the sale of Common Units by the Selling Unitholder. See
"The Selling Unitholder." The Partnership was formed in 1995 to acquire and
operate the propane business and assets of Star Gas and Petroleum Heat and
Power Co., Inc. ("Petro"). Star Gas, the general partner (the "General
Partner") of the Partnership, is a wholly owned subsidiary of Petro.
The Partnership distributes to its partners, on a quarterly basis, all of its
Available Cash, which is generally all of the cash receipts of the Partnership
less all cash disbursements, as adjusted for reserves. The General Partner has
broad discretion in making cash disbursements and establishing reserves. It is
the intent of the Partnership, to the extent there is sufficient Available
Cash, to distribute to each holder of Common Units at least $0.55 per Common
Unit per quarter (the "Minimum Quarterly Distribution") or $2.20 per Common
Unit on an annualized basis. During the Subordination Period, which generally
will not end prior to January 1, 2001, the Minimum Quarterly Distribution will
be made to the holders of Common Units before any distributions will be made on
the Subordinated Units of the Partnership. The Partnership has distributed the
Minimum Quarterly Distribution on all of the outstanding Units for each
calendar quarter since the completion of the Partnership's initial public
offering in December 1995 (the "IPO"). The first distribution on the Common
Units purchased in this Offering will be paid with respect to the quarter
ending December 31, 1997 on or about February 13, 1998 to holders of record on
or about February 2, 1998.
The Common Units are listed on the Nasdaq National Market under the symbol
"SGASZ." The last reported sale price of Common Units on the Nasdaq National
Market on December 16, 1997 was $21.25 per Common Unit.
SEE "RISK FACTORS" BEGINNING ON PAGE 25 OF THIS PROSPECTUS FOR A DISCUSSION
OF THE MATERIAL RISKS RELATING TO AN INVESTMENT IN THE COMMON UNITS. THESE
RISKS INCLUDE:
. CASH DISTRIBUTIONS ARE NOT GUARANTEED, WILL DEPEND ON THE FUTURE OPERATING
PERFORMANCE OF THE PARTNERSHIP AND WILL BE AFFECTED BY THE FUNDING OF
RESERVES, EXPENDITURES AND OTHER MATTERS WITHIN THE DISCRETION OF THE
GENERAL PARTNER. AS A RESULT, THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP
WILL BE ABLE TO DISTRIBUTE THE MINIMUM QUARTERLY DISTRIBUTION OR ANY OTHER
PARTICULAR LEVEL OF CASH DISTRIBUTIONS TO UNITHOLDERS.
. FUTURE PARTNERSHIP PERFORMANCE WILL DEPEND UPON THE SUCCESS OF THE
PARTNERSHIP IN MAXIMIZING PROFITS FROM RETAIL PROPANE SALES. PROPANE SALES
ARE AFFECTED BY WEATHER PATTERNS, PRODUCT PRICES AND COMPETITION, INCLUDING
COMPETITION FROM OTHER ENERGY SOURCES.
(Additional Risk Factors are summarized on page 2.)
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to Proceeds to
Public Commissions(1) Partnership(2) Selling Unitholder
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Common Unit........ $21.25 $1.17 $20.08 $20.08
- -------------------------------------------------------------------------------------
Total.................. $17,695,449 $974,291 $16,244,720 $476,438
- -------------------------------------------------------------------------------------
Total Assuming Full Ex-
ercise of Under-
writers' Over-Allotment
Option(3)............. $20,330,449 $1,119,371 $16,244,720 $2,966,358
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $450,000, which are payable by the
Partnership.
(3) Assuming exercise in full of the 30-day option granted by the Selling
Unitholder to the Underwriters to purchase up to 124,000 additional Units,
on the same terms, solely to cover over-allotments. See "Underwriting."
--------------
The Common Units offered by this Prospectus are offered by the Underwriters
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to their right to reject orders in whole or in part.
It is expected that delivery of the Common Units will be made in New York City
on or about December 22, 1997.
--------------
PAINEWEBBER INCORPORATED LEHMAN BROTHERS
--------------
THE DATE OF THIS PROSPECTUS IS DECEMBER 16, 1997
<PAGE>
(continued from page 1)
. BECAUSE THE RETAIL PROPANE INDUSTRY IS MATURE AND OVERALL DEMAND FOR
PROPANE IS EXPECTED TO EXPERIENCE LIMITED GROWTH IN THE FORESEEABLE FUTURE,
THE PARTNERSHIP WILL DEPEND ON ACQUISITIONS AS THE PRINCIPAL MEANS OF
GROWTH. THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP WILL BE ABLE TO
COMPLETE FUTURE ACQUISITIONS.
. THE PARTNERSHIP IS SIGNIFICANTLY LEVERAGED AND HAS INDEBTEDNESS THAT IS
SUBSTANTIAL IN RELATION TO ITS PARTNERS' EQUITY. ON A PRO FORMA BASIS, AT
SEPTEMBER 30, 1997, THE PARTNERSHIP'S TOTAL INDEBTEDNESS AS A PERCENTAGE OF
ITS TOTAL CAPITALIZATION WOULD HAVE BEEN 57.4%.
. HOLDERS OF COMMON UNITS HAVE LIMITED VOTING RIGHTS, AND THE GENERAL PARTNER
MANAGES AND OPERATES THE PARTNERSHIP.
. THE AVAILABILITY TO A UNITHOLDER OF THE FEDERAL INCOME TAX BENEFITS OF AN
INVESTMENT IN THE PARTNERSHIP LARGELY DEPENDS ON THE CLASSIFICATION OF THE
PARTNERSHIP AS A PARTNERSHIP FOR THAT PURPOSE. THE PARTNERSHIP WILL RELY ON
AN OPINION OF COUNSEL, AND NOT A RULING FROM THE INTERNAL REVENUE SERVICE,
ON THAT ISSUE AND OTHERS RELEVANT TO A UNITHOLDER.
. THE TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP ARE COMPLEX. IT IS
ANTICIPATED THAT THROUGH 2000 A UNITHOLDER WILL RECEIVE SUBSTANTIAL
DISTRIBUTIONS THAT WILL REDUCE HIS TAX BASIS, WITH THE RESULT THAT HE MAY
RECOGNIZE SUBSTANTIAL GAIN, AND A RELATED FEDERAL INCOME TAX LIABILITY,
UPON A SUBSEQUENT SALE OF HIS UNITS.
The Common Units offered hereby will represent an aggregate 13.1% limited
partner interest in the Partnership (15.1% if the Underwriters' over-allotment
option is exercised in full). Following the completion of this Offering, there
will be an aggregate of 3,831,727 Common Units and 2,396,078 subordinated
limited partner interests (the "Subordinated Units") outstanding, representing
a 60.3% and a 37.7% limited partner interest in the Partnership, respectively.
If the Underwriters' over-allotment option is exercised in full, 124,000
additional Common Units will be sold by the Selling Unitholder resulting in
3,831,727 Common Units and 2,396,078 Subordinated Units outstanding
representing a 60.3% and 37.7% limited partner interest in the Partnership,
respectively. The General Partner will own an aggregate 2% general partner
interest in the Partnership and the Operating Partnership as well as 2,396,078
Subordinated Units and 124,000 Common Units (which are subject to the
Underwriters' over-allotment option). The Common Units and the Subordinated
Units are collectively referred to herein as the "Units." Holders of the
Common Units and the Subordinated Units are collectively referred to herein as
"Unitholders."
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON UNITS.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
MAY BID FOR, AND PURCHASE COMMON UNITS IN THE OPEN MARKET AND MAY IMPOSE
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") which represent the Partnership's expectations or beliefs
concerning future events that involve risks and uncertainties, including those
associated with the effect of national and regional economic conditions, the
effect of weather conditions on the Partnership's financial performance, the
price and supply of propane and the ability of the Partnership to obtain new
accounts and retain existing accounts. All statements other than statements of
historical facts included in this Prospectus, including, without limitation,
statements regarding the Partnership's business strategy, plans and objectives
of the Partnership for future operations and statements under "Prospectus
Summary--Cash Available For Distribution" and "Cash Distribution Policy" are
forward-looking statements. Although the Partnership believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
Important factors that could cause actual results to differ materially from
the Partnership's expectations ("Cautionary Statements") are disclosed in this
Prospectus, including, without limitation, in conjunction with the forward-
looking statements included in this Prospectus and under "Risk Factors." All
subsequent written and oral forward-looking statements attributable to the
Partnership or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY........................................................ 6
Star Gas Partners, L.P.................................................. 6
Summary Selected Historical and Pro Forma Financial And Operating Data.. 9
The Offering............................................................ 11
Risk Factors............................................................ 16
Cash Available for Distribution......................................... 20
Partnership Structure and Management.................................... 20
Summary of Tax Considerations........................................... 22
RISK FACTORS.............................................................. 25
Risks Inherent in the Partnership's Business............................ 25
Risks Inherent in an Investment in the Partnership...................... 27
Conflicts of Interest and Fiduciary Responsibility...................... 30
Tax Considerations...................................................... 32
USE OF PROCEEDS........................................................... 34
CAPITALIZATION............................................................ 35
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS............................. 36
CASH DISTRIBUTION POLICY.................................................. 37
Quarterly Distributions of Available Cash............................... 37
Distributions from Operating Surplus during Subordination Period........ 38
Distributions from Operating Surplus after Subordination Period......... 39
Incentive Distributions................................................. 39
Distributions from Capital Surplus...................................... 40
Adjustment of Minimum Quarterly Distribution and Target Distribution
Levels................................................................. 41
Distributions of Cash Upon Liquidation.................................. 41
Cash Available for Distribution......................................... 42
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA............ 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 46
Overview................................................................ 46
Results of Operations and Other Data.................................... 46
Liquidity and Capital Resources......................................... 49
Description of Indebtedness............................................. 50
Effects of Inflation.................................................... 52
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
BUSINESS................................................................... 53
General.................................................................. 53
Pearl Gas Acquisition.................................................... 53
Industry Background...................................................... 54
Business Strategy........................................................ 54
Marketing and Operations................................................. 55
Supply................................................................... 57
Competition.............................................................. 58
Employees................................................................ 58
Government Regulations................................................... 58
Properties............................................................... 60
Litigation............................................................... 60
MANAGEMENT................................................................. 61
Partnership Management................................................... 61
Directors and Executive Officers of the General Partner.................. 61
Key Employees............................................................ 63
Reimbursement of Expenses of the General Partner......................... 64
Executive Compensation................................................... 65
Unit Option Plan......................................................... 65
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End
Option Values........................................................... 65
Compensation of Directors................................................ 65
Ownership of Common and Subordinated Units............................... 66
Ownership of Petro Common Stock by the Directors and Executive Officers
of the General Partner.................................................. 66
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 68
The IPO and Additional Transactions...................................... 68
General.................................................................. 68
Pearl Gas Acquisition.................................................... 69
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITY......................... 70
Conflicts of Interest.................................................... 70
Fiduciary Duties of the General Partner.................................. 73
DESCRIPTION OF THE COMMON UNITS............................................ 75
The Units................................................................ 75
Transfer Agent and Registrar............................................. 75
Transfer of Units........................................................ 75
THE PARTNERSHIP AGREEMENT.................................................. 77
Organization and Duration................................................ 77
Purpose.................................................................. 77
Capital Contributions.................................................... 77
Power of Attorney........................................................ 78
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Restrictions on Authority of the General Partner with Respect to
Extraordinary Transactions; Lack of Dissenter's Rights.................. 78
Withdrawal or Removal of the General Partner; Approval of Successor
General Partner......................................................... 78
Transfer of General Partner Interest..................................... 79
Reimbursement for Services............................................... 79
Status as Limited Partner or Assignee.................................... 79
Non-citizen Assignees; Redemption........................................ 80
Issuance of Additional Securities........................................ 80
Limited Call Right....................................................... 81
Amendment of Partnership Agreement....................................... 81
Meetings; Voting......................................................... 82
Indemnification.......................................................... 83
Limited Liability........................................................ 83
Books and Reports........................................................ 84
Right to Inspect Partnership Books and Records........................... 85
Termination and Dissolution.............................................. 85
Liquidation and Distribution of Proceeds................................. 85
Registration Rights...................................................... 86
UNITS ELIGIBLE FOR FUTURE SALE............................................. 87
TAX CONSIDERATIONS......................................................... 89
Legal Opinions and Advice................................................ 89
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Tax Rates............................................................... 90
Partnership Status...................................................... 90
Limited Partner Status.................................................. 91
Tax Consequences of Unit Ownership...................................... 91
Tax Treatment of Operations............................................. 94
Disposition of Common Units............................................. 97
Uniformity of Units..................................................... 99
Administrative Matters.................................................. 101
State, Local and Other Tax Considerations............................... 103
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS AND INDIVIDUAL
RETIREMENT ACCOUNTS...................................................... 105
UNDERWRITING.............................................................. 106
THE SELLING UNITHOLDER.................................................... 107
VALIDITY OF COMMON UNITS.................................................. 107
EXPERTS................................................................... 107
AVAILABLE INFORMATION..................................................... 107
INDEX TO FINANCIAL STATEMENTS............................................. F-1
APPENDIX A-APPLICATION FOR TRANSFER OF COMMON UNITS....................... A-1
APPENDIX B-GLOSSARY OF TERMS.............................................. B-1
</TABLE>
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and historical and pro forma financial statements and data
appearing elsewhere in this Prospectus and should be read only in conjunction
with the entire Prospectus. Unless otherwise specified, the information in this
Prospectus assumes that the Underwriters' over-allotment option is not
exercised. Information in this Prospectus with respect to the Partnership's
financial statements and operating data as of and for any date or periods
subsequent to October 22, 1997, includes information relating to Pearl Gas Co.
("Pearl Gas"). Except as the context otherwise requires, references to or
descriptions of operations of the Partnership include the operations of the
Operating Partnership and any other subsidiary operating partnership or
corporation, the Partnership's predecessor, Star Gas Corporation ("Star Gas"),
and the propane operations of Petroleum Heat and Power Co., Inc. ("Petro"). All
such operations are sometimes collectively referred to herein as the "Star Gas
Group." For ease of reference, a glossary (the "Glossary") of certain terms
used in this Prospectus is included as Appendix B to this Prospectus.
Capitalized terms not otherwise defined herein have the meanings given in the
Glossary.
STAR GAS PARTNERS, L.P.
GENERAL
The Partnership is a Delaware limited partnership formed in 1995 to acquire
and operate the propane business of Star Gas and its parent corporation, Petro.
The Partnership is primarily engaged in the retail distribution of propane and
related supplies and equipment to residential, commercial, industrial,
agricultural and motor fuel customers. On October 22, 1997, the Partnership
completed the acquisition of Pearl Gas, a retail propane distributor
headquartered in Bowling Green, Ohio, which sells over 14 million gallons of
retail propane annually to over 12,000 customers. After giving effect to such
acquisition, the Partnership believes that it is the eighth largest retail
propane distributor in the United States, serving approximately 162,000
customers from 72 branch locations in the Midwest and Northeast. In addition to
its retail business, the Partnership also serves approximately 60 wholesale
customers from its wholesale operation in southern Indiana.
Propane is used primarily for space heating, water heating and cooking by the
Partnership's residential and commercial customers, which constitute the
largest portion of its customer base. The Partnership believes its business is
relatively stable due to the following characteristics: (i) the demand for
propane has been relatively unaffected by general economic conditions due to
the largely non-discretionary nature of most propane purchases; (ii) the loss
of customers to other competing energy sources has been low; and (iii) customer
retention has been high due to an automatic delivery system, which eliminates
affirmative purchase decisions, and to the Partnership's ownership of over 95%
of the tanks utilized by its customers.
The Partnership sells propane primarily to four specific retail markets:
residential, industrial/commercial, agricultural and other (principally to
other propane retailers and as a motor fuel). In the Midwest, the Partnership
services customers in Indiana, Kentucky, Michigan, Ohio and West Virginia. In
the Northeast, the Partnership services customers in Connecticut, Maine,
Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania and Rhode
Island. During the fiscal year ended September 30, 1997, approximately 71% of
the Partnership's sales (by volume of gallons sold) were to retail customers
(of which approximately 52%, 21%, 18% and 9% were sales to residential
customers, industrial/commercial customers, agricultural customers and motor
fuel customers, respectively) and approximately 29% were to wholesale
customers. Residential sales have a greater profit margin and a more stable
customer base and tend to be less sensitive to price changes than the other
markets served by the Partnership. Sales to residential customers in fiscal
1997 accounted for 62% of the Partnership's gross profit on propane sales,
reflecting the higher-margin nature of this segment of the retail market.
6
<PAGE>
BUSINESS STRATEGY
The Partnership's business strategy is to maximize its cash flow and
profitability, primarily through (i) internal growth, (ii) controlling
operating costs and (iii) acquisitions which have the potential for generating
attractive returns on investment. The retail propane industry is mature and
experiences only limited growth in total demand for the product. The propane
industry is also large and highly fragmented, with approximately 6,000
independently owned and operated distributors. Given these characteristics, the
Partnership's acquisition strategy is focused on acquiring smaller to medium-
sized local and regional independent propane distributors, particularly those
with a relatively large percentage of residential customers, which generate
higher margins than other types of customers, and those located in the Midwest
and Northeast, where the Partnership believes it can attain higher margins than
in other areas of the United States.
Although there are no formal arrangements between Petro and the Partnership,
the Partnership has had, and anticipates that it will continue to have, access
to Petro's management expertise. In particular, the Partnership believes that
the extensive experience of Petro's management team in making acquisitions in
the home heating oil industry, which has many similar characteristics to the
propane industry, provides the Partnership with a competitive advantage.
Additionally, the field of potential acquisition candidates for the Partnership
is broadened because of the ability to acquire companies with both home heating
oil and propane operations, with the Partnership either retaining the propane
operations and Petro retaining the home heating oil operations or the
Partnership retaining both the propane and the home heating oil operations. In
this regard, although the Partnership does not presently have any home heating
oil operations, it may consider acquiring or retaining such operations in the
future to the extent that the Partnership is able to identify attractive
acquisition candidates in the home heating oil field. See "Conflicts of
Interest and Fiduciary Responsibility--Conflicts of Interest."
In order to facilitate the Partnership's acquisition strategy, the Operating
Partnership has entered into bank credit facilities (the "Bank Credit
Facilities"), which consist of a $25.0 million acquisition facility (the
"Acquisition Facility") (of which $21.0 million was outstanding as of November
30, 1997) and a $12.0 million working capital facility (the "Working Capital
Facility") (of which $8.7 million was outstanding as of November 30, 1997). In
addition to borrowings under the Bank Credit Facilities, the Partnership may
fund future acquisitions from internal cash flow or from the issuance of
additional Partnership interests or debt securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
While the Partnership regularly considers and evaluates acquisitions as part
of its ongoing acquisition program, the Partnership does not have any present
agreements or commitments with respect to any acquisition. There can be no
assurance that the Partnership will identify attractive acquisition candidates
in the future or that it will be able to acquire such candidates or obtain
financing for such acquisitions on acceptable terms. In addition, there can be
no assurance that any such acquisition will not dilute earnings and
distributions or that any additional debt incurred to finance acquisitions will
not affect the ability of the Partnership to make distributions to Unitholders.
The General Partner has broad discretion in making acquisitions and it is
expected that the General Partner will not generally seek Unitholder approval
of acquisitions.
RECENT DEVELOPMENTS
Pearl Gas Acquisition
On October 22, 1997, the Operating Partnership completed the acquisition of
Pearl Gas (the "Pearl Gas Acquisition") which is based in Bowling Green, Ohio.
Pearl Gas, which has been in business for more than 70 years, sells over 14
million gallons of retail propane annually to over 12,000 customers. Pearl Gas
operates primarily in northwest Ohio, southern Michigan and northeast Indiana.
Over 80% of Pearl Gas' volume is sold to residential customers.
The purchase price for Pearl Gas was $23.0 million in cash (including
estimated working capital of $1.9 million which is subject to adjustment, and
transaction expenses of $0.4 million) plus the issuance of limited and
7
<PAGE>
general partner interests in the Partnership, including 147,727 Common Units to
the General Partner (valued in total as of the acquisition date at $3.5
million). See "Certain Relationships and Related Transactions" and "The Selling
Unitholder."
The following chart sets forth for the periods indicated Pearl Gas' EBITDA,
net income and volume of retail propane gallons sold:
<TABLE>
<CAPTION>
TWELVE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30, 1997
------------- ------------------
1995 1996 ACTUAL ADJUSTED(B)
------ ------ ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA(a)................................... $2,629 $3,162 $3,012 $3,285
Net income.................................. $2,302 $2,924 $2,667 $2,940
Retail propane gallons sold................. 14,372 15,288 14,303 14,303
</TABLE>
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(a) EBITDA is defined as operating income plus depreciation and amortization,
less net gain (loss) on sale of businesses and equipment and other non-cash
charges (including impairment of long-lived assets). 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 the Partnership's ability to make the Minimum
Quarterly Distributions.
(b) Adjusted to include $0.3 million in estimated cost savings which Management
anticipates will be realized as a result of the Pearl Gas Acquisition. See
the Pro Forma Consolidated Financial Statements of Star Gas Partners, L.P.,
included elsewhere in this Prospectus for the combined effect of the Pearl
Gas Acquisition and this Offering.
On a pro forma basis, after giving effect to the Pearl Gas Acquisition and
the completion of this Offering, for the fiscal year ended September 30, 1997,
the Partnership's volume of retail propane gallons sold, EBITDA and net income
would have been 109.2 million gallons, $23.0 million and $3.4 million,
respectively, as compared to the Partnership's historical results of 94.9
million gallons, $19.7 million and $2.0 million, respectively. See the Pro
Forma Consolidated Financial Statement of Star Gas Partners, L.P. included
elsewhere in this Prospectus.
Management of General Partner
Effective as of December 1, 1997, William G. Powers, Jr., the President and
Chief Executive Officer of the General Partner, was appointed as the President
of Petro, and Joseph P. Cavanaugh, Senior Vice President of Petro, succeeded
Mr. Powers as President and Chief Executive Officer of the General Partner. Mr.
Powers was also appointed a Director of the General Partner, and a member of
the newly organized management committee of the Board of Directors of the
General Partner (consisting of Mr. Powers and Irik P. Sevin, Chairman of the
Board). See "Management."
8
<PAGE>
SUMMARY SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table sets forth for the periods and dates indicated summary
selected historical and operating data for the Partnership and the Star Gas
Group and pro forma financial and operating data for the Partnership. The
Summary Selected Historical Financial Data of the Partnership and the Star Gas
Group presented below are derived from the consolidated financial statements of
the Partnership and the Star Gas Group and should be read in conjunction with
"Selected Historical and Pro Forma Financial and Operating Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Partnership and the Star Gas Group
included elsewhere in this Prospectus. The Partnership's summary selected pro
forma financial data are derived from the pro forma financial statements of the
Partnership included elsewhere herein and should be read in connection
therewith. The pro forma financial statements represent the Partnership's
historical financial statements as of and for the fiscal year ended September
30, 1997, as adjusted on a pro forma basis to give effect to (i) the Pearl Gas
Acquisition and (ii) the closing of this Offering and the application of the
net proceeds therefrom as described under "Use of Proceeds."
PARTNERSHIP/STAR GAS GROUP--HISTORICAL
<TABLE>
<CAPTION>
PARTNERSHIP
YEAR ENDED SEPTEMBER 30, PRO
----------------------------------------------------- FORMA
1993 1994 1995 1996(A) 1997 1997(B)
-------- -------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Sales.................. $143,216 $128,040 $104,550 $119,634 $135,159 $149,766
Gross profit........... 69,861 69,487 54,890 61,077 62,948 69,396
Depreciation and
amortization.......... 16,703 13,039 10,073 9,808 10,405 11,495
Operating income
(loss)................ (30,313)(c) 9,393 2,555 9,802 9,003 11,228
Interest expense, net.. 16,479 10,497 8,549 7,124 6,966 7,766
Net income (loss)...... (47,049)(c) (1,404) (6,169)(d) 2,593 2,012 3,437
Net income per
Unit(e)(f)............ $ -- $ -- $ -- $ 0.11 $ 0.37 $ 0.54
Cash distributions
declared per Unit(f).. -- -- -- 1.17 2.20 2.20
BALANCE SHEET DATA (END
OF PERIOD)
Current assets......... $ 20,637 $ 17,374 $ 14,266 $ 17,842 $ 14,165 $ 21,637
Total assets........... 157,847 147,608 155,393 156,913 147,469 179,516
Long-term debt......... 123,992 70,163 1,389 85,000 85,000 96,000
Due to Petro........... 4,723 8,809 86,002 -- -- --
Predecessor's equity
(deficiency)/Partners'
capital............... (2,825) 44,328 44,305 61,398 51,578 71,184
OTHER DATA
EBITDA(g).............. $ 19,652 $ 21,946 $ 13,541(d) $ 19,870 $ 19,703 $ 22,988
Retail propane gallons
sold.................. 114,405 110,069 89,133 96,294 94,893 109,196
Total capital
expenditures(h)....... 4,688 5,419 7,988 5,332 5,279 5,579(i)
</TABLE>
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(a) Reflects the results of operations of the Star Gas Group for the period
October 1, 1995 through December 20, 1995 and the results of the
Partnership from December 20, 1995 through September 30, 1996. The
operating results for the year ended September 30, 1996 were combined to
facilitate an analysis of the fundamental operating data. For the actual
results of the Partnership from December 20, 1995 through September 30,
1996, see the Consolidated Financial Statements of the Partnership included
elsewhere in this Prospectus.
(b) The pro forma financial statements represent the Partnership's historical
financial statements as of and for the fiscal year ended September 30,
1997, as adjusted on a pro forma basis to give effect to (i) the Pearl Gas
Acquisition and (ii) the closing of this Offering and the application of
the net proceeds therefrom as
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described under "Use of Proceeds." See "Pro Forma Consolidated Financial
Statements of Star Gas Partners, L.P." included elsewhere in this
Prospectus.
(c) Includes a loss of approximately $33.0 million in respect of a charge for
the impairment of long-lived assets.
(d) The decline in net income and EBITDA during fiscal year 1995 was primarily
due to the significantly warmer than normal weather conditions during the
1995 heating season. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(e) Net income per Unit is computed by dividing the limited partners' interest
in net income by the limited partners' weighted average number of Units
outstanding.
(f) The closing of the IPO occurred on December 20, 1995, and thus per Unit
figures are only shown for periods thereafter.
(g) EBITDA is defined as operating income plus depreciation and amortization,
less net gain (loss) on sale of businesses and equipment and other non-
cash charges (including the impairment of long-lived assets). 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 the Partnership's ability to make
the Minimum Quarterly Distribution. For a discussion of the cash flows
provided by (used in) the Partnership's and the Star Gas Group's
operating, investing and financing activities, see the statements of cash
flows in the Consolidated Financial Statements of the Partnership included
elsewhere in this Prospectus.
(h) The net maintenance capital expenditures for the fiscal years ended
September 30, 1996 and 1997 were $2.3 million and $3.1 million,
respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(i) Includes historical net maintenance capital expenditures of the
Partnership of $3.1 million and Management's estimated net maintenance
capital expenditures for Pearl Gas of $0.3 million (Pearl Gas' actual net
maintenance capital expenditures for the twelve months ended September 30,
1997 were $0.1 million).
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<PAGE>
THE OFFERING
Securities Offered by the 809,000 Common Units.
Partnership...................
Securities Offered by the
Selling Unitholder............ 23,727 Common Units (147,727 Common Units if
the Underwriters' over-allotment option is
exercised in full). See "Certain
Relationships and Related Transactions--Pearl
Gas Acquisitions."
Units to be Outstanding After
This Offering................. 3,831,727 Common Units and 2,396,078
Subordinated Units, representing a 60.3% and
a 37.7% limited partner interest in the
Partnership, respectively. If the
Underwriters' over-allotment option is
exercised in full, 124,000 additional Common
Units will be sold by the Selling Unitholder,
resulting in 3,831,727 Common Units and
2,396,078 Subordinated Units, representing a
60.3% and 37.7% limited partner interest in
the Partnership, respectively.
Distributions of Available The Partnership distributes all of its
Cash.......................... Available Cash approximately 45 days after
each March 31, June 30, September 30 and
December 31, to Unitholders of record on the
applicable record date and to the General
Partner. "Available Cash" for any quarter
will consist generally of all cash on hand at
the end of such quarter, as adjusted for
reserves. The complete definition of
Available Cash is set forth in the Glossary.
The General Partner has broad discretion in
making cash disbursements and establishing
reserves, thereby affecting the amount of
Available Cash. Available Cash will generally
be distributed 98% to the Unitholders and 2%
to the General Partner, except that if
distributions of Available Cash exceed Target
Distribution Levels above the Minimum
Quarterly Distribution, the General Partner
will receive a percentage of such excess
distributions that will increase to up to 50%
of distributions in excess of the highest
Target Distribution Level. See "Cash
Distribution Policy--Incentive
Distributions."
Distributions to The Partnership intends, to the extent there
Unitholders................... is sufficient Available Cash from Operating
Surplus, to distribute to each holder of
Common Units at least the Minimum Quarterly
Distribution of $0.55 per Common Unit per
quarter. With respect to each quarter during
the Subordination Period, which will
generally not end earlier than January 1,
2001, the Common Unitholders will generally
have the right to receive the Minimum
Quarterly Distribution, plus any arrearages
thereon, before any distribution of Available
Cash from Operating Surplus is made to the
Subordinated Unitholders. The Partnership has
distributed the Minimum Quarterly
Distribution on all of the outstanding Units
for each calendar quarter since the
completion of the IPO. The first distribution
on the Common Units purchased in this
Offering will be paid
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<PAGE>
with respect to the quarter ending December
31, 1997 on or about February 13, 1998 to
holders of record on or about February 2,
1998. In addition, the Minimum Quarterly
Distribution and the Target Distribution
Levels are subject to adjustments in certain
other circumstances. See "Cash Distribution
Policy--Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels."
Subordinated Units will not accrue
distribution arrearages. Upon the expiration
of the Subordination Period, Common Units
will no longer accrue distribution
arrearages. See "Cash Distribution Policy."
Subordination Period.......... The Subordination Period will generally
extend until the first day of any quarter
beginning on or after January 1, 2001 in
respect of which (i) distributions of
Available Cash from Operating Surplus on the
Common Units and the Subordinated Units
equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the
outstanding Common Units and Subordinated
Units with respect to each of the three non-
overlapping four-quarter periods immediately
preceding such date, (ii) the Adjusted
Operating Surplus generated during each of
the three immediately preceding non-
overlapping four-quarter periods equaled or
exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common
Units and Subordinated Units during such
periods and (iii) there are no arrearages in
payment of the Minimum Quarterly Distribution
on the Common Units. Upon expiration of the
Subordination Period, all remaining
Subordinated Units will convert into Common
Units and will thereafter participate pro
rata with the other Common Units in
distributions of Available Cash. In addition,
if the General Partner is removed as the
general partner of the Partnership other than
for Cause, the Subordination Period will end.
Early Conversion of A portion of the Subordinated Units will
Subordinated Units............ convert into Common Units on the first day
after the record date established for any
quarter ending on or after March 31, 1999
(with respect to 599,020 of the Subordinated
Units) and March 31, 2000 (with respect to an
additional 599,020 of the Subordinated
Units), on a cumulative basis, in respect of
which (i) distributions of Available Cash
from Operating Surplus on the Common Units
and the Subordinated Units equaled or
exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common
Units and Subordinated Units with respect to
each of the three non-overlapping four-
quarter periods immediately preceding such
date, (ii) the Adjusted Operating Surplus
generated during each of the three
immediately preceding non-overlapping four-
quarter periods equaled or exceeded the sum
of the Minimum Quarterly Distribution on all
of the outstanding Common
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<PAGE>
Units and Subordinated Units during such
periods and (iii) there are no arrearages in
payment of the Minimum Quarterly Distribution
on the Common Units. See "Cash Distribution
Policy--Quarterly Distributions of Available
Cash."
Incentive Distributions.......
As an incentive, if quarterly distributions
of Available Cash exceed the Target
Distribution Levels, the General Partner will
receive up to 50% of distributions of
Available Cash in excess of such Target
Distribution Levels as follows:
<TABLE>
<CAPTION>
TOTAL QUARTERLY
DISTRIBUTION GENERAL
AMOUNT UNITHOLDERS PARTNER
--------------- ----------- -------
<S> <C> <C> <C>
Minimum Quarterly Distribution........... $0.550 98% 2%
First Target Distribution................ $0.604 98% 2%
Second Target Distribution............... $0.711 85% 15%
Third Target Distribution................ $0.926 75% 25%
Thereafter............................... -- 50% 50%
</TABLE>
See "Cash Distribution Policy--Incentive
Distributions."
Adjustment of Minimum
Quarterly Distribution and
Target Distribution Levels....
The Minimum Quarterly Distribution and the
Target Distribution Levels are subject to
downward adjustments in the event that
Unitholders receive distributions of
Available Cash from Capital Surplus (which
generally includes cash from transactions
such as borrowings (other than working
capital borrowings), refinancings, sales of
securities or sales or other dispositions of
assets constituting a return of capital under
the Partnership Agreement, as distinguished
from cash from Partnership operations), or in
the event legislation is enacted or existing
law is modified or interpreted in a manner
that causes the Partnership to be treated as
an association taxable as a corporation or
otherwise taxable as an entity for federal,
state or local income tax purposes. If the
Unitholders receive a full return of capital
as a result of distributions of Available
Cash from Capital Surplus, the distributions
payable to the General Partner will increase
to 50% of all amounts distributed thereafter.
See "Cash Distribution Policy--Distributions
from Capital Surplus" and "--Adjustment of
Minimum Quarterly Distribution and Target
Distribution Levels."
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<PAGE>
Partnership's Ability to
Issue Additional Units........ The Partnership Agreement authorizes the
General Partner to cause the Partnership to
issue an unlimited number of additional
limited partner interests of the Partnership
for such consideration and on such terms as
shall be established by the General Partner
in its sole discretion without the approval
of the Unitholders. Prior to the end of the
Subordination Period, however, the
Partnership may not issue equity securities
ranking senior to the Common Units or more
than 1,300,000 additional Common Units or an
equivalent number of securities ranking on a
parity with the Common Units (excluding
Common Units or parity Units issued upon
conversion of Subordinated Units, in
connection with certain acquisitions or to
repay certain indebtedness) without the
approval of a Unit Majority. The Common Units
offered hereby (to the extent that the
proceeds thereof are used to refinance
acquisition debt) and the Common Units issued
to Star Gas in connection with the Pearl Gas
Acquisition will be excluded from such
1,300,000 Common Units. See "Risk Factors--
Risks Inherent in an Investment in the
Partnership--The Partnership May Issue
Additional Units, Diluting Existing
Unitholders' Interests" and "The Partnership
Agreement--Issuance of Additional
Securities."
Limited Call Right............ If at any time not more than 20% of the
outstanding limited partner interests of any
class are held by persons other than the
General Partner and its Affiliates, the
General Partner may purchase all of the
remaining limited partner interests of such
class at specified market prices. See "The
Partnership Agreement--Limited Call Right."
Limited Voting Rights......... Unitholders have only limited voting rights
on matters affecting the Partnership's
business. The approval of at least a majority
of the outstanding Units is required in such
instances. See "The Partnership Agreement."
Removal and Withdrawal of the
General Partner............... Subject to certain conditions, the General
Partner may be removed upon the approval of
the holders of at least 66 2/3% of the
outstanding Units, excluding those Units held
by the General Partner and its Affiliates. A
meeting of the holders of the Common Units
may be called only by the General Partner or
by the holders of 20% or more of the
outstanding Common Units. The General Partner
has agreed not to voluntarily withdraw as
general partner of the Partnership and the
Operating Partnership prior to December 31,
2005, subject to limited exceptions, without
obtaining the approval of at least a Unit
Majority and furnishing an Opinion of
Counsel. See "The Partnership Agreement--
Withdrawal or Removal of the
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<PAGE>
General Partner; Approval of Successor
General Partner" and "--Meetings; Voting."
Transfer Restrictions.........
All purchasers of Common Units in this
Offering and purchasers of Common Units in
the open market who wish to become Common
Unitholders of record must deliver an
executed transfer application (the "Transfer
Application," the form of which is included
in this Prospectus as Appendix A) before the
transfer of such Common Units will be
registered and before cash distributions and
federal income tax allocations will be made
to the transferee. See "Description of the
Common Units--Transfer of Units."
Liquidation Preference........ In the event of any liquidation of the
Partnership during the Subordination Period,
the outstanding Common Units will be entitled
to receive a distribution out of the net
assets of the Partnership, generally in
preference to liquidating distributions on
the Subordinated Units. Following conversion
of the Subordinated Units into Common Units,
all Units will be treated the same upon
liquidation of the Partnership. See "Cash
Distribution Policy--Distributions of Cash
Upon Liquidation."
Use of Proceeds...............
The net proceeds to the Partnership from the
sale of the Common Units offered hereby at an
offering price of $21.25 per Common Unit will
be approximately $15.8 million after
deducting the estimated underwriting
discounts and commissions and the estimated
expenses of this Offering. Approximately
$10.0 million of the net proceeds of this
Offering will be used by the Partnership to
reduce the outstanding balance of the
Acquisition Facility and the balance will be
used for general partnership purposes and to
reduce working capital borrowings. The
Partnership will not receive any of the
proceeds from the sale of the Common Units by
the Selling Unitholder. See "Use of
Proceeds."
Nasdaq Trading Symbol......... "SGASZ"
15
<PAGE>
RISK FACTORS
Limited partner interests are inherently different from the capital stock of
a corporation, although many of the business risks to which the Partnership
will be subject are similar to those that would be faced by a corporation
engaged in a similar business. Prospective purchasers of the Common Units
should consider the following factors in evaluating an investment in the Common
Units. All statements other than statements of historical facts included in
this Prospectus, including, without limitation, statements regarding the
Partnership's business strategy, plans and objectives of management of the
Partnership for future operations and the statements under "--Cash Available
For Distribution" and "Cash Distribution Policy," are forward-looking
statements. Although the Partnership believes that the expectations reflected
in such forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to be correct. Important factors that could
cause actual results to differ materially from the Partnership's expectations
are discussed below, under "Risk Factors" and elsewhere in this Prospectus.
Risks Inherent in the Partnership's Business
. Weather conditions have a significant impact on the demand for propane
for both heating and agricultural purposes. Many customers of the
Partnership rely heavily on propane as a heating fuel. Accordingly, the
volume of retail propane sold is highest during the six-month peak
heating season of October through March and is directly affected by the
severity of the winter weather. Approximately 70% to 75% of the
Partnership's combined retail propane volume is attributable to sales
during the peak heating season. Actual weather conditions can vary
substantially from year to year, significantly affecting the
Partnership's financial performance. Furthermore, variations in weather
in one or more regions in which the Partnership operates can
significantly affect the total volumes sold by the Partnership and the
margins realized on such sales and, consequently, the Partnership's
results of operations.
. The retail propane business is a "margin-based" business in which gross
profits depend on the excess of sales prices over propane supply costs.
Consequently, the Partnership's profitability is sensitive to changes in
wholesale propane prices. Propane is a commodity, the market price of
which can be subject to volatile changes in response to changes in
supply or other market conditions. As it may not be possible immediately
to pass on to customers rapid increases in the wholesale cost of
propane, such increases could reduce the Partnership's gross profits.
. The Partnership's profitability is affected by the competition for
customers among all participants in the retail propane business. Some of
the Partnership's competitors are larger or have greater financial
resources than the Partnership. Should a competitor attempt to increase
market share by reducing prices, the Partnership's financial condition
and results of operations could be materially adversely affected. In
addition, propane competes with other sources of energy, some of which
are less costly for equivalent energy value.
. Acquisitions are the principal means of growth for the Partnership, as
the retail propane industry is mature and overall demand for propane is
expected to experience limited growth. There can be no assurance,
however, that the Partnership will identify attractive acquisition
candidates in the future, that the Partnership will be able to acquire
such businesses on economically acceptable terms, that any acquisitions
will not be dilutive to earnings and distributions to the Unitholders or
that any additional debt incurred to finance acquisitions will not
affect the ability of the Partnership to make distributions to the
Unitholders.
. The Partnership transports combustible petroleum products and its
activities are subject to certain operational hazards, including
explosion and resulting personal injury. Although the Partnership
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<PAGE>
maintains insurance with respect to casualty occurrences, a casualty
occurrence could result in the loss of life or equipment, as well as
injury and extensive property damage. The occurrence of an event not
covered by insurance or indemnification may have a material adverse
effect on the business, results of operations or financial position of
the Partnership. In addition, the occurrence of an explosion may have an
adverse effect on the public's desire to use propane.
. During fiscal year 1997, 43% of the Partnership's volume of propane
purchases in the Midwest was purchased on the spot market from various
Mont Belvieu sources and 21% was purchased from three refineries in
Illinois and Indiana owned by Amoco Canada Marketing Group. Although the
Partnership believes that alternative sources of propane are readily
available, in the event that the Partnership were unable to purchase
propane from either of these sources, the failure to obtain alternate
sources of supply at competitive prices and on a timely basis could have
a material adverse effect on the Partnership. Historically, a
substantial portion of the propane purchased by the Partnership has
originated at the Mont Belvieu, Texas storage facilities and has been
shipped to the Partnership through a major common carrier pipeline. Any
significant interruption in the service at Mont Belvieu or on the common
carrier pipeline could have a material adverse effect on the business of
the Partnership.
Risks Inherent in an Investment in the Partnership
. Cash distributions are not guaranteed and may fluctuate based upon the
Partnership's performance. The General Partner may establish reserves
that reduce the amount of Available Cash. Because the business of the
Partnership is seasonal, the General Partner anticipates that it will
make additions to reserves during certain of the Partnership's fiscal
quarters in order to fund operating expenses, interest payments and cash
distributions to partners with respect to other fiscal quarters. Cash
distributions are dependent primarily on cash flow, including from
reserves, and not on profitability, which is affected by non-cash items.
Therefore, cash distributions may be made during periods when the
Partnership records losses and may not be made during periods when the
Partnership records profits. As a result of these and other factors,
there can be no assurance regarding the actual levels of cash
distributions by the Partnership.
. The Partnership is significantly leveraged and has indebtedness that is
substantial in relation to its partners' capital. On a pro forma basis
as of September 30, 1997, the Partnership's total indebtedness as a
percentage of its total capitalization would have been approximately
57.4%. The principal and interest payable on such indebtedness
(including the First Mortgage Notes, which bear interest at 8.04% per
annum) will reduce the cash available to make distributions on the
Units. The terms of the Partnership's indebtedness may under certain
circumstances restrict the ability of the Partnership to distribute cash
to Unitholders and make additional borrowings.
. The First Mortgage Notes (the "First Mortgage Notes") and the Bank
Credit Facilities are secured by a lien on substantially all of the
assets of the Partnership. In the case of a continuing default by the
Partnership under such indebtedness, the lenders would have the right to
foreclose on the Partnership's assets, which would have a material
adverse effect on the Partnership.
. Prior to making any distribution on the Common Units, the Partnership
will reimburse the General Partner and its Affiliates at cost for all
expenses incurred on behalf of the Partnership. Approximately $18.0
million of expenses (primarily wages and salaries) were reimbursed by
the Partnership to the General Partner and its Affiliates in fiscal
1997. In addition, the General Partner and its Affiliates may provide
services to the Partnership for which the Partnership will be charged
reasonable fees as determined by the General Partner. The reimbursement
of such expenses and the payment of any such fees could adversely affect
the ability of the Partnership to make distributions.
. Certain of the Partnership's indebtedness contain provisions relating to
change of control. If such provisions are triggered, such outstanding
indebtedness may become due. In such event, there is no
17
<PAGE>
assurance that the Partnership would be able to pay the indebtedness, in
which case the lenders would have the right to foreclose on the
Partnership's assets, which would have a material adverse effect on the
Partnership. There is no restriction on the ability of the General
Partner to enter into a transaction which would trigger the change of
control provisions.
. The General Partner manages and operates the Partnership, and holders of
Common Units have no right to participate in such management and
operation. Holders of Common Units have no right to elect the General
Partner on an annual or other continuing basis, and have only limited
voting rights on matters affecting the Partnership's business.
. Subject to certain limitations, the Partnership may issue additional
Units or other interests in the Partnership, the effect of which may be
to dilute the interests of holders of Units in distributions by the
Partnership and to make it more difficult for a person or group to
remove the General Partner as a general partner or otherwise change the
management of the Partnership. The Operating Partnership may not issue
additional partnership interests.
. The Partnership Agreement contains certain provisions that may
discourage a person or group from attempting to remove the General
Partner as general partner or otherwise change the management of the
Partnership. The Partnership Agreement provides that if the General
Partner is removed other than for Cause, the Subordination Period will
end, all arrearages on the Common Units will terminate and all
outstanding Subordinated Units will convert into Common Units. The
effect of these provisions may be to diminish the price at which the
Common Units will trade under certain circumstances.
. If, at any time, less than 20% of the then issued and outstanding
limited partner interests of any class (including Common Units) are held
by persons other than the General Partner and its Affiliates, the
General Partner will have the right, which it may assign to any of its
Affiliates or the Partnership, to acquire all, but not less than all, of
the remaining limited partner interests of such class held by such
unaffiliated persons at a price generally equal to the then-current
market price of limited partner interests of such class. As a
consequence, a holder of Common Units may be required to sell his Common
Units at a time when he may not desire to sell them or at a price that
is less than the price he would desire to receive upon such sale.
. The Partnership Agreement provides that any borrowings by the
Partnership shall not constitute a breach of any duty owed by the
General Partner, including borrowings that have the purpose or effect of
enabling the General Partner to receive incentive distributions or
hasten the conversion of the Subordinated Units into Common Units.
. The Partnership Agreement permits the Partnership to engage in roll-up
transactions. Although the General Partner has no present intention of
causing the Partnership to engage in any roll-up transaction, it is
possible it will do so in the future. There can be no assurance that a
roll-up transaction would not have a material adverse effect on a
Limited Partner's investment in the Partnership.
. Under certain circumstances, holders of Units could lose their limited
liability and could become liable for amounts improperly distributed to
them by the Partnership. See "The Partnership Agreement--Limited
Liability."
Conflicts of Interest and Fiduciary Responsibility
. Conflicts of interest have arisen and could arise in the future between
the General Partner and its Affiliates on the one hand, and the
Partnership or any partner thereof, on the other. The Partnership
Agreement permits the General Partner to consider, in resolving
conflicts of interest, the interests of parties (including the General
Partner and its Affiliates) other than the Unitholders, thereby limiting
the General Partner's fiduciary duties to the Unitholders.
18
<PAGE>
. The Partnership Agreement limits the liability and modifies the
fiduciary duties under Delaware law of the General Partner to the
Partnership and the Unitholders. Holders of Common Units are deemed to
have consented to certain actions that might otherwise be deemed
conflicts of interest or a breach of fiduciary duty. The discretion
given in the Partnership Agreement to the General Partner in resolving
conflicts of interest may significantly limit the ability of a
Unitholder to challenge what might otherwise be a breach of fiduciary
duty.
. The Partnership Agreement permits the General Partner's Affiliates to
compete with the Partnership under certain circumstances and to a
limited extent. There can be no assurance that there will not be
competition between the Partnership and the General Partner's
Affiliates.
Tax Considerations
. The availability to a Unitholder of federal income tax benefits of an
investment in the Partnership depends, in large part, on the
classification of the Partnership as a partnership for federal income
tax purposes. Based on certain representations by the General Partner,
Phillips Nizer Benjamin Krim & Ballon LLP, special counsel to the
General Partner and the Partnership, is of the opinion that the
Partnership has been and will continue to be classified as a partnership
for federal income tax purposes.
. No ruling has been requested from the Internal Revenue Service (the
"IRS") with respect to classification of the Partnership as a
partnership for federal income tax purposes, whether the Partnership's
propane operations generate "qualifying income" under Section 7704 of
the Internal Revenue Code of 1986, as amended (the "Code"), or any other
matter affecting the Partnership.
. A Unitholder will be required to pay income taxes on his allocable share
of the Partnership's income, whether or not he receives cash
distributions from the Partnership.
. Investment in Units by certain tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to such persons. For
example, much of the taxable income derived by most organizations exempt
from federal income tax (including individual retirement accounts
("IRAs") and other retirement plans) from the ownership of a Unit will
be unrelated business taxable income and thus will be taxable to such a
Unitholder.
. In the case of taxpayers subject to the passive loss rules (generally
individuals and closely held corporations), losses generated by the
Partnership, if any, will only be available to offset future income
generated by the Partnership and cannot be used to offset income from
other activities, including passive activities or investments. Passive
losses which are not deductible because they exceed the Unitholder's
income generated by the Partnership may be deducted in full when the
Unitholder disposes of his entire investment in the Partnership in a
fully taxable transaction to an unrelated party.
. The Partnership has been registered with the IRS as a "tax shelter." No
assurance can be given that the Partnership will not be audited by the
IRS or that tax adjustments will not be made. Any adjustment in the
Partnership's tax returns will lead to adjustments in the Unitholder's
tax returns and may lead to audits of the Unitholder's tax returns and
adjustments of items unrelated to the Partnership.
. The Partnership has adopted certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed and
final Treasury regulations. A successful challenge to those conventions
by the IRS could adversely affect the amount of tax benefits available
to a purchaser of Units and could have a negative impact on the value of
the Units or result in audit adjustments to the tax returns of
Unitholders.
. A Unitholder will likely be required to file state and local tax returns
and pay state and local income tax in some or all of the various
jurisdictions in which the Partnership does business or owns property.
The Partnership owns property and conducts business in numerous states
which currently impose a personal income tax.
19
<PAGE>
See "Risk Factors," "Conflicts of Interest and Fiduciary Responsibility,"
"Description of the Common Units," "The Partnership Agreement" and "Tax
Considerations" for a more detailed description of these and other risk factors
that should be considered in evaluating an investment in the Common Units.
CASH AVAILABLE FOR DISTRIBUTION
Based in part upon the Partnership's actual results of operations for fiscal
1997, the Partnership believes that it will generate sufficient Available Cash
from Operating Surplus during fiscal 1998 to cover the full Minimum Quarterly
Distribution for four quarters on all of the outstanding Common Units and
Subordinated Units and the general partner interests. The Partnership's belief
is based on a number of assumptions, including the assumptions that normal
weather conditions will prevail in the Partnership's operating areas, that the
Partnership's operating margins will remain constant and that market and
overall economic conditions will not change substantially. Although the
Partnership believes its assumptions are within a range of reasonableness, most
of the assumptions are not within the control of the Partnership and cannot be
predicted with any degree of certainty. For example, in any particular year or
even series of years, weather may deviate substantially from normal. Therefore,
certain of the Partnership's assumptions may prove to be inaccurate. As a
result, the Operating Surplus of the Partnership could deviate from that
currently expected. See "Risk Factors."
The Partnership is required to establish reserves for the future payment of
principal and interest on the First Mortgage Notes and the indebtedness under
the Bank Credit Facilities. There are other provisions in such agreements which
will, under certain circumstances, restrict the Partnership's ability to make
distributions to its partners. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Description of Indebtedness."
PARTNERSHIP STRUCTURE AND MANAGEMENT
The Partnership's activities are conducted through the Operating Partnership
and its corporate subsidiary. The General Partner serves as general partner of
the Partnership and of the Operating Partnership of which the Partnership owns
a 98.9899% limited partner interest. The General Partner owns an aggregate 2%
combined general partner interest in the Partnership and the Operating
Partnership. References herein to the General Partner's 2% interest or to
distributions to the General Partner of 2% of Available Cash are references to
the amount of the General Partner's combined percentage interest in the
Partnership and the Operating Partnership.
The officers and employees of the General Partner and its Affiliates manage
and operate the Partnership's business. The General Partner does not receive
any management fee or other compensation in connection with its management of
the Partnership, but is reimbursed at cost for all direct and indirect expenses
incurred on behalf of the Partnership and all other necessary or appropriate
expenses allocable to the Partnership or otherwise reasonably incurred by the
General Partner in connection with the operation of the Partnership's business.
In addition, Petro may continue to provide certain management services to the
Partnership for which it will be reimbursed at cost.
Conflicts of interest have arisen and could arise in the future between the
General Partner and its Affiliates, on the one hand, and the Partnership or any
partner thereof, on the other, including conflicts relating to the compensation
of the General Partner's officers and employees and the determination of fees
and expenses that are allocable to the Partnership. The General Partner has an
audit committee (the "Audit Committee") consisting of two independent members
of its Board of Directors that are available at the General Partner's
discretion to review matters involving conflicts of interest. See "Conflicts of
Interest and Fiduciary Responsibility."
The principal executive office of the Partnership is located at 2187 Atlantic
Street, Stamford, Connecticut 06912-0011 and its telephone number is (203) 328-
7300.
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The following chart depicts the organization and ownership of the Partnership
and the Operating Partnership after the sale of the Common Units offered
hereby. The percentages reflected in the following chart represent the
approximate ownership interest in each of the Partnership and the Operating
Partnership, individually, and not on an aggregate basis, assuming that the
Underwriters' over-allotment option is not exercised. The aggregate ownership
of the Partnership and the Operating Partnership on a combined basis is shown
in the box entitled "Effective Ownership of the Partnership" in the
organization chart and where referred to elsewhere in this Prospectus.
[CHART DEPICTING EFFECTIVE OWNERSHIP OF THE PARTNERSHIP]
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SUMMARY OF TAX CONSIDERATIONS
The tax consequences of an investment in the Partnership to a particular
investor will depend in part on the investor's own tax circumstances. Each
prospective investor should consult his own tax advisor about the federal,
state and local tax consequences of an investment in Common Units.
The following is a brief summary of certain expected tax consequences of
owning and disposing of Common Units. The following discussion, insofar as it
relates to federal income tax laws, is based in part upon the opinion of
Phillips Nizer Benjamin Krim & Ballon LLP, special counsel to the General
Partner and the Partnership, described in "Tax Considerations." This summary is
qualified by the discussion in "Tax Considerations," particularly the
qualifications on the opinions of counsel described therein.
PARTNERSHIP STATUS
In the opinion of counsel, the Partnership has been and will continue to be
classified for federal income tax purposes as a partnership, and the beneficial
owners of Common Units will be considered partners in the Partnership.
Accordingly, the Partnership will pay no federal income taxes, and a Common
Unitholder will be required to report in his federal income tax return his
share of the Partnership's income, gains, losses and deductions. In general,
cash distributions to a Common Unitholder will be taxable only if, and to the
extent that, they exceed such Unitholder's tax basis in his Common Units.
PARTNERSHIP ALLOCATIONS AND DISTRIBUTIONS
In general, annual income and loss of the Partnership will be allocated to
the General Partner and the Unitholders for each taxable year in accordance
with their respective percentage interests in the Partnership, as determined
annually and prorated on a monthly basis and subsequently apportioned among the
General Partner and the Unitholders of record as of the opening of the first
business day of the month to which they relate, even though Unitholders may
dispose of their Units during the month in question. A Unitholder will be
required to take into account, in determining his federal income tax liability,
his share of income generated by the Partnership for each taxable year of the
Partnership ending with or within the taxable year of the Unitholder, even if
cash distributions are not made to him. As a consequence, a Unitholder's share
of taxable income of the Partnership (and possibly the income tax payable by
him with respect to such income) may exceed the cash, if any, actually
distributed to such Unitholder. Based on the assumptions and estimates
described below in "--Ratio of Taxable Income to Distributions," a Unitholder
subject to the passive loss rules would not have been able to currently use
such deductions. See "--Limitations on Deductibility of Partnership Losses."
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
The Partnership estimates that a purchaser of Common Units in this offering
who holds such Common Units from the date of the closing of this Offering
through December 31, 2000, will be allocated, on a cumulative basis, an amount
of federal taxable income for such period that will be less than 5% of the cash
distributed with respect to that period. The Partnership further estimates that
for taxable years beginning after December 31, 2000, the taxable income
allocable to the Unitholders will constitute a significantly higher percentage
of cash distributed to Unitholders. The foregoing estimates are based upon the
assumption that gross income from operations will approximate the amount
required to make the Minimum Quarterly Distribution with respect to all Units
and other assumptions with respect to capital expenditures, cash flow and
anticipated cash distributions. These estimates and assumptions are subject to,
among other things, numerous business, economic, regulatory, competitive and
political uncertainties beyond the control of the Partnership. Further, the
estimates are based on current tax law and certain tax reporting positions that
the Partnership intends to adopt and with which the IRS could disagree.
Accordingly, no assurance can be given that the estimates will prove to be
correct. The actual percentage could be higher or lower, and any such
differences could be material and could materially affect the value of the
Common Units. See "Tax Considerations--Tax Consequences of Unit Ownership--
Ratio of Taxable Income to Distributions."
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BASIS OF COMMON UNITS
A Unitholder's initial tax basis for a Unit will be the amount paid for the
Unit. A Unitholder's basis is generally increased by his share of Partnership
income and decreased by his share of Partnership losses and distributions.
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
In the case of taxpayers subject to the passive loss limitations of the
passive loss rules (generally, individuals and closely held corporations)
Partnership losses, if any, will only be available to offset future income
generated by the Partnership and cannot be used to offset income from other
activities including passive activities or investments. Any losses unused by
virtue of the passive loss rules may be deducted when the Unitholder disposes
of all of his Units in a fully taxable transaction with an unrelated party.
SECTION 754 ELECTION
The Partnership has made the election provided for by Section 754 of the
Code, which will generally permit a Unitholder to calculate income and
deductions by reference to the portion of his purchase price attributable to
each asset of the Partnership.
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize gain or loss equal to the
difference between the amount realized (including his share of Partnership
nonrecourse debt) and his adjusted basis in such Common Units. Thus,
distributions of cash from the Partnership to a Unitholder in excess of the
income allocated to him will, in effect, become taxable income if he sells his
Units at a price greater than his adjusted tax basis even if the price is less
than his original cost. A portion of the amount realized (whether or not
representing gain) may be ordinary income.
OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes and estate, inheritance or intangible taxes that may be imposed by the
various jurisdictions in which a Unitholder resides or in which the Partnership
does business or owns property. A Unitholder will likely be required to file
state income tax returns and to pay taxes in various states and may be subject
to penalties for failure to comply with such requirements. The General Partner
anticipates that substantially all of the Partnership's income will be
generated in the following states: Connecticut, Indiana, Kentucky, Maine,
Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania and Rhode
Island. Each of these states currently imposes a personal income tax. Some of
these states may require the Partnership to withhold a percentage of income
from amounts to be distributed to a Unitholder who is not a resident of such
state. Withholding, the amount of which may be more or less than a particular
Unitholder's income tax liability owed to the state, may not relieve the
nonresident Unitholder from the obligation to file an income tax return.
Amounts withheld may be treated as if distributed to Unitholders for purposes
of determining the amounts distributed by the Partnership. Based on current law
and its estimate of future operations, the Partnership anticipates that any
amounts required to be withheld will not be material.
It is the responsibility of each prospective Unitholder to investigate the
legal and tax consequences, under the laws of pertinent states and localities,
of his investment in the Partnership. Accordingly, each prospective Unitholder
should consult, and must depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each Unitholder
to file all federal, state and local tax returns that may be required of such
Unitholder. Counsel has not rendered an opinion on the state and local tax
consequences of an investment in the Partnership.
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OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
An investment in Units by tax-exempt organizations (including IRAs and other
retirement plans), regulated investment companies and foreign persons raises
issues unique to such persons. Much of the income derived by a Unitholder which
is a tax-exempt organization will be unrelated business taxable income, and
thus will be taxable to such Unitholder; no significant amount of the
Partnership's gross income will be qualifying income for purposes of
determining whether a Unitholder will qualify as a regulated investment
company; and a Unitholder who is a nonresident alien, foreign corporation or
other foreign person will be regarded as being engaged in a trade or business
in the United States as a result of ownership of a Unit and thus will be
required to file federal income tax returns and to pay tax on such Unitholder's
share of Partnership taxable income. See "Tax Considerations--Uniformity of
Units--Tax-Exempt Organizations and Certain Other Investors."
TAX SHELTER REGISTRATION
The Code generally requires that "tax shelters" be registered with the
Secretary of the Treasury. It is arguable that the Partnership will not be
subject to the registration requirement on the basis that it will not
constitute a tax shelter. Nevertheless, the Partnership is registered as a tax
shelter with the IRS and the IRS has issued the following tax shelter
registration number to the Partnership: 96026000016. ISSUANCE OF THE
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE PARTNERSHIP OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS.
See "Tax Considerations--Administrative Matters--Registration as a Tax
Shelter."
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RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH THE PARTNERSHIP IS
SUBJECT ARE SIMILAR TO THOSE THAT WOULD BE FACED BY A CORPORATION ENGAGED IN A
SIMILAR BUSINESS. PROSPECTIVE PURCHASERS OF THE COMMON UNITS SHOULD CONSIDER
THE FOLLOWING RISK FACTORS IN EVALUATING AN INVESTMENT IN THE COMMON UNITS.
ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
PARTNERSHIP'S BUSINESS STRATEGY, PLANS AND OBJECTIVES OF MANAGEMENT OF THE
PARTNERSHIP FOR FUTURE OPERATIONS AND STATEMENTS UNDER "PROSPECTUS SUMMARY--
CASH AVAILABLE FOR DISTRIBUTION" AND "CASH DISTRIBUTION POLICY," ARE FORWARD-
LOOKING STATEMENTS. ALTHOUGH THE PARTNERSHIP BELIEVES THAT THE EXPECTATIONS
REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO
ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. IMPORTANT FACTS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE PARTNERSHIP'S
EXPECTATIONS ARE DISCLOSED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
Weather Conditions Affect the Demand for Propane
Weather conditions have a significant impact on the demand for propane for
both heating and agricultural purposes. Many customers of the Partnership rely
heavily on propane as a heating fuel. Accordingly, the volume of propane sold
is at its highest during the six-month peak heating season of October through
March and is directly affected by the severity of the winter weather. Actual
weather conditions can vary substantially from year to year, significantly
affecting the Partnership's financial performance. Approximately 70% to 75% of
the Partnership's retail propane volume is sold during the peak heating season
from October through March. Furthermore, variations in weather in one or more
regions in which the Partnership operates can significantly affect the total
volume of propane sold by the Partnership and the margins realized on such
sales and, consequently, the Partnership's results of operations. Agricultural
demand is also affected by weather, as dry weather during the harvest season
reduces demand for propane used in crop drying. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Partnership Is Subject to Pricing and Inventory Risk
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of selling prices over the propane supply costs.
Propane is a commodity and, as such, its unit price is subject to volatile
changes in response to changes in supply or other market conditions. The
Partnership has no control over these market conditions. Consequently, the
unit price of propane purchased by the Partnership, as well as other
marketers, can change rapidly over a short period of time. In general, product
supply contracts permit suppliers to charge posted prices at the time of
delivery or the current prices established at major storage points such as
Mont Belvieu, Texas or Conway, Kansas. As rapid increases in the wholesale
cost of propane may not be immediately passed on to customers, such increases
could reduce margins. Consequently, the Partnership's profitability is
sensitive to changes in wholesale propane prices. See "--The Retail Propane
Business Is Highly Competitive."
Propane is available from numerous sources, including integrated
international oil companies, independent refiners and independent wholesalers.
The Partnership purchases propane from a variety of suppliers pursuant to
supply contracts or on the spot market. The major portion of propane purchased
by the Partnership (approximately 79% in fiscal 1997) is produced
domestically. To the extent that the Partnership purchases
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propane from Canadian sources (approximately 21% in fiscal 1997), its propane
business will be subject to risks of disruption in foreign supply. The
Partnership attempts to minimize inventory risk by purchasing propane on a
short-term basis. During periods of low demand for propane, which generally
occur during the summer months, the Partnership has on occasion purchased
large volumes of propane at lower-than-market costs for storage in the
Partnership's 21 million gallon underground storage facility in Seymour,
Indiana for future resale. Because of the potential volatility of propane
prices, the market price for propane could fall below the price at which the
Partnership purchased propane held in inventory, thereby adversely affecting
gross margin or sales or rendering sales from such inventory unprofitable. The
Partnership may from time to time engage in transactions (such as options or
fixed price contracts to purchase propane) to hedge product costs in an
attempt to reduce cost volatility. To date, the level of such activities has
not been significant and the Partnership is not currently engaged in any such
transactions. See "Business--Supply."
Inflation increases the Partnership's operating and administrative costs.
The Partnership will attempt to limit the effects of inflation on its results
of operations through cost control efforts, productivity improvements and
increases in gross profit margins, but it may not be successful.
The Retail Propane Business Is Highly Competitive
The Partnership's business is highly competitive. Competition within the
propane distribution industry stems from primarily three types of
participants: larger, multistate marketers; smaller, local independent
marketers; and farm cooperatives. Some of the Partnership's competitors have
substantially greater financial and operating resources than the Partnership.
Generally, competition in the past few years has intensified, partly as a
result of warmer-than-normal weather and general economic conditions. The
Partnership's ability to compete effectively depends on the reliability of its
service, its responsiveness to customers and its ability to maintain
competitive retail prices.
Most of the Partnership's retail branch locations compete with five or more
marketers or distributors. The principal factors influencing competition with
other retail marketers are price, reliability and quality of service,
responsiveness to customer needs and safety concerns. Each branch location
operates in its own competitive environment, as retail marketers are typically
located in close proximity to customers to lower the cost of providing
service. The Partnership's branch locations have an average effective
marketing radius of 35 miles.
As a result of long-standing customer relationships that are typical in the
retail home propane industry, the inconvenience of switching tanks and
suppliers and the lack of growth in the industry, the Partnership's propane
business may experience difficulty in acquiring new retail customers (other
than through acquisitions).
The Partnership's Ability To Grow Depends Upon Acquisitions
The retail propane industry is mature with only limited growth in total
demand for propane. The Partnership believes the overall demand for propane
has remained relatively constant, with year-to-year industry volumes being
affected primarily by weather patterns. Therefore, the ability of the
Partnership's propane business to grow depends heavily on its ability to
acquire other distributors. In making acquisitions, the Partnership competes
with other larger, well-financed companies.
There can be no assurance that the Partnership will identify attractive
acquisition candidates in the future or that it will be able to acquire such
candidates or obtain financing for such acquisitions on acceptable terms. If
the Partnership is able to make acquisitions, there can be no assurance that
such acquisitions will not dilute earnings and distributions, or that any
additional debt incurred to finance acquisitions will not affect the ability
of the Partnership to make distributions. The Partnership is subject to
certain debt incurrence covenants in certain agreements governing its
indebtedness that might restrict the Partnership's ability to incur
indebtedness to finance acquisitions. In addition, to the extent that warm
winter weather adversely affects the Partnership's operating and financial
results, the Partnership's access to capital and its acquisition activities
may be limited.
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Dependence on Principal Suppliers
During fiscal year 1997, 43% of the Partnership's volume of propane
purchases in the Midwest was purchased on the spot market from various Mont
Belvieu sources and 21% was purchased from three refineries in Illinois and
Indiana owned by Amoco Canada Marketing Group. Approximately 47% of purchases
from Amoco Canada Marketing Group were made under long-term market-based
supply contracts and the balance was made under short-term supply contracts.
Although the Partnership believes that alternative sources of propane are
readily available, in the event that the Partnership is unable to purchase
propane from either of these sources, the failure to obtain alternate sources
of supply at competitive prices and on a timely basis could have a material
adverse effect on the Partnership. Substantially all of the Partnership's
propane supply for its Northeast retail operations is purchased under annual
or longer term supply contracts. Historically, a substantial portion of the
propane purchased by the Partnership has originated at the Mont Belvieu, Texas
storage facilities and has been shipped to the Partnership through a major
common carrier pipeline. Any significant interruption in the service at Mont
Belvieu or on the common carrier pipeline could have a material adverse effect
on the business of the Partnership.
Energy Efficiency and Technology Trends May Affect Demand
The national trend toward increased conservation and technological advances,
including installation of improved insulation and the development of more
efficient furnaces and other heating devices, has slowed the growth of demand
for propane by retail customers. The Partnership cannot predict the effect of
future conservation measures or the effect that any technological advances in
heating, conservation, energy generation or other devices might have on its
operations.
The Partnership Is Subject to Operating and Litigation Risks Which May Not Be
Covered by Insurance
The Partnership's operations are subject to all operating hazards and risks
normally incidental to handling, storing and transporting and otherwise
providing for use by consumers of combustible liquids such as propane. As a
result, the Partnership may be a defendant in various legal proceedings and
litigation arising in the ordinary course of business. The Partnership
maintains insurance policies with insurers in such amounts and with such
coverages and deductibles as the General Partner believes are reasonable and
prudent. However, there can be no assurance that such insurance will be
adequate to protect the Partnership from all material expenses related to
potential future claims for personal and property damage or that such levels
of insurance will be available in the future at economical prices. In
addition, the occurrence of an explosion may have an adverse effect on the
public's desire to use propane.
The Retail Propane Business Faces Competition from Alternative Energy Sources
Propane is sold in competition with other sources of energy, some of which
are less costly for equivalent energy value. The Partnership competes for
customers against suppliers of natural gas. Because of the significant cost
advantage of natural gas over propane, propane is generally not competitive
with natural gas in those areas where natural gas is readily available. The
expansion of the nation's natural gas distribution systems has resulted in the
availability of natural gas in areas that previously depended upon propane. To
a lesser extent, the Partnership also competes for customers against suppliers
of electricity and fuel oil. The General Partner cannot predict the effect
that the development of alternative energy sources might have on the
operations of the Partnership. See "Business--Industry Background and
Competition."
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
Cash Distributions Are Not Guaranteed and May Fluctuate with Partnership
Performance
Although the Partnership distributes all of its Available Cash, there can be
no assurance regarding the amounts of Available Cash that the Partnership will
generate. The actual amounts of Available Cash will depend upon numerous
factors, including profitability of operations, required principal and
interest payments on the
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Partnership's debt, the cost of acquisitions (including related debt service
payments), the issuance of debt and equity securities by the Partnership,
fluctuations in working capital, capital expenditures, adjustments in
reserves, prevailing economic conditions and financial, business and other
factors, some of which may be beyond the control of the General Partner. Cash
distributions are dependent primarily on cash flow, including from reserves,
and not on profitability, which is affected by non-cash items. Therefore, cash
distributions may be made during periods when the Partnership records losses
and may not be made during periods when the Partnership records profits.
The Partnership Agreement gives the General Partner discretion in
establishing reserves for the proper conduct of the Partnership's business
that will affect the amount of Available Cash. Because the business of the
Partnership is seasonal, the General Partner expects that it will make
additions to reserves during certain of the Partnership's fiscal quarters in
order to fund operating expenses and distributions to partners with respect to
other fiscal quarters. In addition, the Partnership is required to make
reserves for the future payment of principal and interest on the First
Mortgage Notes and in certain instances for the future payment of principal
and interest under the Bank Credit Facilities and other indebtedness of the
Partnership. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Description of Indebtedness." The Partnership
anticipates that reserves for interest on the First Mortgage Notes will be
established at approximately $1.7 million at each December 31 and June 30, and
the reserves will be eliminated when interest payments are made on the First
Mortgage Notes in March and September. Reserves for repayment of principal on
the First Mortgage Notes are not required until December 31, 2000 and then
will equal 50% of the next installment at each December 31 and June 30 and the
reserves will be eliminated when principal payments are made on the First
Mortgage Notes in March and September. In addition, the First Mortgage Notes
and the Bank Credit Facilities limit the Operating Partnership's ability to
distribute cash to the Partnership. Distributions from the Operating
Partnership will be the Partnership's primary source of Available Cash. As a
result of these and other factors, there can be no assurance regarding the
actual levels of cash distributions by the Partnership, and the Partnership's
ability to distribute cash may be limited during the existence of any events
of default under any of the Partnership's debt instruments.
The Partnership's Indebtedness May Limit the Partnership's Ability to Make
Distributions and May Affect its Operations
At September 30, 1997, (after giving pro forma effect to the Offering) the
Partnership's total indebtedness as a percentage of total capitalization would
have been approximately 57.4%. As a result, the Partnership is significantly
leveraged and has indebtedness that is substantial in relation to its
partners' equity. The ability of the Partnership to make principal and
interest payments will depend on future performance which is subject to many
factors, some of which will be outside the Partnership's control. Certain of
the Partnership's indebtedness contain provisions relating to change of
control. In particular, the First Mortgage Notes and the Bank Credit
Facilities require the General Partner to serve as general partner of the
Partnership and to maintain with its Affiliates ownership of a minimum number
of Units. If such change of control provisions are triggered, (i) under the
Bank Credit Facilities, all outstanding indebtedness may become due and (ii)
under the First Mortgage Notes, the indebtedness will be re-rated by a rating
agency. In such event, there is no assurance that the Partnership will be able
to pay the indebtedness, in which case the lenders would have the right to
foreclose on the Partnership's assets, which would have a material adverse
effect on the Partnership. There is no restriction on the ability of the
General Partner to enter into a transaction which would trigger such change of
control provisions. In addition, all of the Partnership's indebtedness is
secured by substantially all of the assets of the Partnership and will contain
covenants that limit the ability of the Operating Partnership to distribute
cash and to incur additional indebtedness. In the case of a continuing default
by the Partnership under such indebtedness, the lenders would have the right
to foreclose on the Partnership's assets, which would have a material adverse
effect on the Partnership. Payment of principal and interest on such
indebtedness, as well as compliance with the requirements and covenants of
such indebtedness, may limit the Partnership's ability to make distributions
to Unitholders. The Partnership's leverage may also adversely affect the
ability of the Partnership to finance its future operations and
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capital needs, may limit its ability to pursue other business opportunities
and may make its results of operations more susceptible to adverse economic
conditions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Description of Indebtedness."
Holders of Common Units Have Limited Voting Rights; The General Partner
Manages and Operates the Partnership
The General Partner manages and operates the Partnership. Unlike the holders
of common stock in a corporation, holders of outstanding Common Units have
only limited voting rights on matters affecting the Partnership's business.
Holders of Common Units have no right to elect the General Partner on an
annual or other continuing basis, and the General Partner generally may not be
removed except pursuant to the vote of the holders of not less than 66 2/3% of
the outstanding Units, excluding those held by the General Partner and its
Affiliates. As a result, holders of Common Units have limited influence on
matters affecting the operation of the Partnership and third parties may find
it difficult to attempt to gain control or influence the activities of the
Partnership. See "The Partnership Agreement."
The Partnership May Issue Additional Units, Diluting Existing Unitholders'
Interests
The Partnership may issue an unlimited number of additional limited partner
interests of the Partnership for such consideration and on such terms as shall
be established by the General Partner in its sole discretion without the
approval of the Unitholders. Prior to the end of the Subordination Period,
however, the Partnership may not issue equity securities ranking senior to the
Common Units or more than 1,300,000 additional Common Units or an equivalent
number of securities ranking on a parity with the Common Units (excluding
Common Units or parity Units issued upon conversion of Subordinated Units, in
connection with certain acquisitions or to repay certain indebtedness),
without the approval of a Unit Majority. The Common Units offered hereby (to
the extent that the proceeds therefrom are used to refinance acquisition debt)
and the Common Units issued to Star Gas in connection with the Pearl Gas
Acquisition will be excluded from such 1,300,000 Common Units. See "The
Partnership Agreement--Issuance of Additional Securities." The effect of any
such issuance may be to dilute the interests of holders of Units in
distributions by the Partnership and to make it more difficult for a person or
group to remove the General Partner as a general partner or otherwise change
management of the Partnership.
The General Partner Will Have a Limited Call Right with Respect to the Common
Units
If, at any time, not more than 20% of the issued and outstanding Common
Units are held by persons other than the General Partner and its Affiliates,
the General Partner will have the right, which it may assign to any of its
Affiliates or the Partnership, to acquire all, but not less than all, of the
remaining Common Units held by such unaffiliated persons at specified prices.
As a consequence of the General Partner's right to purchase outstanding Common
Units, a Unitholder may have his Common Units purchased from him even though
he may not desire to sell them, and the price paid may be less than the amount
the Unitholder would desire to receive upon the sale of his Common Units. See
"The Partnership Agreement--Limited Call Right."
Change of Management Provisions
The Partnership Agreement contains certain provisions that may discourage a
person or group from attempting to remove the General Partner as general
partner. The Partnership Agreement provides that if the General Partner is
removed other than for Cause, the Subordination Period will end, all
arrearages on the Common Units will terminate and all outstanding Subordinated
Units will convert into Common Units. See "The Partnership Agreement--
Withdrawal or Removal of the General Partner; Approval of Successor General
Partner." The effect of these provisions may be to diminish the price at which
the Common Units will trade under certain circumstances.
Unitholders May Not Have Limited Liability in Certain Circumstances
The limitations on the liability of holders of Common Units for the
obligations of a limited partnership have not been clearly established in some
states. If it were determined that the Partnership had been conducting
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business in any state without compliance with the applicable limited
partnership statute, or that the right or the exercise of the right by the
holders of Common Units as a group to remove or replace the General Partner,
to make certain amendments to the Partnership Agreement or to take other
action pursuant to the Partnership Agreement constituted participation in the
"control" of the Partnership's business, then a holder of Common Units could
be held liable under certain circumstances for the Partnership's obligations
to the same extent as the General Partner. See "The Partnership Agreement--
Limited Liability" for a discussion of the limitations on liability and the
implications thereof to a holder of Common Units.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITY
Conflicts of interest have arisen and could arise in the future as a result
of the relationships between the General Partner and its Affiliates, on the
one hand, and the Partnership or any partner thereof, on the other. The
directors and officers of the General Partner have fiduciary duties to manage
the General Partner in a manner beneficial to the shareholder of the General
Partner. At the same time, the General Partner, as general partner, has
fiduciary duties to manage the Partnership in a manner beneficial to the
Partnership and the Unitholders. The duties of the General Partner, as general
partner, to the Partnership and the Unitholders, therefore, may come into
conflict with the duties of the directors and officers of the General Partner
to its sole shareholder, Petro.
Such conflicts of interest might arise in the following situations, among
others:
(i) Decisions of the General Partner with respect to the amount and
timing of cash expenditures, borrowings, issuances of additional Units and
reserves in any quarter will affect whether or the extent to which there is
sufficient Available Cash from Operating Surplus to meet the Minimum
Quarterly Distribution and Target Distribution Levels on all Units in a
given quarter. In addition, actions by the General Partner may have the
effect of enabling the General Partner to receive incentive distributions
or accelerating the expiration of the Subordination Period or the
conversion of Subordinated Units into Common Units.
(ii) The Partnership does not have any employees and relies solely on
employees of the General Partner and its Affiliates.
(iii) Under the terms of the Partnership Agreement, the Partnership will
reimburse the General Partner and its Affiliates for costs incurred in
managing and operating the Partnership, including costs incurred in
rendering corporate staff and support services to the Partnership.
(iv) Whenever possible, the General Partner intends to limit the
Partnership's liability under contractual arrangements to all or particular
assets of the Partnership, with the other party thereto to have no recourse
against the General Partner or its assets.
(v) Any agreements between the Partnership and the General Partner and
its Affiliates will not grant to the holders of Common Units, separate and
apart from the Partnership, the right to enforce the obligations of the
General Partner and such Affiliates in favor of the Partnership. Therefore,
the General Partner, in its capacity as the general partner of the
Partnership, will be primarily responsible for enforcing such obligations.
(vi) Under the terms of the Partnership Agreement, the General Partner is
not restricted from causing the Partnership to pay the General Partner or
its Affiliates for any services rendered on terms that are fair and
reasonable to the Partnership or entering into additional contractual
arrangements with any of such entities on behalf of the Partnership.
Neither the Partnership Agreement nor any of the other agreements,
contracts and arrangements between the Partnership, on the one hand, and
the General Partner and its Affiliates, on the other, are or will be the
result of arm's-length negotiations.
(vii) The General Partner may exercise its right to call for and purchase
Units as provided in the Partnership Agreement or assign such right to one
of its Affiliates or to the Partnership.
(viii) The Partnership Agreement provides that, subject to certain
restrictions, it will not constitute a breach of the General Partner's
fiduciary duties to the Partnership or the Unitholders for the General
Partner's Affiliates, including Petro, to engage in activities of the type
conducted by the Partnership, even if
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<PAGE>
in direct competition with the Partnership. The General Partner and its
Affiliates have no obligation to present business opportunities to the
Partnership.
Petro has agreed with the Partnership that neither Petro nor any of its
Affiliates will acquire a business which derives any revenues from the sale of
propane, if, after giving effect to such acquisition, Petro's Pro Forma
Propane Volumes would equal or exceed the lesser of (i) 15% of the
Partnership's reported propane volume sold for the most recently completed
four fiscal quarters which ended at least 90 days prior to the date of such
acquisition or (ii) 15 million gallons of propane. Petro's "Pro Forma Propane
Volumes" means that actual propane volumes sold by Petro and any of its
Affiliates (other than the Partnership) for the most recently completed four
fiscal quarters which ended at least 90 days prior to the date of
determination plus the propane volumes sold by the propane business to be
acquired for the most recently completed four fiscal quarters which ended at
least 90 days prior to the date of determination. In addition, in the event
Petro or an Affiliate owns a propane business, Petro or such Affiliate may not
accept as a customer any person who is a customer of the Partnership.
Notwithstanding the above, there are no restrictions on the ability of Petro
or other Affiliates of the General Partner to engage in the sale of propane
outside the continental United States or to trade or store propane. Petro has
advised the Partnership that it currently has no plans to acquire any propane
business, engage in the sale of propane outside the continental United States
or to trade or store propane.
Unless provided for otherwise in the partnership agreement, Delaware law
generally requires a general partner of the Delaware limited partnership to
adhere to fiduciary duty standards under which it owes its limited partners
the highest duties of good faith, fairness and loyalty and which generally
prohibit such general partner from taking any action or engaging in any
transaction as to which it has a conflict of interest. The Partnership
Agreement expressly permits the General Partner to resolve conflicts of
interest between itself or its Affiliates on the one hand, and the Partnership
or the Unitholders, on the other, and to consider, in resolving such conflicts
of interest and actions of the General Partner and its Affiliates that might
otherwise be prohibited, including those described in paragraphs (i)-(viii)
above, and provides that such conflicts of interest and actions do not
constitute a breach by the General Partner of any duty stated or implied by
law or equity. The General Partner will not be in breach of its obligations
under the Partnership Agreement or its duties to the Partnership or the
Unitholders if the resolution of such conflict is fair and reasonable to the
Partnership. The latitude given in the Partnership Agreement to the General
Partner in resolving conflicts of interest may significantly limit the ability
of a Unitholder to challenge what might otherwise be a breach of fiduciary
duty. The General Partner believes, however, that such latitude is necessary
and appropriate to enable it to serve as the general partner of the
Partnership without undue risk of liability.
The Partnership Agreement expressly limits the liability of the General
Partner by providing that the General Partner, its Affiliates and its officers
and directors will not be liable for monetary damages to the Partnership, the
limited partners or assignees for errors of judgment or for any actual
omissions if the General Partner and other persons acted in good faith. In
addition, the Partnership is required to indemnify the General Partner, its
Affiliates and their respective officers, directors, employees and agents to
the fullest extent permitted by law, against liabilities, costs and expenses
incurred by the General Partner or such other persons, if the General Partner
or such persons acted in good faith and in a manner they reasonably believed
to be in, or not opposed to, the best interest of the Partnership and, with
respect to any criminal proceedings, had no reasonable cause to believe the
conduct was unlawful.
The provisions of Delaware law that allow the common law fiduciary duties of
a general partner to be modified by a partnership agreement have not been
resolved in a court of law, and the General Partner has not obtained an
opinion of counsel covering the provisions set forth in the Partnership
Agreement that purport to waive or restrict the fiduciary duties of the
General Partner that would be in effect under common law were it not for the
Partnership Agreement. See "Conflicts of Interest and Fiduciary
Responsibility--Fiduciary Duties of the General Partner."
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<PAGE>
TAX CONSIDERATIONS
For a general discussion of the expected federal income tax consequences of
owning and disposing of Units, see "Tax Considerations."
Tax Treatment Is Dependent on Partnership Status
The availability to a Unitholder of the federal income tax benefits of an
investment in the Partnership depends, in large part, on the classification of
the Partnership (unless the context requires otherwise, references in this
subdivision to the Partnership are references to both the Partnership and the
Operating partnership) as a partnership for federal income tax purposes. Based
on certain representations by the General Partner, counsel is of the opinion
that, under current law, the Partnership has been and will continue to be
classified as a partnership for federal income tax purposes. However, no
ruling from the IRS as to such status has been or will be requested, and the
opinion of counsel is not binding on the IRS. One of the representations of
the General Partner on which the opinion of counsel is based is that at least
90% of the Partnership's gross income for each taxable year has been and will
be "qualifying income." Whether the Partnership will continue to be classified
as a partnership in part depends, therefore, on the Partnership's ability to
meet this qualifying income test in the future. See "Tax Considerations--
Partnership Status."
If the Partnership were classified as a corporation for federal income tax
purposes, the Partnership would pay tax on its income at corporate rates,
distributions would generally be taxed to the Unitholders as corporate
distributions, and no income, gain, losses or deductions would flow through to
the Unitholders. Because a tax would be imposed upon the Partnership as an
entity, the cash available for distribution to the Unitholders would be
substantially reduced. Treatment of the Partnership as an association taxable
as a corporation or otherwise as a taxable entity would result in a material
reduction in the anticipated cash flow and after-tax return to the Unitholders
and this would likely result in a substantial reduction in the value of the
Units. See "Tax Considerations--Partnership Status."
There can be no assurance that the law will not be changed so as to cause
the Partnership to be treated as an entity taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level
taxation. The Partnership Agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that subjects the
Partnership to taxation as a corporation or otherwise subjects the Partnership
to entity-level taxation for federal, state or local income tax purposes,
certain provisions of the Partnership Agreement relating to the subordination
of distributions on Subordinated Units will be subject to change, including a
decrease in the amount of the Minimum Quarterly Distribution (and Target
Distribution Levels) to reflect the impact of such law on the Partnership. See
"Cash Distribution Policy--Adjustment of Minimum Quarterly Distribution and
Target Distribution Levels."
No IRS Ruling with Respect to Tax Consequences
No ruling has been requested from the IRS with respect to classification of
the Partnership as a partnership for federal income tax purposes, whether the
Partnership's propane operations generate "qualifying income", or any other
matter affecting the Partnership. Accordingly, the IRS may adopt positions
that differ from counsel's conclusions expressed herein. It may be necessary
to resort to administrative or court proceedings in an effort to sustain some
or all of counsel's conclusions, and some or all of such conclusions
ultimately may not be sustained. The costs of any contest with the IRS will be
borne directly or indirectly by some or all of the Unitholders and the General
Partner.
Deductibility of Losses
In the case of taxpayers subject to the passive loss rules, losses generated
by the Partnership, if any, will only be available to offset future income
generated by the Partnership and cannot be used to offset income from other
activities, including passive activities or investments. Unused losses may be
deducted when the Unitholder disposes of all of his Units in a fully taxable
transaction with an unrelated party. Net passive income from the
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<PAGE>
Partnership may be offset by a Unitholder's unused Partnership losses carried
over from prior years, but not by losses from other passive activities,
including losses from other publicly traded partnerships. See "Tax
Considerations--Tax Consequences of Unit Ownership--Limitations on
Deductibility of Partnership Losses."
Tax Liability Exceeding Cash Distribution
A Unitholder will be required to pay federal income tax and, in certain
cases, state and local income taxes on his allocable share of the
Partnership's income, even if he receives no cash distributions from the
Partnership. No assurance can be given that a Unitholder will receive cash
distributions equal to his allocable share of taxable income from the
Partnership or even the tax liability to him resulting from that income.
Further, a holder of Units may incur a tax liability, in excess of the amount
of cash received, upon the sale of his Units. See "Tax Considerations--Tax
Consequences of Unit Ownership" and "--Disposition of Units."
Bunching of Income
Each Unitholder will be required to include in income his allocable share of
Partnership income, gain, loss and deduction for the fiscal year of the
Partnership ending within or with the taxable year of the Unitholder. In
addition, a Unitholder who has a taxable year ending on other than December 31
and who disposes of Units following the close of the Partnership's taxable
year but before the close of the Unitholder's taxable year must include his
allocable share of Partnership income, gain, loss and deduction in income for
the Unitholder's taxable year with the result that the Unitholder will be
required to report in income for his taxable year his distributive share of
more than one year of Partnership income, gain, loss and deduction. See "Tax
Considerations--Disposition of Common Units--Allocations Between Transferors
and Transferees."
Ownership of Units by Tax-Exempt Organizations and Certain Other Investors
Investment in Units by certain tax-exempt entities, regulated investment
companies and foreign persons raises issues unique to such persons. For
example, much of the taxable income derived by most organizations exempt from
federal income tax (including IRAs and other retirement plans) from the
ownership of a Unit will be unrelated business taxable income and thus will be
taxable to such a Unitholder. See "Tax Considerations--Uniformity of Units--
Tax-Exempt Organizations and Certain Other Investors."
Tax Shelter Registration; Potential IRS Audit
The Partnership is registered with the IRS as a "tax shelter." No assurance
can be given that the Partnership will not be audited by the IRS or that tax
adjustments will not be made. The rights of a Unitholder owning less than a 1%
profit interest in the Partnership to participate in the income tax audit
process are very limited. Further, any adjustments in the Partnership's
returns will lead to adjustments in the Unitholders' returns and may lead to
audits of Unitholders' returns and adjustments of items unrelated to the
Partnership. Each Unitholder would bear the cost of any expenses incurred in
connection with an examination of such Unitholder's personal tax return.
Possible Loss of Tax Benefits Relating to Non-uniformity of Units and
Nonconforming Depreciation Conventions
Because the Partnership cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of Units must be maintained. To maintain uniformity and for other reasons, the
Partnership has adopted certain depreciation and amortization conventions that
do not conform with all aspects of certain proposed and final Treasury
Regulations. A successful challenge to those conventions by the IRS could
adversely affect the amount of tax benefits available to a purchaser of Units
and could have a negative impact on the value of the Units. See "Tax
Considerations--Uniformity of Units."
State, Local and Other Tax Considerations
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
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<PAGE>
jurisdictions in which the Partnership does business or owns property. A
Unitholder will likely be required to file state and local income tax returns
and pay state and local income taxes in some or all of the various
jurisdictions in which the Partnership does business or owns property and may
be subject to penalties for failure to comply with those requirements. The
General Partner anticipates that substantially all of the Partnership's income
will be generated in the following states: Connecticut, Indiana, Kentucky,
Maine, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania and
Rhode Island, each of which currently imposes a personal income tax. It is the
responsibility of each Unitholder to file all United States federal, state and
local tax returns that may be required of such Unitholder. Counsel has not
rendered an opinion on the state or local tax consequences of an investment in
the Partnership. See "Tax Considerations--State, Local and Other Tax
Considerations."
Tax Gain or Loss on Disposition of Units
A Unitholder who sells Units will recognize gain or loss equal to the
difference between the amount realized (including his share of Partnership
nonrecourse liabilities) and his adjusted tax basis in such Units. Thus, prior
Partnership distributions in excess of cumulative net taxable income in
respect of a Unit which decreased a Unitholder's tax basis in such Unit will,
in effect, become taxable income if the Unit is sold at a price greater than
the Unitholder's tax basis in such Units, even if the price is less than his
original cost. A portion of the amount realized (whether or not representing
gain) may be ordinary income. Furthermore, should the IRS successfully contest
certain conventions to be used by the Partnership, a Unitholder could realize
more gain on the sale of Units than would be the case under such conventions
without the benefit of decreased income in prior years.
Reporting of Partnership Tax Information and Audits
The Partnership will furnish each holder of Units with a Schedule K-1 that
sets forth his allocable share of income, gains, losses and deductions. In
preparing these schedules, the Partnership will use the various accounting and
reporting conventions and adopt various depreciation and amortization methods.
There is no assurance that these schedules will yield a result that conforms
to statutory or regulatory requirements or to administrative pronouncements of
the IRS. Further, the Partnership's tax return may be audited, and any such
audit could result in an audit of a partner's individual tax return as well as
increased liabilities for taxes because of adjustments resulting from the
audit.
USE OF PROCEEDS
The net proceeds to the Partnership from the sale of the Common Units
offered hereby at an offering price of $21.25 per Common Unit will be
approximately $15.8 million after deducting estimated underwriting discounts
and commissions and the estimated expenses of this Offering. Approximately
$10.0 million of the net proceeds of this Offering will be used to reduce the
outstanding balance under the Acquisition Facility, which aggregated $21.0
million as of November 30, 1997, and the balance will be used for general
partnership purposes and to reduce working capital borrowings. The Acquisition
Facility borrowings bear interest at a rate equal to 7.3% per annum.
The Partnership will not receive any of the proceeds from the sale of Common
Units by the Selling Unitholder.
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<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Partnership as of September 30, 1997, (ii) as adjusted to give pro forma
effect to the Pearl Gas Acquisition and (iii) as further adjusted to give pro
forma effect to the closing of this Offering, including the sale of Common
Units offered hereby at an offering price of $21.25 per Common Unit and the
application by the Partnership of the net proceeds therefrom as described in
"Use of Proceeds." The table should be read in conjunction with the historical
and pro forma financial statements and notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------
ACTUAL AS ADJUSTED(A) PRO FORMA(A)
-------- -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash.................................. $ 889 $ 742 $ 6,881
======== ======== ========
Debt:
First Mortgage Notes................ $ 85,000 $ 85,000 $ 85,000
Acquisition Facility................ -- 21,000 11,000
-------- -------- --------
Total debt........................ 85,000 106,000 96,000
-------- -------- --------
Partners' capital:
Common Unitholders.................. 47,573 50,970 66,765
Subordinated Unitholders............ 4,034 4,034 4,034
General Partner..................... (29) 41 385
-------- -------- --------
Total partners' capital............. 51,578 55,045 71,184
-------- -------- --------
Total capitalization.............. $136,578 $161,045 $167,184
======== ======== ========
</TABLE>
- --------
(a) See the Pro Forma Consolidated Financial Statements of Star Gas Partners,
L.P., included elsewhere in this Prospectus, for a discussion of the pro
forma adjustments.
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<PAGE>
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS
The Common Units, representing common limited partner interests in the
Partnership, are listed and traded on the Nasdaq National Market under the
symbol SGASZ. The Common Units began trading on December 20, 1995, at an
initial public offering price of $22.00 per Common Unit. The following table
sets forth the closing high and low sales prices for the Common Units on the
Nasdaq National Market and the cash distribution declared per Common Unit for
the periods indicated.
COMMON UNIT CLOSING SALES PRICE RANGE
<TABLE>
<CAPTION>
CASH DISTRIBUTIONS
HIGH LOW DECLARED PER UNIT
----------------------- ----------------------- --------------------
FISCAL QUARTER 1998 1997 1996 1998 1997 1996 1998 1997 1996
- -------------- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter........... $23.38(a) $23.88 $22.50 $21.25(a) $21.75 $22.00 $0.55 $ 0.55 --
Second Quarter.......... -- $24.63 $22.50 -- $20.75 $21.13 -- $ 0.55 --
Third Quarter........... -- $21.88 $22.00 -- $19.00 $19.75 -- $ 0.55 $ 0.62(b)
Fourth Quarter.......... -- $23.50 $24.75 -- $21.00 $20.50 -- $ 0.55 $ 0.55
</TABLE>
- --------
(a) Through December 16, 1997.
(b) This distribution amounted to $0.6225 per unit and represented a pro rata
distribution of $0.0725 per unit for the period December 20, 1995 to
December 31, 1995 and a quarterly distribution of $0.55 per unit for the
three months ended March 31, 1996.
The last reported sale price of Common Units on the Nasdaq National Market
on December 16, 1997 was $21.25 per Common Unit.
As of November 20, 1997, there were approximately 116 holders of record of
the Partnership's Common Units. There is no established public trading market
for the Partnership's 2,396,078 Subordinated Units which are all held by the
General Partner. The Partnership makes quarterly distributions to its Partners
in an aggregate amount equal to its Available Cash for such quarter. See "Cash
Distribution Policy."
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<PAGE>
CASH DISTRIBUTION POLICY
The Partnership distributes to its partners, on a quarterly basis, all its
Available Cash in the manner described herein. "Available Cash" is defined in
the Glossary and generally means, with respect to any fiscal quarter of the
Partnership, 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
Partnership's business, (ii) comply with applicable law or any Partnership
debt instrument or other agreement or (iii) provide funds for distributions to
the Unitholders and the General Partner during the next four quarters.
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed to Unitholders in relation to the General Partner, and under
certain circumstances it determines whether holders of Subordinated Units
receive any distributions. See "--Quarterly Distributions of Available Cash."
Operating Surplus generally refers to (i) the cash balance of the
Partnership on the date the Partnership commenced operations, plus $6.0
million, plus all cash receipts of the Partnership, less (ii) all Partnership
operating expenses (including expenses of the General Partner incurred on
behalf of the Partnership), debt service payments, maintenance capital
expenditures and reserves established for future Partnership operations.
Capital Surplus will generally be generated only by borrowings (other than
for working capital purposes), sales of debt and equity securities and sales
or other dispositions of assets for cash (other than inventory, accounts
receivable and other assets, all as disposed of in the ordinary course of
business).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Partnership is from Operating Surplus or Capital Surplus,
all Available Cash distributed by the Partnership from any source will be
treated as distributed from Operating Surplus until the sum of all Available
Cash distributed since the commencement of the Partnership equals the
Operating Surplus as of the end of the quarter prior to such distribution. Any
excess Available Cash (irrespective of its source) will be deemed to be
Capital Surplus and distributed accordingly.
If Capital Surplus is distributed in respect of each Common Unit in an
aggregate amount per Unit equal to $22.00 per Common Unit (the "Initial Unit
Price"), the distinction between Operating Surplus and Capital Surplus will
cease, and all distributions will be treated as from Operating Surplus. The
General Partner does not expect that there will be significant distributions
from Capital Surplus.
The Subordinated Units are a separate class of interests in the Partnership,
and the rights of holders of such interests to participate in distributions
differ from the rights of the holders of Common Units. For any given quarter,
Available Cash will be distributed to the General Partner and to the holders
of Common Units, and it may also be distributed to the holders of Subordinated
Units, depending upon the amount of Available Cash for the quarter, amounts
distributed in prior quarters, whether the Subordination Period has ended and
other factors discussed below.
The discussion below indicates the percentages of cash distributions
required to be made to the General Partner and the Common Unitholders and the
circumstances under which holders of Subordinated Units are entitled to cash
distributions and the amounts thereof. For a discussion of Available Cash from
Operating Surplus available for distributions with respect to the Units on a
pro forma basis, see "--Cash Available for Distribution."
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to each
fiscal quarter of the Partnership prior to liquidation in an amount equal to
all of its Available Cash for such quarter. Distributions will be made
approximately 45 days after each March 31, June 30, September 30 and December
31, to holders of record on
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<PAGE>
the applicable record date. The first distribution on the Common Units
purchased in this Offering will be paid with respect to the quarter ending
December 31, 1997 on or about February 13, 1998 to holders of record on or
about February 2, 1998.
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly Distribution, plus any Cumulative
Common Unit Arrearages, prior to any distribution of Available Cash to the
holders of Subordinated Units. Upon expiration of the Subordination Period,
all Subordinated Units will be converted (on a one-for-one basis) into Common
Units and will participate pro rata with all other holders of Common Units in
future distributions of Available Cash. Under certain circumstances, up to
1,198,040 Subordinated Units may convert into Common Units prior to the
expiration of the Subordination Period. 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.
The Minimum Quarterly Distribution and the Target Distribution Levels are
subject to adjustment as described below under "--Distributions from Capital
Surplus" and "--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels."
DISTRIBUTIONS FROM OPERATING SURPLUS DURING SUBORDINATION PERIOD
The Subordination Period will generally extend until the first day of any
quarter beginning on or after January 1, 2001 in respect of which (i)
distributions of Available Cash from Operating Surplus on the Common Units and
the Subordinated Units equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units
with respect to each of the three non-overlapping four-quarter periods
immediately preceding such date, (ii) the Adjusted Operating Surplus generated
during each of the three immediately preceding non-overlapping four-quarter
periods equaled or exceeded the sum of the Minimum Quarterly Distribution on
all of the outstanding Common Units and Subordinated Units during such periods
and (iii) there are no arrearages in payment of the Minimum Quarterly
Distribution on the Common Units.
Prior to the end of the Subordination Period, a portion of the Subordinated
Units will convert into Common Units on the first day after the record date
established for any quarter ending on or after March 31, 1999 (with respect to
599,020 of the Subordinated Units) and March 31, 2000 (with respect to an
additional 599,020 of the Subordinated Units), on a cumulative basis, in
respect of which (i) distributions of Available Cash from Operating Surplus on
the Common Units and the Subordinated Units equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units with respect to each of the three non-overlapping four-
quarter periods immediately preceding such date, (ii) the Adjusted Operating
Surplus generated during each of the three immediately preceding non-
overlapping four-quarter periods equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the outstanding Common Units and Subordinated
Units during such periods and (iii) there are no arrearages in payment of the
Minimum Quarterly Distribution on the Common Units.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units and will thereafter participate pro rata
with the other Common Units in distributions of Available Cash. In addition,
if the General Partner is removed other than for Cause, the Subordination
Period will end, the existing arrearages on the Common Units will terminate
and the Subordinated Units will immediately convert into Common Units.
"Adjusted Operating Surplus" for any period generally means Operating
Surplus generated during such period, but excluding (i) any net increase in
working capital borrowings during such period and (ii) any net reduction in
cash reserves for Operating Expenditures during such period, but including (x)
any net decrease in
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<PAGE>
working capital borrowings during such period and (y) any net increase in cash
reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium.
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter during the Subordination Period will be made in
the following manner:
first, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each Common Unit an
amount equal to the Minimum Quarterly Distribution for such quarter;
second, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each Common Unit an
amount equal to any Cumulative Common Unit Arrearages on each Common Unit with
respect to any prior quarter;
third, 98% to the Subordinated Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each Subordinated Unit
an amount equal to the Minimum Quarterly Distribution for such quarter; and
thereafter, in the manner described in "--Incentive Distributions" below.
The above references to the 2% of Available Cash constituting Operating
Surplus distributed to the General Partner are references to the amount of the
General Partner's percentage interest in distributions from the Partnership
and the Operating Partnership on a combined basis. The General Partner owns a
1% general partner interest in the Partnership and a 1.0101% general partner
interest in the Operating Partnership. Other references in this Prospectus to
the General Partner's 2% interest or to distributions of 2% of Available Cash
are also references to the amount of the General Partner's combined percentage
interest in the Partnership and the Operating Partnership.
DISTRIBUTIONS FROM OPERATING SURPLUS AFTER SUBORDINATION PERIOD
Distributions by the Partnership of Available Cash constituting Operating
Surplus with respect to any quarter after the Subordination Period will be
made in the following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit an amount equal to
the Minimum Quarterly Distribution for such quarter; and
thereafter, in the manner described in "--Incentive Distributions" below.
INCENTIVE DISTRIBUTIONS
For any quarter for which Available Cash from Operating Surplus is
distributed in respect of both the Common Units and the Subordinated Units in
an amount equal to the Minimum Quarterly Distribution and Available Cash has
been distributed on outstanding Common Units in such amount as may be
necessary to eliminate any Cumulative Common Unit Arrearages, then any
additional Available Cash from Operating Surplus in respect of such quarter
will be distributed among the Unitholders and the General Partner in the
following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate any Cumulative Common Unit Arrearages) a total
of $0.604 for such quarter in respect of each Unit (the "First Target
Distribution");
second, 85% to all Unitholders, pro rata, and 15% to the General Partner,
until the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate any Cumulative Common Unit Arrearages) a total
of $0.711 for such quarter in respect of each Unit (the "Second Target
Distribution");
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<PAGE>
third, 75% to all Unitholders, pro rata, and 25% to the General Partner,
until the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate any Cumulative Common Unit Arrearages) a total
of $0.926 for such quarter in respect of each Unit (the "Third Target
Distribution"); and
thereafter, 50% to all Unitholders, pro rata, and 50% to the General
Partner.
The following table illustrates the percentage allocation of any such
additional Available Cash among the Unitholders and the General Partner up to
the various Target Distribution Levels at each different level of allocation
between the Unitholders and the General Partner. The amounts set forth under
"Marginal Percentage Interest in Distributions" are the percentage interests
of the Unitholders and the General Partner in any Available Cash from
Operating Surplus distributed up to and including the quarterly distribution
amount shown, until Available Cash reaches the next Target Distribution Level,
if any. The calculations are based on the assumption that the quarterly
distribution amounts shown do not include any Cumulative Common Unit
Arrearages. The percentage interests shown for the Unitholders and the General
Partner for the Minimum Quarterly Distribution are also applicable to
quarterly distribution amounts that are less than the Minimum Quarterly
Distribution.
<TABLE>
<CAPTION>
MARGINAL PERCENTAGE
INTEREST IN DISTRIBUTIONS
TOTAL QUARTERLY ------------------------------
DISTRIBUTION GENERAL
AMOUNT UNITHOLDERS PARTNER
--------------- -------------- ------------
<S> <C> <C> <C>
Minimum Quarterly
Distribution........... $0.550 98% 2%
First Target
Distribution........... $0.604 98% 2%
Second Target
Distribution........... $0.711 85% 15%
Third Target
Distribution........... $0.926 75% 25%
Thereafter.............. -- 50% 50%
</TABLE>
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions by the Partnership of Available Cash from Capital Surplus will
be made 98% to all Unitholders, pro rata, and 2% to the General Partner, until
the Partnership shall have distributed, in respect of each Unit, Available
Cash from Capital Surplus in an aggregate amount per Unit equal to the Initial
Unit Price. Thereafter, all distributions from Capital Surplus will be
distributed as if they were from Operating Surplus.
As a distribution is made from Capital Surplus, it is treated as if it were
a repayment of the Initial Unit Price. To reflect such repayment, the Minimum
Quarterly Distribution and the Target Distribution Levels will be adjusted
downward by multiplying each such amount by a fraction, the numerator of which
is the Unrecovered Initial Unit Price immediately after giving effect to such
repayment and the denominator of which is the Unrecovered Initial Unit Price
immediately prior to such repayment. For example, based on the Unrecovered
Initial Unit Price of $22.00 per Unit and assuming Available Cash from Capital
Surplus of $11.00 per Unit is distributed to Unitholders (assuming no prior
adjustments), then the amount of the Minimum Quarterly Distribution and the
Target Distribution Levels would each be reduced to 50% of its initial level.
When "payback" of the Initial Unit Price has occurred, i.e., when the
Unrecovered Initial Unit Price is zero, then in effect the Minimum Quarterly
Distribution and the Target Distribution Levels each will have been reduced to
zero. Thereafter, all distributions of Available Cash from all sources will be
treated as if they were from Operating Surplus and, because the Minimum
Quarterly Distribution and the Target Distribution Levels will have been
reduced to zero, the General Partner will be entitled to receive 50% of all
distributions of Available Cash after distributions in respect of Cumulative
Common Unit Arrearages.
Distributions from Capital Surplus will not reduce the Minimum Quarterly
Distribution or any of the Target Distribution Levels for the quarter with
respect to which they are distributed.
40
<PAGE>
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to adjustments made upon a distribution of Available Cash from
Capital Surplus, the Minimum Quarterly Distribution, the Target Distribution
Levels, the Unrecovered Initial Unit Price, the number of additional Common
Units issuable during the Subordination Period without a Unitholder vote, the
number of Common Units issuable upon conversion of the Subordinated Units and
other amounts calculated on a per Unit basis will be proportionately adjusted
upward or downward, as appropriate, in the event of any combination or
subdivision of Common Units (whether effected by a distribution payable in
Common Units or otherwise), but not by reason of the issuance of additional
Common Units for cash or property. For example, in the event of a two-for-one
split of the Common Units (assuming no prior adjustments), the Minimum
Quarterly Distribution, the Target Distribution Levels and the Unrecovered
Initial Unit Price would each be reduced to 50% of its initial level.
The Minimum Quarterly Distribution and Target Distribution Levels may also
be adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Partnership to become taxable as a corporation or otherwise subjects the
Partnership to taxation as an entity for federal, state or local income tax
purposes. In such event, the Minimum Quarterly Distribution and Target
Distribution Levels for each quarter thereafter would be reduced to amounts
equal to the product of (i) the respective Minimum Quarterly Distribution or
Target Distribution Level multiplied by (ii) one minus the sum of (x) the
maximum marginal federal income tax rate to which the Partnership is then
subject as an entity plus (y) any increase in the effective overall state and
local income tax rate to which the Partnership is subject as a result of the
new imposition of the entity level tax (after taking into account the benefit
of any deduction allowable for federal income tax purposes with respect to the
payment of state and local income taxes). For example, assuming the
Partnership was not previously subject to state and local income tax, if the
Partnership were to become taxable as an entity for federal income tax
purposes and the Partnership became subject to a maximum marginal federal, and
effective state and local, income tax rate of 38%, then the Minimum Quarterly
Distribution and the Target Distribution Levels would each be reduced to 62%
of the amount thereof immediately prior to such adjustment.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
Following the commencement of the dissolution and liquidation of the
Partnership, assets will be sold or otherwise disposed of and the partners'
capital account balances will be adjusted to reflect any resulting gain or
loss. The proceeds of such liquidation will, first, be applied to the payment
of creditors of the Partnership in the order of priority provided in the
Partnership Agreement and by law and, thereafter, be distributed to the
Unitholders and the General Partner in accordance with their respective
capital account balances, as so adjusted.
Partners are entitled to liquidation distributions in accordance with
capital account balances. Although operating losses are allocated to all
Unitholders pro rata, the allocations of gains and losses attributable to
liquidation are intended to entitle the holders of outstanding Common Units to
a preference over the holders of outstanding Subordinated Units upon the
liquidation of the Partnership, to the extent of the Unrecovered Initial Unit
Price plus any Cumulative Common Unit Arrearages. However, no assurance can be
given that there will be sufficient gain upon liquidation of the Partnership
to enable the holders of Common Units to fully recover all of such amounts,
even though there may be cash available for distribution to the holders of
Subordinated Units. The manner of such adjustment is provided in the
Partnership Agreement, which has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Any gain (or unrealized gain
attributable to assets distributed in kind) will be allocated to the partners
as follows:
first, to the General Partner and the holders of Units that have negative
balances in their capital accounts to the extent of and in proportion to such
negative balance;
second, 98% to the holders of Common Units, pro rata, and 2% to the General
Partner, until the capital account for each Common Unit is equal to the
Unrecovered Initial Unit Price in respect of such Common Unit
41
<PAGE>
(including the amount of the Minimum Quarterly Distribution for the fiscal
quarter during which the dissolution occurs) plus any Cumulative Common Unit
Arrearages in respect of such Common Units;
third, 98% to the holders of Subordinated Units, pro rata, and 2% to the
General Partner, until the capital account for each Subordinated Unit is equal
to the Unrecovered Subordinated Unit Capital (including the amount of the
Minimum Quarterly Distribution for the fiscal quarter during which the
dissolution occurs) in respect of a Subordinated Unit;
fourth, 98% to all Unitholders, pro rata and 2% to the General Partner,
until there has been allocated under this clause fourth an amount per Unit
equal to (a) the excess of the First Target Distribution per Unit over the
Minimum Quarterly Distribution per Unit for each quarter of the Partnership's
existence, less (b) the amount per Unit of any distributions of Available Cash
from Operating Surplus in excess of the Minimum Quarterly Distribution per
Unit that was distributed 98% to the Unitholders, pro rata, and 2% to the
General Partner, for each quarter of the Partnership's existence;
fifth, 85% to all Unitholders, pro rata, and 15% to the General Partner
until there has been allocated under this clause fifth an amount per Unit
equal to (a) the excess of the Second Target Distribution per Unit over the
First Target Distribution per Unit for each quarter of the Partnership's
existence, less (b) the amount per Unit of any distributions of Available Cash
from Operating Surplus in excess of the First Target Distribution per Unit
that was distributed 85% to the Unitholders, pro rata, and 15% to the General
Partner, for each quarter of the Partnership's existence;
sixth, 75% to all Unitholders, pro rata, and 25% to the General Partner,
until there has been allocated under this clause sixth an amount per Unit
equal to (a) the excess of the Third Target Distribution per Unit over the
Second Target Distribution per Unit for each quarter of the Partnership's
existence, less (b) the amount per Unit of any distributions of Available Cash
from Operating Surplus in excess of the Second Target Distribution per Unit
that was distributed 75% to the Unitholders, pro rata, and 25% to the General
Partner, for each quarter of the Partnership's existence; and
thereafter, 50% to all Unitholders, pro rata, and 50% to the General
Partner.
Any loss or unrealized loss will be allocated to the General Partner and the
Unitholders as follows: first, 98% to the Subordinated Unitholders in
proportion to the positive balances in their respective capital accounts, and
2% to the General Partner, until the positive balances in such Subordinated
Unitholders' respective capital accounts have been reduced to zero; second,
98% to the Common Unitholders in proportion to the positive balances in their
respective capital accounts, and 2% to the General Partner, until the positive
balances in such Common Unitholders' respective capital accounts have been
reduced to zero; and thereafter, to the General Partner.
Interim adjustments to Capital Accounts will be made at the time the
Partnership issues additional interests in the Partnership or makes
distributions of property. Such adjustments will be based on the fair market
value of the interests issued or the property distributed and any gain or loss
resulting therefrom will be allocated to the Unitholders in the same manner as
gain or loss is allocated upon liquidation.
CASH AVAILABLE FOR DISTRIBUTION
Based in part upon the Partnership's actual results of operations for fiscal
1997, the Partnership believes that it will generate sufficient Available Cash
from Operating Surplus during fiscal 1998 to cover the full Minimum Quarterly
Distribution for four quarters on all of the outstanding Common Units and
Subordinated Units and the general partner interests. The Partnership's belief
is based on a number of assumptions, including the assumptions that normal
weather conditions will prevail in the Partnership's operating areas, that the
Partnership's operating margins will remain constant and that market and
overall economic conditions will not
42
<PAGE>
change substantially. Although the Partnership believes its assumptions are
within a range of reasonableness, most of the assumptions are not within the
control of the Partnership and cannot be predicted with any degree of
certainty. For example, in any particular year or even series of years,
weather may deviate substantially from normal. Therefore, certain of the
Partnership's assumptions may prove to be inaccurate. As a result, the
Operating Surplus of the Partnership could deviate from that currently
expected. See "Risk Factors."
The Partnership is required to establish reserves for the future payment of
principal and interest on the First Mortgage Notes and the indebtedness under
the Bank Credit Facilities. There are other provisions in such agreements
which will, under certain circumstances, restrict the Partnership's ability to
make distributions to its partners. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Description of
Indebtedness."
43
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table sets forth for the periods and dates indicated, selected
historical and operating data for the Partnership and the Star Gas Group and
pro forma financial and operating data for the Partnership.
The selected historical financial data presented below for, and as of the
end of, each of the years in the five-year period ended September 30, 1997 are
derived from the consolidated financial statements of the Partnership and the
Star Gas Group, which financial statements have been audited by KPMG Peat
Marwick LLP, independent certified public accountants.
The Consolidated Financial Statements as of September 30, 1996 and 1997, and
for each of the years in the three-year period ended September 30, 1997, and
the report thereon, are included elsewhere in this Prospectus.
The Selected Pro Forma Financial Data is derived from the unaudited pro
forma consolidated financial statements of the Partnership and should be read
in conjunction therewith.
The information presented below under the caption "Other Data" is unaudited.
PARTNERSHIP/STAR GAS GROUP--HISTORICAL
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, PARTNERSHIP
----------------------------------------------------- PRO FORMA
1993 1994 1995 1996(A) 1997 1997(B)
-------- -------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Sales................... $143,216 $128,040 $104,550 $119,634 $135,159 $149,766
Gross profit............ 69,861 69,487 54,890 61,077 62,948 69,396
Depreciation and
amortization........... 16,703 13,039 10,073 9,808 10,405 11,495
Operating income
(loss)................. (30,313)(c) 9,393 2,555 9,802 9,003 11,228
Interest expense, net... 16,479 10,497 8,549 7,124 6,966 7,766
Net income (loss)....... (47,049)(c) (1,404) (6,169)(d) 2,593 2,012 3,437
Net income per
Unit(e)(f)............. $ -- $ -- $ -- $ 0.11 $ 0.37 $ 0.54
Cash distributions
declared per Unit(f)... -- -- -- 1.17 2.20 2.20
BALANCE SHEET DATA (END
OF PERIOD)
Current assets.......... $ 20,637 $ 17,374 $ 14,266 $ 17,842 $ 14,165 $ 21,637
Total assets............ 157,847 147,608 155,393 156,913 147,469 179,516
Long-term debt.......... 123,992 70,163 1,389 85,000 85,000 96,000
Due to Petro............ 4,723 8,809 86,002 -- -- --
Predecessor's equity
(deficiency)/Partners'
capital................ (2,825) 44,328 44,305 61,398 51,578 71,184
OTHER DATA
EBITDA(g)............... $ 19,652 $ 21,946 $ 13,541(d) $ 19,870 $ 19,703 $ 22,988
Retail propane gallons
sold................... 114,405 110,069 89,133 96,294 94,893 109,196
Total capital
expenditures(h)........ 4,688 5,419 7,988 5,332 5,279 5,579(i)
</TABLE>
- --------
(a) Reflects the results of operations of the Star Gas Group for the period
October 1, 1995 through December 20, 1995 and the results of the
Partnership from December 20, 1995 through September 30, 1996. The
operating results for the year ended September 30, 1996 were combined to
facilitate an analysis of the fundamental operating data. For the actual
results of the Partnership from December 20, 1995 through September 30,
1996, see the Consolidated Financial Statements of the Partnership
included elsewhere in this Prospectus.
(b) The pro forma financial statements represent the Partnership's historical
financial statements as of and for the fiscal year ended September 30,
1997, as adjusted on a pro forma basis to give effect to (i) the Pearl
44
<PAGE>
Gas Acquisition and (ii) the closing of this Offering and the application
of the net proceeds therefrom as described under "Use of Proceeds."
(c) Includes a loss of approximately $33.0 million in respect of a charge for
the impairment of long-lived assets.
(d) The decline in net income and EBITDA during fiscal year 1995 was primarily
due to the significantly warmer than normal weather conditions during the
1995 heating season. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(e) Net income per Unit is computed by dividing the limited partners' interest
in net income by the limited partners' weighted average number of Units
outstanding.
(f) The closing of the IPO occurred on December 20, 1995, and thus per Unit
figures are only shown for periods thereafter.
(g) EBITDA is defined as operating income plus depreciation and amortization,
less net gain (loss) on sale of businesses, equipment and other non-cash
charges (including the impairment of long-lived assets). 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 the Partnership's ability to make the Minimum
Quarterly Distribution. For a discussion of the cash flows provided by
(used in) the Partnership's and the Star Gas Group's operating, investing
and financing activities, see the statements of cash flows in the
Consolidated Financial Statements of the Partnership included elsewhere in
this Prospectus.
(h) The net maintenance capital expenditures for the fiscal years ended
September 30, 1996 and 1997 were $2.3 million and $3.1 million,
respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(i) Includes historical net maintenance capital expenditures of the
Partnership of $3.1 million and Management's estimated net maintenance
capital expenditures for Pearl Gas of $0.3 million (Pearl Gas' actual net
maintenance capital expenditures for the twelve months ended September 30,
1997 were $0.1 million).
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
In analyzing the historical financial results of the Partnership and the
Star Gas Group, the following matters should be considered.
Following Petro's initial investment in Star Gas in December 1993, new
management initiated significant restructuring efforts in order to focus and
expand its operations in its most profitable geographic markets, the Midwest
and Northeast. These activities included Star Gas' divestiture of its Texas
operations in August 1994, the sale of its southern Georgia operations in
November 1994 and the completion of six acquisitions totaling 4.7 million
gallons annually in its core Midwest and Northeast markets from June 1994 to
July 1996.
The results for fiscal 1997 do not include the operating results of the
Partnership's most recent acquisition, Pearl Gas, which was completed on
October 22, 1997. On a pro forma basis, after giving effect to the Pearl Gas
Acquisition, and the completion of this Offering, for the fiscal year ended
September 30, 1997, the Partnership's volume of retail propane gallons sold,
EBITDA and net income would have been 109.2 million gallons, $23.0 million and
$3.4 million, respectively, as compared to the Partnership's historical
results of 94.9 million gallons, $19.7 million and $2.0 million, respectively.
See the Pro Forma Consolidated Financial Statement of Star Gas Partners, L.P.
included elsewhere in this Prospectus.
Gross profit margins vary according to the customer mix. For example, sales
to certain customer groups, such as residential or commercial, generate higher
gross profit margins than sales to other customer groups, such as agricultural
customers. Accordingly, a change in customer mix can affect gross profit
without necessarily impacting total sales.
Because propane's primary use is for heating in residential and commercial
buildings, weather conditions have a significant impact on the financial
performance of the Partnership. Management believes that despite year-to-year
fluctuations, average temperatures have been relatively stable over time.
Nevertheless, as reflected by the unusually warm weather in fiscal 1995,
actual yearly weather conditions can vary substantially from historical
averages. Accordingly, in analyzing changes in financial performance, the
weather conditions in which the Partnership/Star Gas Group operated in any
given period should be considered.
RESULTS OF OPERATIONS AND OTHER DATA
The following discussion reflects the results of operations and operating
data of the Star Gas Group for the year ended September 30, 1995 and is
compared to the combined results of the Star Gas Group for the period October
1, 1995 through December 20, 1995, and the results of the Partnership from
December 20, 1995 through September 30, 1996 and for the year ended September
30, 1997. The operating results of the Star Gas Group and the Partnership for
the year ended September 30, 1996 were combined to facilitate an analysis of
the fundamental operating data. For the actual results of the Partnership from
December 20, 1995 through September 30, 1996, see the Consolidated Financial
Statements of the Partnership included elsewhere in this Prospectus.
Fiscal Year Ended September 30, 1997 Compared To Fiscal Year Ended September
30, 1996
Volume. For the year ended September 30, 1997, retail propane volume
declined 1.4 million gallons, or 1.5%, to 94.9 million gallons, as compared to
96.3 million gallons for fiscal 1996. The decline was primarily attributable
to the effect on volume of warmer temperatures experienced during the second
fiscal quarter of fiscal 1997 compared to the prior year's second fiscal
quarter and to customer conservation efforts attributable to significantly
higher propane selling prices. The Partnership was able to mitigate the
effects of the warmer temperatures on retail propane volume through both
internal account growth and two acquisitions completed since March 15, 1996.
Also favorably impacting the year-to-year comparison was an increase in sales
to agricultural customers, resulting from a return to more normal propane
demand for grain drying.
46
<PAGE>
Sales. For the year ended September 30, 1997, sales increased $15.5 million,
or 13.0%, to $135.2 million, as compared to $119.6 million for the year ended
September 30, 1996. The increase was due to higher selling prices in response
to an industry wide significant increase in propane supply costs experienced
during fiscal 1997.
Cost of Sales. Cost of sales increased $13.7 million, or 23.3%, to $72.2
million for fiscal 1997, as compared to $58.6 million for fiscal 1996. The
increase was due to higher per gallon propane supply costs.
Gross Profit. Gross profit increased $1.9 million, or 3.1%, to $62.9 million
for fiscal 1997, as compared to $61.1 million for fiscal 1996. The increase in
gross profit resulted from higher per gallon margins across all market
segments which was partially offset by the impact of slightly lower retail
propane volume.
Delivery and Branch Expenses. Delivery and branch expenses increased $1.7
million, or 4.8%, to $36.4 million for fiscal 1997, as compared to $34.8
million for fiscal 1996. The increase was primarily due to the additional
expenses associated with the first fiscal quarter's increase in agricultural
volume, higher vehicle operating costs due to an increase in fuel costs and
higher employee benefit expenses.
Depreciation and Amortization. Depreciation and amortization expenses
increased $0.6 million, or 6.1%, to $10.4 million for fiscal 1997, as compared
to $9.8 million for fiscal 1996, due to the impact of two acquisitions
completed since March 15, 1996, the amortization of certain deferred charges
relating to the First Mortgage Notes and depreciation expense associated with
capital expenditures made during fiscal 1997 and 1996.
General and Administrative Expenses. General and administrative expenses
increased $0.4 million, or 5.6%, to $6.8 million for fiscal 1997, as compared
to $6.5 million for fiscal 1996. This increase was primarily due to $0.9
million of one-time expenses associated with the exploration of strategic
alternatives designed to maximize Unitholder value, including, without
limitation, the sale or merger of the Partnership, offset by lower acquisition
related expenses. On March 3, 1997, the Partnership decided to terminate its
efforts to seek a merger or possible sale of the Partnership.
Interest Expense, Net. Interest expense, net declined $0.1 million, or 2.2%,
to $7.0 million for fiscal 1997, as compared to $7.1 million for fiscal 1996.
This reduction was primarily due to a decline in the weighted average
borrowing rate.
Income Tax Expense. Income tax expense primarily represents certain state
income taxes related to the Partnership's wholly owned corporate subsidiary
which conducts non-qualifying master limited partnership business.
Net Income. Net income decreased $0.6 million or 22.4% to $2.0 million for
fiscal 1997, as compared to $2.6 million for fiscal 1996. This decrease was
attributable to the increase in operating expenses, $0.9 million of one-time
costs associated with the exploration of strategic alternatives and $0.6
million of depreciation and amortization which was partially offset by a $1.9
million increase in gross profit.
EBITDA. EBITDA decreased $0.2 million, or 1.0%, to $19.7 million for fiscal
1997, as compared to $19.9 million for fiscal 1996. Excluding the one-time
expenses associated with the strategic alternative, EBITDA increased $0.7
million, or 3.7%, to $20.6 million due to improved per gallon margins across
all market segments and growth in the customer base provided by both internal
marketing and acquisition efforts. 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 the
Partnership's ability to make the Minimum Quarterly Distribution.
Fiscal Year Ended September 30, 1996 Compared To Fiscal Year Ended September
30, 1995
Volume. For the year ended September 30, 1996, retail propane volume
increased 8.0% or 7.2 million gallons to 96.3 million gallons, as compared to
89.1 million gallons for the year ended September 30, 1995.
47
<PAGE>
Excluding the divested southern Georgia operations, which contributed 1.9
million gallons in fiscal 1995, retail propane volume increased 10.4% or 9.1
million gallons. Propane sold to residential and commercial customers
increased 17.9% or 11.5 million gallons, due to colder temperatures,
acquisitions and internal account growth. Based on degree days in areas in
which the Partnership operates, fiscal 1996 was 6.5% colder than normal and
19.5% colder than fiscal 1995. While the residential and commercial market
segments were favorably impacted by the colder temperatures, sales to
agricultural customers, who use propane predominately in the grain drying
process, declined by approximately 2.5 million gallons primarily due to the
unusually dry crop harvest during the first fiscal quarter. For fiscal 1996,
propane sold to wholesale customers was 39.0 million gallons, virtually
unchanged from the fiscal 1995 level.
Sales. Sales increased 14.4% or $15.0 million, to $119.6 million for fiscal
1996, as compared to $104.6 million for fiscal 1995. Excluding the results
attributable to the southern Georgia operations, which contributed $2.1
million of sales in fiscal 1995, sales rose $17.1 million or 16.7% due to
increased volume and higher retail and wholesale selling prices.
Cost of Sales. Cost of sales increased 17.9% or $8.9 million to $58.6
million for fiscal 1996, as compared to $49.7 million for fiscal 1995. While
cost of sales declined by $1.0 million due to the disposition of the southern
Georgia assets, cost of sales in the core Midwest and Northeast operations
increased by $9.9 million due to the increase in volume and higher per gallon
wholesale propane costs. During the first quarter of fiscal 1996, the
partnership was able to lower its cost of sales through the utilization of its
underground storage facility. However, this benefit was offset during the
second fiscal quarter by a rapid spike in wholesale propane costs.
Gross Profit. Gross profit increased 11.3% or $6.2 million, to $61.1 million
for fiscal 1996 as compared to $54.9 million for fiscal 1995. Excluding $1.0
million of gross profit earned by the divested southern Georgia operations in
fiscal 1995, gross profit increased 13.4% or $7.2 million and was attributable
to retail volume growth, improved wholesale gross profit margins and increased
revenues from the sale, service and rental of appliances. Partially offsetting
these positive influences on gross profit were the effects of the second
quarter rise in wholesale propane costs and the decline in sales to lower
margin agricultural customers. On an overall basis, per gallon retail gross
profit margins increased as a greater proportion of the Partnership's sales
were made to higher margin residential and commercial customers.
Delivery and Branch Expenses. Delivery and branch expenses declined 1.3% or
$0.5 million to $34.8 million for fiscal 1996 as compared to $35.2 million for
fiscal 1995. This decline was due to the elimination of $1.6 million of
operating costs attributable to the southern Georgia operations which was
partially offset by an increase of $1.1 million or 3.4% in the remaining core
operations. The 10.4% volume increase and the impact on operating costs of the
severe winter weather experienced in the Partnership's Northeast markets were
the primary factors for the $1.1 million increase in operating costs in the
core operations. On a per gallon basis, operating costs in the Midwest and
Northeast operations declined 6.4% due to lower insurance expense, improved
operating efficiencies and economies of scale achieved in connection with
growing the Partnership's customer base.
Depreciation and Amortization. Depreciation and amortization expense
declined $0.3 million to $9.8 million for fiscal 1996, as compared to $10.1
million for fiscal 1995 primarily due to the divestiture of the southern
Georgia operations.
General and Administrative Expenses. General and administrative expenses
increased approximately $0.4 million to $6.5 million for fiscal 1996, as
compared to $6.1 million for fiscal 1995. This increase was primarily due to
$0.4 million of non-recurring expenses associated with certain professionals
engaged by the Partnership to assist management in analyzing and structuring
two significant acquisition candidates.
Net Gain (Loss) on Sales of Assets. Loss on sales of assets declined to $0.3
million for fiscal 1996 from $0.9 million in fiscal 1995. During fiscal 1995 a
loss of $0.7 million was recorded in connection with the sale of the southern
Georgia operations.
48
<PAGE>
Interest Expense, Net. Interest expense, net declined 16.7% or $1.4 million
to $7.1 million for fiscal 1996, as compared to $8.5 million for fiscal 1995.
This reduction was primarily due to a decline in the weighted average long-
term borrowing rate and additional income generated on higher cash balances.
For further discussions concerning the Partnership's debt structure, see Note
10 of Notes to the Consolidated Financial Statements of the Partnership.
Income Tax Expense. Income tax expense for fiscal 1996 was approximately
$0.1 million. This expense primarily represents certain state income taxes
that the Star Gas Group was required to pay. Subsequent to December 20, 1995,
taxes on income will be borne by the Partners and not the Partnership, except
for income taxes relating to the Partnership's wholly owned corporate
subsidiary which conducts non-qualifying master limited partnership business.
Net Income. Net Income increased $8.8 million to $2.6 million for fiscal
1996 as compared to a loss of $6.2 million in fiscal 1995. The improvement was
attributable to the 10.4% increase in retail propane volume, the positive
impact of divesting the southern Georgia operations and lower non-cash
expenses, including the loss on sales of assets.
EBITDA. EBITDA increased $6.3 million or 46.7% to $19.9 million for fiscal
1996 as compared to $13.5 million for fiscal 1995. This improvement in EBITDA
was the result of the volume increase associated with colder temperatures and
growth in the Partnership's customer base due to both acquisitions and
internal marketing, partially offset by the impact of lower per-gallon gross
profit margins experienced during the second quarter of fiscal 1996. For
continuing operations, delivery and branch expenses declined by 6.4%, when
measured on a per gallon basis, due to the impact of the cost reduction
programs implemented over the prior two years and the increase in volume. Also
contributing to the growth in EBITDA was the divestiture of the southern
Georgia operations, which reduced EBITDA in the prior year by approximately
$0.6 million. 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 the Partnership's ability to
make the Minimum Quarterly Distribution.
LIQUIDITY AND CAPITAL RESOURCES
For fiscal 1996, net cash flow provided by operating activities of $10.0
million consisted of $2.6 million of net income and $9.8 million of
depreciation and amortization, which was offset by a $2.4 million increase in
working capital and other changes. Inventories increased by $2.3 million due
to both an increase in propane gallons stored and higher per unit propane
costs. Net accounts receivable increased by $0.6 million due to an increase in
sales in the fourth quarter of fiscal 1996 compared to the fourth quarter of
fiscal 1995. Net cash used in investing activities was $7.0 million for 1996,
as the proceeds from the sale of fixed assets of $0.8 million were used to
partially fund $2.4 million of acquisitions and $5.3 million of capital
expenditures, including $2.3 million of maintenance capital expenditures.
For fiscal 1997, net cash provided by operating activities of $19.0 million
combined with $0.3 million from the sale of certain fixed assets amounted to
$19.3 million. These funds were utilized in investing activities to fund $5.3
million of capital expenditures (including $3.1 million of maintenance capital
expenditures), in financing activities to repay net credit facility borrowings
of $2.4 million and to pay Partnership distributions of $11.8 million. As a
result of the above activities, cash at September 30, 1997 declined by $0.2
million to $0.9 million, as compared to $1.1 million on hand at the beginning
of the period.
On October 22, 1997, the Partnership completed the Pearl Gas Acquisition.
The purchase price for Pearl Gas was $23.0 million in cash (including
estimated working capital of $1.9 million which is subject to adjustment and
transaction expenses of $0.4 million) plus the issuance of limited and general
partner interests in the Partnership, including 147,727 Common Units issued to
the General Partner (valued in total as of the acquisition date at $3.5
million). The Partnership funded the cash portion of the purchase price with
$2.0 million of available cash and $21.0 million borrowed under the
Partnership's Acquisition Facility. See "Certain Relationships and Related
Transactions--Pearl Gas Acquisition."
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Based on its current cash position, bank credit availability and expected
net cash flow from operating activities, the Partnership expects to be able to
meet all of its above obligations for fiscal 1998, as well as all of its other
current obligations as they become due. For fiscal 1998, after giving effect
to this Offering, the Partnership anticipates paying interest on its First
Mortgage Notes and Acquisition Facility of $6.8 million and $0.9 million,
respectively, anticipates paying limited and general partner distributions of
approximately $13.4 million and plans to incur approximately $3.0 million in
net maintenance capital expenditures.
DESCRIPTION OF INDEBTEDNESS
Description of First Mortgage Notes. In December 1995, the General Partner
issued $85.0 million in First Mortgage Notes pursuant to a First Mortgage Note
Agreement with various institutional investors, which Notes were assumed by
the Operating Partnership in connection with the Star Gas Conveyance. The
Operating Partnership's obligations under the First Mortgage Note Agreement
and the First Mortgage Notes are secured, on an equal and ratable basis with
the Operating Partnership's obligations under the Bank Credit Facilities, by a
mortgage on substantially all of the real property and liens on substantially
all of the operating facilities, equipment and other assets of the Operating
Partnership (collectively, the "Mortgaged Property"). The First Mortgage Notes
bear interest at the annual rate of 8.04%, subject to adjustment as provided
in the First Mortgage Note Agreement. The First Mortgage Notes mature
approximately 14 years from the date of issuance, and will require semiannual
prepayments, without premium, of the principal thereof beginning approximately
five years from the date of issuance. The Operating Partnership, at its
option, and under certain circumstances following the disposition of assets,
may be required to offer to prepay the First Mortgage Notes, in whole or in
part. Certain of these prepayments will be at a premium as defined in the
First Mortgage Note Agreement.
The First Mortgage Note Agreement contains various restrictive and
affirmative covenants applicable to the Operating Partnership, including (i)
restrictions on the incurrence of additional indebtedness other than (a)
borrowings under the Bank Credit Facilities, (b) certain indebtedness secured
by the Mortgaged Property which is incurred in connection with additions,
repairs or improvements to the Mortgaged Property, not to exceed an amount
equal to the net proceeds of any partnership interests sold by the Operating
Partnership or certain capital contributions to the Operating Partnership to
finance such additions, repairs or improvements, (c) additional indebtedness,
if after giving effect to the incurrence thereof and the repayment of any debt
being refinanced or repaid (x) the ratio of Consolidated Cash Flow to
Consolidated Pro Forma Debt Service (each as defined in the First Mortgage
Note Agreement) is greater than 2.5 to 1.0 and (y) the ratio of Consolidated
Cash Flow to Maximum Consolidated Pro Forma Debt Service (each as defined in
the First Mortgage Note Agreement) is greater than 1.25 to 1.0, and which, if
incurred in connection with additions, repairs and improvements to Mortgaged
Property, may be secured by Mortgaged Property, (d) unsecured debt owed to the
General Partner or an Affiliate of the General Partner, provided that such
debt is expressly subordinated to the First Mortgage Notes and the Bank Credit
Facilities and does not exceed a total of $10 million in the aggregate at any
time outstanding, (e) certain subordinated intercompany indebtedness, (f)
certain pre-existing indebtedness of acquired persons or assets, provided that
(x) such indebtedness was not incurred in anticipation of such acquisition,
(y) after giving effect to such acquisition, the Operating Partnership could
incur at least $1 of additional indebtedness pursuant to clause (c) above and
(z) no condition exists which constitutes an event of default, (g) certain
specified preexisting indebtedness and (h) refundings and refinancings of the
Bank Credit Facilities and the First Mortgage Notes provided that (x) the
principal amount of such indebtedness may not exceed that of the Bank Credit
Facilities or the First Mortgage Notes (including any prepayment premium), as
the case may be, (y) the maturity date of any such indebtedness shall not
exceed that of the Bank Credit Facilities or the First Mortgage Notes, as the
case may be, and (z) with respect to secured indebtedness, such indebtedness
could be incurred pursuant to clause (c) above, (ii) restrictions on certain
liens, investments, guarantees, loans, advances, restricted payments, mergers,
consolidations, sales of assets, and entering into transactions with
affiliates and (iii) restrictions on the payment of dividends or other
distributions in respect of any partnership interest if the pro forma ratio of
Consolidated Cash Flow to Consolidated Interest Expense (each as defined in
the First Mortgage Note Agreement) is less than 1.75 to 1.0.
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Upon the closing of this Offering, after giving pro forma effect to this
Offering, the Operating Partnership would be in compliance with the
restrictive and affirmative covenants applicable under the First Mortgage Note
Agreement.
Under the First Mortgage Note Agreement, so long as no default exists or
would result, the Operating Partnership is permitted to make cash
distributions to the Partnership not more frequently than quarterly in an
amount not to exceed Available Cash (as defined in the First Mortgage Note
Agreement) for the immediately preceding calendar quarter. The First Mortgage
Note Agreement and the Bank Credit Facilities require that in the quarter
preceding a quarter in which an interest payment is to be made on the First
Mortgage Notes, Available Cash reflects a reserve equal to 50% of the interest
to be paid on the First Mortgage Notes which reserve may, under certain
circumstances, be increased. In addition, in the quarter preceding a quarter
in which a scheduled principal payment is to be made on the First Mortgage
Notes, Available Cash will be required to reflect a reserve equal to 50% of
the principal amount to be repaid on such payment date.
If an event of default exists on the First Mortgage Notes, the Noteholders
may accelerate the maturity of the First Mortgage Notes and exercise other
rights and remedies, including foreclosure upon the Mortgaged Property. In the
case of an event of default referred to in clause (h) below, the acceleration
of the maturity of the First Mortgage Notes will occur automatically. Events
of default include (a) failure to pay any principal or premium when due, or
interest within five days of when due, on the First Mortgage Notes, (b) a
material misrepresentation in the First Mortgage Note Agreement, (c) failure
to perform or otherwise comply with covenants, (d) default by the Operating
Partnership or designated subsidiaries of the Operating Partnership in the
payment of any interest on or principal of, or default by any such person in
the performance of any agreement if the effect is to permit the acceleration
of any indebtedness the aggregate principal amount of which is at least $2
million, (e) the default of the General Partner or the Operating Partnership
under certain other agreements, including the Partnership Agreement, which
default is unremedied for 30 days, (f) certain unsatisfied judgments in excess
of $1 million, (g) a material failure of any of the security documents
relating to the Mortgaged Property to be in full force and effect and (h)
various bankruptcy or insolvency events involving the Operating Partnership,
the General Partner or certain designated subsidiaries of the Operating
Partnership.
Description of Bank Credit Facilities. In December 1995, the Operating
Partnership entered into the Bank Credit Facilities with a group of commercial
banks. The Bank Credit Facilities consist of a $25.0 million Acquisition
Facility and a $12.0 million Working Capital Facility. At November 30, 1997,
$21.0 million was outstanding under the Acquisition Facility and $8.7 was
outstanding under the Working Capital Facility. Approximately $10.0 million of
the net proceeds to the Partnership of this Offering will be used to reduce
the outstanding balance of the Acquisition Facility and the balance will be
used for general partnership purposes and to reduce working capital
borrowings. The Partnership is currently engaged in discussions with certain
institutions with respect to issuing additional institutional debt in order to
repay the balance of the Acquisition Facility, of which there can be no
assurance. See "Use of Proceeds."
The agreement governing the Bank Credit Facilities contains covenants and
default provisions generally similar to those contained in the First Mortgage
Note Agreement. In addition, if the Operating Partnership borrows under the
Acquisition Facility, the ratio of Total Funded Debt to Consolidated Cash Flow
(as such terms are defined in the Bank Credit Facilities) may not exceed 4.95
to 1.0 through December 31, 1997 and thereafter 4.5 to 1.0. The Operating
Partnership's obligations under the Bank Credit Facilities are secured, on an
equal and ratable basis with the Operating Partnership's obligations under the
First Mortgage Note Agreement and the First Mortgage Notes, by a mortgage on
the Mortgaged Property. The Bank Credit Facilities bear interest at a rate
based upon, at the Operating Partnership's option, either the London Interbank
Offered Rate plus a margin or a Base Rate (each as defined in the Bank Credit
Facilities). The Partnership has no present intention of entering into
interest rate protection agreements with respect to the Bank Credit
Facilities.
The Working Capital Facility will expire on December 31, 1999, but may be
extended annually thereafter with the consent of the banks. The Acquisition
Facility will revolve until December 31, 1998, after which time any
outstanding loans thereunder will amortize quarterly in equal principal
payments over the period from December 31, 1998 through December 31, 2001.
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Amounts borrowed under both facilities are due at maturity. However, there
must be no amount outstanding under the Working Capital Facility for at least
30 consecutive days during each calendar year. In addition, if the Operating
Partnership exercises its option to convert the Acquisition Facility into a
term loan, the outstanding principal balance under this facility will be
amortized in equal quarterly installments.
Certain of the Partnership's indebtedness contain provisions relating to
change of control. In particular, the First Mortgage Notes and the Bank Credit
Facilities require the General Partner to serve as general partner of the
Partnership and to maintain with its Affiliates ownership of a minimum number
of Units. If such change of control provisions are triggered, (i) under the
Bank Credit Facilities, all outstanding indebtedness may become due and (ii)
under the First Mortgage Notes, the indebtedness will be re-rated by a rating
agency. In such event, there is no assurance that the Partnership will be able
to pay the indebtedness, in which case the lenders would have the right to
foreclose on the Partnership's assets, which would have a material adverse
effect on the Partnership. There is no restriction on the ability of the
General Partner to enter into a transaction which would trigger such change of
control provisions.
EFFECTS OF INFLATION
Although inflation affects the price the Partnership pays for operating and
administrative services and propane, the Partnership attempts to limit the
effects of inflation on its results of operations through cost control and
productivity improvements, as well as through adjustment of sales prices.
Changing prices as a result of inflationary pressures have not had a material
adverse effect on profitability, although sales may be affected. Inflation has
not materially impacted the results of operations and the Partnership does not
believe normal inflationary pressures will have a material adverse effect on
the profitability of the Partnership in the future.
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BUSINESS
GENERAL
The Partnership is primarily engaged in the retail distribution of propane
and related supplies and equipment to residential, commercial, industrial,
agricultural and motor fuel customers. Including the operations of Pearl Gas,
the Partnership believes that it is the eighth largest retail propane
distributor in the United States, serving approximately 162,000 customers from
54 branch locations and 30 satellite storage facilities in the Midwest and 18
branch locations and 15 satellite storage facilities in the Northeast. The
Partnership also serves approximately 60 wholesale customers from its
wholesale operation in southern Indiana.
The Partnership was formed on October 16, 1995 to acquire and operate the
propane business of Star Gas and its parent corporation Petro. Substantially
all of the consolidated assets and liabilities of the Partnership are
accounted for by the Operating Partnership in which the Partnership owns a 99%
limited partnership interest and the General Partner owns a 1% general
partnership interest.
The General Partner directs and manages all activities of the Partnership
and the Operating Partnership and is reimbursed on a monthly basis for all
direct and indirect expenses it incurs on their behalf, including the cost of
employees.
PEARL GAS ACQUISITION
On October 22, 1997, the Operating Partnership completed the acquisition of
Pearl Gas, which is based in Bowling Green, Ohio. Pearl Gas, which has been in
business for more than 70 years, sells over 14 million gallons of retail
propane annually to over 12,000 customers. Pearl Gas operates primarily in
northwest Ohio, southern Michigan and northeast Indiana. Over 80% of Pearl
Gas' volume is sold to residential customers.
The purchase price for Pearl Gas was $23.0 million in cash (including
estimated working capital of $1.9 million which is subject to adjustment and
transaction expenses of $0.4 million) plus the issuance of limited and general
partner interests in the Partnership, including 147,727 Common Units to the
General Partner (valued in total at $3.5 million). See "Certain Relationships
and Related Transactions" and "The Selling Unitholder".
The following chart sets forth for the periods indicated Pearl Gas' EBITDA,
net income and volume of retail propane gallons sold:
<TABLE>
<CAPTION>
YEAR ENDED TWELVE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, 1997
--------------- -------------------
1995 1996 ACTUAL ADJUSTED(B)
------- ------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA(a)................................ $ 2,629 $ 3,162 $ 3,012 $ 3,285
Net income............................... $ 2,302 $ 2,924 $ 2,667 $ 2,940
Retail propane gallons sold.............. 14,372 15,288 14,303 14,303
</TABLE>
- --------
(a) EBITDA is defined as operating income plus depreciation and amortization,
less net gain (loss) on sale of businesses and equipment and other non-
cash charges (including impairment of long-lived assets). 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 the Partnership's ability to make the Minimum
Quarterly Distributions.
(b) Adjusted to include $0.3 million in estimated cost savings which
Management anticipates will be realized as a result of the Pearl Gas
Acquisition. See the Pro Forma Consolidated Financial Statements of Star
Gas Partners, L.P., included elsewhere in the Prospectus for the combined
effect of the Pearl Gas Acquisition and this Offering.
On a pro forma basis, after giving effect to the Pearl Gas Acquisition, and
the completion of this Offering, for the fiscal year ended September 30, 1997,
the Partnership's volume of retail propane gallons sold, EBITDA and net income
would have been 109.2 million gallons, $23.0 million and $3.4 million,
respectively, as
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compared to the Partnership's historical results of 94.9 million gallons,
$19.7 million and $2.0 million, respectively. See the Pro Forma Consolidated
Financial Statement of Star Gas Partners, L.P. included elsewhere in this
Prospectus.
INDUSTRY BACKGROUND
Propane is used primarily for space heating, water heating and cooking by
residential and commercial customers, which constitute the largest portion of
the customer base. 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. Propane is clean-burning, producing negligible amounts of
pollutants when consumed. According to the National Propane Gas Association,
the domestic retail market for propane is approximately 9.4 billion gallons
annually, with limited growth for retail demand for the product. Based upon
information contained in the Energy Information Administration's Annual Energy
Review-1995, propane accounts for approximately 3.8% of household energy
consumption in the United States.
BUSINESS STRATEGY
The Partnership's strategy is to maximize its cash flow and profitability,
primarily through (i) internal growth, (ii) controlling operating costs and
(iii) acquisitions which have the potential for generating attractive returns
on investment. The retail propane industry is mature and experiences only
limited growth in total demand for the product. The propane industry is also
large and highly fragmented, with approximately 6,000 independently owned and
operated distributors. Given these characteristics, the Partnership's
acquisition strategy is focused on acquiring smaller- to medium-sized local
and regional independent propane distributors, particularly those with a
relatively large percentage of residential customers, which generate higher
margins than other types of customers, and those located in the Midwest and
Northeast, where the Partnership believes it can attain higher margins than in
other areas of the United States.
Although there are no formal arrangements between Petro and the Partnership,
the Partnership has had, and anticipates that it will continue to have, access
to Petro's management expertise. In particular, the Partnership believes that
the extensive experience of Petro's management team in making acquisitions in
the home heating oil industry, which has many similar characteristics to the
propane industry, provides the Partnership with a competitive advantage.
Additionally, the field of potential acquisition candidates for the
Partnership is broadened because of the ability to acquire companies with both
home heating oil and propane operations, with the Partnership either retaining
the propane operations and Petro retaining the home heating oil operations or
the Partnership retaining both the propane and the home heating oil
operations. In this regard, although the Partnership does not presently have
any home heating oil operations, it may consider acquiring or retaining such
operations in the future to the extent that the Partnership is able to
identify attractive acquisition candidates in the home heating oil field. See
"Conflicts of Interest and Fiduciary Responsibility--Conflicts of Interest."
In order to facilitate the Partnership's acquisition strategy, the Operating
Partnership has entered into the Bank Credit Facilities which consist of a
$25.0 million Acquisition Facility (of which $21.0 million was outstanding as
of November 30, 1997) and a $12.0 million Working Capital Facility (of which
$8.7 million was outstanding as of November 30, 1997). In addition to
borrowings under the Bank Credit Facilities, the Partnership may fund future
acquisitions from internal cash flow or from the issuance of additional
Partnership interests or debt securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
While the Partnership regularly considers and evaluates acquisitions as part
of its ongoing acquisition program, the Partnership does not have any present
agreements or commitments with respect to any acquisition. There can be no
assurance that the Partnership will identify attractive acquisition candidates
in the future or that
54
<PAGE>
it will be able to acquire such candidates or obtain financing for such
acquisitions on acceptable terms. In addition, there can be no assurance that
any acquisition will not dilute earnings and distributions or that any
additional debt incurred to finance acquisitions will not affect the ability
of the Partnership to make distributions to Unitholders. The General Partner
has broad discretion in making acquisitions and it is expected that the
General Partner will not generally seek Unitholder approval of acquisitions.
MARKETING AND OPERATIONS
As of October 31, 1997, the Partnership distributed propane to approximately
162,000 retail customers in 13 states from 72 branch locations. The
Partnership's operations are conducted under several leading trademarks and
trade names, including: Star Gas(R), Star Gas Service(TM), Silgas(TM), Blue
Flame(R), Maingas(TM), Arrow Gas(TM), Mid-Hudson Valley Propane(TM), Coleman
Gas Service(TM), H & S Gas(TM), Isch Gas(TM), Wilhoyte L.P. Gas(TM), Rural
Natural Gas(TM) and Pearl Gas(TM). (The Partnership does not have the right to
use the trademark Star Gas in the State of New York nor does the Partnership
have the right to use the Blue Flame trademark in certain limited areas
outside of the Partnership's current area of operations). The marketing areas
served by the Partnership are generally rural but also include suburban areas
where natural gas is generally not available.
The Partnership's retail operations are located primarily in the Northeast
and Midwest regions of the United States:
NORTHEAST MIDWEST
CONNECTICUT PENNSYLVANIA INDIANA KENTUCKY
Stamford Hazelton Akron (CONTINUED)
Hartford Wind Gap Batesville Shelbyville
Williamstown
Bedford
MAINE RHODE ISLAND Bluffton
Fairfield Davisville Coal City MICHIGAN
Fryeburg College Corner Hillsdale
Skowhegan Columbia City Somerset Center
Wells Decatur
Windham Ferdinand OHIO
Bowling Green
Greencastle
MASSACHUSETTS Jeffersonville Cincinnati
Belchertown Linton Defiance
Rochdale Madison Deshler
Westfield New Salisbury Ft. Recovery
Swansea N. Manchester Hebron
Ironton
N. Vernon
NEW HAMPSHIRE N. Webster Kenton
(from Fryeburg, ME) Portland Lancaster
Lewisburg
Remington
NEW JERSEY Richmond Lynchburg
Maple Shade Salem Macon
Tuckahoe Seymour Maumee
McClure
Sulphur Springs
NEW YORK Versailles Milford
Poughkeepsie Warren Mt. Orab
Washingtonville Waterloo Northstar
Winamac Ripley
Sabina
KENTUCKY Waverly
Glencoe West Union
Prospect
WEST VIRGINIA
(from Ironton, OH)
55
<PAGE>
The distribution of propane at the retail level generally involves large
numbers of small deliveries averaging 100-150 gallons each to residential,
commercial, industrial, agricultural and motor fuel users. Homeowners or
residential customers use propane primarily for space heating, water heating,
clothes drying and cooking. Commercial customers such as motels, restaurants,
retail stores and laundromats generally use propane for the same purposes as
residential customers. Industrial users, such as manufacturers, use propane as
a heating and energy source in manufacturing and drying processes. In
addition, propane is used to supply heat for drying crops and curing tobacco
and as a fuel source for certain motor vehicles.
During the fiscal year ended September 30, 1997, approximately 71% of the
Partnership's sales (by volume of gallons sold) were to retail customers (of
which approximately 52%, 21%, 18% and 9% were sales to residential customers,
industrial/commercial customers, agricultural customers and motor fuel
customers, respectively) and approximately 29% were to wholesale customers.
Sales to residential customers in fiscal year 1997 accounted for 62% of the
Partnership's gross profit on propane sales, reflecting the higher-margin
nature of this segment of the market.
From its branch locations, the Partnership also sells, installs and services
equipment related to its propane distribution business, including heating and
cooking appliances and, at some locations, rents water softeners. Typical
branch locations consist of an office, appliance showroom, warehouse and
service facilities, with one or more 12,000 to 30,000 gallon bulk storage
tanks on or near the premises. Satellite facilities typically contain only
storage tanks.
Retail deliveries of propane are usually made to customers by means of the
Partnership's fleet of bobtail and rack trucks which aggregated 269 vehicles
as of October 31, 1997. Propane is pumped from the bobtail truck, which
generally holds 2,000 to 3,000 gallons, into a stationary storage tank at the
customer's premises. The Partnership generally owns these storage tanks. The
capacity of these tanks ranges from approximately 24 gallons to approximately
1,000 gallons. The Partnership also delivers propane to retail customers in
portable cylinders, which typically are picked up and replenished at the
Partnership distribution locations, then returned to the retail customer. To a
limited extent, the Partnership also delivers propane to certain end users of
propane in larger trucks known as transports (which have an average capacity
of approximately 9,000 gallons). End users receiving transport deliveries
include industrial customers, large-scale heating accounts, such as local gas
utilities which use propane as a supplemental fuel to meet peak demand
requirements, and large agricultural accounts which use propane for crop
drying and space heating.
A majority of the Partnership'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. The Partnership
delivers propane to its heating customers an average of approximately six
times during the year, depending upon weather conditions and historical
consumption patterns. In addition, the Partnership provides emergency service
seven days a week, 52 weeks a year. Management believes its propane customer
base to be relatively stable. In excess of 95% of the Partnership's retail
propane customers lease their tanks from the Partnership. In most states,
certain fire safety regulations restrict the refilling of a leased tank solely
to the propane supplier that owns the tank. The inconvenience associated with
switching tanks greatly reduces a propane customer's tendency to change
distributors.
Profits in the retail propane business are primarily based on margins, the
cents-per-gallon difference between the purchase price and the sales price of
propane. The Partnership generally purchases propane pursuant to market based
contracts, and in the spot markets, primarily from natural gas processors and
major oil companies, for its short-term requirements. Therefore, its supply
costs fluctuate with market price fluctuations. Should wholesale propane
prices decline in the future, the Partnership's margins on its retail propane
distribution business should increase in the short-term because retail prices
tend to change less rapidly than wholesale prices. Should the wholesale cost
of propane increase, for similar reasons retail margins and profitability
would likely be reduced at least for the short-term until retail prices can be
increased.
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<PAGE>
The retail market for propane is seasonal because it is used primarily for
heating in residential and commercial buildings. Approximately 70% to 75% of
the Partnership's retail propane volume is sold during the peak heating season
from October through March, as many customers use propane for heating
purposes.
Consequently, sales and operating profits are largely generated in the first
and second fiscal quarters (October through March). To the extent necessary,
the Partnership will reserve cash flows from the first and second quarters for
distribution to holders of Common Units in the third and fourth fiscal
quarters. In addition, sales volume traditionally fluctuates from year to year
in response to variations in weather, prices and other factors. The
Partnership believes that the broad geographic distribution of its operations
helps to minimize exposure to regional weather or economic patterns.
SUPPLY
The Partnership obtains propane from over 25 sources, all of which are
domestic or Canadian oil companies, including Amoco Canada Marketing Group;
Ashland Petroleum Company; Bayway Refining Company; Ferrell North America;
Enron Gas Liquids, Inc.; Marathon Oil Company; Markwest Hydrocarbons Partners,
Ltd.; Mobil Oil Company; Petro Canada LPG Inc.; Shell Oil Company; Shell
Canada Limited; and Warren Gas Liquids, Inc. Supplies from these sources have
traditionally been readily available, although no assurance can be given that
supplies of propane will be readily available in the future.
Substantially all of the Partnership's propane supply for its Northeast
retail operations are purchased under annual or longer term supply contracts,
which generally provide for pricing in accordance with market prices at the
time of delivery. Certain of the contracts provide for minimum and maximum
amounts of propane to be purchased. During the year ended September 30, 1997,
none of the Partnership's Northeast suppliers accounted for more than 10% of
the Partnership's volumes.
The Partnership typically supplies its Midwest retail and wholesale
operations by a combination of (i) spot purchases from suppliers at Mont
Belvieu, Texas, which are transported by pipeline to the Partnership's 21
million gallon underground storage facility in Seymour, Indiana (the "Seymour
Facility"), and then delivered to the Midwest branches and (ii) purchases from
a number of Midwest refineries which are transported by truck to the branches
either directly or via the Seymour Facility. Most of the refinery purchases
are purchased under market based contracts.
The Seymour Facility is located on the TEPPCO Partners, L.P. pipeline
system. The pipeline is connected to the Mont Belvieu storage facilities and
is one of the largest conduits of supply for the U.S. propane industry. The
Seymour Facility allows the Partnership to buy and store large quantities of
propane during periods of low demand, which generally occur during the summer
months. The General Partner believes that this ability allows the Partnership
to achieve cost savings to an extent generally not available to the
Partnership's competitors in its Midwest markets.
For fiscal 1997, 43% of the Midwest volume was purchased on the spot market
from various Mont Belvieu sources, and 21% was purchased from three refineries
in Illinois and Indiana owned by Amoco Canada Marketing Group. Ten other
refineries provided the remaining required propane. The Partnership believes
that its diversification of suppliers will enable it to purchase all of its
supply needs at market prices if supplies are interrupted from any of the
sources without a material disruption of its operations.
Propane is generally transported from refineries, pipeline terminals and
storage facilities (including the Partnership's Seymour Facility) and coastal
terminals to the Partnership's branch location bulk plants by a combination of
the Partnership's own highway transport fleet, common carriers, owner-
operators and railroad tank cars. Branches and their related satellites
typically have one or more 12,000 to 30,000 gallon storage tanks.
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<PAGE>
COMPETITION
The Partnership's business is highly competitive. However, long-standing
customer relationships are typical of the retail propane industry. Retail
propane customers generally lease their storage tanks from their suppliers.
The lease terms and, in most states, certain fire safety regulations restrict
the refilling of a leased tank solely to the propane supplier that owns the
tank. The inconvenience of switching tanks minimizes a customer's tendency to
switch among suppliers of propane.
The ability to compete effectively further depends on the reliability of
service, responsiveness to customers and the ability to maintain competitive
prices. The Partnership believes that its superior service capabilities and
customer responsiveness differentiate it from many of its competitors. Branch
operations offer emergency service twenty-four hours per day, seven days per
week.
Propane competes primarily with electricity, natural gas and fuel oil as an
energy source on the basis of price, availability and portability. Propane is
generally less expensive to use than electricity for space heating, water
heating, clothes drying and cooking and competes effectively in those parts of
the country where propane is cheaper than electricity on an equivalent British
Thermal Unit basis. Propane is generally more expensive than natural gas, but
serves as an alternative to natural gas in rural and suburban areas where
natural gas is unavailable or portability of product is required. The
expansion of natural gas into traditional propane markets has historically
been inhibited by the capital costs required to expand distribution and
pipeline systems. Although the extension of natural gas pipelines tends to
displace propane distribution in the areas affected, the Partnership believes
that new opportunities for propane sales arise as more geographically remote
areas are developed. Although propane is similar to fuel oil in space heating
and water heating applications as well as in market demand and price, propane
and fuel oil have generally developed their own distinct geographic markets.
Because furnaces and appliances that burn propane will not operate on fuel
oil, a conversion from one fuel to the other requires the installation of new
equipment.
In addition to competing with alternative energy sources, the Partnership
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, smaller local independent marketers and farm cooperatives.
Based on industry publications, the Partnership believes that the ten largest
multi-state marketers, including the Partnership, account for less than 35% of
the total retail sales of propane in the United States, and that no single
marketer has a greater than 10% share of the total retail market in the United
States. Most of the Partnership's branches compete with five or more marketers
or distributors. The principal factors influencing competition among propane
marketers are price and service. Each retail distribution outlet operates in
its own competitive environment as retail marketers locate in close proximity
to customers to lower the cost of providing service. The typical retail
distribution outlet has an effective marketing radius of approximately 35
miles.
EMPLOYEES
The Partnership has no employees, except for certain employees of its
corporate subsidiary, Stellar Propane Service Corporation, and is managed by
the General Partner pursuant to the Partnership Agreement. As of October 31,
1997, Star Gas had 630 employees providing full time services to the Operating
Partnership of which 44 were employed by the corporate office in Stamford,
Connecticut and 586 were located in branch offices; 191 of Star Gas' employees
were administrative, 281 were engaged in transportation and storage and 114
were engaged in field servicing. Approximately 78 of Star Gas' employees are
represented by six different local chapters of labor unions. Management
believes that its relations with both its union and non-union employees are
satisfactory.
GOVERNMENT REGULATIONS
The Partnership 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
58
<PAGE>
the handling of solid and hazardous wastes. These laws include 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 statues. CERCLA, also known as the
"Superfund" law, imposes joint and several liability 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. Such laws and regulations could result in civil
or criminal penalties in cases of non-compliance or impose liability for
remediation costs. To date, the Partnership has not been named as a party to
any litigation in which the Partnership is alleged to have violated or
otherwise incurred liability under any of the foregoing laws and regulations.
In connection with all acquisitions of retail propane businesses that
involve the purchase of real estate, the Partnership conducts a due diligence
investigation to 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 due diligence includes questioning the seller, obtaining
representations and warranties concerning the seller's compliance with
environmental laws and performing site assessments in which employees of the
General Partner, and, in certain cases, independent environmental consulting
firms hired by the General Partner review historical records and data bases
and conduct physical investigations of the property to look for evidence of
hazardous substances, compliance violations and the existence of underground
storage tanks.
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 the Partnership 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, the
Partnership 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. The Partnership conducts ongoing training programs to help
ensure that its operations are in compliance with applicable regulations. The
Partnership maintains various permits that are necessary to operate some of
its facilities, some of which may be material to its operations. Management
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.
On August 18, 1997, the U.S. Department of Transportation (the "DOT")
published its Final Rule for Continued Operation of the Present Propane Trucks
(the "Final Rule"). The Final Rule is intended to address perceived risks
during the transfer of propane. The Final Rule required certain immediate
changes in the industry operating procedures, including retrofitting all
propane delivery trucks. The Partnership, as well as the National Propane Gas
Association ("NPGA") and the propane industry in general, believe that the
Final Rule cannot practicably be complied with in its current form. On October
15, 1997, five of the principal multi-state propane marketers (unrelated to
the Partnership) filed an action against the DOT in the United States District
Court for the Western District of Missouri seeking to enjoin enforcement of
the Final Rule. The NPGA subsequently filed a similar suit. In addition, in
November 1997, a bill was introduced in the United States House of
Representatives that would prohibit the DOT from enforcing certain provisions
of the Final Rule. At this time, the Partnership cannot determine the likely
outcome of the litigation or the proposed legislation or what the ultimate
long-term cost of compliance with the Final Rule will be to the Partnership
and the propane industry in general.
Future developments, such as stricter environmental, health or safety laws
and regulations thereunder, could affect Partnership operations. It is not
anticipated that the Partnership's compliance with or liabilities under
environmental, health and safety laws and regulations, including CERCLA, will
have a material adverse effect on the Partnership. To the extent that there
are any environmental liabilities unknown to the Partnership or environmental,
health or safety laws or regulations are made more stringent, there can be no
assurance that the Partnership's results of operations will not be materially
and adversely affected.
59
<PAGE>
PROPERTIES
As of October 31, 1997, the Partnership owned 58 of its 72 branch locations
and 34 of its 45 satellite storage facilities and leased the balance. In
addition, the Partnership owns the Seymour Facility, in which it stores
propane for itself and third parties. The Partnership leases its corporate
headquarters in Stamford, Connecticut, as well as office and training
facilities in the Midwest.
The transportation of propane requires specialized equipment. The trucks
utilized for this purpose carry specialized steel tanks that maintain the
propane in a liquefied state. As of October 31, 1997, the Partnership had a
fleet of 28 tractors, 38 transport trailers, 269 bobtail and rack trucks and
314 other service and pick-up trucks, the majority of which are owned. The
Partnership owns 20 and leases 33 automobiles. As of October 31, 1997, the
Partnership owned approximately 238 bulk storage tanks with typical capacities
of 12,000 to 30,000 gallons, approximately 203,000 stationary customer storage
tanks with typical capacities of 24 to 1,000 gallons and approximately 34,000
portable propane cylinders with typical capacities of 5 to 24 gallons. The
obligations of the Partnership under its borrowings are secured by liens and
mortgages on all real and personal property of the Partnership.
LITIGATION
Propane is a flammable, combustible gas. Serious personal injury and
property damage can occur in connection with its transportation, storage or
use. The Partnership, in the ordinary course of business, is threatened with
or is named as a defendant in various lawsuits which, among other items, seek
actual and punitive damages for product liability, personal injury and
property damage. However, the Partnership is not a party to any litigation
which individually or in the aggregate could reasonably be expected to have a
material adverse effect on the results of operations or the financial
condition of the Partnership. The Partnership maintains liability insurance
policies with insurers in such amounts and with such coverages and deductibles
as the General Partner believes is reasonable and prudent. However, there can
be no assurance that such insurance will be adequate to protect the
Partnership from material expenses related to such personal injury or property
damage or that such levels of insurance will continue to be available in the
future at economical prices.
60
<PAGE>
MANAGEMENT
PARTNERSHIP MANAGEMENT
The General Partner manages and operates the activities of the Partnership.
Unitholders do not directly or indirectly participate in the management or
operation of the Partnership. The General Partner owes a fiduciary duty to the
Unitholders. See "Conflicts of Interest and Fiduciary Responsibility."
Notwithstanding any limitation on obligations or duties, the General Partner
is liable, as the general partner of the Partnership, for all debts of the
Partnership (to the extent not paid by the Partnership), except to the extent
that indebtedness or other obligations incurred by the Partnership are made
specifically non-recourse to the General Partner. In addition, if the
Operating Partnership defaults under the First Mortgage Notes or the Bank
Credit Facilities, the General Partner will be liable for any deficiency
remaining after foreclosure on the Operating Partnership's assets.
William P. Nicoletti and Elizabeth K. Lanier, who are neither officers or
employees of the General Partner nor directors, officers or employees of any
Affiliate of the General Partner, have been appointed to serve on the Audit
Committee of the General Partner's Board of Directors with the authority to
review, at the request of the General Partner, specific matters as to which
the General Partner 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 the Partnership. Any matters approved by the Audit
Committee will be conclusively deemed to be fair and reasonable to the
Partnership, approved by all partners of the Partnership and not a breach by
the General Partner of any duties it may owe the Partnership or the
Unitholders. In addition, the Audit Committee reviews external financial
reporting of the Partnership, recommends engagement of the Partnership's
independent accountants and reviews the Partnership's procedures for internal
auditing and the adequacy of the Partnership's internal accounting controls.
With respect to such additional matters, the Audit Committee may act on its
own initiative to question the General Partner and, absent the delegation of
specific authority by the entire Board of Directors, its recommendations with
regard thereto will be advisory.
As is commonly the case with publicly traded limited partnerships, the
Partnership does not directly employ any of the persons responsible for
managing or operating the Partnership. The management and employees of the
Star Gas Group who managed and operated the propane business and assets prior
to the IPO that are now owned by the Partnership continue to manage and
operate the Partnership's business as officers and employees of the General
Partner and its Affiliates. See "Business--Employees."
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER
The following table sets forth certain information with respect to the
directors and executive officers of the General Partner. Executive officers
and directors are elected for one-year terms.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE GENERAL PARTNER
---- --- ---------------------------------
<S> <C> <C>
Irik P. Sevin(a)(b).................. 50 Chairman of the Board of Directors
Joseph P. Cavanaugh.................. 60 President and Chief Executive Officer
David R. Eastin...................... 39 Vice President--Operations
Norman L. Bushey..................... 68 Vice President--Safety/Compliance
Richard F. Ambury.................... 40 Vice President--Finance
Audrey L. Sevin...................... 71 Director and Secretary
William G. Powers, Jr.(b)............ 44 Director
Thomas J. Edelman.................... 46 Director
Paul Biddelman....................... 51 Director
Wolfgang Traber(a)................... 53 Director
William P. Nicoletti(c).............. 52 Director
Elizabeth K. Lanier(c)............... 46 Director
</TABLE>
- --------
(a) Member of the Compensation Committee
(b) Member of the Management Committee
(c) Member of the Audit Committee
61
<PAGE>
IRIK P. SEVIN has been the Chairman of the Board of Directors of Star Gas
since December 1993. Mr Sevin has been a director of Petro since its
organization in October 1983 and Chairman of the Board of Petro since January
1993. Mr. Sevin has been President of Petro, Inc. (a predecessor of Petro)
since November 1979 and was President of Petro from 1983 through January 1997.
Mr. Sevin was an associate in the investment banking division of Kuhn Loeb &
Co. and then Lehman Brothers Kuhn Loeb Incorporated from February 1975 to
December 1978. Mr. Sevin is a graduate of the Cornell University School of
Industrial and Labor Relations (B.S.), New York University School of Law
(J.D.) and the Columbia University School of Business Administration (M.B.A.).
JOSEPH P. CAVANAUGH has been President and Chief Executive Officer of Star
Gas since December 1997. Mr. Cavanaugh was Senior Vice President-Safety and
Compliance of Petro from January 1993 through November 1997. From October 1985
to January 1993, Mr. Cavanaugh was Vice President of Petro. Mr. Cavanaugh was
Controller of Petro, Inc. from 1973 to 1985 and of Petro from its organization
in 1983 until 1994. Mr. Cavanaugh has also taken an active role in assisting
the Partnership's management with the development of safety/compliance
programs, assisting with acquisitions and their subsequent integration into
the Partnership and with the Partnership's risk management efforts, since
Petro's initial involvement with the Star Gas Group in 1993. Mr. Cavanaugh is
a graduate of Iona College (B.B.A.) and Pace University (M.S. in Taxation).
DAVID R. EASTIN has served as Vice President of Operations of Star Gas since
September 1995. He joined Star Gas in 1992, and served as a Regional Manager
and as Director of Operations--Eastern Area. Prior to joining Star Gas, he was
employed by Ferrellgas, Inc. (1987 through 1992) and a predecessor company,
Buckeye Gas Products (1980 through 1987), in a variety of operational
capacities. Mr. Eastin is a graduate of the University of Tulsa (B.S. 1980)
and Duquesne University (M.B.A. 1985).
NORMAN L. BUSHEY has served as Vice President of Safety/Compliance of the
General Partner since September 1995. Prior thereto he served as the Northeast
Area Safety Manager for Star Gas following Star Gas' acquisition of Maingas,
Inc. in 1988. From 1974 through 1988, Mr. Bushey served as Vice President and
General Manager of Maingas, Inc. From 1953 through 1974, Mr. Bushey was
employed by Suburban Propane.
RICHARD F. AMBURY has been Vice President of Finance of Star Gas since
February 1996. Prior to joining Star Gas, he was employed by Petro from 1983
through 1996 where he served in various accounting/finance capacities. Prior
to joining Petro, Mr. Ambury was employed by a predecessor firm of KPMG Peat
Marwick LLP. Mr. Ambury is a graduate of Marist College (B.S. 1979) and has
been a certified public accountant since 1981.
AUDREY L. SEVIN has been a director of Star Gas since December 1993 and the
Secretary of Star Gas since June 1994. Mrs. Sevin has been a director and
Secretary of Petro since its organization in October 1983. Mrs. Sevin was a
director, executive officer and principal shareholder of A. W. Fuel Co., Inc.
from 1952 until its purchase by Petro Inc. in May 1981. Mrs. Sevin is a
graduate of New York University (B.S.).
WILLIAM G. POWERS, JR. has been a Director of Star Gas since December 1997.
Mr. Powers has been President of Petro since December 1997. Mr. Powers was
President of Star Gas from December 1993 through November 1997. Prior to
joining Star Gas, he was employed by Petro from 1984 to 1993 where he served
in various capacities, including Regional Operations Manager and Vice
President of Acquisitions. He has participated in over 90 acquisitions for
Petro. From 1977 to 1983, he was employed by The Augsbury Corporation, a
company engaged in the wholesale and retail distribution of fuel oil and
gasoline throughout New York and New England and served as Vice President of
Marketing and Operations. Mr. Powers is a graduate of the University of Notre
Dame (B.A. 1975) and the University of Vermont Graduate School of Business
(M.B.A. 1984).
THOMAS J. EDELMAN has been a Director of Star Gas from December 1993 through
June 1995 and since October 1995. Mr. Edelman has been a Director of Petro
since its organization in October 1983. Mr. Edelman has been the Chairman of
the Board, President and Chief Executive Office of Patina Oil & Gas
Corporation since
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<PAGE>
its formation in May 1996. Mr. Edelman also serves as Chairman of Lomak
Petroleum, Inc. He co-founded Snyder Oil Corporation and was its President and
a Director from 1981 through February 1997. Prior to 1981, he was a Vice
President of The First Boston Corporation. From 1975 through 1980, Mr. Edelman
was with Lehman Brothers Kuhn Loeb Incorporated. Mr. Edelman received his
Bachelor of Arts Degree from Princeton University and his Masters Degree in
Finance from Harvard University's Graduate School of Business Administration.
Mr. Edelman serves as a Director of Paradise Music & Entertainment, Inc.,
Weatherford Enterra, Inc., and serves as a Trustee of The Hotchkiss School.
PAUL BIDDELMAN has been a director of Star Gas from December 1993 through
June 1995 and since October 1995. Mr. Biddelman has been a director of Petro
since October 1994. Mr. Biddelman has been Treasurer of Hanseatic Corporation
since April 1992. Mr. Biddelman joined Hanseatic from Clements Taee Biddelman
Incorporated, a merchant banking firm which he co-founded in 1991. From 1982
through 1990, he was a Managing Director in Corporate Finance at Drexel
Burnham Lambert Incorporated. Mr. Biddelman also worked in corporate finance
at Kuhn, Loeb & Co. from 1975 to 1979, and at Oppenheimer & Co. from 1979 to
1982. Mr. Biddelman is a director of Celadon Group, Inc., Electronic Retailing
Systems International, Inc., Institution Technologies, Inc. and Premier Parks,
Inc.
WOLFGANG TRABER has been a director of Star Gas from December 1993 through
June 1995 and since October 1995. Mr. Traber has been a director of Petro
since its organization in October 1983. Mr. Traber is Chairman of the Board of
Hanseatic Corporation, a private investment corporation in New York, New York.
Mr. Traber is a director of Deltec Asset Management Corporation, Blue Ridge
Real Estate Company, Hellespont Tankers Ltd. and M.M. Warburg & Co.
WILLIAM P. NICOLETTI has been a director of Star Gas since November 1995.
Since 1991, Mr. Nicoletti has been Managing Director of Nicoletti & Company
Inc., a private investment bank servicing clients in energy related
industries. From 1988 through 1990, he was a Managing Director and head of the
Energy and Natural Resources Group of PaineWebber Incorporated. From 1969
through 1987 he was with E.F. Hutton & Company Inc., where from 1980 through
1987 he was a Senior Vice President and head of the Energy and Natural
Resources Group. He is Chairman of the Board of Amerac Energy Corporation and
a director of Domain Energy Corporation and StatesRail, Inc.
ELIZABETH K. LANIER has been a director of Star Gas since November 1995.
Since June 1996 Ms. Lanier has been Vice President and Chief of Staff of
Cinergy Corp., a public utility. From 1984 through 1996, Ms. Lanier was a
partner in the law firm of Frost & Jacobs, in Cincinnati, Ohio. From 1976
through 1982, she was associated with Davis, Polk & Wardwell, in New York, New
York. Ms. Lanier specializes in corporate and litigation matters. Ms. Lanier
is General Counsel to the Southwest Ohio Regional Transit Authority. Ms.
Lanier is a graduate of Smith College (B.A.) and the Columbia University
School of Law (J.D.).
Audrey Sevin is the mother of Irik P. Sevin. There are no other familial
relationships between any of the directors and executive officers.
KEY EMPLOYEES
The following senior management personnel, although not executive officers
of the Company, make significant business contributions to the Company.
RICHARD BARKER has been President of Silgas, the Partnership's wholesale and
supply distribution center for the Midwest, since July 1990. Previously, Mr.
Barker was part-owner and operator of Silgas. Mr. Barker
63
<PAGE>
managed and supervised the construction of the Partnership's underground
storage facility in Seymour, Indiana. Mr. Barker has over forty-four years in
the propane gas industry.
BRYAN N. BRADSHAW has been Regional Manager of the Midwest-Western Region
since May 1991. Prior to joining the Partnership, Mr. Bradshaw was employed by
Suburban Propane and Petrolane Gas Service. Mr. Bradshaw has over eleven years
in the propane gas industry.
THOMAS E. CHRISTERSON joined Star Gas as Regional Manager of the Midwest-
Southern Region in August 1993. Prior to joining Star Gas, Mr. Christerson was
associated with Suburban Propane, Petrolane Gas Service and Pyrofax Gas
Corporation. Mr. Christerson has over thirty-seven years in the propane gas
industry.
RICHARD NODES has been Regional Manager of the Mid-Atlantic Region since
October 1994. From August 1991 through October 1994, Mr. Nodes was Branch
Manager of the Poughkeepsie and Maple Shade branches. Mr. Nodes has over
thirteen years in the propane gas industry.
MARTY M. PANNING has been Regional Manager of the Midwest-Northern Region
since March 1994. From April 1990 through March 1994, Mr. Panning was Branch
Manager at the Waterloo and Deshler branches. Mr. Panning has over fourteen
years in the propane gas industry.
CRAIG C. PREMO has been Regional Manager of the Pearl Region since October
22, 1997, when the Partnership acquired Pearl Gas. Mr. Premo has over thirty-
one years in the propane industry, all with Pearl Gas, and served as its
President from January 1996 through October 1997.
PAUL WELDON has been Regional Manager of the New England Region since
November 1989. Prior to joining Star Gas, Mr. Weldon worked at Pyrofax Gas
Corporation, Penn Fuel Gas Inc. and Finger Lakes Gas Equipment. He has over
twenty-five years in the propane business.
THOMAS E. WRIGHT has been Regional Manager of the Midwest-Eastern Region
since January 1986. From March 1979 through December 1985, Mr. Wright was
Branch Manager of the Deshler branch. Mr. Wright has over twenty-four years in
the propane gas industry.
REIMBURSEMENT OF EXPENSES OF THE GENERAL PARTNER
The General Partner does not receive any management fee or other
compensation in connection with its management of the Partnership. The General
Partner is reimbursed at cost for all expenses incurred on behalf of the
Partnership, including the costs of compensation described herein properly
allocable to the Partnership, and all other expenses necessary or appropriate
to the conduct of the business of, and allocable to, the Partnership. The
Partnership Agreement provides that the General Partner shall determine the
expenses that are allocable to the Partnership in any reasonable manner
determined by the General Partner in its sole discretion. Affiliates of the
General Partner, including Petro, perform certain management and acquisition
services for the General Partner on behalf of the Partnership. Such Affiliates
do not receive a fee for such services, but are reimbursed for all direct and
indirect expenses incurred in connection therewith. Approximately $18.0
million in expenses (primarily wages and salaries) were reimbursed by the
Partnership to the General Partner and its Affiliates in fiscal 1997.
The General Partner owns 2,396,078 Subordinated Units which it received as
consideration for its contribution to the Partnership of its limited partner
interest in the Operating Partnership, which was received as consideration for
its contribution to the Operating Partnership of the propane businesses of
Star Gas and Petro, and 147,727 Common Units which it received in connection
with the Pearl Gas Acquisition. The General Partner is entitled to
distributions on such Units, and the General Partner will be entitled to
Incentive Distributions in respect of its general partner interest, as
described under "Cash Distribution Policy." See "The Selling Unitholder."
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the annual salary, bonuses and all other
compensation awards and payouts to the President and Chief Executive Officer
and to certain named executive officers of the General Partner for services
rendered to Star Gas and its subsidiaries during the fiscal years ended
September 30, 1995, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- --------------------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
William G. Powers, Jr. ................. 1997 $225,000 $100,000 $20,803(a)
President and Chief Executive Officer 1996 $225,000 $100,000 $21,071(a)
1995 $225,000 $ 75,000 $18,094(a)
Richard F. Ambury....................... 1997 $143,000 $ 35,750 $20,408(a)
Vice President--Finance 1996 $ 99,667(d) $ 25,000 --
David R. Eastin......................... 1997 $120,000 $ 30,000 $ 3,214(b)
Vice President--Operations 1996 $106,826 $ 26,707 $ 9,292(c)
1995 $ 89,896 $ 10,000 --
Norman L. Bushey........................ 1997 $ 70,000 $ 17,500 $ 2,625(b)
Vice President--Safety/Compliance 1996 $ 63,000 $ 15,750 $ 1,900(b)
</TABLE>
- --------
(a) Represents amounts paid in lieu of contribution under Star Gas' 401(k)
plan.
(b) Represents matching contributions paid to Star Gas' 401(k) plan.
(c) Represents a $7,570 relocation allowance and Star Gas' matching
contribution to Mr. Eastin's 401(k) retirement plan of $1,722.
(d) Mr. Ambury joined Star Gas on February 1, 1996.
UNIT OPTION PLAN
On December 20, 1995, the General Partner adopted the 1995 Star Gas
Corporation Unit Option Plan (the "Unit Option Plan"), which currently
authorizes the issuance of options (the "Unit Options") and Unit Appreciation
Rights ("UARS") covering up to 300,000 Subordinated Units to certain officers
and employees of the General Partner. A total of 40,000 options were granted
to key executives in December 1995. The Unit Options have the following
characteristics: (i) an exercise price of $22.00 per unit, which is an
estimate of the fair market value of the Subordinated Units at the time of
grant; (ii) vest over a five year period; (iii) are exercisable after January
1, 2001, assuming the subordination period has elapsed; and (iv) expire on the
tenth anniversary of the date of grant. Upon conversion of the Subordinated
Units held by the General Partner and its affiliates, the Unit Options granted
will convert to Common Unit Options. No UARS have been granted pursuant to the
Unit Option Plan.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS AT
SEPTEMBER 30, 1997
EXERCISABLE (E)/UNEXERCISABLE VALUE OF IN THE MONEY OPTIONS
NAME (U) AT SEPTEMBER 30, 1997
---- -------------------------------- -----------------------------
<S> <C> <C>
William G. Powers,
Jr. ................... 30,000 (U) $3,750
David R. Eastin......... 10,000 (U) $1,250
</TABLE>
COMPENSATION OF DIRECTORS
The General Partner currently pays no additional remuneration to its
employees (or employees of any of its Affiliates) for serving as directors or
to directors who are not employees of the General Partner or any of its
Affiliates. The General Partner may in the future pay remuneration to its
directors.
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<PAGE>
OWNERSHIP OF COMMON AND SUBORDINATED UNITS
The following table sets forth certain information as of November 5, 1997
regarding the beneficial ownership of (i) the Common and Subordinated Units of
the Partnership by certain beneficial owners and all directors of the General
Partner, each of the named executive officers and all directors and executive
officers as a group. The General Partner knows of no person beneficially
owning more than 5% of the Common Units.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF UNITS PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIALLY OWNED CLASS
-------------- ----------------------- ------------------ ----------
<S> <C> <C> <C>
Common Units............ Richard F. Ambury(a) 525 --
Common Units............ Wolfgang Traber(a) 10,400(b) --
Common Units............ Star Gas Corporation(a) 147,727 4.8%
Subordinated Units...... Star Gas Corporation(a) 2,396,078 100.0%
</TABLE>
- --------
(a) The address of such person is care of the Partnership at 2187 Atlantic
Street, Stamford, CT 06912-0011.
(b) Includes 10,000 Common Units owned by Mr. Traber's wife and 400 Common
Units owned by Mr. Traber's daughter as to which he may be deemed to share
beneficial ownership.
OWNERSHIP OF PETRO COMMON STOCK BY THE DIRECTORS AND EXECUTIVE OFFICERS OF THE
GENERAL PARTNER
The table below sets forth as of November 5, 1997, the beneficial ownership
of Petro Common Stock by each director and each named executive officer of the
General Partner, as well as the directors and all of the executive officers of
the General Partner as a group. The total shares beneficially owned by the
directors and executive officers as a group, including 393,518 shares of Class
A Common Stock and 70,379 shares of Class C Common Stock subject to options
exercisable within the next 60 days, represent 22.03% of Petro's outstanding
Class A Common Stock and 55.67% of Petro's outstanding Class C Common Stock.
Each share of Class A Common Stock is entitled to one vote and each share of
Class C Common Stock is entitled to 10 votes, but otherwise the two Classes
have the same rights. The Class A Common Stock is listed on the Nasdaq
National Market under the symbol "HEAT". There is no public market for the
Class C Common Stock.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES(A) TOTAL PERCENT OF
---------------------- --------------- TOTAL VOTING
NAME CLASS A CLASS C CLASS A CLASS C POWER(B)
---- --------- --------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Audrey L. Sevin(c)...... 1,888,624 477,716 7.95% 18.39% 13.41%
Irik P. Sevin(c)........ 1,167,847(d) 272,020(d) 4.84% 10.20% 7.65%
Wolfgang Traber(e)...... 1,652,203(f) 606,472(g) 6.96% 23.35% 15.52%
Thomas J. Edelman(c).... 593,049(h) 129,019 2.50% 4.97% 3.79%
Paul Biddelman(e)....... 1,654,589(f) 597,424 6.97% 23.00% 15.34%
William G. Powers,
Jr.(c)................. -- -- -- -- --
Richard F. Ambury(c).... 12,345(i) -- 0.05% -- 0.02%
David R. Eastin(c)...... -- -- -- -- --
Norman L. Bushey(c)..... -- -- -- -- --
Elizabeth K. Lanier(j).. -- -- -- -- --
William P.
Nicoletti(k)........... -- -- -- -- --
All officers and
directors as a group
(11 persons)........... 5,316,454 1,485,227 22.03% 55.67% 39.86%
</TABLE>
- --------
(a) For purposes of this table, a person or group is deemed to have
"beneficial ownership" of any shares which such person has the right to
acquire within 60 days after September 30, 1997. For purposes of
calculating the percentage of outstanding shares held by each person named
above, any shares which such person has the right to acquire within 60
days after September 30, 1997 are deemed to be outstanding, but not for
the purpose of calculating the percentage ownership of any other person.
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(b) Total voting power means the total voting power of all shares of Class A
Common Stock and Class C Common Stock. This column reflects the percentage
of total voting power represented by all shares of Class A Common Stock
and Class C Common Stock held by the named persons.
(c) The address of such person is c/o the Partnership at 2187 Atlantic Street,
Stamford, CT 06902.
(d) Includes options to purchase 381,518 shares of Class A Common Stock and
70,379 shares of Class C Common Stock.
(e) The address of such person is 450 Park Avenue, New York, NY 10022.
(f) Includes 1,652,203 shares held by Hanseatic Americas LDC, a Bahamian
limited duration company in which the sole managing member is Hansabel
Partners, LLC, a Delaware limited liability company in which the sole
managing member is Hanseatic Corporation, a New York corporation
("Hanseatic"). Messrs. Traber and Biddelman are executive officers of
Hanseatic and Mr. Traber holds in excess of a majority of the shares of
capital stock of Hanseatic.
(g) Includes 298,717 shares owned by each of Hanseatic and Tortosa
Vermogensverwaltungsgesellschaft gmbH ("Tortosa"), a German corporation
owned and controlled by Hubertus Langen, and as to which Hanseatic and
Tortosa each hold shared voting power.
(h) Includes 76,000 shares of Class A Common Stock owned by Mr. Edelman's wife
and minor children.
(i) Includes options to purchase 12,000 shares of Class A Common Stock.
(j) The address of such person is 221 E. Fourth St., 30th Fl., Cincinnati, OH
45202.
(k) The address of such person is 1155 Avenue of the Americas, 29th Fl., New
York, NY 10036.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE IPO AND ADDITIONAL TRANSACTIONS
On December 20, 1995, the Partnership consummated the IPO in which it issued
2,600,000 Common Units and received therefrom net proceeds aggregating
approximately $50.3 million. On January 18, 1996, the IPO over-allotment
option was exercised in part with respect to 275,000 Common Units and the
Partnership received net proceeds therefrom aggregating approximately $5.6
million, which the Partnership used for general partnership purposes.
Immediately prior to the closing of the IPO, Petro conveyed all of its
propane assets and related liabilities to the General Partner. Concurrently
with the closing of the IPO, the General Partner issued $85.0 million in First
Mortgage Notes to certain institutional investors. The General Partner then
conveyed substantially all of its assets (other than $83.7 million in cash
from the proceeds of the First Mortgage Notes and certain non-operating
assets) to the Operating Partnership pursuant to the Star Gas Conveyance in
exchange for general and limited partner interests in the Operating
Partnership and the assumption by the Operating Partnership of substantially
all the liabilities of the General Partner (excluding certain income tax
liabilities and certain other long-term obligations of the General Partner
that will be assumed by Petro), including the First Mortgage Notes and
approximately $53.8 million of intercompany debt (the "Intercompany Debt").
Immediately after the Star Gas Conveyance, the General Partner conveyed its
limited partner interest in the Operating Partnership to the Partnership in
exchange for 2,396,078 Subordinated Units.
The Partnership contributed the net proceeds from the sale of the Common
Units offered in the IPO to the Operating Partnership, which used such
proceeds to repay to Petro all of the Intercompany Debt assumed by the
Operating Partnership in the Star Gas Conveyance.
Of the $83.7 million in cash retained by the General Partner from the
proceeds of the First Mortgage Notes, $35.8 million was paid to Petro in
satisfaction of certain additional indebtedness, $8.6 million was paid in
redemption of certain preferred stock of the General Partner held by Petro,
$12.0 million was loaned to Petro (at an annual rate of 11.0%) and $6.0
million was retained to be available to fund an additional capital
contribution obligation, which obligation was subsequently terminated
following the satisfaction of certain performance criteria by the Partnership.
The remaining $21.3 million was paid as dividends to Petro.
GENERAL
The Partnership and the General Partner have certain ongoing relationships
with Petro and its Affiliates. Affiliates of the General Partner, including
Petro, perform certain administrative services for the General Partner on
behalf of the Partnership. Such Affiliates do not receive a fee for such
services, but are reimbursed for all direct and indirect expenses incurred in
connection therewith. The Partnership currently reimburses Petro for the
allocable cost of the services that Petro provides to the Partnership,
including the services of Irik P. Sevin, the Chairman of Petro. The
Partnership is contemplating changing this reimbursement arrangement in order
to more closely relate the amount paid for Mr. Sevin's services to those
rendered as well as to provide him with a more direct incentive to assist in
the Partnership's growth through its acquisition program.
For the period October 1, 1996 through September 30, 1997, the Partnership
reimbursed the General Partner and Petro $17.1 million representing salary,
payroll tax and other compensation to the employees of the General Partner,
including $0.2 million paid to Petro for corporate services such as
compliance, supply and finance. In addition, the Partnership has reimbursed
Petro for $0.9 million relating to the Partnership's share of the costs
incurred by Petro in conducting the operations of certain shared branch
locations which include managerial services.
Prior to Petro's acquisition of Star Gas, Star Gas engaged Nicoletti &
Company Inc., an investment banking firm owned by William P. Nicoletti, who is
now a Director of the General Partner, to perform certain investment banking
services for Star Gas. In 1995, Star Gas paid Nicoletti & Company Inc. $20,000
in advisory fees in connection with a proposed acquisition. In 1997, Star Gas
paid Mr. Nicoletti $20,000 for serving on the Board of Directors Special
Committee which explored the possible sale or merger of the Partnership.
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Elizabeth K. Lanier, a Director of the General Partner, was a partner in the
law firm of Frost & Jacobs, in Cincinnati, Ohio until June 1996. Frost &
Jacobs has acted as counsel to Star Gas in connection with certain litigation
matters. In 1997, Star Gas paid Ms. Lanier $20,000 for serving on the Board of
Directors Special Committee which explored the possible sale or merger of the
Partnership.
In 1995, Petro paid Mr. Edelman $20,000 in advisory fees in connection with
a proposed acquisition by Star Gas.
PEARL GAS ACQUISITION
On October 22, 1997, the General Partner purchased (the "Stock Purchase")
all of the issued and outstanding capital stock of Pearl Gas. The purchase
price for said stock was $22.6 million and was paid in cash. The purchase
price included estimated working capital of $1.9 million. The purchase price
will be adjusted on or before December 5, 1997 based upon actual working
capital of Pearl Gas at October 21, 1997. Funding for the Stock Purchase as
well as acquisition expenses of $0.4 million was provided by $23.0 million in
bank debt. Subsequent to the Stock Purchase, Pearl Gas was merged (the
"Merger") into the General Partner in a tax-free transaction.
Immediately following the Stock Purchase and the Merger, the General Partner
conveyed (the "Pearl Gas Conveyance") to the Operating Partnership all of the
assets of Pearl Gas. In exchange, the General Partner received a 2.7% limited
partnership interest in the Operating Partnership and a 0.00028% general
partnership interest in the Operating Partnership. In addition, the Operating
Partnership assumed all of the liabilities associated with the Stock Purchase
and Pearl Gas, including the $23.0 million of bank debt. The aggregate value
of the partnership interests transferred to Star Gas from the Partnership as
of the date of the acquisition was $3.5 million.
The General Partner then exchanged the above described interests in the
Operating Partnership for a 0.00027% general partnership interest in the
Partnership and 147,727 Common Units in the Partnership, at a per Unit price
based upon the average closing price of the Partnership's Common Units ten
days prior to the execution of the stock purchase agreement on October 20,
1997. The Partnership then repaid the $23.0 million in bank debt with $2.0
million of available cash and $21.0 million borrowed under the Acquisition
Facility.
The Pearl Gas Acquisition was structured in two stages in order to permit
the Partnership to accommodate the Sellers' desire to sell stock rather than
assets. The issuance of the additional partnership interests to the General
Partner was intended to compensate for the tax liabilities associated with the
assets conveyed to the Partnership. The issuance of such partnership interests
was approved by the Audit Committee of the General Partner and the Executive
Committee of Petro.
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<PAGE>
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITY
CONFLICTS OF INTEREST
Certain conflicts of interest have arisen and could arise in the future as a
result of the General Partner's relationships with its stockholder, Petro, on
the one hand, and the Partnership, on the other hand. The directors and
officers of the General Partner have fiduciary duties to manage the General
Partner, including its investments in its subsidiaries and Affiliates, in a
manner beneficial to its stockholder. In general, the General Partner has a
fiduciary duty to manage the Partnership in a manner beneficial to the
Partnership and the Unitholders. The Partnership Agreement contains provisions
that allow the General Partner to take into account the interests of parties
in addition to the Partnership in resolving conflicts of interest, thereby
limiting its fiduciary duty to the Unitholders as well as provisions that may
restrict the remedies available to Unitholders for actions taken that might,
without such limitations, constitute breaches of fiduciary duty. The duty of
the directors and officers of the General Partner to the stockholder of the
General Partner may, therefore, come into conflict with the duties of the
General Partner to the Partnership and the Unitholders. That Audit Committee
of the Board of Directors of the General Partner will, at the request of the
General Partner, review conflicts of interest that may arise between the
General Partner or its Affiliates, on the one hand, and the Partnership, on
the other. See "Management--Partnership Management" and "--Fiduciary Duties of
the General Partner."
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Act that allow the fiduciary duties of a
general partner to be waived or restricted by a partnership agreement have not
been resolved in a court of law, and the General Partner has not obtained an
opinion of counsel covering the provisions set forth in the Partnership
Agreement that purport to waive or restrict fiduciary duties of the General
Partner. Unitholders should consult their own legal counsel concerning the
fiduciary responsibilities of the General Partner and its officers and
directors and the remedies available to the Unitholders.
Conflicts of interest could arise in the situations described below, among
others:
Certain Actions Taken by the General Partner May Affect the Amount of Cash
Available for Distribution to Unitholders or Accelerate the Right to Convert
Subordinated Units
Decisions of the General Partner with respect to the amount and timing of
cash expenditures, participation in capital expansions and acquisitions,
borrowings, issuance of additional Units and reserves in any quarter may
affect whether, or the extent to which, there is sufficient Available Cash
from Operating Surplus to meet the Minimum Quarterly Distribution and Target
Distribution Levels on all Units in such quarter or subsequent quarters. The
Partnership Agreement provides that any borrowings by the Partnership or the
approval thereof by the General Partner shall not constitute a breach of any
duty owed by the General Partner to the Partnership or the Unitholders
including borrowings that have the purpose or effect, directly or indirectly,
of enabling the General Partner to receive incentive distributions or hasten
the expiration of the Subordination Period or the conversion of the
Subordinated Units into Common Units. The Partnership Agreement provides that
the Partnership may borrow funds from the General Partner and its Affiliates.
The General Partner and its Affiliates may not borrow funds from the
Partnership. Further, any actions taken by the General Partner consistent with
the standards of reasonable discretion set forth in the definitions of
Available Cash, Operating Surplus and Capital Surplus will be deemed not to
breach any duty of the General Partner to the Partnership or the Unitholders.
See "Risk Factors--Conflicts of Interest and Fiduciary Responsibility" and
"Cash Distribution Policy."
Borrowings by the Partnership May Enable the General Partner to Permit
Payments of Distributions on the Subordinated Units
The General Partner generally must act as a fiduciary to the Partnership and
the Unitholders, and therefore must generally consider the best interests of
the Partnership when deciding whether to make capital or operating
expenditures or take other steps with respect to the business of the
Partnership. However, the Partnership Agreement provides that it will not
constitute a breach of the General Partner's fiduciary duty if Partnership
70
<PAGE>
borrowings are effected that, directly or indirectly, enable the General
Partner to permit the payment of distributions on the Subordinated Units.
Employees of the General Partner's Affiliates Who Provide Services to the
Partnership Will Also Provide Services to Other Businesses
The Partnership does not have any employees and relies on employees of the
General Partner and its Affiliates, including Petro. While the General Partner
will not conduct any other business, Petro and other Affiliates of the General
Partner, principally direct and indirect wholly owned subsidiaries of Petro,
will conduct business and activities of their own in which the Partnership
will have no economic interest. There may be competition between the
Partnership and Petro for the time and effort of employees who provide
services to both. Certain officers of Affiliates of the General Partner will
divide their time between the business of the Partnership and the business of
the Affiliates and will not be required to spend any specified percentage or
amount of their time on the business of the Partnership.
The Partnership Reimburses the General Partner and Its Affiliates for
Certain Expenses
Under the terms of the Partnership Agreement, the General Partner and its
Affiliates are reimbursed by the Partnership for certain expenses incurred on
behalf of the Partnership, including costs incurred in providing corporate
staff and support services to the Partnership. The Partnership Agreement
provides that the General Partner shall determine the expenses that are
allocable to the Partnership in any reasonable manner determined by the
General Partner in its sole discretion. See "Management--Reimbursement of
Expenses of the General Partner."
The General Partner Intends to Limit Its Liability with Respect to the
Partnership's Obligations
Whenever possible, the General Partner intends to limit the Partnership's
liability under contractual arrangements to all or particular assets of the
Partnership, with the other party thereto to have no recourse against the
General Partner or its assets. The Partnership Agreement provides that any
action by the General Partner in so limiting the liability of the General
Partner or that of the Partnership will not be deemed to be a breach of the
General Partner's fiduciary duties, even if the Partnership could have
obtained more favorable terms without such limitation on liability.
Common Unitholders Have No Right to Enforce Obligations of the General
Partner and Its Affiliates Under Agreements with the Partnership
The Partnership acquires or provides many services from or to the General
Partner and its Affiliates on an ongoing basis, including those described
above. The agreements relating thereto do not grant to the holders of the
Common Units, separate and apart from the Partnership, the right to enforce
the obligations of the General Partner and its Affiliates in favor of the
Partnership. Therefore, the General Partner is primarily responsible for
enforcing such obligations.
Contracts Between the Partnership on the One Hand, and the General Partner
and Its Affiliates on the Other Not Be the Result of Arms-Length Negotiations
Under the terms of the Partnership Agreement, the General Partner is not
restricted from paying the General Partner or its Affiliates for any services
rendered (provided such services are rendered on terms fair and reasonable to
the Partnership) or entering into additional contractual arrangements with any
of them on behalf of the Partnership. Neither the Partnership Agreement nor
any of the other agreements, contracts and arrangements between the
Partnership, on the one hand, and the General Partner and its Affiliates, on
the other, are or will be the result of arm's-length negotiations. All of such
transactions entered into after the IPO are required to be on terms which are
fair and reasonable to the Partnership, provided that any transaction shall be
deemed fair and reasonable if (i) such transaction is approved by the Audit
Committee, (ii) its terms are no less favorable to the Partnership than those
generally being provided to or available from unrelated third parties or (iii)
taking into
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<PAGE>
account the totality of the relationships between the parties involved
(including other transactions that may be particularly favorable or
advantageous to the Partnership), the transaction is fair to the Partnership.
The General Partner and its Affiliates have no obligation to permit the
Partnership to use any facilities or assets of the General Partner and such
Affiliates, except as may be provided in contracts entered into from time to
time specifically dealing with such use, nor is there any obligation of the
General Partner and its Affiliates to enter into any such contracts.
Common Units Are Subject to the General Partner's Limited Call Right
The Partnership Agreement provides that it will not constitute a breach of
the General Partner's fiduciary duties if the General Partner exercises its
right to call for and purchase Units as provided in the Partnership Agreement
or assign this right to its Affiliates or to the Partnership. The General
Partner thus may use its own discretion, free of fiduciary duty restrictions,
in determining whether to exercise such right. As a consequence, a Common
Unitholder may have his Common Units purchased from him even though he may not
desire to sell them, and the price paid may be less than the amount the holder
would desire to receive upon sale of his Common Units. For a description of
such right, see "The Partnership Agreement--Limited Call Right."
The General Partner's Affiliates May Compete with the Partnership
The General Partner may not engage in any business or activity or incur any
debts or liabilities except in connection with or incidental to (i) its
performance as general partner of the Partnership or its Affiliates or (ii)
the acquiring, owning or disposing of debt or equity securities of such
entities. Except as limited by the following paragraphs, the General Partner's
Affiliates are not restricted from engaging in any business activities,
including those in competition with the Partnership.
The Partnership Agreement provides that, subject to certain restrictions, it
will not constitute a breach of the General Partner's fiduciary duties to the
Partnership or the Unitholders for the General Partner's Affiliates, including
Petro, to engage in activities of the type conducted by the Partnership, even
if in direct competition with the Partnership. The General Partner and its
Affiliates have no obligation to present business opportunities to the
Partnership.
Petro has agreed with the Partnership that neither Petro nor any of its
Affiliates will acquire a business which derives any revenues from the sale of
propane, if after giving effect to such acquisition, Petro's Pro Forma Propane
Volumes would equal or exceed the lesser of (i) 15% of the Partnership's
reported propane volumes sold for the most recently completed four fiscal
quarters which ended at least 90 days prior to the date of such acquisition or
(ii) 15 million gallons of propane. Petro's "Pro Forma Propane Volumes" means
the actual propane volumes sold by Petro and any of its Affiliates (other than
the Partnership) for the most recently completed four fiscal quarters which
ended at least 90 days prior to the date of determination plus the propane
volumes sold of the propane business to be acquired for the most recently
completed four fiscal quarters which ended at least 90 days prior to the date
of determination. In addition, in the event Petro or an Affiliate owns a
propane business, Petro or such Affiliate may not accept as a customer any
person who is a customer of the Partnership.
Notwithstanding the above, there are no restrictions on the ability of Petro
(or other Affiliates) of the General Partner to engage in the sale of propane
outside the continental United States or in the trading or storage of propane.
The General Partner is Not Restricted from Engaging in a Transaction Which
Would Trigger Change of Control Provisions
The Partnership's indebtedness contains provisions relating to change of
control. If such change of control provisions are triggered, such outstanding
indebtedness may become due. There is no restriction on the ability of the
General Partner to enter into a transaction which would trigger such change of
control provisions. See
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"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Description of Indebtedness."
The Partnership Agreement Permits the Partnership to Engage in Roll-up
Transactions
The Partnership Agreement does not prohibit the Partnership from engaging in
roll-up transactions. Were the General Partner to cause the Partnership to
engage in a roll-up transaction, there could be no assurance that such a
transaction would not have a material adverse effect on the Unitholder's
investment in the Partnership.
FIDUCIARY DUTIES OF THE GENERAL PARTNER
The General Partner is accountable to the Partnership and the Unitholders as
a fiduciary. Consequently, the General Partner must exercise good faith and
integrity in handling the assets and affairs of the Partnership. In contrast
to the relatively well-developed law concerning fiduciary duties owed by
officers and directors to the shareholders of a corporation, the law
concerning the duties owed by general partners to other partners and to
partnerships is relatively undeveloped. Neither the Delaware Revised Uniform
Limited Partnership Act (the "Delaware Act") nor case law defines with
particularity the fiduciary duties owed by general partners to limited
partners or a limited partnership, but the Delaware Act provides that Delaware
limited partnerships may, in their partnership agreements, restrict or expand
the fiduciary duties that might otherwise be applied by a court in analyzing
the standard of duty owed by general partners to limited partners and the
partnership. Fiduciary duties are generally considered to include an
obligation to act with the highest good faith, fairness and loyalty. Such duty
of loyalty, in the absence of a provision in a partnership agreement providing
otherwise, would generally prohibit a general partner of a Delaware limited
partnership from taking any action or engaging in any transaction as to which
it has a conflict of interest. In order to induce the General Partner to
manage the business of the Partnership, the Partnership Agreement, as
permitted by the Delaware Act, contains various provisions intended to have
the effect of restricting the fiduciary duties that might otherwise be owed by
the General Partner to the Partnership and its partners and waiving or
consenting to conduct by the General Partner and its Affiliates that might
otherwise raise issues as to compliance with fiduciary duties or applicable
law.
The Partnership Agreement provides that in order to become a limited partner
of the Partnership, a holder of Common Units is required to agree to be bound
by the provisions thereof, including the provisions discussed above. This is
in accordance with the policy of the Delaware Act favoring the principle of
freedom of contract and the enforceability of partnership agreements. The
Delaware Act also provides that a partnership agreement is not unenforceable
by reason of its not having been signed by a person being admitted as a
limited partner or becoming an assignee in accordance with the terms thereof.
The Partnership Agreement provides that whenever a conflict of interest
arises between the General Partner or its Affiliates, on the one hand, and the
Partnership or any other partner, on the other, the General Partner shall
resolve such conflict. The General Partner shall not be in breach of its
obligations under the Partnership Agreement or its duties to the Partnership
or the Unitholders if the resolution of such conflict is fair and reasonable
to the Partnership, and any resolution shall conclusively be deemed to be fair
and reasonable to the Partnership if such resolution is (i) approved by the
Audit Committee (although no party is obligated to seek such approval and the
General Partner may adopt a resolution or course of action that has not
received such approval), (ii) on terms no less favorable to the Partnership
than those generally being provided to or available from unrelated third
parties or (iii) fair to the Partnership, taking into account the totality of
the relationships between the parties involved (including other transactions
that may be particularly favorable or advantageous to the Partnership). In
resolving such conflict, the General Partner may (unless the resolution is
specifically provided for in the Partnership Agreement) consider the relative
interests of the parties involved in such conflict or affected by such action,
any customary or accepted industry practices or historical dealings with a
particular person or entity and, if applicable, generally accepted accounting
or engineering practices or principles and such other factors as it deems
relevant. Thus, unlike the strict duty of a fiduciary who must act solely in
the best interests of his beneficiary, the Partnership Agreement permits the
General Partner to consider the interests of all parties to a conflict of
interest, including the interests of the General Partner. In connection with
the resolution of any conflict
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<PAGE>
that arises, unless the General Partner has acted in bad faith, the action
taken by the General Partner shall not constitute a breach of the Partnership
Agreement, any other agreement or any standard of care or duty imposed by the
Delaware Act or other applicable law. The Partnership Agreement also provides
that in certain circumstances the General Partner may act in its sole
discretion, in good faith or pursuant to other appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has refused to institute
the action or where an effort to cause the general partner to do so is not
likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself or all other similarly situated limited partners (a class action)
to recover damages from a general partner for violations of its fiduciary
duties to the limited partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited, to the extent permitted by
law, as required to permit the General Partner and its officers and directors
to act under the Partnership Agreement or any other agreement contemplated
therein and to make any decision pursuant to the authority prescribed in the
Partnership Agreement so long as such action is reasonably believed by the
General Partner to be in, or not inconsistent with, the best interests of the
Partnership. Further, the Partnership Agreement provides that the General
Partner and its officers and directors will not be liable for monetary damages
to the Partnership, the limited partners or assignees for errors of judgment
or for any acts or omissions if the General Partner and such other persons
acted in good faith.
In addition, under the terms of the Partnership Agreement, the Partnership
is required to indemnify the General Partner and its officers, directors,
employees, Affiliates, partners, agents and trustees, to the fullest extent
permitted by law, against liabilities, costs and expenses incurred by the
General Partner or other such persons, if the General Partner or such persons
acted in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the Partnership and, with respect to any
criminal proceedings, had no reasonable cause to believe the conduct was
unlawful. See "The Partnership Agreement--Indemnification." Thus, the General
Partner could be indemnified for its negligent acts if it meets such
requirements concerning good faith and the best interests of the Partnership.
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DESCRIPTION OF THE COMMON UNITS
The Common Units have been registered under the Exchange Act, and the rules
and regulations promulgated thereunder, and the Partnership is subject to the
reporting and certain other requirements of the Exchange Act. The Partnership
is required to file periodic reports containing financial and other
information with the Securities and Exchange Commission (the "Commission").
Purchasers of Common Units in this Offering and subsequent transferees of
Common Units (or their brokers, agents or nominees on their behalf) will be
required to execute Transfer Applications, the form of which is included as
Appendix A to this Prospectus and which is also set forth on the reverse side
of the certificate representing Common Units. Purchasers may hold Common Units
in nominee accounts, provided that the broker (or other nominee) executes and
delivers a Transfer Application and becomes a limited partner. The Partnership
will be entitled to treat the nominee holder of a Common Unit as the absolute
owner thereof, and the beneficial owner's rights will be limited solely to
those that it has against the nominee holder as a result of or by reason of
any understanding or agreement between such beneficial owner and nominee
holder.
THE UNITS
Generally, the Common Units and the Subordinated Units represent limited
partner interests in the Partnership, which entitle the holders thereof to
participate in Partnership distributions and exercise the rights or privileges
available to limited partners under the Partnership Agreement. For a
description of the relative rights and preferences of holders of Common Units
and holders of Subordinated Units in and to Partnership distributions,
together with a description of the circumstances under which Subordinated
Units may convert into Common Units, see "Cash Distribution Policy." For a
description of the rights and privileges of limited partners under the
Partnership Agreement, see "The Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
The Partnership has retained BankBoston N.A. as registrar and transfer agent
(the "Transfer Agent") for the Common Units. The Transfer Agent receives a fee
from the Partnership for serving in such capacities. All fees charged by the
Transfer Agent for transfers of Common Units will be borne by the Partnership
and not by the holders of Common Units, except that fees similar to those
customarily paid by stockholders for surety bond premiums to replace lost or
stolen certificates, taxes and other governmental charges, special charges for
services requested by a holder of a Common Unit and other similar fees or
charges will be borne by the affected holder. There will be no charge to
holders for disbursements of the Partnership's cash distributions. The
Partnership will indemnify the Transfer Agent, its agents and each of their
respective shareholders, directors, officers and employees against all claims
and losses that may arise out of acts performed or omitted in respect of its
activities as such, except for any liability due to any negligence, gross
negligence, bad faith or intentional misconduct of the indemnified person or
entity.
The Transfer Agent may at any time resign, by notice to the Partnership, or
be removed by the Partnership, such resignation or removal to become effective
upon the appointment by the General Partner of a successor transfer agent and
registrar and its acceptance of such appointment. If no successor has been
appointed and accepted such appointment within 30 days after notice of such
resignation or removal, the General Partner is authorized to act as the
transfer agent and registrar until a successor is appointed.
TRANSFER OF UNITS
Until a Common Unit has been transferred on the books of the Partnership,
the Partnership and the Transfer Agent, notwithstanding any notice to the
contrary, may treat the record holder thereof as the absolute owner for all
purposes, except as otherwise required by law or stock exchange regulations.
The transfer of the Common Units to persons that purchase directly from the
Underwriter will be accomplished through the completion, execution and
delivery of a Transfer Application by such purchaser in connection with such
purchase. Any
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subsequent transfers of a Common Unit will not be recorded by the Transfer
Agent or recognized by the Partnership unless the transferee executes and
delivers a Transfer Application. By executing and delivering a Transfer
Application, the transferee of Common Units (i) becomes the record holder of
such Units and shall constitute an assignee until admitted into the
Partnership as a substituted limited partner, (ii) automatically requests
admission as a substituted limited partner in the Partnership, (iii) agrees to
be bound by the terms and conditions of, and executes, the Partnership
Agreement, (iv) represents that such transferee has the capacity, power and
authority to enter into the Partnership Agreement, (v) grants powers of
attorney to the General Partner and any liquidator of the Partnership as
specified in the Partnership Agreement and (vi) makes the consents and waivers
contained in the Partnership Agreement. An assignee will become a substituted
limited partner of the Partnership in respect of the transferred Common Units
upon the consent of the General Partner, which may be withheld for any reason
in its sole discretion, and the recordation of the name of the assignee on the
books and records of the Partnership.
Common Units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission
as a substituted limited partner in the Partnership in respect of the
transferred Common Units. A purchaser or transferee of Common Units who does
not execute and deliver a Transfer Application obtains only (a) the right to
assign the Common Units to a purchaser or other transferee and (b) the right
to transfer the right to seek admission as a substituted limited partner in
the Partnership with respect to the transferred Common Units. Thus, a
purchaser or transferee of Common Units who does not execute and deliver a
Transfer Application will not receive cash distributions unless the Common
Units are held in a nominee or "street name" account and the nominee or broker
has executed and delivered a Transfer Application with respect to such Common
Units, and may not receive certain federal income tax information or reports
furnished to record holders of Common Units. The transferor of Common Units
will have a duty to provide such transferee with all information that may be
necessary to obtain registration of the transfer of the Common Units, but a
transferee agrees, by acceptance of the certificate representing Common Units,
that the transferor will not have a duty to insure the execution of the
Transfer Application by the transferee and will have no liability or
responsibility if such transferee neglects or chooses not to execute and
forward the Transfer Application to the Transfer Agent. See "The Partnership
Agreement--Status as Limited Partner or Assignee."
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THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of certain provisions of the
Partnership Agreement. The form of the Partnership Agreement for the
Partnership and the form of Partnership Agreement for the Operating
Partnership (the "Operating Partnership Agreement") are included as exhibits
to the Registration Statement of which this Prospectus constitutes a part. The
Partnership will provide prospective investors with a copy of the form of the
Partnership Agreement and the Operating Partnership Agreement upon request at
no charge. The following discussion is qualified in its entirety by reference
to the Partnership Agreements for the Partnership and for the Operating
Partnership. The Partnership is the sole limited partner of the Operating
Partnership, which owns, manages and operates the Partnership's business. The
General Partner serves as the general partner of the Partnership and of the
Operating Partnership, collectively owning a 2% general partner interest in
the business and properties owned by the Partnership and the Operating
Partnership on a combined basis and the Unitholders (including the General
Partner as an owner of Common Units and Subordinated Units) hold a 98%
interest as limited partners in the Partnership and the Operating Partnership
on a combined basis. Unless specifically described otherwise, references
herein to the term "Partnership Agreement" constitute references to the
Partnership Agreements of the Partnership and the Operating Partnership,
collectively.
Certain provisions of the Partnership Agreement are summarized elsewhere in
this Prospectus under various headings. With regard to various transactions
and relationships of the Partnership with the General Partner and its
Affiliates, see "Risk Factors--Conflicts of Interest and Fiduciary
Responsibility" and "Conflicts of Interest and Fiduciary Responsibility." With
regard to the management of the Partnership, see "Management." With regard to
the transfer of Units, see "Description of the Common Units." With regard to
distributions of Available Cash, see "Cash Distribution Policy." With regard
to allocations of taxable income and taxable loss, see "Tax Considerations."
Prospective investors are urged to review these sections of this Prospectus
and the Partnership Agreement carefully.
ORGANIZATION AND DURATION
The Partnership and the Operating Partnership were organized in 1995 as
Delaware limited partnerships. The Partnership will dissolve on December 31,
2085, unless sooner dissolved pursuant to the terms of the Partnership
Agreement.
PURPOSE
The purpose of the Partnership is limited to serving as the limited partner
of the Operating Partnership and engaging in any other activity approved by
the General Partner. The purpose of the Operating Partnership Agreement is
broadly stated and provides that the Operating Partnership may engage in any
activity engaged in by Star Gas immediately prior to the IPO, any activities
that are, in the sole judgment of the General Partner, reasonably related
thereto and any other activity approved by the General Partner. The General
Partner has the ability under the Partnership Agreement to cause the
Partnership and the Operating Partnership to engage in activities that may
pose a greater risk to investors than the propane marketing business. The
General Partner is authorized in general to perform all acts deemed necessary
to carry out such purposes and to conduct the business of the Partnership. The
General Partner has the power to cause the Partnership to commence a
bankruptcy proceeding under the federal bankruptcy laws. However, the General
Partner does not intend to cause the Partnership to commence such a proceeding
unless the Partnership is insolvent.
CAPITAL CONTRIBUTIONS
For a description of the initial capital contributions made to the
Partnership, see "Certain Relationships and Related Transactions--The IPO and
Additional Transactions." The Unitholders are not obligated to make additional
capital contributions to the Partnership, except as described below under "--
Limited Liability."
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POWER OF ATTORNEY
Each limited partner, and each person who acquires a Unit from a Unitholder
and executes and delivers a Transfer Application with respect thereto, grants
to the General Partner and, if a liquidator of the Partnership has been
appointed, such liquidator, a power of attorney to, among other things,
execute and file certain documents required in connection with the
qualification, continuance or dissolution of the Partnership, or the amendment
of the Partnership Agreement in accordance with the terms thereof and to make
consents and waivers contained in the Partnership Agreement.
RESTRICTIONS ON AUTHORITY OF THE GENERAL PARTNER WITH RESPECT TO EXTRAORDINARY
TRANSACTIONS; LACK OF DISSENTER'S RIGHTS
The authority of the General Partner is limited in certain respects under
the Partnership Agreement. The General Partner is prohibited, without the
prior approval of holders of record of at least a Unit Majority, from, among
other things, selling, exchanging or otherwise disposing of all or
substantially all of the Partnership's assets in a single transaction or a
series of related transactions (including by way of merger, consolidation or
other combination) or approving on behalf of the Partnership the sale,
exchange or other disposition of all or substantially all of the assets of the
Operating Partnership; provided that the Partnership may mortgage, pledge,
hypothecate or grant a security interest in all or substantially all of the
Partnership's assets without such approval. The Partnership may also sell all
or substantially all of its assets pursuant to a foreclosure or other
realization upon the foregoing encumbrances without such approval. The
Unitholders are not entitled to dissenters' rights of appraisal under the
Partnership Agreement or applicable Delaware law in the event of a merger or
consolidation of the Partnership, a sale, exchange or other disposition of
substantially all of the Partnership's assets or any other event.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER; APPROVAL OF SUCCESSOR GENERAL
PARTNER
The General Partner has agreed not to voluntarily withdraw as general
partner of the Partnership and the Operating Partnership prior to December 31,
2005 (with limited exceptions described below), without obtaining the approval
of at least a Unit Majority and furnishing an opinion of counsel that such
withdrawal (following the selection of a successor general partner) will not
result in the loss of the limited liability of the limited partners of the
Partnership or cause the Partnership to be treated as an association taxable
as a corporation or otherwise taxed as an entity for federal income tax
purposes (an "Opinion of Counsel"). On or after December 31, 2005, the General
Partner may withdraw as general partner by giving 90 days' written notice
(without first obtaining approval from the Unitholders), and such withdrawal
will not constitute a violation of the Partnership Agreement. Notwithstanding
the foregoing, the General Partner may withdraw without Unitholder approval
upon 90 days' notice to the limited partners if more than 50% of the
outstanding Units are held or controlled by one person and its Affiliates
(other than the General Partner and its Affiliates). In addition, the
Partnership Agreement permits the General Partner (in certain limited
instances) to sell all of its general partner interest in the Partnership. See
"--Transfer of General Partner Interest."
Upon the withdrawal of the General Partner under any circumstances (other
than as a result of a transfer by the General Partner of all or a part of its
general partner interest in the Partnership), the holders of a Unit Majority
may select a successor to such withdrawing General Partner. If such a
successor is not elected, or is elected but an Opinion of Counsel cannot be
obtained, the Partnership will be dissolved, wound up and liquidated, unless
within 180 days after such withdrawal the holders of a majority of the Units
agree in writing to continue the business of the Partnership and to the
appointment of a successor General Partner. See "--Termination and
Dissolution."
The General Partner may not be removed unless such removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding Units
owned by Limited Partners other than the General Partner and its Affiliates
and the Partnership receives an Opinion of Counsel. Any such removal is also
subject to the approval of a successor general partner by the vote of the
holders of a Unit Majority (excluding for purposes of such determination any
Units held by the General Partner or its Affiliates). If the General Partner
is removed as
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General Partner other than for Cause, the Subordination Period will end, any
then-existing arrearages on the Common Units will be terminated and any
Subordinated Units held by the General Partner will immediately convert into
Common Units.
Removal or withdrawal of the General Partner of the Partnership also
constitutes removal or withdrawal, as the case may be, of the General Partner
as general partner of the Operating Partnership.
In the event of withdrawal of the General Partner where such withdrawal
violates the Partnership Agreement or removal of the General Partner by the
limited partners under circumstances where Cause exists, a successor general
partner will have the option to purchase the general partner interest of the
departing General Partner (the "Departing Partner") in the Partnership and the
Operating Partnership for a cash payment equal to the fair market value of
such interest. Under all other circumstances where the General Partner
withdraws or is removed by the limited partners, the Departing Partner will
have the right to require the successor general partner to purchase such
general partner interest of the Departing Partner for such amount. In each
case, such fair market value will be determined by agreement between the
Departing Partner and the successor general partner, or if no agreement is
reached, by an independent investment banking firm or other independent
experts selected by the Departing Partner and the successor general partner
(or if no expert can be agreed upon, by the expert chosen by agreement of the
experts selected by each of them). In addition, the Partnership will be
required to reimburse the Departing Partner for all amounts due the Departing
Partner, including, without limitation, all employee-related liabilities,
including severance liabilities, incurred in connection with the termination
of the employees employed by the Departing Partner for the benefit of the
Partnership.
If the above-described option is not exercised by either the Departing
Partner or the successor general partner, as applicable, the Departing
Partner's general partner interest in the Partnership will be converted into
Common Units equal to the fair market value of such interest as determined by
an investment banking firm or other independent expert selected in the manner
described in the preceding paragraph.
TRANSFER OF GENERAL PARTNER INTEREST
Except for a transfer by the General Partner of all, but not less than all,
of its general partner interest in the Partnership to an Affiliate or in
connection with the merger or consolidation of the General Partner with or
into another entity, the General Partner may not transfer all or any part of
its general partner interest in the Partnership to another person or entity
prior to December 31, 2005, without the approval of holders of at least a Unit
Majority; provided that, in each case such transferee assumes the rights and
duties of the General Partner, agrees to be bound by the provisions of the
Partnership Agreement, furnishes an Opinion of Counsel and agrees to purchase
all (or the appropriate portion thereof as applicable) of the General
Partner's partnership interest in the Operating Partnership. At any time,
Petro may sell or otherwise transfer its interest in the General Partner to a
third party without the approval of the Unitholders.
REIMBURSEMENT FOR SERVICES
The Partnership Agreement provides that the General Partner is not entitled
to receive any compensation for its services as general partner of the
Partnership; the General Partner is, however, entitled to be reimbursed on a
monthly basis (or such other basis as the General Partner may reasonably
determine) for all direct and indirect expenses it incurs or payments it makes
on behalf of the Partnership, and all other necessary or appropriate expenses
allocable to the Partnership or otherwise reasonably incurred by the General
Partner in connection with the operation of the Partnership's business
(including expenses allocated to the General Partner by its Affiliates). The
Partnership Agreement provides that the General Partner shall determine the
expenses that are allocable to the Partnership in any reasonable manner
determined by the General Partner in its sole discretion.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described below under "--Limited Liability," the Units will be
fully paid, and Unitholders will not be required to make additional
contributions to the Partnership.
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An assignee of a Common Unit, subsequent to executing and delivering a
Transfer Application, but pending its admission as a substituted limited
partner in the Partnership, is entitled to an interest in the Partnership
equivalent to that of a limited partner with respect to the right to share in
allocations and distributions from the Partnership, including liquidating
distributions. The General Partner will vote and exercise other powers
attributable to Common Units owned by an assignee who has not become a
substitute limited partner at the written direction of such assignee. See "--
Meetings; Voting." Transferees who do not execute and deliver a Transfer
Application will be treated neither as assignees nor as record holders of
Common Units, and will not receive cash distributions, federal income tax
allocations or reports furnished to record holders of Common Units. See
"Description of the Common Units--Transfer of Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Partnership is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the General Partner,
create a substantial risk of cancellation or forfeiture of any property in
which the Partnership has an interest because of the nationality, citizenship
or other related status of any limited partner or assignee, the Partnership
may redeem the Units held by such limited partner or assignee at their Current
Market Price. In order to avoid any such cancellation or forfeiture, the
General Partner may require each limited partner or assignee to furnish
information about his nationality citizenship, residency or related status. If
a limited partner or assignee fails to furnish information about such
nationality, citizenship, residency or other related status within 30 days
after a request for such information, such limited partner or assignee may be
treated as a non-citizen assignee ("Non-citizen Assignee"). In addition to
other limitations on the rights of an assignee who is not a substituted
limited partner, a Non-citizen Assignee does not have the right to direct the
voting of his Units and may not receive distributions in kind upon liquidation
of the Partnership.
ISSUANCE OF ADDITIONAL SECURITIES
The Partnership Agreement authorizes the General Partner to cause the
Partnership to issue an unlimited number of additional limited partner
interests and other equity securities of the Partnership for such
consideration and on such terms and conditions as shall be established by the
General Partner in its sole discretion without the approval of any limited
partners, provided that, prior to the end of the Subordination Period, (a)
except as provided in clauses (b) and (c) below, the Partnership may not issue
equity securities of the Partnership ranking prior or senior to the Common
Units or an aggregate of more than 1,300,000 additional Common Units
(excluding Common Units issued and upon conversion of Subordinated Units and
subject to adjustment in the event of a combination or subdivision of Common
Units) or an equivalent amount of securities ranking on a parity with the
Common Units, in either case without the approval of a Unit Majority; (b) the
Partnership may also issue an unlimited number of additional Common Units or
parity securities without the approval of the Unitholders if such issuance
occurs (i) in connection with an Acquisition or a Capital Improvement or (ii)
within 365 days of, and the net proceeds from such issuance are used to repay
debt incurred in connection with, an Acquisition or a Capital Improvement, in
each case where such Acquisition or Capital Improvement involves assets that
would have, if acquired by the Partnership as of the date that is one year
prior to the first day of the quarter in which such transaction is to be
effected, resulted in an increase in (A) the amount of Adjusted Operating
Surplus generated by the Partnership on a per-Unit basis for all outstanding
Units with respect to each of the four most recently completed quarters (on a
pro forma basis) over (B) the actual amount of Adjusted Operating Surplus
generated by the Partnership on a per-Unit basis for all outstanding Units
with respect to each of such four quarters; and (c) the Partnership may also
issue an unlimited number of parity Units prior to the end of the
Subordination Period and without the approval of the Unitholders if the use of
proceeds from such issuance is exclusively to repay up to $20 million of
indebtedness of the Partnership or the Operating Partnership. The Common Units
offered hereby (to the extent that the proceeds thereof are used to refinance
acquisition debt) and the Common Units issued to Star Gas in connection with
the Pearl Gas Acquisition will be excluded from such 1,300,000 Common Units.
In accordance with Delaware law and the provisions of the Partnership
Agreement, the General Partner may cause the Partnership to issue additional
partnership interests that, in the General Partner's sole discretion, may have
special voting rights to which the Common Units are not entitled.
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The General Partner will have the right, which it may from time to time
assign in whole or in part to any of its Affiliates, to purchase Common Units,
Subordinated Units or other equity securities of the Partnership from the
Partnership whenever, and on the same terms that, the Partnership issues such
securities or rights to persons other than the General Partner and its
Affiliates, to the extent necessary to maintain the percentage interest of the
General Partner and its Affiliates in the Partnership that existed immediately
prior to each such issuance. The holders of Common Units will not have
preemptive rights to acquire additional Common Units or other partnership
interests that may be issued by the Partnership.
Additional issuances of Units, including Subordinated Units or other equity
securities of the Partnership ranking junior to the Common Units, may reduce
the likelihood of, and the amount of, any distributions above the Minimum
Quarterly Distribution.
LIMITED CALL RIGHT
If at any time not more than 20% of the then-issued and outstanding limited
partner interests of any class are held by persons other than the General
Partner and its Affiliates, the General Partner will have the right, which it
may assign and transfer in whole or in part to any of its Affiliates or to the
Partnership, to acquire all, but not less than all, of the remaining limited
partner interests of such class held by such unaffiliated persons as of a
record date to be selected by the General Partner, on at least 10 but not more
than 60 days' notice The purchase price in the event of such purchase shall be
the greater of (a) the highest cash price paid by the General Partner or any
of its Affiliates for any limited partner interests of such class purchased
within the 90 days preceding the date on which the General Partner first mails
notice of its election to purchase such limited partner interests and (b) the
Current Market Price as of the date three days prior to the date such notice
is mailed. As a consequence of the General Partner's right to purchase
outstanding limited partner interests, a holder of limited partner interests
may have his limited partner interests purchased from him even though such
holder may not desire to sell them, or the price paid may be less than the
amount the holder would desire to receive upon the sale of his limited partner
interests. The tax consequences to a Unitholder of the exercise of this call
right are the same as a sale by such Unitholder of his Units in the market.
See "Tax Considerations--Disposition of Common Units".
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the General Partner. In order to adopt a proposed amendment, the
General Partner is required to seek written approval of the holders of the
number of Units required to approve such amendment or call a meeting of the
limited partners to consider and vote upon the proposed amendment, except as
described below. Proposed amendments (unless otherwise specified) must be
approved by holders of at least a Unit Majority except that no amendment may
be made that would (i) enlarge the obligations of any limited partner, without
its consent, (ii) enlarge the obligations of, restrict in any way any action
by or rights of, or reduce in any way the amounts distributable, reimbursable
or otherwise payable to, the General Partner, without its consent, which may
be given or withheld in its sole discretion, (iii) change the term of the
Partnership, (iv) provide that the Partnership is not dissolved upon
expiration of its term or (v) give any person the right to dissolve the
Partnership other than the General Partner's right to dissolve the Partnership
with the approval of holders of at least a Unit Majority.
The General Partner may make amendments to the Partnership Agreement without
the approval of any limited partner or assignee of the Partnership to reflect
(i) a change in the name of the Partnership, the location of the principal
place of business of the Partnership, the registered agent or the registered
office of the Partnership, (ii) admission, substitution, withdrawal or removal
of partners in accordance with the Partnership Agreement, (iii) a change that,
in the sole discretion of the General Partner, is necessary or advisable to
qualify or continue the qualification of the Partnership as a partnership in
which the limited partners have limited liability or that is necessary or
advisable in the opinion of the General Partner to ensure that the Partnership
and the Operating Partnership will not be treated as an association taxable as
a corporation or otherwise taxed as an entity for federal income tax purposes,
(iv) an amendment that is necessary, in the opinion of counsel to the
Partnership,
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to prevent the Partnership or the General Partner or its respective directors
or officers from in any manner being subjected to the provisions of the
Investment Company Act of 1940, as amended, the Investment Advisors Act of
1940, as amended, or "plan asset" regulations adopted under the Employee
Retirement Income Security Act of 1974, as amended, whether or not
substantially similar to plan asset regulations currently applied or proposed,
(v) subject to the limitations on the issuance of additional Common Units or
other limited or general partner interests described above, an amendment that
in the sole discretion of the General Partner is necessary or advisable in
connection with the authorization of additional limited or general partner
interests, (vi) any amendment expressly permitted in the Partnership Agreement
to be made by the General Partner acting alone, (vii) an amendment effected,
necessitated or contemplated by a merger agreement that has been approved
pursuant to the terms of the Partnership Agreement, (viii) any amendment that,
in the sole discretion of the General Partner, is necessary or advisable in
connection with the formation by the Partnership of, or its investment in, any
corporation, partnership or other entity (other than the Operating
Partnership) as otherwise permitted by the Partnership Agreement, (ix) a
change in the fiscal year and taxable year of the Partnership and changes
related thereto and (x) any other amendments substantially similar to the
foregoing.
In addition, the General Partner may make amendments to the Partnership
Agreement without the approval of any limited partner or assignee if such
amendments (i) do not adversely affect the limited partners in any material
respect, (ii) are necessary or advisable (in the sole discretion of the
General Partner) to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, ruling or regulation of any federal or
state agency or judicial authority or contained in any federal or state
statute, (iii) are necessary or advisable to facilitate the trading of the
Units or to comply with any rule, regulation, guideline or requirement of any
securities exchange on which the Units are or will be listed for trading,
compliance with any of which the General Partner deems to be in the best
interests of the Partnership and the Unitholders or (iv) are required or
contemplated by the Partnership Agreement.
The General Partner will not be required to obtain an Opinion of Counsel in
the event of the amendments described in the two immediately preceding
paragraphs. No other amendments to the Partnership Agreement will become
effective without the approval of at least 90% of the Units unless the
Partnership obtains an Opinion of Counsel to the effect that such amendment
will not affect the limited liability of any limited partner in the
Partnership or the limited partner of the Operating Partnership.
Any amendment that materially and adversely affects the rights or
preferences of any type or class of outstanding Units in relation to other
classes of Units will require the approval of holders of at least a majority
of the outstanding Units so affected (excluding, during the Subordination
Period, any Common Units held by the General Partner and its Affiliates).
MEETINGS; VOTING
Unitholders or assignees who are record holders of Units on the record date
set pursuant to the Partnership Agreement will be entitled to notice of, and
to vote at, meetings of limited partners of the Partnership and to act with
respect to matters as to which approvals may be solicited. With respect to
voting rights attributable to Common Units that are owned by an assignee who
is a record holder but who has not yet been admitted as a limited partner, the
General Partner shall be deemed to be the limited partner with respect thereto
and shall, in exercising the voting rights in respect of such Common Units on
any matter, vote such Common Units at the written direction of such record
holder. Absent such direction, such Common Units will not be voted (except
that, in the case of Units held by the General Partner on behalf of Non-
citizen Assignees, the General Partner shall distribute the votes in respect
of such Units in the same ratios as the votes of limited partners in respect
of other Units are cast).
The General Partner does not anticipate that any meeting of limited partners
will be called in the foreseeable future. Any action that is required or
permitted to be taken by the limited partners may be taken either at a meeting
of the limited partners or without a meeting if consents in writing setting
forth the action so taken are signed by holders of such number of limited
partner interests as would be necessary to authorize or take such
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action at a meeting of all of the limited partners. Meetings of the limited
partners of the Partnership may be called by the General Partner or by limited
partners owning at least 20% of the outstanding Units of the class for which a
meeting is proposed. Limited partners may vote either in person or by proxy at
meetings. The holders of a majority of the outstanding Units of the class or
classes for which a meeting has been called represented in person or by proxy
shall constitute a quorum at a meeting of limited partners of such class or
classes, unless any such action by the limited partners requires approval by
holders of a greater percentage of such Units, in which case the quorum shall
be such greater percentage (excluding, in either case, if such are to be
excluded from the vote, outstanding Units owned by the General Partner and its
Affiliates).
Each record holder of a Unit has a vote according to his percentage interest
in the Partnership, although additional limited partner interests having
special voting rights could be issued by the General Partner. See "--Issuance
of Additional Securities." The Partnership Agreement provides that Units held
in nominee or street name account will be voted by the broker (or other
nominee) pursuant to the instruction of the beneficial owner unless the
arrangement between the beneficial owner and his nominee provides otherwise.
Except as otherwise provided in the Partnership Agreement, Subordinated Units
will vote together with Common Units as a single class.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of Units (regardless of whether such
record holder has been admitted as a limited partner) under the terms of the
Partnership Agreement will be delivered to the record holder by the
Partnership or by the Transfer Agent at the request of the Partnership.
INDEMNIFICATION
The Partnership Agreement provides that the Partnership will indemnify the
General Partner, any Departing Partner, any Person who is or was an Affiliate
of the General Partner or any Departing Partner, any Person who is or was an
officer, director, employee, partner, agent or trustee of the General Partner
or any Departing Partner or any affiliate of the General Partner or any
Departing Partner, or any Person who is or was serving at the request of the
General Partner or any Departing Partner or any Affiliate of the General
Partner or any Departing Partner as an officer, director, employee, partner,
agent or trustee of another Person ("Indemnitees"), to the fullest extent
permitted by law, from and against any and all losses, claims, damages,
liabilities (joint or several), expenses (including, without limitation, legal
fees and expenses), judgments, fines, penalties, interest, settlements and
other amounts arising from any and all claims, demands, actions, suits or
proceedings, whether civil, criminal, administrative or investigative, in
which any Indemnitee may be involved, or is threatened to be involved, as a
party or otherwise, by reason of its status as any of the foregoing; provided
that in each case the Indemnitee acted in good faith and in a manner that such
Indemnitee reasonably believed to be in or not opposed to the best interests
of the Partnership and, with respect to any criminal proceeding, had no
reasonable cause to believe its conduct was unlawful. Any indemnification
under these provisions will be only out of the assets of the Partnership, and
the General Partner shall not be personally liable for, or have any obligation
to contribute or loan funds or assets to the Partnership to enable it to
effectuate, such indemnification. The Partnership is authorized to purchase
(or to reimburse the General Partner or its Affiliates for the cost of)
insurance against liabilities asserted against and expenses incurred by such
persons in connection with the Partnership's activities, regardless of whether
the Partnership would have the power to indemnify such person against such
liabilities under the provisions described above.
LIMITED LIABILITY
Assuming that a limited partner does not participate in the control of the
business of the Partnership within the meaning of the Delaware Act and that he
otherwise acts in conformity with the provisions of the Partnership Agreement,
his liability under the Delaware Act will be limited, subject to certain
possible exceptions, to the amount of capital he is obligated to contribute to
the Partnership in respect of his Units plus his share of any undistributed
profits and assets of the Partnership. If it were determined, however, that
the right or exercise of the right by the limited partners as a group to
remove or replace the General Partner, to approve certain
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amendments to the Partnership Agreement or to take other action pursuant to
the Partnership Agreement constituted "participation in the control" of the
Partnership's business for the purposes of the Delaware Act, then the limited
partners could be held personally liable for the Partnership's obligations
under the laws of the State of Delaware to the same extent as the General
Partner with respect to persons who transact business with the Partnership
reasonably believing, based on the limited partner's conduct, that the limited
partner is a general partner.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
nonrecourse liabilities, exceed the fair value of the assets of the limited
partnership. For the purpose of determining the fair value of the assets of a
limited partnership, the Delaware Act provides that the fair value of property
subject to nonrecourse liability shall be included in the assets of the
limited partnership only to the extent that the fair value of that property
exceeds that nonrecourse liability. The Delaware Act provides that a limited
partner who receives such a distribution and knew at the time of the
distribution that the distribution was in violation of the Delaware Act shall
be liable to the limited partnership for the amount of the distribution for
three years from the date of the distribution. Under the Delaware Act, an
assignee who becomes a substituted limited partner of a limited partnership is
liable for the obligations of his assignor to make contributions to the
partnership, except the assignee is not obligated for liabilities unknown to
him at the time he became a limited partner and which could not be ascertained
from the partnership agreement.
The Operating Partnership conducts business in at least 15 states.
Maintenance of limited liability may require compliance with legal
requirements in such jurisdictions in which the Operating Partnership conducts
business, including qualifying the Operating Partnership to do business
therein. Limitations on the liability of limited partners for the obligations
of a limited partnership have not been clearly established in many
jurisdictions. If it were determined that the Partnership was, by virtue of
its limited partner interest in the Operating Partnership or otherwise,
conducting business in any state without compliance with the applicable
limited partnership statute, or that the right or exercise of the right by the
limited partners as a group to remove or replace the General Partner, to
approve certain amendments to the Partnership Agreement, or to take other
action pursuant to the Partnership Agreement constituted "participation in the
control" of the Partnership's business for the purposes of the statutes of any
relevant jurisdiction, then the limited partners could be held personally
liable for the Partnership's obligations under the law of such jurisdiction to
the same extent as the General Partner under certain circumstances. The
Partnership will operate in such manner as the General Partner deems
reasonable and necessary or appropriate to preserve the limited liability of
Unitholders.
BOOKS AND REPORTS
The General Partner is required to keep appropriate books of the business of
the Partnership at the principal offices of the Partnership. The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
The fiscal year of the Partnership (for accounting but not for tax purposes)
is October 1 to September 30.
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the General Partner will furnish each record holder of
Units (as of a record date selected by the General Partner) with an annual
report containing audited financial statements of the Partnership for the past
fiscal year, prepared in accordance with generally accepted accounting
principles. As soon as practicable, but in no event later than 90 days after
the close of each quarter (except the last quarter of each fiscal year), the
General Partner will furnish each record holder of Units (as of a record date
selected by the General Partner) a report containing unaudited financial
statements of the Partnership with respect to such quarter and such other
information as may be required by law.
The General Partner will use all reasonable efforts to furnish each record
holder of a Unit information reasonably required for tax reporting purposes
within 90 days after the close of each calendar year in which the
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Partnership's taxable year ends. Such information is expected to be furnished
in summary form so that certain complex calculations normally required of
partners can be avoided. The General Partner's ability to furnish such summary
information to Unitholders will depend on the cooperation of such Unitholders
in supplying certain information to the General Partner. Every Unitholder
(without regard to whether he supplies such information to the General
Partner) will receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax returns.
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a limited partner can for a purpose
reasonably related to such limited partner's interest as a limited partner,
upon reasonable demand and at his own expense, have furnished to him (i) a
current list of the name and last known address of each partner, (ii) a copy
of the Partnership's tax returns, (iii) information as to the amount of cash,
and a description and statement of the net agreed value of any other property
or services, contributed or to be contributed by each partner and the date on
which each became a partner, (iv) copies of the Partnership Agreement, the
certificate of limited partnership of the Partnership, amendments thereto and
powers of attorney pursuant to which the same have been executed, (v)
information regarding the status of the Partnership's business and financial
condition and (vi) such other information regarding the affairs of the
Partnership as is just and reasonable. The General Partner may, and intends
to, keep confidential from the limited partners trade secrets or other
information the disclosure of which the General Partner believes in good faith
is not in the best interests of the Partnership or which the Partnership is
required by law or by agreements with third parties to keep confidential.
TERMINATION AND DISSOLUTION
The Partnership will continue until December 31, 2085, unless sooner
terminated pursuant to the Partnership Agreement. The Partnership will be
dissolved upon (i) the election of the General Partner to dissolve the
Partnership, if approved by holders of at least a Unit Majority, (ii) the
sale, exchange or other disposition of all or substantially all of the assets
and properties of the Partnership and the Operating Partnership, (iii) the
entry of a decree of judicial dissolution of the Partnership or (iv)
withdrawal or removal of the General Partner or any other event that results
in its ceasing to be the General Partner (other than by reason of a transfer
of its general partner interest in accordance with the Partnership Agreement
or withdrawal or removal following approval and admission of a successor).
Upon a dissolution pursuant to clause (iv), the holders of at least a majority
of the outstanding Units (excluding Units held by the Departing General
Partner and its Affiliates) may also elect, within certain time limitations,
to reconstitute the Partnership and continue its business on the same terms
and conditions set forth in the Partnership Agreement by forming a new limited
partnership on terms identical to those set forth in the Partnership Agreement
and having as a general partner a person or entity approved by at least the
holders of a majority of the outstanding Units (excluding Units held by the
Departing General Partner and its Affiliates), subject to receipt by the
Partnership of an Opinion of Counsel.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is reconstituted
and continued as a new limited partnership, the person authorized to wind up
the affairs of the Partnership (the "Liquidator") will, acting with all of the
powers of the General Partner that such Liquidator deems necessary or
desirable in its good faith judgment in connection therewith, liquidate the
Partnership's assets and apply the proceeds of the liquidation as provided in
"Cash Distribution Policy--Distribution of Cash Upon Liquidation." Under
certain circumstances and subject to certain limitations, the Liquidator may
defer liquidation or distribution of the Partnership's assets for a reasonable
period of time or distribute assets to partners in kind if it determines that
a sale would be impractical or would cause undue loss to the partners.
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REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Partnership has agreed to register for
resale under the Securities Act and applicable state securities laws any Units
proposed to be sold by Star Gas or its Affiliates if an exemption from such
registration requirements is not otherwise available for such proposed
transaction. The Partnership is obligated to pay all expenses incidental to
such registration, excluding underwriting discounts and commissions. See "The
Selling Unitholder."
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UNITS ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, the General Partner held 147,727 Common
Units, which are being offered for sale hereby (including 124,000 Common Units
which are being offered pursuant to the Underwriter's over-allotment option),
and 2,396,078 Subordinated Units, all of which may convert into Common Units
after termination of the Subordination Period and portions of which may
convert as early as the first day after the record date established for the
quarter ending December 31, 1999. The sale of these Common Units could have an
adverse impact on the price of the Common Units. For a discussion of the
transactions whereby the General Partner acquired the Subordinated Units in
connection with the organization of the Partnership, see "Certain
Relationships and Related Transactions--The IPO and Additional Transactions."
The Common Units sold in this offering will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any Common Units owned by an "affiliate" of the Partnership (as that term
is defined in the rules and regulations under the Securities Act) may not be
resold publicly except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption therefrom under Rule 144 thereunder
("Rule 144") or otherwise. Rule 144 permits securities acquired by an
affiliate of the issuer in an offering to be sold into the market in an amount
that does not exceed, during any three-month period, the greater of (i) 1% of
the total number of such securities outstanding or (ii) the average weekly
reported trading volume of the Units for the four calendar weeks prior to such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Partnership. A person who is not deemed to have been an
affiliate of the Partnership at any time during the three months preceding a
sale, and who has beneficially owned his Units for at least two years, would
be entitled to sell such Units under Rule 144 without regard to the public
information requirements, volume limitations, manner of sale provisions or
notice requirements of Rule 144.
Prior to the end of the Subordination Period, the Partnership may not issue
equity securities of the Partnership ranking prior or senior to the Common
Units or an aggregate of more than 1,300,000 additional Common Units or an
equivalent amount of securities ranking on a parity with the Common Units
(excluding Common Units issued upon conversion of Subordinated Units, or in
connection with certain acquisitions or to repay certain indebtedness) without
the approval of the holders of at least a Unit Majority. The Common Units
offered hereby (to the extent that the proceeds thereof are used to refinance
acquisition debt) and the Common Units issued to Star Gas in connection with
the Pearl Gas Transaction will be excluded from such 1,300,000 Common Units.
After the Subordination Period, the General Partner, without a vote of the
Unitholders, may cause the Partnership to issue additional Common Units or
other equity securities of the Partnership on a parity with or senior to the
Common Units. In such circumstance, the General Partner will have certain
preemptive rights. The Partnership Agreement does not impose any restriction
on the Partnership's ability to issue equity securities ranking junior to the
Common Units at any time. Any issuance of additional Units would result in a
corresponding decrease in the proportionate ownership interest in the
Partnership represented by, and could adversely affect the cash distributions
to and market price of, Common Units then outstanding. See "The Partnership
Agreement--Issuance of Additional Securities."
Pursuant to the Partnership Agreement, the General Partner and its
Affiliates will have the right, upon the terms and subject to the conditions
therein, to cause the Partnership to register under the Securities Act the
offer and sale of any Units held by such party. Subject to the terms and
conditions of the Partnership Agreement, such registration rights allow the
General Partner and its Affiliates, or their assignees, holding any Units to
require registration of any such Units and to include any such Units in a
registration by the Partnership of other Units, including Units offered by the
Partnership or by any Unitholder. Such registration rights will continue in
effect for two years following any withdrawal or removal of the General
Partner as the general partner of the Partnership. In connection with any such
registration, the Partnership will indemnify each holder of Units
participating in such registration and its officers, directors and controlling
persons from and against any liabilities under the Securities Act or any state
securities laws arising from the registration statement or prospectus. The
Partnership will bear the reasonable costs of any such registration. In
addition, the General Partner and its Affiliates may sell their Units in
private transactions at any time, in accordance with applicable law. See "The
Selling Unitholder."
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The Partnership, the Selling Unitholder and certain of the Unitholders have
agreed that, for a period of 120 days from the date of this Prospectus, they
will not, without the prior written consent of PaineWebber Incorporated and
Lehman Brothers Inc. directly or indirectly, sell, contract to sell or
otherwise dispose of any Common Units or any security convertible into Common
Units, except (i) upon exercise of the options outstanding or to be issued
pursuant to the Unit Option Plan or (ii) pursuant to or in connection with an
acquisition by the Partnership provided that any person receiving such Common
Units in the acquisition will also agree not to sell, contract to sell or
otherwise dispose of any Common Units or rights to acquire such units for the
time remaining on the 120-day period from the date of this Prospectus.
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TAX CONSIDERATIONS
This section is a summary of material tax considerations that may be
relevant to prospective Unitholders and, to the extent set forth below under
"--Legal Opinions and Advice" expresses the opinion of Phillips Nizer Benjamin
Krim & Ballon LLP, special counsel to the General Partner and the Partnership
("Counsel"), insofar as it relates to matters of law and legal conclusions.
This section is based upon current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), existing and proposed regulations thereunder
and current administrative rulings and court decisions, all of which are
subject to change. Subsequent changes in such authorities may cause the tax
consequences to vary substantially from the consequences described below.
Unless the context otherwise requires, references in this section to the
Partnership are references to both the Partnership and the Operating
Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting the Partnership or the Unitholders.
Moreover, the discussion focuses on Unitholders who are individual citizens or
residents of the United States and has only limited application to
corporations, estates, trusts, non-resident aliens or other Unitholders
subject to specialized tax treatment (such as tax-exempt institutions, foreign
persons, individual retirement accounts, REITs or mutual funds). Accordingly,
each prospective Unitholder should consult, and should depend on, his own tax
advisor in analyzing the federal, state, local and foreign tax consequences
peculiar to him of the ownership or disposition of Common Units.
LEGAL OPINIONS AND ADVICE
Counsel is of the opinion that, based on the accuracy of the representations
and subject to the qualifications set forth in the detailed discussion that
follows, for federal income tax purposes (i) the Partnership and the Operating
Partnership will each be treated as a partnership and (ii) owners of Common
Units (with certain exceptions, as described in "Limited Partner Status"
below) will be treated as partners of the Partnership (but not the Operating
Partnership). In addition, all statements as to matters of law and legal
conclusions contained in this section, unless otherwise noted, reflect the
opinion of Counsel.
Although no attempt has been made in the following discussion to comment on
all federal income tax matters affecting the Partnership or prospective
Unitholders, Counsel has advised the Partnership that, based on current law,
the following is a general description of the principal federal income tax
consequences that should arise from the ownership and disposition of Common
Units and, insofar as it relates to matters of law and legal conclusions,
addresses the material tax consequences to Unitholders who are individual
citizens or residents of the United States.
No ruling has been or will be requested from the Internal Revenue Service
(the "IRS") with respect to classification of the Partnership as a partnership
for federal income tax purposes, whether the Partnership's propane operations
generate "qualifying income" under Section 7704 of the Code or any other
matter affecting the Partnership or prospective Unitholders. An opinion of
counsel represents only that counsel's best legal judgment and does not bind
the IRS or the courts. Thus, no assurance can be provided that the opinions
and statements set forth herein would be sustained by a court if contested by
the IRS. Any such contest with the IRS may materially and adversely impact the
market for the Common Units and the price at which Common Units trade. In
addition, the costs of any contest with the IRS will be borne directly or
indirectly by the Unitholders and the General Partner. Furthermore, no
assurance can be given that the treatment of the Partnership or an investment
therein will not be significantly modified by future legislative or
administrative changes or court decisions. Any such modification may or may
not be retroactively applied.
For the reasons hereinafter described, Counsel has not rendered an opinion
with respect to the following specific federal income tax issues: (i) the
treatment of a Unitholder whose Common Units are loaned to a short seller to
cover a short sale of Common Units (see "--Tax Treatment of Operations--
Treatment of Short Sales"), (ii) whether a Unitholder acquiring Common Units
in separate transactions must maintain a single aggregate adjusted tax basis
in his Common Units (see "--Disposition of Common Units--Recognition of Gain
or Loss"),
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(iii) whether the Partnership's monthly convention for allocating taxable
income and losses is permitted by existing Treasury Regulations (see "--
Disposition of Common Units--Allocations Between Transferors and
Transferees"), (iv) whether the Partnership's method for depreciating Section
743 adjustments is sustainable (see "--Tax Treatment of Operations--Section
754 Election") and (v) whether the allocations of recapture income contained
in the Partnership Agreement will be respected for federal income tax purposes
(see "--Tax Consequences of Unit Ownership--Allocation of Partnership Income,
Gain, Loss and Deduction").
TAX RATES
The top marginal income tax rate for individuals for 1998 is 39.6%. Pursuant
to the Taxpayer Relief Act of 1997 (the "TRA of 1997") in general, net capital
gains of an individual are subject to a maximum 28% tax rate, if the asset was
held for at least one year and a 20% tax rate if the asset was held for at
least 18 months.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his
allocable share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of
whether cash distributions are made. Distributions by a partnership to a
partner are generally not taxable unless the amount of any cash distributed is
in excess of the partner's adjusted basis in his partnership interest.
No ruling has been or will be sought from the IRS as to the status of the
Partnership or the Operating Partnership as a partnership for federal income
tax purposes. Instead the Partnership has relied on the opinion of Counsel
that, based upon the Code, the regulations thereunder, published revenue
rulings and court decisions, the Partnership and the Operating Partnership
have been and will each continue to be classified as a partnership for federal
income tax purposes.
In rendering its opinion Counsel has relied on the following factual
representations made by the Partnership and the General Partner:
Neither the Partnership nor the Operating Partnership has nor will elect to
be treated as an association or corporation;
The Partnership and the Operating Partnership have been and will continue to
be operated in accordance with (i) all applicable partnership statutes, (ii)
the applicable Partnership Agreement and (iii) the description thereof in this
Prospectus;
For each taxable year, more than 90% of the gross income of the Partnership
will be (i) derived from the exploration, development, production, processing,
refining, transportation or marketing of any mineral or natural resource,
including oil, gas or products thereof or (ii) other items of "qualifying
income" within the meaning of Section 7704(d) of the Code; and
The General Partner has and will at all times act independently of the
limited partners.
Section 7704 of the Code provides that publicly-traded partnerships, as a
general rule, will be taxed as corporations. However, an exception (the
"Qualifying Income Exception") exists with respect to publicly-traded
partnerships if 90% or more of its gross income for every taxable year
consists of "qualifying income." Qualifying income includes interest (from
other than a financial business), dividends and income and gains from the
processing, transportation and marketing of crude oil, natural gas, and
products thereof, including the retail and wholesale marketing of propane and
the transportation of propane and natural gas liquids. Based upon the
representations of the Partnership and the General Partner and a review of the
applicable legal authorities, Counsel is of the opinion that at least 90% of
the Partnership's gross income will constitute qualifying income. The
Partnership estimates that less than 7% of its gross income for each taxable
year will not constitute qualifying income.
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If the Partnership fails to meet the Qualifying Income Exception (other than
a failure which is determined by the IRS to be inadvertent and which is cured
within a reasonable time after discovery), the Partnership will be treated as
if it had transferred all of its assets (subject to liabilities) to a newly
formed corporation (on the first day of the year in which it fails to meet the
Qualifying Income Exception) in return for stock in such corporation, and then
distributed such stock to the partners in liquidation of their interests in
the Partnership. This contribution and liquidation should be tax-free to
Unitholders and the Partnership, so long as the Partnership, at that time,
does not have liabilities in excess of the tax basis of its assets.
Thereafter, the Partnership would be treated as a corporation for federal
income tax purposes.
If the Partnership or the Operating Partnership were taxed as a corporation
in any taxable year, either as a result of a failure to meet the Qualifying
Income Exception or otherwise, its items of income, gain, loss and deduction
would be reflected only on its tax return rather than being passed through to
the Unitholders, and its net income would be taxed to the Partnership or the
Operating Partnership, as the case may be, at corporate rates. In addition,
any distribution made to a Unitholder would be treated as either taxable
dividend income (to the extent of the Partnership's current or accumulated
earnings and profits) or (in the absence of earnings and profits) a nontaxable
return of capital (to the extent of the Unitholder's tax basis in his Common
Units) or taxable capital gain (after the Unitholder's tax basis in the Common
Units has been reduced to zero). Accordingly, treatment of either the
Partnership or the Operating Partnership as an association taxable as a
corporation would result in a material reduction in a Unitholder's cash flow
and after-tax return and thus would likely result in a substantial reduction
of the value of the Units.
The discussion below is based on the assumption that the Partnership will be
classified as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of the Partnership will be
treated as partners of the Partnership for federal income tax purposes.
Counsel is also of the opinion that (a) assignees who have executed and
delivered Transfer Applications, and are awaiting admission as limited
partners and (b) Unitholders whose Common Units are held in street name or by
a nominee and who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their Common Units will be
treated as partners of the Partnership for federal income tax purposes. As
there is no direct authority dealing with the issue of addressing assignees of
Common Units who are entitled to execute and deliver Transfer Applications and
thereby become entitled to direct the exercise of attendant rights, but who
fail to execute and deliver Transfer Applications, Counsel's opinion does not
extend to those persons. Income, gain, deductions or losses would not appear
to be reportable by a Unitholder who is not a partner for federal income tax
purposes, and any cash distributions received by such a Unitholder would
therefore be fully taxable as ordinary income. These holders should consult
their own tax advisors with respect to their status as partners in the
Partnership for federal income tax purposes. Furthermore, a purchaser or other
transferee of Common Units who does not execute and deliver a Transfer
Application may not receive certain federal income tax information or reports
furnished to record holders of Common Units unless the Common Units are held
in a nominee or street name account and the nominee or broker has executed and
delivered a Transfer Application with respect to such Common Units.
A beneficial owner of Common Units whose Common Units have been transferred
to a short seller to complete a short sale would appear to lose his status as
a partner with respect to such Common Units for federal income tax purposes.
See "Treatment of Operations--Treatment of Short Sales."
TAX CONSEQUENCES OF UNIT OWNERSHIP
Flow-through of Taxable Income
No federal income tax will be paid by the Partnership. Instead, each
Unitholder will be required to report on his income tax return his allocable
share of the income, gains, losses and deductions of the Partnership without
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regard to whether corresponding cash distributions are received by such
Unitholder. Consequently, a Unitholder may be allocated income from the
Partnership even if he has not received a cash distribution. Each Unitholder
will be required to include in income his allocable share of Partnership
income, gain, loss and deduction for the taxable year of the Partnership
ending with or within the taxable year of the Unitholder.
Treatment of Partnership Distributions
Distributions by the Partnership to a Unitholder generally will not be
taxable to the Unitholder for federal income tax purposes to the extent of his
tax basis in his Common Units immediately before the distribution. Cash
distributions in excess of a Unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the Common Units, taxable
in accordance with the rules described under "--Disposition of Common Units"
below. Any reduction in a Unitholder's share of the Partnership's liabilities
for which no partner, including the General Partner, bears the economic risk
of loss ("nonrecourse liabilities") will be treated as a distribution of cash
to that Unitholder. To the extent that Partnership distributions cause a
Unitholder's "at risk" amount to be less than zero at the end of any taxable
year, he must recapture any losses deducted in previous years. See "--
Limitations on Deductibility of Partnership Losses."
A decrease in a Unitholder's percentage interest in the Partnership because
of the issuance by the Partnership of additional Units will decrease such
Unitholder's share of nonrecourse liabilities of the Partnership, and thus
will result in a corresponding deemed distribution of cash. A non-pro rata
distribution of money or property may result in ordinary income to a
Unitholder, regardless of his tax basis in his Common Units, if such
distribution reduces the Unitholder's share of the Partnership's "unrealized
receivables" (including depreciation recapture) and/or substantially
appreciated "inventory items" (both as defined in Section 751 of the Code)
(collectively, "Section 751 Assets"). To that extent, the Unitholder will be
treated as having been distributed his proportionate share of the Section 751
Assets and having exchanged such assets with the Partnership in return for the
non-pro rata portion of the actual distribution made to him. This latter
deemed exchange will generally result in the Unitholder's realization of
ordinary income under Section 751(b) of the Code. Such income will equal the
excess of (1) the non-pro rata portion of such distribution over (2) the
Unitholder's tax basis for the share of such Section 751 Assets deemed
relinquished in the exchange.
Ratio of Taxable Income to Distributions
The Partnership estimates that a purchaser of Common Units in this offering
who holds such Common Units from the date of the closing of this offering
through December 31, 2000, will be allocated, on a cumulative basis, an amount
of federal taxable income for such period that will be less than 5% of the
cash distributed with respect to that period. The Partnership further
estimates that for taxable years beginning after December 31, 2000, the
taxable income allocable to the Unitholders will constitute a significantly
higher percentage of cash distributed to Unitholders. The foregoing estimates
are based upon the assumption that gross income from operations will
approximate the amount required to make the Minimum Quarterly Distribution
with respect to all Units and other assumptions with respect to capital
expenditures, cash flow and anticipated cash distributions. These estimates
and assumptions are subject to, among other things, numerous business,
economic, regulatory, competitive and political uncertainties beyond the
control of the Partnership. Further, the estimates are based on current tax
law and certain tax reporting positions that the Partnership intends to adopt
and with which the IRS could disagree. Accordingly, no assurance can be given
that the estimates will prove to be correct. The actual percentage could be
higher or lower, and any such differences could be material and could
materially affect the value of the Common Units.
Basis of Common Units
A Unitholder's initial tax basis for his Common Units will be the amount he
paid for the Common Units plus his share of the Partnership's nonrecourse
liabilities. That basis will be increased by his share of Partnership income
and by any increases in his share of Partnership nonrecourse liabilities. That
basis will be decreased (but not below zero) by distributions from the
Partnership, by the Unitholder's share of Partnership losses, by any
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decrease in his share of Partnership nonrecourse liabilities and by his share
of expenditures of the Partnership that are not deductible in computing its
taxable income and are not required to be capitalized. A limited partner will
have no share of Partnership debt which is recourse to the General Partner,
but will have a share, generally based on his share of profits, of Partnership
debt which is not recourse to any partner. See "--Disposition of Common
Units--Recognition of Gain or Loss."
Limitations on Deductibility of Partnership Losses
The deduction by a Unitholder of his share of Partnership losses will be
limited to the tax basis in his Units and, in the case of an individual
Unitholder or a corporate Unitholder (if more than 50% of the value of its
stock is owned directly or indirectly by five or fewer individuals or certain
tax-exempt organizations), to the amount for which the Unitholder is
considered to be "at risk" with respect to the Partnership's activities, if
that is less than the Unitholder's tax basis. A Unitholder must recapture
losses deducted in previous years to the extent that Partnership distributions
cause the Unitholder's at risk amount to be less than zero at the end of any
taxable year. Losses disallowed to a Unitholder or recaptured as a result of
these limitations will carry forward and will be allowable to the extent that
the Unitholder's tax basis or at risk amount (whichever is the limiting
factor) is subsequently increased. Upon the taxable disposition of a Unit, any
gain recognized by a Unitholder can be offset by losses that were previously
suspended by the at risk limitation but may not be offset by losses suspended
by the basis limitation. Any excess loss (above such gain) previously
suspended by the at risk or basis limitations is no longer utilizable.
In general, a Unitholder will be at risk to the extent of the tax basis of
his Units, excluding any portion of that basis attributable to his share of
Partnership nonrecourse liabilities, reduced by any amount of money the
Unitholder borrows to acquire or hold his Units if the lender of such borrowed
funds owns an interest in the Partnership, is related to such a person or can
look only to Units for repayment. A Unitholder's at risk amount will increase
or decrease as the tax basis of the Unitholder's Units increases or decreases
(other than tax basis increases or decreases attributable to increases or
decreases in his share of Partnership nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely-held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses generated by the Partnership will only be available to offset
future income generated by the Partnership and will not be available to offset
income from other passive activities or investments (including other publicly-
traded partnerships) or salary or active business income. Passive losses which
are not deductible because they exceed a Unitholder's income generated by the
Partnership may be deducted in full when he disposes of his entire investment
in the Partnership in a fully taxable transaction to an unrelated party. The
passive activity loss rules are applied after other applicable limitations on
deductions such as the at risk rules and the basis limitation.
A Unitholder's share of net income from the Partnership may be offset by any
suspended passive losses from the Partnership, but it may not be offset by any
other current or carryover losses from other passive activities, including
those attributable to other publicly-traded partnerships. The IRS has
announced that Treasury Regulations will be issued which characterize net
passive income from a publicly-traded partnership as investment income for
purposes of the limitations on the deductibility of investment interest.
Limitations on Interest Deductions
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a Unitholder's net passive income from the Partnership will
be treated as investment income for this purpose. In addition, the
Unitholder's share of the Partnership's portfolio income will be treated as
investment income. Investment interest expense includes (i) interest on
indebtedness properly allocable to property held for investment, (ii) the
Partnership's interest
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expense attributed to portfolio income and (iii) the portion of interest
expense incurred to purchase or carry an interest in a passive activity to the
extent attributable to portfolio income. The computation of a Unitholder's
investment interest expense will take into account interest on any margin
account borrowing or other loan incurred to purchase or carry a Unit. Net
investment income includes gross income from property held for investment and
amounts treated as portfolio income pursuant to the passive loss rules less
deductible expenses (other than interest) directly connected with the
production of investment income, but generally does not include gains
attributable to the disposition of property held for investment.
Allocation of Partnership Income, Gain, Loss and Deduction
In general, if the Partnership has a net profit, items of income, gain, loss
and deduction will be allocated among the General Partner and the Unitholders
in accordance with their respective percentage interests in the Partnership.
At any time that distributions are made to a Limited Partner in excess of the
distribution to another Limited Partner (determined on a per Unit basis), or
that Incentive Distributions are made to the General Partner, gross income
will be allocated to the recipients to the extent of such distribution. If the
Partnership has a net loss, items of income, gain, loss and deduction
generally will be allocated first, to the General Partner and the Unitholders
in accordance with their respective Percentage Interests to the extent of
their positive capital accounts (as maintained under the Partnership
Agreement) and, thereafter, to the General Partner.
As required by Section 704(c) of the Code and as permitted by Regulations
thereunder, certain items of Partnership income, deduction, gain and loss will
be allocated to account for the difference between the tax basis and fair
market value of property owned by the Partnership. This allocation will have
the effect of giving a purchaser in the Offering a basis in Partnership assets
equal to the fair market value of those assets. In addition, certain items of
recapture income will be allocated to the extent possible to the partner
allocated the deduction or curative allocation giving rise to the treatment of
such gain as recapture income in order to minimize the recognition of ordinary
income to the other Unitholders. Finally, although the Partnership does not
expect that its operations will result in the creation of negative capital
accounts, if negative capital accounts nevertheless result, items of
Partnership income and gain will be allocated in an amount and manner
sufficient to eliminate the negative balance as quickly as possible.
Regulations provide that an allocation of items of partnership income, gain,
loss or deduction, other than an allocation required by Section 704(c) of the
Code to eliminate the difference between a partner's "book" capital account
(credited with the fair market value of Contributed Property) and "tax"
capital account (credited with the tax basis of Contributed Property) (the
"Book-Tax Disparity"), will generally be given effect for federal income tax
purposes in determining a partner's distributive share of an item of income,
gain, loss or deduction only if the allocation has substantial economic
effect. In any other case, a partner's distributive share of an item will be
determined on the basis of the partner's interest in the partnership, which
will be determined by taking into account all the facts and circumstances,
including the partner's relative contributions to the partnership, the
interests of the partners in economic profits and losses, the interest of the
partners in cash flow and other nonliquidating distributions and rights of the
partners to distributions of capital upon liquidation.
Counsel is of the opinion that, with the exception of the allocation of
recapture income discussed above, allocations under the Partnership Agreement
will be given effect for federal income tax purposes in determining a
partner's distributive share of an item of income, gain, loss or deduction.
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year
The Partnership uses the fiscal year ending December 31 as its taxable year
and has adopted the accrual method of accounting for federal income tax
purposes. Each Unitholder will be required to include in income his allocable
share of Partnership income, gain, loss and deduction for the fiscal year of
the Partnership ending within or with the taxable year of the Unitholder. In
addition, a Unitholder who disposes of Units following the close of
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the Partnership's taxable year but before the close of his taxable year must
include his allocable share of Partnership income, gain, loss and deduction in
income for his taxable year with the result that he will be required to report
in income for his taxable year his distributive share of more than one year of
Partnership income, gain, loss and deduction. See "--Disposition of Common
Units--Allocations Between Transferors and Transferees."
Tax Basis, Depreciation and Amortization
The tax basis of the various assets of the Partnership will be used for
purposes of computing depreciation and cost recovery deductions and,
ultimately, gain or loss on the disposition of such assets. The Partnership
assets initially had an aggregate tax basis equal to the tax basis of the
assets in the possession of the General Partner immediately prior to the
formation of the Partnership. The federal income tax burden associated with
the difference between the fair market value of property held by the
Partnership and its tax basis immediately prior to this Offering will be borne
by partners holding interests in the Partnership prior to this offering. See
"--Tax Consequences of Unit Ownership--Allocation of Partnership Income, Gain,
Loss and Deduction."
If the Partnership disposes of depreciable property by sale, foreclosure, or
otherwise, all or a portion of any gain (determined by reference to the amount
of depreciation previously deducted and the nature of the property) may be
subject to the recapture rules and taxed as ordinary income rather than
capital gain. Similarly, a partner who has taken cost recovery or depreciation
deductions with respect to property owned by the Partnership may be required
to recapture such deductions as ordinary income upon a sale of his interest in
the Partnership. See "--Consequences of Unit Ownership--Allocation of
Partnership Income, Gain, Loss and Deduction" and "--Disposition of Common
Units--Recognition of Gain or Loss."
Costs incurred in organizing the Partnership are being amortized over a
period of 60 months. The costs incurred in promoting the issuance of Units
(i.e. syndication expenses) must be capitalized and cannot be deducted
currently, ratably or upon termination of the Partnership. There are
uncertainties regarding the classification of costs as organization expenses,
which may be amortized, and as syndication expenses, which may not be
amortized. Under recently adopted regulations, the underwriting discounts and
commissions would be treated as a syndication cost.
Section 754 Election
The Partnership has made the election permitted by Section 754 of the Code.
That election is irrevocable without the consent of the IRS. The election
generally permits the Partnership to adjust a Common Unit purchaser's (other
than a Common Unit purchased from the Partnership) tax basis in the
Partnership's assets ("inside basis") pursuant to Section 743(b) of the Code
to reflect his purchase price. The Section 743(b) adjustment belongs to the
purchaser and not to other partners. (For purposes of this discussion, a
partner's inside basis in the Partnership's assets will be considered to have
two components: (1) his share of the Partnership's tax basis in such assets
("common basis") and (2) his Section 743(b) adjustment to that basis.)
Proposed Treasury Regulation Section 1.168-2(n) generally requires the
Section 743(b) adjustment attributable to recovery property to be depreciated
as if the total amount of such adjustment were attributable to newly-acquired
recovery property placed in service when the purchaser acquires the Unit.
Similarly, the proposed regulations under Section 197 indicate that the
Section 743(b) adjustment attributable to an amortizable Section 197
intangible should be treated as a newly-acquired asset placed in service in
the month when the purchaser acquires the Unit. Under Treasury Regulation
Section 1.167(c)-1(a)(6), a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167 of the Code rather than cost
recovery deductions under Section 168 is generally required to be depreciated
using either the straight-line method or the 150% declining balance method.
The depreciation and amortization methods and useful lives associated with the
Section 743(b) adjustment, therefore, may differ from the methods and useful
lives generally used to depreciate the common basis in such properties.
Pursuant to the Partnership Agreement, the Partnership is authorized to adopt
a convention to preserve the uniformity of Units even if such convention is
not consistent with Treasury Regulation
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Section 1.167(c)-1(a)(6), Proposed Treasury Regulation Section 1.168-2(n) or
Proposed Treasury Regulation Section 1.197-2(g)(3). See "--Uniformity of
Units."
Although Counsel is unable to opine as to the validity of such an approach,
the Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of Partnership
property (to the extent of any unamortized Book-Tax Disparity) using a rate of
depreciation or amortization derived from the depreciation or amortization
method and useful life applied to the common basis of such property, or treat
that portion as non-amortizable to the extent attributable to property the
common basis of which is not amortizable, despite its inconsistency with
Proposed Treasury Regulation Section 1.168-2(n), Treasury Regulation Section
1.167(c)-1(a)(6) (neither of which is expected to directly apply to a material
portion of the Partnership's assets) or Proposed Treasury Regulation 1.197-
2(g)(3). To the extent such Section 743(b) adjustment is attributable to
appreciation in value in excess of the unamortized Book-Tax Disparity, the
Partnership will apply the rules described in the Regulations. If the
Partnership determines that such position cannot reasonably be taken, the
Partnership may adopt a depreciation or amortization convention under which
all purchasers acquiring Units in the same month would receive depreciation or
amortization, whether attributable to common basis or Section 743(b)
adjustment, based upon the same applicable rate as if they had purchased a
direct interest in the Partnership's assets. Such an aggregate approach may
result in lower annual depreciation or amortization deductions than would
otherwise be allowable to certain Unitholders. See "--Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. The IRS may seek to reallocate some or all of any Section
743(b) adjustment not so allocated by the Partnership to goodwill which, as an
intangible asset, would be amortizable over a longer period of time than the
Partnership's tangible assets.
A Section 754 election is advantageous if the transferee's tax basis in his
Units is higher than such Units' share of the aggregate tax basis to the
Partnership of the Partnership's assets immediately prior to the transfer. In
such a case, as a result of the election, the transferee would have a higher
tax basis in his share of the Partnership's assets for purposes of
calculating, among other items, his depreciation and depletion deductions and
his share of any gain or loss on a sale of the Partnership's assets.
Conversely, a Section 754 election is disadvantageous if the transferee's tax
basis in such Units is lower than such Unit's share of the aggregate tax basis
of the Partnership's assets immediately prior to the transfer. Thus, the fair
market value of the Units may be affected either favorably or adversely by the
election.
The calculations involved in the Section 754 election are complex and will
be made by the Partnership on the basis of certain assumptions as to the value
of Partnership assets and other matters. There is no assurance that the
determinations made by the Partnership will not be successfully challenged by
the IRS and that the deductions resulting from them will not be reduced or
disallowed altogether. Should the IRS require a different basis adjustment to
be made, and should, in the Partnership's opinion, the expense of compliance
exceed the benefit of the election, the Partnership may seek permission from
the IRS to revoke the Section 754 election for the Partnership. If such
permission is granted, a subsequent purchaser of Units may be allocated more
income than he would have been allocated had the election not been revoked.
Alternative Minimum Tax
Although it is not expected that the Partnership will generate significant
tax preference items or adjustments, each Unitholder will be required to take
into account his distributive share of any items of Partnership income, gain,
deduction or loss for purposes of the alternative minimum tax.
The alternative minimum tax rate for noncorporate taxpayers is 26% on the
first $175,000 of alternative minimum taxable income in excess of the
exemption amount and 28% on any additional alternative minimum taxable income.
Prospective Unitholders should consult with their tax advisors as to the
impact of an investment in Units on their liability for the alternative
minimum tax.
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Valuation of Partnership Property and Basis of Properties
The federal income tax consequences of the ownership and disposition of
Units will depend in part on estimates by the Partnership of the relative fair
market values and determinations of the initial tax bases of the assets of the
Partnership. Although the Partnership may from time to time consult with
professional appraisers with respect to valuation matters, many of the
relative fair market value estimates will be made by the Partnership. These
estimates and determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair market value or
determinations of basis are subsequently found to be incorrect, the character
and amount of items of income, gain, loss or deductions previously reported by
Unitholders might change, and Unitholders might be required to adjust their
tax liability for prior years.
Treatment of Short Sales
A Unitholder whose Units are loaned to a "short seller" to cover a short
sale of Units may be considered as having disposed of ownership of those
Units. If so, he would no longer be a partner with respect to those Units
during the period of the loan and may recognize gain or loss from the
disposition. As a result, during this period, any Partnership income, gain,
deduction or loss with respect to those Units would not be reportable by the
Unitholder, any cash distributions received by the Unitholder with respect to
those Units would be fully taxable and all of such distributions would appear
to be treated as ordinary income. Unitholders desiring to assure their status
as partners and avoid the risk of gain recognition should modify any
applicable brokerage account agreements to prohibit their brokers from
borrowing their Units. The IRS has announced that it is actively studying
issues relating to the tax treatment of short sales of Partnership interests.
See also "--Disposition of Common Units--Recognition of Gain or Loss."
DISPOSITION OF COMMON UNITS
Recognition of Gain or Loss
Gain or loss will be recognized on a sale of Units equal to the difference
between the amount realized and the Unitholder's tax basis for the Units sold.
A Unitholder's amount realized will be measured by the sum of the cash or the
fair market value of other property received plus his share of Partnership
nonrecourse liabilities. Because the amount realized includes a Unitholder's
share of Partnership nonrecourse liabilities, the gain recognized on the sale
of Units could result in a tax liability in excess of any cash received from
such sale.
Partnership distributions in excess of cumulative net taxable income in
respect of a Common Unit which decrease a Unitholder's tax basis in such
Common Unit will, in effect, become taxable income if the Common Unit is sold
at a price greater than the Unitholder's tax basis in such Common Unit, even
if the price is less than his original cost.
Should the IRS successfully contest the convention used by the Partnership
to amortize only a portion of the Section 743(b) adjustment (described under
"--Tax Treatment of Operations--Section 754 Election") attributable to an
amortizable Section 197 intangible after a sale by the General Partner of
Units, a Unitholder could realize additional gain from the sale of Units than
had such convention been respected. In that case, the Unitholder may have been
entitled to additional deductions against income in prior years but may be
unable to claim them, with the result to him of greater overall taxable income
than appropriate. Counsel is unable to opine as to the validity of the
convention but believes such a contest by the IRS to be unlikely because a
successful contest could result in substantial additional deductions to other
Unitholders.
Gain or loss recognized by a Unitholder (other than a "dealer" in Units) on
the sale or exchange of a Unit will generally be taxable as capital gain or
loss. Capital gain recognized on the sale of Units held for more than 18
months will generally be taxed at a maximum rate of 20%. A portion of this
gain or loss (which could be substantial), however, will be separately
computed and taxed as ordinary income or loss under Section 751 of the Code to
the extent attributable to assets giving rise to depreciation recapture or
other "unrealized receivables" or to "inventory items" owned by the
Partnership. The term "unrealized receivables" includes potential recapture
items, including depreciation recapture. Ordinary income attributable to
unrealized
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receivables, inventory items and depreciation recapture may exceed net taxable
gain realized upon the sale of the Unit and may be recognized even if there is
a net taxable loss realized on the sale of the Unit. Thus, a Unitholder may
recognize both ordinary income and a capital loss upon a disposition of Units.
Net capital loss may offset no more than $3,000 of ordinary income each year
in the case of individuals and may only be used to offset capital gain in the
case of corporations.
The IRS has ruled that a partner who acquires interests in a Partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If
this ruling is applicable to the holders of Common Units, a Common Unitholder
will be unable to select high or low basis Common Units to sell as would be
the case with corporate stock. It is not clear whether the ruling applies to
the Partnership because, similar to corporate stock, interests in the
Partnership are evidenced by separate certificates. Accordingly, Counsel is
unable to opine as to the effect such ruling will have on the Unitholders. A
Unitholder considering the purchase of additional Common Units or a sale of
Common Units purchased in separate transactions should consult his tax advisor
as to the possible consequences of such ruling.
The TRA of 1997 affects the taxation of certain financial products and
securities, including partnership interests by treating a taxpayer as having
sold an "appreciated" partnership interest (one in which gain would be
recognized if it were sold, assigned or otherwise terminated at its fair
market value) if the taxpayer or related persons enters into (i) a short sale
of, (ii) an offsetting notional principal contract with respect to, or (iii) a
futures or forward contract to deliver, (or, in the case of an appreciated
financial position that is a short sale or offsetting notional principal or
futures or forward contract, acquire) the same or substantially identical
property. The Secretary of Treasury is also authorized to issue regulations
that treat a taxpayer that enters into transactions or positions that have
substantially the same effect as the preceding transactions as having
constructively sold the financial position.
Allocations Between Transferors and Transferees
In general, the Partnership's taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be subsequently
apportioned among the Unitholders in proportion to the number of Units owned
by each of them as of the opening of the principal national securities
exchange on which the Common Units are then traded on the first business day
of the month (the "Allocation Date"). However, gain or loss realized on a sale
or other disposition of Partnership assets other than in the ordinary course
of business will be allocated among the Unitholders on the Allocation Date in
the month in which that gain or loss is recognized. As a result, a Unitholder
transferring Common Units in the open market may be allocated income, gain,
loss and deduction accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of Units. If this method is not allowed under the Treasury
Regulations (or only applies to transfers of less than all of the Unitholder's
interest), taxable income or losses of the Partnership might be reallocated
among the Unitholders. The Partnership is authorized to revise its method of
allocation between transferors and transferees (as well as among partners
whose interests otherwise vary during a taxable period) to conform to a method
permitted under future Treasury Regulations.
A Unitholder who owns Units at any time during a quarter and who disposes of
such Units prior to the record date set for a cash distribution with respect
to such quarter will be allocated items of Partnership income, gain, loss and
deductions attributable to such quarter but will not be entitled to receive
that cash distribution.
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Notification Requirements
A Unitholder who sells or exchanges Units is required to notify the
Partnership in writing of that sale or exchange within 30 days after the sale
or exchange and in any event by no later than January 15 of the year following
the calendar year in which the sale or exchange occurred. The Partnership is
required to notify the IRS of that transaction and to furnish certain
information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. Additionally, a transferee of a Unit will be required to furnish a
statement to the IRS, filed with its income tax return for the taxable year in
which the sale or exchange occurred, that sets forth the amount of the
consideration paid for the Unit. Failure to satisfy these reporting
obligations may lead to the imposition of substantial penalties.
Constructive Termination
The Partnership and the Operating Partnership will be considered to have
been terminated if there is a sale or exchange of 50% or more of the total
interests in Partnership capital and profits within a 12-month period. Under
Treasury Regulations, a termination of the Partnership will result in a deemed
transfer by the Partnership of its assets to a new partnership in exchange for
an interest in the new partnership followed by a deemed distribution of
interests in the new partnership to the Unitholders in liquidation of the
Partnership. Under TRA of 1997, if the Partnership elects to be treated as a
large partnership it will not terminate by reason of the sale or exchange of
interests in the Partnership. A termination of the Partnership will cause a
termination of the Operating Partnership. A termination of the Partnership
will result in the closing of the Partnership's taxable year for all
Unitholders. In the case of a Unitholder reporting on a taxable year other
than a fiscal year ending December 31, the closing of the Partnership's
taxable year may result in more than 12 months' taxable income or loss of the
Partnership being includable in his taxable income for the year of
termination. New tax elections required to be made by the Partnership,
including a new election under Section 754 of the Code, must be made
subsequent to a termination, and a termination could result in a deferral of
Partnership deductions for depreciation. A termination could also result in
penalties if the Partnership were unable to determine that the termination had
occurred. Moreover, a termination might either accelerate the application of,
or subject the Partnership to, any tax legislation enacted prior to the
termination.
Entity-Level Collections
If the Partnership is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any Unitholder or any General
Partner or any former Unitholder, the Partnership is authorized to pay those
taxes from Partnership funds. Such payment, if made, will be treated as a
distribution of cash to the partner on whose behalf the payment was made. If
the payment is made on behalf of a person whose identity cannot be determined,
the Partnership is authorized to treat the payment as a distribution to
current Unitholders. The Partnership is authorized to amend the Partnership
Agreement in the manner necessary to maintain uniformity of intrinsic tax
characteristics of Units and to adjust subsequent distributions, so that after
giving effect to such distributions, the priority and characterization of
distributions otherwise applicable under the Partnership Agreement is
maintained as nearly as is practicable. Payments by the Partnership as
described above could give rise to an overpayment of tax on behalf of an
individual partner in which event the partner could file a claim for credit or
refund.
UNIFORMITY OF UNITS
Because the Partnership cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of such Units must be maintained. In the absence of uniformity, compliance
with a number of federal income tax requirements, both statutory and
regulatory, could be substantially diminished. A lack of uniformity can result
from a literal application of Proposed Treasury Regulation Section 1.168-2(n).
Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed Treasury Regulation
1.197-2(g)(3). Any non-uniformity could have a negative impact on the value of
the Units. See "--Treatment of Operations--Section 754 Election."
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The Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of contributed
property or adjusted property (to the extent of any unamortized Book-Tax
Disparity) using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the common
basis of such property, or treat that portion as nonamortizable, to the extent
attributable to property the common basis of which is not amortizable, despite
its inconsistency with Proposed Treasury Regulation Section 1.168-2(n) and
Treasury Regulation Section 1.167(c)-1(a)(6) (neither of which is expected to
directly apply to a material portion of the Partnership's assets) and Proposed
Treasury Regulation 1.197-1(a)(3). See "--Tax Treatment of Operations--Section
754 Election." To the extent such Section 743(b) adjustment is attributable to
appreciation in value in excess of the unamortized Book-Tax Disparity, the
Partnership will apply the rules described in the Regulations. If the
Partnership determines that such a position cannot reasonably be taken, the
Partnership may adopt a depreciation and amortization convention under which
all purchasers acquiring Units in the same month would receive depreciation
and amortization deductions, whether attributable to common basis or Section
743(b) basis, based upon the same applicable rate as if they had purchased a
direct interest in the Partnership's property. If such an aggregate approach
is adopted, it may result in lower annual depreciation and amortization
deductions than would otherwise be allowable to certain Unitholders and risk
the loss of depreciation and amortization deductions not taken in the year
that such deductions are otherwise allowable. This convention will not be
adopted if the Partnership determines that the loss of depreciation and
amortization deductions will have a material adverse effect on the
Unitholders. If the Partnership chooses not to utilize this aggregate method,
the Partnership may use any other reasonable depreciation and amortization
convention to preserve the uniformity of the intrinsic tax characteristics of
any Units that would not have a material adverse effect on the Unitholders.
The IRS may challenge any method of depreciating the Section 743(b) adjustment
described in this paragraph. If such a challenge were sustained, the
uniformity of Units might be affected, and the gain from the sale of Units
might be increased without the benefit of additional deductions. See "--
Disposition of Common Units--Recognition of Gain or Loss."
Tax-Exempt Organizations and Certain Other Investors
Ownership of Units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and,
as described below, may have substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal
income tax (including IRAs) and other retirement plans) are subject to federal
income tax on unrelated business taxable income. Much of the taxable income
derived by such an organization from the ownership of a Unit will be unrelated
business taxable income and thus will be taxable to such a Unitholder.
A regulated investment Partnership or "mutual fund" is required to derive
90% or more of its gross income from interest, dividends, gains from the sale
of stocks or securities or foreign currency or certain related sources. It is
not anticipated that any significant amount of the Partnership's gross income
will include that type of income.
Non-resident aliens and foreign corporations, trusts or estates which hold
Units will be considered to be engaged in business in the United States on
account of ownership of Units. As a consequence, they will be required to file
federal tax returns in respect of their share of Partnership income, gain,
loss or deduction and pay federal income tax at regular rates on any net
income or gain. Generally, a partnership is required to pay a withholding tax
on the portion of the partnership's income which is effectively connected with
the conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been
made to such partners. However, under rules applicable to publicly-traded
partnerships, the Partnership will withhold (currently at the rate of 39.6%)
on actual cash distributions made quarterly to foreign Unitholders. Each
foreign Unitholder must obtain a taxpayer identification number from the IRS
and submit that number to the Transfer Agent of the Partnership in order to
obtain credit for the taxes withheld. A change in applicable law may require
the Partnership to change these procedures.
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Because a foreign corporation which owns Units will be treated as engaged in
a United States trade or business, such a corporation may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its allocable share of the Partnership's income and gain (as
adjusted for changes in the foreign corporation's "United States net equity")
which are effectively connected with the conduct of a United States trade or
business. That tax may be reduced or eliminated by an income tax treaty
between the United States and the country with respect to which the foreign
corporate Unitholder is a qualified resident. In addition, such a Unitholder
is subject to special information reporting requirements under Section 6038C
of the Code.
Under a ruling of the IRS, a foreign Unitholder who sells or otherwise
disposes of a Unit will be subject to federal income tax on gain realized on
the disposition of such Unit to the extent that such gain is effectively
connected with a United States trade or business of the foreign Unitholder.
Apart from the ruling, a foreign Unitholder will not be taxed upon the
disposition of a Unit if that foreign Unitholder has held less than 5% in
value of the Units during the five-year period ending on the date of the
disposition and if the Units are regularly traded on an established securities
market at the time of the disposition.
ADMINISTRATIVE MATTERS
Partnership Information Returns and Audit Procedures
The Partnership intends to furnish to each Unitholder, within 90 days after
the close of each calendar year, certain tax information, including a Schedule
K-1, which sets forth each Unitholder's share of the Partnership's income,
gain, loss and deduction for the preceding Partnership taxable year. In
preparing this information, which will generally not be reviewed by counsel,
the Partnership will use various accounting and reporting conventions, some of
which have been mentioned in the previous discussion, to determine the
Unitholder's share of income, gain, loss and deduction. There is no assurance
that any of those conventions will yield a result which conforms to the
requirements of the Code, regulations or administrative interpretations of the
IRS. The Partnership cannot assure prospective Unitholders that the IRS will
not successfully contend in court that such accounting and reporting
conventions are impermissible. Any such challenge by the IRS could negatively
affect the value of the Units.
The federal income tax information returns filed by the Partnership may be
audited by the IRS. Adjustments resulting from any such audit may require each
Unitholder to adjust a prior year's tax liability, and possibly may result in
an audit of the Unitholder's own return. Any audit of a Unitholder's return
could result in adjustments of non-Partnership as well as Partnership items.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss and deduction are determined in a partnership proceeding
rather than in separate proceedings with the partners. The Code provides for
one partner to be designated as the "Tax Matters Partner" for these purposes.
The Partnership Agreement appoints the General Partner as the Tax Matters
Partner of the Partnership.
The Tax Matters Partner will make certain elections on behalf of the
Partnership and Unitholders and can extend the statute of limitations for
assessment of tax deficiencies against Unitholders with respect to Partnership
items. The Tax Matters Partner may bind a Unitholder with less than a 1%
profits interest in the Partnership to a settlement with the IRS unless that
Unitholder elects, by filing a statement with the IRS, not to give such
authority to the Tax Matters Partner. The Tax Matters Partner may seek
judicial review (by which all the Unitholders are bound) of a final
partnership administrative adjustment and, if the Tax Matters Partner fails to
seek judicial review, such review may be sought by any Unitholder having at
least a 1% interest in the profits of the Partnership and by the Unitholders
having in the aggregate at least a 5% profits interest. However, only one
action for judicial review will go forward, and each Unitholder with an
interest in the outcome may participate. However, under TRA of 1997, if the
Partnership elects to be treated as a large partnership, a partner will not
have the right to participate in settlement conferences with the IRS or to
seek a refund.
101
<PAGE>
A Unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on the Partnership's return. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder to
substantial penalties. However, if the Partnership elects to be treated as a
large partnership, its partners would be required to treat all Partnership
items in a manner consistent with the Partnership return.
Under the provisions of the TRA of 1997, if the Partnership elects to be
treated as a large partnership, each partner would take into account
separately his share of the following items, determined at the partnership
level: (1) taxable income or loss from passive loss limitation activities; (2)
taxable income or loss from other activities (such as portfolio income or
loss); (3) net capital gains to the extent allocable to passive loss
limitation activities and other activities; (4) tax exempt interest; (5) a net
alternative minimum tax adjustment separately computed for passive loss
limitation activities and other activities; (6) general credits; (7) low-
income housing credit; (8) rehabilitation credit; (9) foreign income taxes;
(10) credit for producing fuel from a nonconventional source; and (11) any
other items the Secretary of Treasury deems appropriate. Moreover,
miscellaneous itemized deductions would not be passed through to its partners
and 30% of such deductions would be used at the partnership level.
The TRA of 1997 also made a number of changes to the tax compliance and
administrative rules relating to electing large partnerships. One provision
would require that each partner in an electing large partnership, such as the
Partnership, take into account his share of any adjustments to partnership
items in the year such adjustments are made. Under prior law, adjustments
relating to partnership items for a previous taxable year are taken into
account by those persons who were partners in the previous taxable year.
Alternatively, under the TRA of 1997, a partnership could elect to or, in some
circumstances, could be required to directly pay the tax resulting from any
such adjustments. In either case, therefore, Unitholders could bear
significant economic burdens associated with tax adjustments relating to
periods predating their acquisition of Units.
Nominee Reporting
Persons who hold an interest in the Partnership as a nominee for another
person are required to furnish to the Partnership (a) the name, address and
taxpayer identification number of the beneficial owner and the nominee; (b)
whether the beneficial owner is (i) a person that is not a United States
person, (ii) a foreign government, an international organization or any
wholly-owned agency or instrumentality of either of the foregoing or (iii) a
tax-exempt entity; (c) the amount and description of Units held, acquired or
transferred for the beneficial owner; and (d) certain information including
the dates of acquisitions and transfers, means of acquisitions and transfers,
and acquisition cost for purchases, as well as the amount of net proceeds from
sales. Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and certain
information on Units they acquire, hold or transfer for their own account. A
penalty of $50 per failure (up to a maximum of $100,000 per calendar year) is
imposed by the Code for failure to report such information to the Partnership.
The nominee is required to supply the beneficial owner of the Units with the
information furnished to the Partnership.
Registration as a Tax Shelter
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that
the Partnership is not subject to the registration requirement on the basis
that it will not constitute a tax shelter. However, the General Partner, as a
principal organizer of the Partnership, has registered the Partnership as a
tax shelter with the Secretary of the Treasury in the absence of assurance
that the Partnership will not be subject to tax shelter registration and in
light of the substantial penalties which might be imposed if registration is
required and not undertaken. The IRS has issued the following tax shelter
registration number to the Partnership: 96026000016. ISSUANCE OF THE
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE PARTNERSHIP OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS.
The Partnership must furnish the registration number
102
<PAGE>
to the Unitholders, and a Unitholder who sells or otherwise transfers a Unit
in a subsequent transaction must furnish the registration number to the
transferee. The penalty for failure of the transferor of a Unit to furnish the
registration number to the transferee is $100 for each such failure. The
Unitholders must disclose the tax shelter registration number of the
Partnership on Form 8271 to be attached to the tax return on which any
deduction, loss or other benefit generated by the Partnership is claimed or
income of the Partnership is included. A Unitholder who fails to disclose the
tax shelter registration number on his return, without reasonable cause for
that failure, will be subject to a $250 penalty for each failure. Any
penalties discussed herein are not deductible for federal income tax purposes.
Registration as a tax shelter may increase the risk of an audit.
Accuracy-Related Penalties
A penalty equal to 20% of the amount of any portion of an underpayment of
tax which is attributable to one or more of certain listed causes, including
negligence or disregard of rules or regulations, substantial understatements
of income tax and substantial valuation misstatements, is imposed by the Code.
No penalty will be imposed, however, with respect to any portion of an
underpayment if it is shown that there was a reasonable cause for that portion
and that the taxpayer acted in good faith with respect to that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally
is reduced if any portion is attributable to a position adopted on the return
(i) with respect to which there is, or was, "substantial authority" or (ii) as
to which there is a reasonable basis and the pertinent facts of such position
are disclosed on the return. Certain more stringent rules apply to "tax
shelters," a term that in this context does not appear to include the
Partnership. If any Partnership item of income, gain, loss or deduction
included in the distributive shares of Unitholders might result in such an
understatement of income for which no "substantial authority" exists, the
Partnership must disclose the pertinent facts on its return. In addition, the
Partnership will make a reasonable effort to furnish sufficient information
for Unitholders to make adequate disclosure on their returns to avoid
liability for this penalty.
A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000
for most corporations). If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that may be imposed by the
various jurisdictions in which a Unitholder resides or in which the
Partnership does business or owns property. A Unitholder will likely be
required to file state income tax returns and to pay taxes in various states
and may be subject to penalties for failure to comply with such requirements.
The General Partner anticipates that substantially all of the Partnership's
income will be generated in the following states: Connecticut, Indiana,
Kentucky, Maine, Massachusetts, Michigan, New Jersey, New York, Ohio,
Pennsylvania and Rhode Island. Each of the states in which the General Partner
anticipates that a substantial portion of the Partnership's income will be
generated currently imposes a personal income tax. Some of these states may
require the Partnership to withhold a percentage of income from amounts to be
distributed to a Unitholder who is not a resident of such state. Withholding,
the amount of which may be greater or less than a particular income tax
liability to the state, generally does not relieve the non-resident Unitholder
from the obligation to file an income tax return. Amounts withheld may be
treated as if distributed to Unitholders for purposes of determining the
amounts distributed by the Partnership. See "--Disposition of Common Units--
Entity-Level Collections." Based on current law and its estimate of future
Partnership operations, the General Partner anticipates that any amounts
required to be withheld will not be material.
103
<PAGE>
It is the responsibility of each Unitholder to investigate the legal and tax
consequences, under the laws of pertinent states and localities, of his
investment in the Partnership. Accordingly, each prospective Unitholder should
consult, and must depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each Unitholder
to file all state and local, as well as U.S. federal, tax returns that may be
required of such Unitholder. Counsel has not rendered an opinion on the state
or local tax consequences of an investment in the Partnership.
104
<PAGE>
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS
AND INDIVIDUAL RETIREMENT ACCOUNTS
An investment in the Partnership by an employee benefit plan is subject to
certain additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and restrictions imposed by Section 4975 of the Code. As used herein, the term
"employee benefit plan" includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or Individual Retirement Accounts established
or maintained by an employer or employee organization. Among other things,
consideration should be given to (a) whether such investment is prudent under
Section 404(a)(1)(B) of ERISA; (b) whether in making such investment, such
plan will satisfy the diversification requirements of Section 404(a)(1)(C) of
ERISA; and (c) (i) the fact that such investment could result in recognition
of unrelated business taxable income by such plan even if there is no net
income, (ii) the effect of an imposition of income taxes on the potential
investment return for an otherwise tax exempt investor and (iii) the
requirement on such an investor plan of filing an additional federal income
tax return (if gross income is $1,000 or more). The person with investment
discretion with respect to the assets of an employee benefit plan (a
"fiduciary") should determine whether an investment in the Partnership is
authorized by the appropriate governing instrument and is a proper investment
for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
Individual Retirement Accounts that are not considered part of an employee
benefit plan) prohibit an employee benefit plan from engaging in certain
transactions involving "plan assets" with parties that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
the plan.
In addition to considering whether the purchase of Common Units is a
prohibited transaction, a fiduciary of an employee benefit plan should
consider whether such plan will, by investing in the Partnership, be deemed to
own an undivided interest in the assets of the Partnership, with the result
that the General Partner also would be a fiduciary of such plan and the
operations of the Partnership would be subject to the regulatory restrictions
of ERISA, including its prohibited transaction rules, as well as the
prohibited transaction rules of the Code.
The Department of Labor regulations provide guidance with respect to whether
the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under certain circumstances. Pursuant
to these regulations, an entity's assets would not be considered to be "plan
assets" if, among other things, (a) the equity interest acquired by employee
benefit plans are publicly offered securities--i.e., the equity interests are
widely held by 100 or more investors independent of the issuer and each other,
freely transferable and registered pursuant to certain provisions of the
federal securities laws, (b) the entity is an "operating company," i.e., it is
primarily engaged in the production or sale of a product or service other than
the investment of capital either directly or through a majority-owned
subsidiary or subsidiaries or (c) there is no significant investment by
benefit plan investors, which is defined to mean that less than 25% of the
value of each class of equity interest (disregarding certain interests held by
the General Partner, its Affiliates, and certain other persons) is held by the
employee benefit plans referred to above, Individual Retirement Accounts and
other employee benefit plans not subject to ERISA (such as governmental
plans). The Partnership's assets should not be considered "plan assets" under
these regulations because it is expected that the investment will satisfy the
requirements in (a) and (b) above and may also satisfy the requirements in
(c).
105
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated December 16, 1997 (the "Underwriting Agreement"), the
underwriters named below (the "Underwriters"), for whom PaineWebber
Incorporated and Lehman Brothers Inc. are acting as representatives (the
"Representatives"), have agreed, severally but not jointly, to purchase, and
the Partnership and the Selling Unitholder have agreed to sell, the following
respective number of Common Units:
To be sold by the Partnership:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF COMMON UNITS
----------- ----------------------
<S> <C>
PaineWebber Incorporated............................. 404,500
Lehman Brothers Inc.................................. 404,500
-------
Total.............................................. 809,000
=======
</TABLE>
To be sold by the Selling Unitholder:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF COMMON UNITS
----------- ----------------------
<S> <C>
PaineWebber Incorporated............................. 11,864
Lehman Brothers Inc.................................. 11,863
------
Total.............................................. 23,727
======
</TABLE>
The Underwriters propose to offer the Common Units at the offering price set
forth on the cover page of this Prospectus, and in part to certain securities
dealers (who may include the Underwriters) at such price less a concession not
in excess of $0.68 per Common Unit, and the Underwriters and such dealers may
reallow to certain dealers a discount not in excess of $0.10 per Common Unit.
The Common Units are offered subject to receipt and acceptance by the
Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part.
The Selling Unitholder has granted the Underwriters an option to purchase up
to 124,000 additional Common Units, in each case exercisable for 30 days after
the date hereof and to cover over-allotments, if any, at the offering price
less the underwriting discount and commissions. The Underwriters may purchase
such Common Units only to cover over-allotments made in connection with this
Offering.
The Partnership and the Selling Unitholder have agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under
the federal securities laws, or to contribute to payments which the
Underwriters may be required to make in respect thereof.
The Partnership, the Selling Unitholder and certain of the Unitholders have
agreed that, for a period of 120 days from the date of this Prospectus, they
will not, without the prior written consent of PaineWebber Incorporated and
Lehman Brothers Inc. directly or indirectly, sell, contract to sell or
otherwise dispose of any Common Units or any security convertible into Common
Units, except (i) upon exercise of the options outstanding or to be issued
pursuant to the Unit Option Plan or (ii) pursuant to or in connection with an
acquisition by the Partnership provided that any person receiving such Common
Units in the acquisition will also agree not to sell, contract to sell or
otherwise dispose of any Common Units or rights to acquire such units for the
time remaining on the 120-day period from the date of this Prospectus.
106
<PAGE>
PaineWebber Incorporated and Lehman Brothers Inc. have in the past
performed, and may continue to perform, investment banking, broker dealer,
lending and financial advisory services for the Partnership, and have received
customary compensation therefor.
In addition, if the Underwriters over-allot (i.e., if they sell more Common
Units than are set forth on the cover page of this Prospectus) and thereby
create a short position in the Common Units in connection with this Offering,
then the Underwriters may reduce that short position by purchasing Common
Units in the open market. The Underwriters may also elect to reduce any short
position by exercising all or part of the over-allotment option described
herein.
Neither the Partnership nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Units. In
addition, neither the Partnership nor the Underwriters make any representation
that the Underwriters will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
THE SELLING UNITHOLDER
As of the date of this Prospectus, Star Gas, the Selling Unitholder, held
147,727 Common Units, all of which are being offered pursuant to this
Prospectus (including 124,000 Common Units which are subject to the
Underwriters' over-allotment option). In addition, Star Gas held 2,396,078
Subordinated Units as of such date. The Common Units were issued to Star Gas
in connection with the Pearl Gas Acquisition. See "Certain Relationships and
Related Transactions--Pearl Gas Acquisition."
VALIDITY OF COMMON UNITS
The validity of the Common Units will be passed upon for the Partnership by
Phillips Nizer Benjamin Krim & Ballon LLP, New York. New York. Certain legal
matters in connection with the Common Units will be passed upon for the
Underwriters by Andrews & Kurth L.L.P., New York, New York.
EXPERTS
The consolidated financial statements and schedule of Star Gas Partners,
L.P. and subsidiary and the Star Gas Group (Predecessor) as of September 30,
1996 and 1997 and for the fiscal years ended September 30, 1995, 1996 and
1997, have been included herein and elsewhere in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing herein and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Pearl Gas Co., as of December 31, 1995 and 1996
and for the fiscal years ended December 31, 1995 and 1996 have been included
herein and elsewhere in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein and upon the authority of said firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
The Partnership has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act, with respect to the
securities offered by this Prospectus. Certain of the information contained in
the Registration Statement is omitted from this Prospectus, and reference is
hereby made to the Registration Statement and exhibits and schedules relating
thereto for further information with respect to the Partnership and the
securities offered by this Prospectus. The Partnership is subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
files reports and other information with the Commission. Such
107
<PAGE>
reports and other information are available for inspection at, and copies of
such materials may be obtained upon payment of the fees prescribed therefor by
the rules and regulations of the Commission from, the Commission at its
principal offices located at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the Regional Offices of the Commission
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and at 7 World Trade Center, New York, New York 10048 or
may be obtained on the Internet at http:\\www.sec.gov. In addition, the Common
Units of the Partnership are listed on the Nasdaq National Market, and such
reports and other information may be inspected and copied at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.
Washington, D.C. 20006.
108
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA FINANCIAL STATEMENTS:
Pro Forma Condensed Consolidated Financial Statements of Star Gas
Partners, L.P.:
Pro Forma Condensed Consolidated Balance Sheet--September 30, 1997
(unaudited)............................................................ F-2
Pro Forma Condensed Consolidated Statement of Operations--Year Ended
September 30, 1997 (unaudited)......................................... F-3
Notes to Pro Forma Condensed Consolidated Financial Statements.......... F-4
HISTORICAL FINANCIAL STATEMENTS:
Star Gas Partners, L.P. and the Star Gas Group (Predecessor):
Independent Auditors' Report............................................ F-5
Consolidated Balance Sheets as of September 30, 1996 and 1997........... F-6
Consolidated Statements of Operations for the year ended September 30,
1995 (Predecessor), and from October 1, 1995 through December 20, 1995
(Predecessor), December 20, 1995 through September 30, 1996, and the
year ended September 30, 1997.......................................... F-7
Consolidated Statements of Partners' Capital for the period December 20,
1995 through September 30, 1996 and the year ended September 30, 1997
and the Consolidated Statement of Predecessor's Equity for year ended
September 30, 1995 (Predecessor) and the period October 1, 1995 through
December 20, 1995 (Predecessor)........................................ F-8
Consolidated Statements of Cash Flows for the year ended September 30,
1995 (Predecessor), and from October 1, 1995 through December 20, 1995
(Predecessor), December 20, 1995 through September 30, 1996, and the
year ended September 30, 1997.......................................... F-9
Notes to Consolidated Financial Statements.............................. F-10
Pearl Gas Co.:
Independent Auditors' Report............................................ F-22
Balance Sheets as of December 31, 1995 and 1996......................... F-23
Statements of Income for the Years ended December 31, 1995 and 1996..... F-24
Statements of Shareholders' Equity for the Years ended December 31, 1995
and 1996............................................................... F-25
Statements of Cash Flows for the Years ended December 31, 1995 and
1996................................................................... F-26
Notes to Financial Statements........................................... F-27
Balance Sheets as of December 31, 1996 and September 30, 1997
(unaudited)............................................................ F-31
Statements of Income for the Nine Months ended September 30, 1996
(unaudited) and September 30, 1997 (unaudited)......................... F-32
Statements of Cash Flows for the Nine Months ended September 30, 1996
(unaudited) and September 30, 1997 (unaudited)......................... F-33
Notes to Financial Statements (unaudited)............................... F-34
</TABLE>
F-1
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
STAR GAS
PARTNERS,
STAR GAS PEARL GAS CO. PRO FORMA PRO FORMA L.P.
PARTNERS, L.P. CONVEYANCE(A) ADJUSTMENTS COMBINED THE OFFERING PRO FORMA
-------------- ------------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................... $ 889 $ 1,853 $ 21,000 (b) $ 742 $ 15,795 (h) $ 6,881
(23,000)(c) 344 (h)
(10,000)(i)
Notes and accounts
receivables........... 5,720 515 6,235 6,235
Inventories............ 6,597 302 6,899 6,899
Prepaid expenses and
other current assets.. 959 663 1,622 1,622
-------- ------- -------- -------- -------- --------
Total current assets... 14,165 3,333 (2,000) 15,498 6,139 21,637
-------- ------- -------- -------- -------- --------
Property and equipment,
net................... 95,282 13,585 108,867 108,867
Intangible and other
assets, net........... 38,022 10,990 49,012 49,012
-------- ------- -------- -------- -------- --------
Total assets........... $147,469 $27,908 $ (2,000) $173,377 $ 6,139 $179,516
======== ======= ======== ======== ======== ========
LIABILITIES AND
PARTNERS' CAPITAL
Current liabilities:
Deferred revenue....... $ -- $ 197 $ $ 197 $ $ 197
Contract payable....... -- 633 633 633
Accounts payable....... 3,178 188 3,366 3,366
Accrued expenses....... 3,325 423 3,748 3,748
Customer credit
balances.............. 4,343 -- 4,343 4,343
-------- ------- -------- -------- -------- --------
Total current
liabilities........... 10,846 1,441 12,287 12,287
-------- ------- -------- -------- -------- --------
Long-term debt.......... 85,000 23,000 21,000 (b) 106,000 (10,000)(i) 96,000
(23,000)(c)
Other long-term
liabilities............ 45 45 45
Partners' Capital:
Common unitholders..... 47,573 3,397 50,970 15,795 (h) 66,765
Subordinated
unitholder............ 4,034 -- 4,034 4,034
General partner........ (29) 70 41 344 (h) 385
-------- ------- -------- -------- -------- --------
Total Partners'
Capital............... 51,578 3,467 55,045 16,139 71,184
-------- ------- -------- -------- -------- --------
Total Liabilities and
Partners' Capital..... $147,469 $27,908 $ (2,000) $173,377 $ 6,139 $179,516
======== ======= ======== ======== ======== ========
</TABLE>
F-2
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
STAR GAS
PARTNERS,
STAR GAS PRO FORMA PRO FORMA L.P.
PARTNERS, L.P. PEARL GAS CO. ADJUSTMENTS COMBINED THE OFFERING PRO FORMA
-------------- ------------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Sales................... $135,159 $14,607 $ $149,766 $ $149,766
Cost of sales........... 72,211 8,159 80,370 80,370
-------- ------- -------- --------
Gross Profit........... 62,948 6,448 69,396 69,396
Operating expenses...... 43,245 3,436 (273)(d) 46,408 46,408
Depreciation and
amortization........... 10,405 423 667 (e) 11,495 11,495
Net gain (loss) on sales
of assets.............. (295) 30 (265) (265)
-------- ------- ------- -------- --------
Operating income....... 9,003 2,619 (394) 11,228 11,228
Interest income
(expense), net......... (6,966) 48 (1,527)(f) (8,493) 727(j) (7,766)
(48)(f)
-------- ------- ------- -------- ---- --------
Income (loss) before
income taxes.......... 2,037 2,667 (1,969) 2,735 727 3,462
Income tax expense...... 25 -- 25 25
-------- ------- ------- -------- ---- --------
Net income............. $ 2,012 $ 2,667 $(1,969) $ 2,710 $727 $ 3,437
======== ======= ======= ======== ==== ========
General Partner's
interest in net
income................. $ 40 $ 54 $ 69
======== ======== ========
Limited Partners'
interest in net
income................. $ 1,972 $ 2,656 $ 3,368
======== ======== ========
Net Income per Limited
Partner unit........... $ 0.37 $ 0.49 $ 0.54
======== ======== ========
Weighted average number
of Limited Partner
units outstanding...... 5,271 5,419 (g) 6,228
======== ======== ========
</TABLE>
F-3
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 1997
The following pro forma adjustments give effect to (i) the Pearl Gas
Conveyance (defined below) which was effected as part of the Pearl Gas
Acquisition and (ii) this Offering (assuming that the Underwriters' over-
allotment option is not exercised), as if each such transaction had taken
place on September 30, 1997, in the case of the pro forma condensed
consolidated balance sheet, or as of October 1, 1996, in the case of the pro
forma condensed consolidated statement of operations for the year ended
September 30, 1997. The pro forma adjustments are based upon currently
available information and certain estimates and assumptions, and therefore the
actual results may differ from the pro forma results. However, management
believes that the assumptions provide a reasonable basis for presenting the
significant effects of the transactions as contemplated, and that the pro
forma adjustments give appropriate effect to those assumptions and are
properly applied in the pro forma financial information.
THE PEARL GAS CONVEYANCE
(a) Reflects the conveyance (the "Pearl Gas Conveyance") of assets and
liabilities of Pearl Gas to the Partnership by Star Gas, including $23.0
million in long-term debt, in exchange for 147,727 Common Units, valued at
$3.4 million and an aggregate general partner interest of .00055 percent
valued at $70 thousand. Upon purchase of Pearl Gas by Star Gas, the assets
were written up to the fair market value through an adjustment to property,
plant and equipment of $11.2 million and an adjustment to intangible assets of
$11.0 million. In addition, cash and accrued expenses have been increased by
$1.0 million and $0.3 million to reflect the estimated working capital as of
October 21, 1997. See Note 7 of Notes to the Consolidated Financial Statements
of the Partnership.
(b) Reflects the net proceeds to the Partnership of $21.0 million borrowed
under the Acquisition Facility.
(c) Reflects the use of $23.0 million in cash to retire $ 23.0 million of
debt assumed in the Pearl Gas Conveyance.
(d) Adjustment for certain cost savings, primarily salary and benefit
expenses of certain selling shareholders.
(e) Reflects the incremental depreciation and amortization expense
attributable to the Pearl Gas assets conveyed.
(f) Reflects the adjustment to interest expense resulting from $21.0 million
in bank borrowings at 7.27%, and the elimination of $48 thousand of interest
income generated on cash balances during the twelve months ended September 30,
1997.
(g) Reflects the additional 147,727 Common Units issued to Star Gas.
THE OFFERING
(h) Reflects the net proceeds to the Partnership of approximately $15.8
million from the issuance and sale of 809,000 Common Units at an offering
price of $21.25 per Common Unit, net of Underwriters' discount ($0.9 million)
and offering expenses (estimated to be $0.5 million). Further reflects a 2%
capital contribution of $0.3 million by the General Partner.
(i) Reflects the use of $10.0 million from the proceeds of this Offering to
repay a portion of the Acquisition Facility.
(j) Reflects the adjustment to interest expense resulting from the use of
$10.0 million in proceeds from this Offering to repay the Acquisition
Facility.
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners of Star Gas Partners, L.P.:
We have audited the accompanying consolidated balance sheets of Star Gas
Partners, L.P. and Subsidiary as of September 30, 1996 and 1997 and the
related consolidated statements of operations, predecessor's equity and cash
flows for the year ended September 30, 1995 and for the period October 1, 1995
through December 20, 1995 of its Predecessor and the consolidated statements
of operations, partner's capital and cash flows for the period December 20,
1995 through September 30, 1996 and for the year ended September 30, 1997 of
Star Gas Partners, L.P. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above,
present fairly, in all material respects, the financial position of Star Gas
Partners, L.P. and Subsidiary and its Predecessor as of September 30, 1996 and
1997 and the results of their operations and their cash flows for each of the
years in the three-year period ended September 30, 1997, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Stamford, Connecticut
November 7, 1997
F-5
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 1,106 $ 889
Receivables, net of allowance of $291 and $273,
respectively.................................... 7,226 5,720
Inventories...................................... 8,494 6,597
Prepaid expenses and other current assets........ 1,016 959
-------- --------
Total current assets........................... 17,842 14,165
-------- --------
Property and equipment, net........................ 97,733 95,282
Intangibles and other assets, net.................. 41,338 38,022
-------- --------
Total assets................................... $156,913 $147,469
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Bank credit facility borrowings.................. $ 2,350 $ --
Accounts payable................................. 1,991 3,178
Accrued expenses................................. 2,757 3,004
Accrued interest................................. 340 321
Customer credit balances......................... 2,858 4,343
-------- --------
Total current liabilities...................... 10,296 10,846
-------- --------
Long-term debt..................................... 85,000 85,000
Other long-term liabilities........................ 219 45
Partners' Capital:
Common unitholders............................... 52,821 47,573
Subordinated unitholder.......................... 8,410 4,034
General partner.................................. 167 (29)
-------- --------
Total Partners' Capital........................ 61,398 51,578
-------- --------
Total liabilities and partners' capital........ $156,913 $147,469
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 1, OCTOBER 1,
YEAR 1995 DECEMBER 20, 1995
ENDED THROUGH 1995 THROUGH
SEPTEMBER 30, DECEMBER 20, THROUGH SEPTEMBER 30, YEAR ENDED
1995 1995 SEPTEMBER 30, 1996 SEPTEMBER 30,
(PREDECESSOR) (PREDECESSOR) 1996 (COMBINED) 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sales................... $104,550 $28,159 $91,475 $119,634 $135,159
Cost of sales........... 49,660 12,808 45,749 58,557 72,211
-------- ------- ------- -------- --------
Gross profit........... 54,890 15,351 45,726 61,077 62,948
Delivery and branch..... 35,222 7,729 27,021 34,750 36,427
Depreciation and
amortization........... 10,073 2,177 7,631 9,808 10,405
General and
administrative......... 6,127 1,349 5,108 6,457 6,818
Net (loss) on sales of
assets................. (913) (113) (147) (260) (295)
-------- ------- ------- -------- --------
Operating income....... 2,555 3,983 5,819 9,802 9,003
Interest expense, net... 8,549 1,922 5,202 7,124 6,966
-------- ------- ------- -------- --------
Income (loss) before
income taxes.......... (5,994) 2,061 617 2,678 2,037
Income tax expense...... 175 60 25 85 25
-------- ------- ------- -------- --------
Net income (loss)...... $ (6,169) $ 2,001 $ 592 $ 2,593 $ 2,012
======== ======= ======= ======== ========
General Partner's
interest in net
income................. $ 12 $ 40
------- --------
Limited Partners'
interest in net
income................. $ 580 $ 1,972
======= ========
Net Income per Limited
Partner unit........... $ 0.11 $ 0.37
======= ========
Weighted average number
of Limited Partner
units outstanding...... 5,271 5,271
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL AND PREDECESSOR EQUITY
(IN THOUSANDS, EXCEPT PER UNIT DATA)
PREDECESSOR'S EQUITY
YEAR ENDED SEPTEMBER 30, 1995 AND THE PERIOD OCTOBER 1, 1995 THROUGH DECEMBER
20, 1995
<TABLE>
<CAPTION>
8% TOTAL
CUMULATIVE 12.5% CAPITAL IN PREDECESSOR'S
PREFERRED PREFERRED EXCESS OF EQUITY
STOCK STOCK PAR VALUE DEFICIT (DEFICIENCY)
---------- --------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of September
30, 1994............... $ 500 $ -- $108,336 $(64,508) $ 44,328
Conversion of preferred
stock................. (266) 319 (53) -- --
Redemption of preferred
stock................. (49) -- (5,042) -- (5,091)
Stock dividends
declared.............. 4 -- 368 (732) (360)
Cash dividends
preferred stock....... -- -- -- (5,287) (5,287)
Purchase accounting
adjustment............ -- -- (51,906) 68,790 16,884
Net loss............... -- -- -- (6,169) (6,169)
----- ---- -------- -------- --------
Balance as of September
30, 1995............... 189 319 51,703 (7,906) 44,305
Dividends.............. -- -- -- (21,309) (21,309)
Additional capital
contribution.......... -- -- 4,184 -- 4,184
Net income............. -- -- -- 2,001 2,001
----- ---- -------- -------- --------
Balance as of December
20, 1995............... $ 189 $319 $ 55,887 $(27,214) $ 29,181
===== ==== ======== ======== ========
</TABLE>
PARTNERS' CAPITAL
FOR THE PERIOD ENDED DECEMBER 20, 1995 THROUGH SEPTEMBER 30, 1996 AND THE YEAR
ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NUMBER OF UNITS TOTAL
------------------- GENERAL PARTNERS'
COMMON SUBORDINATED COMMON SUBORDINATED PARTNER CAPITAL
------ ------------ ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December
20, 1995............... -- -- $ -- $ -- $ -- $ --
Contribution of assets,
net................... -- 2,396 -- 10,956 225 11,181
Issuance of Common
Units, net............ 2,875 -- 55,875 -- 56 55,931
Net Income............. -- -- 317 263 12 592
Distributions ($1.17
per unit)............. -- -- (3,371) (2,809) (126) (6,306)
----- ----- ------- ------- ----- --------
Balance as of September
30, 1996............... 2,875 2,396 52,821 8,410 167 61,398
----- ----- ------- ------- ----- --------
Net Income............. -- -- 1,077 895 40 2,012
Distributions ($2.20
per unit)............. -- -- (6,325) (5,271) (236) (11,832)
----- ----- ------- ------- ----- --------
Balance as of September
30, 1997............... 2,875 2,396 $47,573 $ 4,034 $ (29) $ 51,578
===== ===== ======= ======= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 1, 1995 OCTOBER 1, 1995
YEAR ENDED THROUGH DECEMBER 20, THROUGH
SEPTEMBER 30, DECEMBER 20, 1995 THROUGH SEPTEMBER 30, YEAR ENDED
1995 1995 SEPTEMBER 30, 1996 SEPTEMBER 30,
(PREDECESSOR) (PREDECESSOR) 1996 (COMBINED) 1997
------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
activities:
Net income (loss)........ $ (6,169) $ 2,001 $ 592 $ 2,593 $ 2,012
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Depreciation and
amortization............ 10,073 2,177 7,631 9,808 10,405
Provision for losses on
accounts receivable..... 809 101 321 422 312
Net (gain) loss on sales
of assets............... 913 113 147 260 295
Changes in operating
assets and liabilities:
Decrease (increase) in
receivables............. 1,390 (2,779) 1,766 (1,013) 1,193
Decrease (increase) in
inventories............. (1,196) 1,430 (3,770) (2,340) 1,897
Decrease (increase) in
prepaid and
other assets............ 188 (455) 754 299 124
Increase (decrease) in
other
current liabilities..... (5,504) (1,703) 1,757 54 2,900
Decrease in other long-
term liabilities........ (87) (12) (89) (101) (174)
-------- -------- -------- -------- --------
Net cash provided by
operating activities.. 417 873 9,109 9,982 18,964
-------- -------- -------- -------- --------
Cash Flows from Investing
activities:
Capital expenditures..... (7,988) (1,617) (3,715) (5,332) (5,279)
Business acquisitions.... (4,557) -- (2,440) (2,440) --
Proceeds from sales of
fixed assets............ 707 566 252 818 374
Proceeds from sale of
businesses.............. 13,250 -- -- -- --
-------- -------- -------- -------- --------
Net cash provided by
(used in) investing
activities............ 1,412 (1,051) (5,903) (6,954) (4,905)
-------- -------- -------- -------- --------
Cash Flows from Financing
activities:
Credit facility
borrowings.............. 6,700 -- 5,850 5,850 5,000
Credit facility
repayments.............. (10,700) -- (3,500) (3,500) (7,350)
Acquisition facility
borrowings.............. 700 -- -- -- 3,350
Acquisition facility
repayments.............. (700) -- -- -- (3,350)
Borrowings (repayments)
of debt................. 6,576 (35,783) (53,780) (89,563) --
Repayments of preferred
stock................... (5,091) (8,625) -- (8,625) --
Cash dividends paid...... (412) (21,309) -- (21,309) --
Distributions............ -- -- (6,306) (6,306) (11,832)
Loan to Petro............ -- (12,000) -- (12,000) --
Proceeds from issuance of
First Mortgage Notes.... -- 85,000 -- 85,000 --
Proceeds from issuance of
Common Units, net....... -- -- 55,931 55,931 --
Debt placement and credit
agreement expenses...... -- (1,313) (814) (2,127) (94)
Cash retained by general
partner................. -- (6,000) -- (6,000) --
-------- -------- -------- -------- --------
Net cash used in
financing activities.. (2,927) (30) (2,619) (2,649) (14,276)
-------- -------- -------- -------- --------
Net increase (decrease)
in cash............... (1,098) (208) 587 379 (217)
Cash at beginning of
period.................. 1,825 727 519 727 1,106
-------- -------- -------- -------- --------
Cash at end of period.... $ 727 $ 519 $ 1,106 $ 1,106 $ 889
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER UNIT DATA)
1) PARTNERSHIP ORGANIZATION AND FORMATION
Star Gas Partners, L.P. ("Star Gas Partners" or the "Partnership") was
formed on October 16, 1995, as a Delaware limited partnership. Star Gas
Partners and its subsidiary, Star Gas Propane, L.P., a Delaware limited
partnership, (the "Operating Partnership" or the "OLP") were formed to
acquire, own and operate substantially all of the propane operations and
assets and liabilities of Star Gas Corporation ("Star Gas"), a Delaware
corporation (and the general partner of Star Gas Partners and the Operating
Partnership) and the propane operations and assets and liabilities of Star
Gas' parent corporation, Petroleum Heat and Power Co., Inc., a Minnesota
corporation ("Petro") (collectively hereinafter referred to as the "Star Gas
Group" or the "Predecessor Company"). The Operating Partnership is, and the
Star Gas Group was, engaged in the marketing and distribution of propane gas
and related appliances to retail and wholesale customers in the United States
located principally in the Midwest and Northeast. On December 20, 1995, (i)
Petro conveyed all of its propane assets and related liabilities to Star Gas
and (ii) Star Gas and its subsidiaries conveyed substantially all of their
assets (other than $83.7 million in cash from the proceeds of the First
Mortgage Notes and certain non-operating assets) to the Operating Partnership
(the "Star Gas Conveyance") in exchange for general and limited partner
interests in the Operating Partnership and the assumption by the Operating
Partnership of substantially all of the liabilities of Star Gas and its
subsidiaries (excluding certain income tax liabilities and certain other long-
term obligations of Star Gas that were assumed by Petro), including the First
Mortgage Notes and approximately $53.8 million in outstanding Star Gas debt
due to Petro. The net book value of the assets contributed by Star Gas and its
subsidiaries to the Operating Partnership exceeded the liabilities assumed by
$11.2 million. Immediately after the Star Gas Conveyance, Star Gas and its
subsidiaries conveyed their limited partner interests in the Operating
Partnership to Star Gas Partners in exchange for an aggregate of 2.4 million
Subordinated Units of limited partner interests in Star Gas Partners.
Of the $83.7 million in cash retained by the General Partner, $35.8 million
was paid to Petro in satisfaction of additional indebtedness, $8.6 million was
used to redeem preferred stock of the General Partner held by Petro, $12.0
million was loaned to Petro, and $6.0 million was retained to be available to
fund the General Partner's additional capital contribution obligation. The
remaining $21.3 million was paid to Petro as dividends.
F-10
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
During fiscal 1996, Star Gas Partners completed its initial public offering
of 2.9 million Common Units, including an over allotment of 0.3 million Common
Units, representing Limited Partner interests, at a price of $22.00 a unit.
The net proceeds received of $55.9 million, after deducting underwriting
discounts, commissions and expenses were contributed to the Operating
Partnership and used to repay $50.3 million of debt due to Petro, which was
assumed by the Operating Partnership in the Star Gas Conveyance and the
Partnership used the balance of $5.6 million for general operating purposes.
In order that the Partnership would commence operations with $6.2 million of
working capital on December 20, 1995, the Conveyance Agreement provided that
the amount of debt due to Petro at closing would be adjusted upwards or
downwards to the extent that the Star Gas Partners' net working capital
exceeded or was less than $6.2 million. At closing, net working capital was
$9.7 million and $3.5 million was repaid to Petro on January 18, 1996.
The General Partner holds a 1.0% general partner interest in Star Gas
Partners and a 1.0101% general partner interest in the Operating Partnership.
Star Gas Partners and the Operating Partnership have no employees, except for
certain employees of its corporate subsidiary Stellar Propane Service
Corporation. The General Partner conducts, directs and manages all activities
of Star Gas Partners and the Operating Partnership and is reimbursed on a
monthly basis for all direct and indirect expenses it incurs on their behalf
including the cost of employee wages.
The following presents the Condensed Consolidated Balance Sheet as of
December 31, 1996 and September 30, 1997 (unaudited) of the General Partner,
Star Gas Corporation.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash................................ $ 4,408 $ 3
Investments......................... 1,398 99
Other receivables................... 6,100 --
Interest receivable................. -- 330
------- -------
Total current assets.............. 11,906 432
Investment in Star Gas Partners,
L.P.................................. 9,942 4,005
Note receivable from Petro............ 12,000 12,000
------- -------
Total Assets...................... $33,848 $16,437
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accrued expenses.................... $ 26 $ 26
------- -------
Total Current Liabilities......... 26 26
Shareholder's Equity
Common Stock-Class A................ -- --
Preferred Stock..................... 508 508
Additional Paid in Capital.......... 55,687 55,887
Retained Earnings................... (22,373) (39,984)
------- -------
Total Shareholder's Equity........ 33,822 16,411
------- -------
Total Liabilities & Shareholder's
Equity........................... $33,848 $16,437
======= =======
</TABLE>
F-11
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
The Operating Partnership is, and the Star Gas Group was, primarily engaged
in the retail distribution of propane and related supplies and equipment to
residential, commercial, industrial, agricultural and motor fuel customers,
operating from 49 branches in the Midwest and 18 branches in the Northeast.
Propane is used primarily for space heating, water heating and cooking by the
Partnership's residential and commercial customers and as a result, weather
conditions have a significant impact on the demand for propane for both
heating and agricultural purposes. Actual weather conditions can vary
substantially from year to year, and accordingly can significantly affect the
Partnership's financial performance.
2) ACQUISITION BY PETRO
In December 1993, Petro acquired an approximate 29.5% interest in Star Gas
for $16.0 million. Petro exercised its right in December 1994 to purchase the
remaining outstanding common equity of Star Gas by paying $3.8 million in cash
and issuing approximately 2.5 million shares of its common stock.
The acquisition was accounted for as a purchase, accordingly, the purchase
price was allocated to the underlying assets and liabilities based upon their
estimated fair value at the date of acquisition. The fair value of assets
acquired was $141.3 million (including $3.3 million in cash) and liabilities
and preferred stock was $109.5 million. The excess of the purchase price over
the fair value of assets acquired and liabilities assumed was $9.0 million and
is being amortized over a period of twenty-five years.
3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements for the year ended September 30, 1995
and the period October 1, 1995 through December 20, 1995 include the propane
operations, assets and liabilities of the Star Gas Group. The Consolidated
Financial Statements for the period December 20, 1995 through September 30,
1996 and for the year ended September 30, 1997 include the accounts of Star
Gas Partners, L.P., the Operating Partnership and its corporate subsidiary,
Stellar Propane Service Corp., collectively referred to herein as the
"Partnership". All material intercompany items and transactions have been
eliminated in consolidation and certain reclassifications have been made to
the 1995 and 1996 financial statements to conform to the 1997 presentation.
Net Income per Limited Partner Unit
Net income per Limited Partner Unit is computed by dividing net income,
after deducting the General Partner's 2.0% interest, by the weighted average
number of Common Units and Subordinated Units outstanding.
Revenue Recognition
Sales of propane and propane appliances are recognized at the time of
delivery of the product to the customer or at the time of sale or
installation. Revenue from service repairs and maintenance is recognized upon
completion of the service provided.
F-12
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
Inventories
Inventories are stated at the lower of cost or market and are computed on a
first-in, first-out basis. At the dates indicated the components of inventory
were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1996 1997
------ ------
<S> <C> <C>
Propane gas................................................... $6,625 $4,805
Appliances and equipment...................................... 1,869 1,792
------ ------
$8,494 $6,597
====== ======
</TABLE>
Substantially all of the Partnership's propane supply for the Northeast
retail operations are purchased under supply contracts. Certain of the supply
contracts provide for minimum and maximum amounts of propane to be purchased
thereunder, and provide for pricing in accordance with posted prices at the
time of delivery or include a pricing formula that typically is based on
current market prices. One supply agreement, representing approximately 7,200
gallons, extends through March 31, 1999. During 1995, 1996 and 1997, spot
purchases from Mont Belvieu sources accounted for approximately 8%, 26% and
36%, respectively, of the Partnership's total volume of propane purchases. In
addition, the three single largest suppliers accounted for an aggregate of
approximately 56%, 32% and 31%, respectively, of total propane purchases in
1995, 1996 and 1997.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the depreciable assets using the straight-line
method.
Intangible Assets
The excess of cost over the fair value of net assets resulting from the
acquisition of the Predecessor Company by Petro in December 1994 is being
amortized using the straight-line method over 25 years. For the period October
1993 through December 1994, goodwill was amortized over 10 years. Other
intangible assets, including covenants not to compete and customer lists are
recorded at cost and are being amortized over their estimated useful lives,
ranging from 1 to 15 years. Also included as intangible assets are the costs
associated with the issuance of the Company's First Mortgage Notes which are
being amortized under the interest method over the life of the notes.
It is the Partnership's policy to review intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
of such assets may not be recoverable. The Partnership determines that the
carrying values of intangible assets are recoverable over their remaining
estimated lives through undiscounted future cash flow analysis. If such a
review should indicate that the carrying amount of the intangible assets is
not recoverable, it is the Partnership's policy to reduce the carrying amount
of such assets to fair value.
Customer Credit Balances
Customer credit balances represent pre-payments received from customers.
These payments relate primarily to a budget payment plan whereby customers pay
their estimated annual propane gas charges on a fixed monthly basis and
payments made have exceeded actual deliveries billed.
Use of Estimates
In accordance with generally accepted accounting principles, management of
the Partnership has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of
F-13
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
contingent assets and liabilities to prepare these financial statements.
Actual results could differ from those estimates.
Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents.
Income Taxes
The Partnership is a master limited partnership. As a result, for Federal
income tax purposes, earnings or losses are allocated directly to the
individual partners. Except for the Partnership's corporate subsidiary which
generates non-qualifying Master Limited Partnership income, no recognition has
been given to Federal income taxes in the accompanying financial statements of
the Partnership. 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 due to taxable income allocation requirements of the
Partnership agreement.
From December 1994 and prior to the Partnership's formation, the Predecessor
filed a consolidated Federal income tax return with Petro and its affiliates.
Income taxes were computed as though each company filed its own income tax
return. Deferred income taxes were recognized for the tax consequences of
temporary differences between the financial statement carrying amounts and the
tax basis of existing assets and liabilities. Prior to the December 1994
acquisition by Petro, Star Gas filed consolidated tax returns with its
subsidiaries.
4) QUARTERLY DISTRIBUTION OF AVAILABLE CASH
The Partnership distributes to its partners, on a quarterly basis, all of
its "Available Cash." Available Cash generally means, with respect to any
fiscal quarter of the Partnership, 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.
Distribution by the Partnership in an amount equal to 100% of its Available
Cash will generally be made 98% to the Common and Subordinated Unitholders and
2% to the General Partner, subject to the payment of incentive distributions
in the event Available Cash exceeds the Minimum Quarterly Distribution ($0.55)
on all Units. To the extent there is sufficient Available Cash, the holders of
Common Units have the right to receive the Minimum Quarterly Distribution,
plus any arrearage, prior to the distribution of Available Cash to holders of
Subordinated Units. Common Units will not accrue arrearage for any quarter
after the end of the Subordination Period (as defined below) and Subordinated
Units will not accrue any arrearage with respect to distributions for any
quarter.
The first distribution commenced with the quarter ending March 31, 1996 and
was paid on May 15, 1996 to holders of record as of May 1, 1996. The initial
distribution was $0.6225 per Unit and represented a pro rata distribution of
$0.0725 per Unit for the period December 20, 1995 to December 31, 1995 and a
quarterly distribution of $0.55 per Unit for the three months ended March 31,
1996. During fiscal 1996, distributions of $1.17 per Unit (including the
initial distribution) were declared and paid on all common, subordinated and
general partnership interests. The aggregate amount paid for such
distributions was $6.3 million during fiscal 1996.
During fiscal 1997, distributions of $2.20 per Unit were declared and paid
on all common, subordinated and general partnership interests. The aggregate
paid for such distributions was $11.8 million during fiscal 1997.
F-14
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
5) DISTRIBUTIONS FROM OPERATING SURPLUS DURING SUBORDINATION PERIOD
The Subordination Period will generally extend until the first day of any
quarter beginning on or after January 1, 2001 in respect of which (i)
distributions of Available Cash from Operating Surplus on the Common Units and
the Subordinated Units equals or exceeds the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units
with respect to each of the three non-overlapping four-quarter periods
immediately preceding such date, (ii) the Adjusted Operating Surplus generated
during each of the three immediately preceding non-overlapping four-quarter
periods equals or exceeds the sum of the Minimum Quarterly Distribution on all
of the outstanding Common Units and Subordinated Units during such periods and
(iii) there are no arrearages in payment of the Minimum Quarterly Distribution
on the Common Units.
Prior to the end of the Subordination Period, a portion of the Subordinated
Units will convert into Common Units on the first day after the record date
established for any quarter ending on or after March 31, 1999 (with respect to
599,020 of the Subordinated Units) and March 31, 2000 (with respect to an
additional 599,020 of the Subordinated Units), on a cumulative basis, in
respect of which (i) distributions of Available Cash from Operating Surplus on
the Common Units and the Subordinated Units equals or exceeds the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units with respect to each of the three non-overlapping four-
quarter periods immediately preceding such date, (ii) the Adjusted Operating
Surplus generated during each of the three immediately preceding non-
overlapping four-quarter periods equals or exceeds the sum of the Minimum
Quarterly Distribution on all of the outstanding Common Units and Subordinated
Units during such periods and (iii) there are no arrearages in payment of the
Minimum Quarterly Distribution on the Common Units.
6) ACQUISITIONS--PRO FORMA
During fiscal 1995 and 1996, the Partnership acquired several propane
dealers with an aggregate cost of $4.6 million and $2.4 million, in each
respective fiscal year. There were no acquisitions of propane dealers made
during fiscal 1997.
The acquisitions were accounted for under the purchase method of accounting.
Purchase prices have been allocated to the acquired assets and liabilities
based on their respective fair market values on the dates of acquisition. The
purchase prices in excess of the fair values of net assets acquired were
classified as intangibles in the Consolidated Balance Sheets. Sales and net
income have been included in the Consolidated Statements of Operations from
the respective dates of acquisition.
Unaudited Pro forma data giving effect to the purchased businesses as if
they had been acquired on October 1 of the year preceding the year of
purchase.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Sales............................................. $ 107,714 $ 120,645
============ ============
Net income (loss)................................. $ (6,260) $ 2,817
============ ============
</TABLE>
F-15
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
7) SUBSEQUENT EVENTS--ACQUISITION OF PEARL GAS CO.
On October 22, 1997, pursuant to a purchase agreement ("Stock Purchase
Agreement") dated as of October 20, 1997, Star Gas Corporation purchased 240
shares of Common Stock ($100 par value) of Pearl Gas Co. ("Pearl"), an Ohio
Corporation, representing all of the issued and outstanding capital stock of
Pearl. Pearl markets and distributes propane in Ohio and Michigan through a
storage and distribution system consisting of five offices, fifteen bulk
storage plants, fifty employees and over forty-five vehicles. For the twelve
months ended September 30, 1997, Pearl sold approximately 14.3 million gallons
of propane, primarily to residential customers. Pearl currently serves over
12,000 active customers.
The purchase price for said stock was $22.6 million and was paid in cash.
The purchase price included estimated working capital of $1.9 million. This
amount will be adjusted on or before December 5, 1997 upward or downward based
on actual working capital as of October 21, 1997. The amount of consideration
for the Pearl Common Stock was determined by arms length bargaining between
Star Gas and the sellers. Funding for the stock purchase and related
transaction expenses of $0.4 million was provided by a $23.0 million bank
acquisition facility. Subsequent to the acquisition of the common stock of
Pearl, Pearl was merged into Star Gas in a tax-free liquidation.
On October 22, 1997, a Conveyance and Contribution Agreement was entered
into by, and among, the Partnership, the OLP and Star Gas Corporation. Star
Gas Corporation contributed to the OLP all of the Pearl assets it obtained in
the stock purchase of Pearl Gas and the subsequent merger of Pearl into Star
Gas Corporation. In exchange, Star Gas received a 2.7% limited partnership
interest in the OLP and a 0.00028% general partnership interest in the OLP. In
addition, the OLP assumed all of the liabilities associated with the Pearl
stock purchase prior and subsequent to the merger, including the $23.0 million
of bank debt. The aggregate value of the interests transferred to Star Gas
from the OLP is $3.5 million.
The issuance of the additional partnership interests to Star Gas is intended
to compensate Star Gas for additional significant income tax liabilities which
would be reflected in the consolidated federal income tax return of Star Gas'
parent corporation, Petro. The issuance of such partnership interests was
approved by the Audit Committee of Star Gas and the Executive Committee of
Petro.
Star Gas then exchanged the above described interest in the OLP for a
0.00027% general partnership interest in the Partnership and 148 common units
in the Partnership, at a per unit price based upon the average closing price
of the Partnership's common units ten days prior to the execution of the Stock
Purchase Agreement. The OLP then repaid the $23.0 million acquisition facility
with $2.0 million of available cash and $21.0 million borrowed under the OLP's
own acquisition facility.
F-16
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
8) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment and their estimated useful
lives were as follows at the indicated dates:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1996 1997 USEFUL LIVES
-------- -------- ------------
<S> <C> <C> <C>
Land........................................ $ 3,916 $ 4,060 --
Buildings................................... 8,945 8,871 30 years
Fleet....................................... 12,679 14,464 5-30 years
Tanks and equipment......................... 82,296 84,766 5-30 years
Furniture and fixtures...................... 2,440 2,504 10 years
-------- --------
Total..................................... 110,276 114,665
Less: accumulated depreciation.............. (12,543) (19,383)
-------- --------
Total..................................... $ 97,733 $ 95,282
======== ========
</TABLE>
9) INTANGIBLES AND OTHER ASSETS
The components of intangibles and other assets were as follows at the
indicated dates:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1996 1997
------- -------
<S> <C> <C>
Goodwill................................................... $14,186 $14,186
Covenants not to compete................................... 2,040 2,040
Customer lists............................................. 28,797 28,797
Deferred charges and other................................. 2,795 2,822
------- -------
Total.................................................... 47,818 47,845
Less: accumulated amortization............................. (6,480) (9,823)
------- -------
Total.................................................... $41,338 $38,022
======= =======
</TABLE>
10) LONG-TERM DEBT AND WORKING CAPITAL BORROWINGS
In December 1995, the General Partner issued $85.0 million of first mortgage
notes (the "First Mortgage Notes") with an annual interest rate of 8.04%.
These notes were assumed as part of the Star Gas Conveyance by the Operating
Partnership. The Operating Partnership's obligations under the First Mortgage
Note Agreement are secured, on an equal basis with the Operating Partnership's
obligations under the Bank Credit Facilities, by a mortgage on substantially
all of the real property and liens on substantially all of the operating
facilities, equipment and other assets of the Operating Partnership. The First
Mortgage Notes will mature September 15, 2009, and will require semiannual
prepayments, without premium on the principal thereof, beginning on March 15,
2001. Interest is payable semiannually on March 15 and September 15. For the
year ended September 30, 1997, the Partnership paid interest in the amount of
$6.8 million on the First Mortgage Notes.
The First Mortgage Note Agreement contains various restrictive and
affirmative covenants applicable to the Operating Partnership, including
restrictions on the incurrence of additional indebtedness and restrictions on
certain investments, guarantees, loans, sales of assets and other
transactions.
As of September 30, 1997, the Partnership was in compliance with all
borrowing agreement covenants, as amended.
F-17
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
The Bank Credit Facilities consist of a $25.0 million Acquisition Facility
and a $12.0 million Working Capital Facility. The agreement governing the Bank
Credit Facilities contains covenants and default provisions generally similar
to those contained in the First Mortgage Note Agreement. As of September 30,
1997, there were no outstanding borrowings under the Acquisition Facility or
the Working Capital Facility. The Bank Credit Facilities bear interest at a
rate based upon, at the Partnership's option, either the London Interbank
Offered Rate plus a margin or a Base Rate (each as defined in the Bank Credit
Facilities). The Partnership is required to pay a fee for unused commitments
which amounted to $0.1 million for fiscal 1996 and $0.2 million for fiscal
1997.
The Working Capital Facility will expire December 31, 1999, but may be
extended annually thereafter with the consent of the banks. Borrowings under
the Acquisition Facility will revolve until September 30, 1998, after which
time any outstanding loans thereunder, will amortize quarterly in equal
principal payments with a final payment due on December 31, 2001. However,
there must be no amount outstanding under the Working Capital Facility for at
least 30 consecutive days during each fiscal year.
As of September 30, 1997, the annual maturities of the First Mortgage Notes
are set forth in the following table:
<TABLE>
<S> <C>
1998................................. $ --
1999................................. --
2000................................. --
2001................................. 1,923
2002................................. 8,703
Thereafter........................... 74,374
-------
$85,000
=======
</TABLE>
In connection with the Pearl acquisition, the Operating Partnership borrowed
$21.0 million under the Acquisition Facility on October 22, 1997.
11) EMPLOYEE BENEFIT PLANS
Star Gas has a 401(k) plan which covers certain eligible union and non-union
employees. Subject to IRS limitations, the 401(k) plan provides for each
employee to contribute from 1.0% to 15.0% of compensation. Star Gas
contributes to non-union participants a matching amount up to a maximum of
3.0% of compensation. Aggregate matching contributions made to the 401(k) plan
during fiscal 1995, 1996 and 1997 were $0.2 million, $0.3 million and $0.4
million, respectively.
Star Gas also makes monthly contributions on behalf of its union employees
to a union sponsored defined benefit plan. The amount charged to expense was
$0.2 million, $0.3 million and $0.4 million in fiscal 1995, 1996 and 1997,
respectively.
12) UNIT OPTION PLAN
On December 20, 1995, the General Partner adopted the 1995 Star Gas
Corporation Unit Option Plan (the "Unit Option Plan"), which currently
authorizes the issuance of options (the "Unit Options") and Unit Appreciation
Rights ("UARS") covering up to 300,000 Subordinated Units to certain officers
and employees of the General Partner. A total of 40,000 options were granted
to key executives in December 1995. The Unit Options have the following
characteristics: 1) an exercise price of $22.00 per unit, which is an estimate
of the fair market value of the Subordinated Units at the time of grant, 2)
vest over a five year period, 3) are exercisable after January 1, 2001,
assuming the subordination period has elapsed, and 4) expire on the tenth
anniversary of the date of grant. Upon conversion of the Subordinated Units
held by the General Partner and its affiliates, the Unit Options granted will
convert to Common Unit Options. No UARS have been granted pursuant to the
plan.
F-18
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
13) LEASE COMMITMENTS
The Partnership has entered into certain operating leases for office space,
trucks and other equipment.
The future minimum rental commitments at September 30, 1997 under leases
having an initial or remaining non-cancelable term of one year or more are as
follows:
<TABLE>
<S> <C>
1998.................................. $ 906
1999.................................. 786
2000.................................. 701
2001.................................. 669
2002.................................. 540
Thereafter............................ 345
------
Total Minimum lease payments.......... $3,947
======
</TABLE>
The Partnership incurred rent expense of $1.2 million, $1.2 million and $1.3
million in 1995, 1996 and 1997, respectively.
14) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes................................. $ 2,950 $ 80 $ 7
========= ======== ========
Interest..................................... $ 4,284 $ 5,088 $ 7,170
========= ======== ========
Non-cash adjustment:
Purchase accounting adjustment:
Increase in intangibles.................... $ 23,028
Decrease in property & equipment........... (680)
Increase in other accrued expenses......... (4,000)
Increase in long-term debt................. (1,700)
Decrease in deferred income taxes.......... 236
---------
$ 16,884
=========
Dividends declared......................... $ 4,875
=========
</TABLE>
15) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Partnership is threatened with, or
is named in, various lawsuits. The Partnership is not a party to any
litigation which individually or in the aggregate could reasonably be expected
to have a material adverse effect on the Partnership.
F-19
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
16) RELATED PARTY TRANSACTIONS
The Partnership has no employees (except for certain employees of its
corporate subsidiary, Stellar Propane Service Corporation) and is managed and
controlled 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 the Partnership, and all
other necessary or appropriate expenses allocable to the Partnership or
otherwise reasonably incurred by the General Partner in connection with
operating the Partnership's business. For the fiscal year ended September 30,
1996 and September 30, 1997, the Partnership reimbursed the General Partner
and Petro $14.4 million and $17.1 million, respectively, representing salary,
payroll tax and other compensation paid to the employees of the General
Partner, including $0.3 million and $0.2 million paid to Petro for certain
corporate functions such as finance and compliance. In addition, the
Partnership reimbursed Petro for $1.9 million and $0.9 million for the fiscal
year ended September 30, 1996 and September 30, 1997, respectively, relating
to the Partnership's share of the costs incurred by Petro in conducting the
operations of a certain shared branch location which includes managerial
services.
17) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, Accounts Receivable, Notes Receivable and Other Current Assets, Working
Capital Borrowing, Accounts Payable and Accrued Expenses
The carrying amount approximates fair value because of the short maturity of
these instruments.
Long-Term Debt
The fair values of each of the Partnership's long-term financing
instruments, including current maturities, are based on the amount of future
cash flows associated with each instrument, discounted using the Company's
current borrowing rate for similar instruments of comparable maturity.
The estimated fair value of the Partnership's long-term debt is summarized
as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-----------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------- -----------
<S> <C> <C>
Long-term debt....................................... $ 85,000 $ 86,726
========== ==========
</TABLE>
F-20
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
18) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The seasonal nature of the Partnership's business results in the sale by the
Partnership of approximately 35% of its volume in the first fiscal quarter and
40% of its volume in the second fiscal quarter of each year. The Partnership
generally realizes net income in both of these quarters and net losses during
the quarters ending June and September.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996 1996 TOTAL
------------ --------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
Sales................... $34,634(a) $47,080 $18,416 $19,504 $119,634
Gross profit............ 18,729(a) 22,599 9,933 9,816 61,077
Income (loss) before
taxes.................. 3,546(a) 7,244 (4,029) (4,083) 2,678
Net income (loss)....... 3,486(a) 7,230 (4,046) (4,077) 2,593
Limited Partner interest
in net income (loss)... 1,455(b) 7,085 (3,965) (3,995) 580
Net income (loss) per
Limited Partner Unit... $ 0.28(b) $ 1.34 $ (0.75) $ (0.76) $ 0.11
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997 TOTAL
------------ --------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
Sales................... $50,876 $46,442 $20,078 $17,763 $135,159
Gross profit............ 21,849 21,523 10,446 9,130 62,948
Income (loss) before
taxes.................. 5,898 5,332 (4,138) (5,055) 2,037
Net income (loss)....... 5,892 5,325 (4,143) (5,062) 2,012
Limited Partner interest
in net income (loss)... 5,774 5,218 (4,060) (4,960) 1,972
Net income (loss) per
Limited Partner Unit... $ 1.10 $ 0.99 $ (0.77) $ (0.94) $ 0.37
</TABLE>
- --------
(a) Reflects the results of operations of the Predecessor Company for the
period October 1, 1995 through December 20, 1995 and of Star Gas Partners,
L.P. from December 20, 1995 through December 31, 1995.
(b) Reflects limited partners interest from December 20, 1995 through December
31, 1995.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pearl Gas Co.:
We have audited the accompanying balance sheets of Pearl Gas Co. as of
December 31, 1995 and 1996, and the related statements of income,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Pearl Gas Co. as of
December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick llp
Detroit, Michigan
October 22, 1997
F-22
<PAGE>
PEARL GAS CO.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 1,040,748 $2,183,738
Accounts receivable (less allowance for doubtful
accounts of $64,706 for 1995 and 1996,
respectively)...................................... 1,137,328 1,977,564
Other non-trade receivables......................... 44,856 25,048
Inventories (Note 3)................................ 301,597 400,647
Prepaid expenses.................................... 431,536 480,264
----------- ----------
Total current assets............................ 2,956,065 5,067,261
----------- ----------
Property and equipment, net (Note 4).................. 2,996,345 2,707,537
Investments--stock.................................... 2,951 2,951
----------- ----------
$ 5,955,361 $7,777,749
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Deferred revenue.................................... $ 278,182 $ 272,171
Contract payable (Note 5)........................... 375,501 437,000
Current portion of long-term debt (Note 6).......... 200,000 --
Accounts payable.................................... 594,435 821,766
Customer deposits................................... 8,110 7,510
Accrued liabilities:
Employee benefits................................. 108,499 108,367
Interest.......................................... 23,351 3,369
Payroll taxes..................................... 46,055 38,133
Federal income tax................................ -- 16,080
State and local taxes............................. 117,826 144,668
----------- ----------
295,731 310,617
----------- ----------
Total current liabilities....................... 1,751,959 1,849,064
----------- ----------
Long-term debt excluding current portion (Note 6)..... 1,000,002 --
Deferred federal income tax (Note 7).................. 461,000 444,920
Shareholders' equity
Common stock, $100 par value, 750 shares authorized,
240 shares outstanding............................. 24,000 24,000
Retained earnings................................... 4,708,065 6,132,042
Notes receivable--shareholders (Note 2)............. (1,989,665) (672,277)
----------- ----------
Total shareholders' equity...................... 2,742,400 5,483,765
Commitments (Note 9)..................................
----------- ----------
$ 5,955,361 $7,777,749
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
PEARL GAS CO.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Sales................................................. $11,611,082 $14,910,109
Cost of goods sold.................................... 5,683,973 8,353,916
----------- -----------
Gross profit...................................... 5,927,109 6,556,193
Depreciation and amortization......................... 437,743 422,912
Operating expenses.................................... 3,298,270 3,393,819
Gain on disposal of equipment......................... 13,822 45,880
----------- -----------
Operating income.................................. 2,204,918 2,785,342
Other income (expense):
Interest income..................................... 260,423 169,703
Other............................................... 19,843 4,346
Interest expense.................................... (183,436) (35,414)
----------- -----------
96,830 138,635
----------- -----------
Net income........................................ $ 2,301,748 $ 2,923,977
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
PEARL GAS CO.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK NOTES TOTAL
-------------- RETAINED RECEIVABLE SHAREHOLDERS'
SHARES AMOUNT EARNINGS SHAREHOLDERS EQUITY
------ ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 330 $33,000 $ 4,115,499 $(2,802,101) $ 1,346,398
Dividends paid.......... -- -- (600,000) -- (600,000)
Loans made.............. -- -- -- (220,301) (220,301)
Collections on loans.... -- -- -- 1,032,737 1,032,737
Stock redemption........ (90) (9,000) (1,109,182) -- (1,118,182)
Net income.............. -- -- 2,301,748 -- 2,301,748
--- ------- ----------- ----------- -----------
Balance, December 31,
1995................... 240 $24,000 4,708,065 (1,989,665) 2,742,400
Dividends paid.......... -- -- (1,500,000) -- (1,500,000)
Loans made.............. -- -- -- (94,602) (94,602)
Collections on loans.... -- -- -- 1,411,990 1,411,990
Net income.............. -- -- 2,923,977 -- 2,923,977
--- ------- ----------- ----------- -----------
Balance, December 31,
1996................... 240 $24,000 $ 6,132,042 $ (672,277) $ 5,483,765
=== ======= =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
PEARL GAS CO.
STATEMENTS OF CASH FLOWS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income......................................... $ 2,301,748 $ 2,923,977
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 437,743 422,912
Deferred income tax.............................. -- (16,080)
Gain on disposal of property and equipment....... (13,822) (45,880)
Changes in operating assets and liabilities:
Accounts receivable.............................. (660,675) (840,236)
Other non-trade receivables...................... (23,278) 19,808
Inventory........................................ (43,320) (99,050)
Prepaid expenses................................. (11,318) 12,771
Prepaid taxes.................................... 2,310 --
Accounts payable................................. 160,485 227,331
Customer Deposits................................ 150 (600)
Accrued Liabilities.............................. (56,631) 14,886
Deferred Revenue................................. 7,517 (6,011)
----------- -----------
Net cash provided by operating activities...... 2,100,909 2,613,828
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................ (277,541) (134,859)
Proceeds from sale of property and equipment....... 13,822 46,635
Loans made to shareholders......................... (220,301) (94,602)
Collections on notes receivable--shareholder....... 1,032,737 1,411,990
----------- -----------
Net cash provided by investing activities...... 548,717 1,229,164
----------- -----------
Cash flows from financing activities:
Stock redemption................................... (1,118,182) --
Principal payments of long-term debt............... (799,998) (1,200,002)
Dividends paid..................................... (600,000) (1,500,000)
----------- -----------
Net cash used in financing activities.......... (2,518,180) (2,700,002)
----------- -----------
Net increase in cash and cash equivalents............ 131,446 1,142,990
Cash and cash equivalents at beginning of year....... 909,302 1,040,748
----------- -----------
Cash and cash equivalents at end of year............. $ 1,040,748 $ 2,183,738
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid...................................... $ 177,591 $ 55,396
</TABLE>
Non-cash disclosure:
On September 1, 1996, the remaining balance of notes receivable
shareholders of $821,926 were converted into new notes.
See accompanying notes to financial statements.
F-26
<PAGE>
PEARL GAS CO.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(1) DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The primary business of Pearl Gas Co. (the "Company"), is the sale and
distribution of propane gas. The Company's primary customers are businesses
and individuals in the Northwest Ohio, Southeast Michigan and Northeast
Indiana areas.
Accounts Receivable
The Company enters into "budget payment plans" with several, principally
residential customers, which allow for pre-established set monthly payments
regardless of actual usage. This may result with a customer in a pre-payment
situation in low usage months. It is the Company's practice to net the pre-
payments with accounts receivable for financial statement presentation.
Inventories
Inventories are stated at the lower of cost determined by first-in, first-
out method or market value (net realizable value).
Property and Equipment
Property and equipment are carried at cost. Expenditures for additions and
improvements that add materially to productive capacity or extend the life of
an asset are capitalized, and expenditures for maintenance and repairs are
charged to operations. When machinery and equipment items are retired or
otherwise disposed of, the related accounts for cost and depreciation are
relieved.
The Company provides depreciation on property and equipment for reporting
purposes by the straight-line method over their estimated useful lives, which
range from 10 to 25 years for buildings, building components and land
improvements, 5 to 10 years for automotive vehicles, and 10 to 20 years for
office and operating equipment and tanks.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid short-term investments with original maturities of three months
or less to be cash equivalents.
Environmental
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed.
Contract Payable
In order to guarantee the supply of propane, the Company enters into take or
pay supply contracts with certain propane suppliers. At the time the Contract
is entered into, a prepaid asset and corresponding contract payable is
recorded on the balance sheet. The asset and liability are reduced as the
Company takes delivery of the propane.
F-27
<PAGE>
PEARL GAS CO.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
Deferred Revenue
The Company bills customers annually for propane tank rental. The rental
revenue is deferred and recognized ratably over the twelve month period of the
rental agreement.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and disclosures of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(2) NOTES RECEIVABLES--SHAREHOLDERS
Notes receivable from shareholders, which is reflected as a reduction to
shareholders' equity on the accompanying balance sheet, consists of the
following:
<TABLE>
<CAPTION>
1995 1996
---------- --------
<S> <C> <C>
Notes receivable due from shareholder, due January 10,
1996, interest payable monthly at prime plus one
percent................................................ $1,989,665 --
Notes receivable due from shareholder, due August 31,
1999, interest payable quarterly at prime rate (8 1/4%
at December 31, 1996).................................. -- $672,277
---------- --------
Total................................................. $1,989,665 $672,277
========== ========
</TABLE>
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Propane Gas............................................... $229,293 $324,942
Appliances and equipment.................................. 72,304 75,705
-------- --------
$301,597 $400,647
======== ========
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Land.................................................. $ 624,064 $ 624,064
Land improvements..................................... 33,375 33,375
Buildings............................................. 727,900 727,900
Office furniture and equipment........................ 68,408 70,665
Equipment............................................. 3,126,162 3,133,302
Delivery equipment.................................... 1,483,287 1,607,577
Bulk propane plant.................................... 272,525 272,525
---------- ----------
6,335,721 6,469,408
Less accumulated depreciation......................... 3,339,376 3,761,871
---------- ----------
Net property and equipment........................... $2,996,345 $2,707,537
========== ==========
</TABLE>
F-28
<PAGE>
PEARL GAS CO.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(5) CONTRACT PAYABLE
At December 31, 1995 and 1996, the Company had two outstanding purchase
commitments with a supplier under take or pay contracts, for terms of three
months. The outstanding contracts at December 31, 1995 and 1996 were $375,501
and $437,000, respectively, with interest payable monthly at prime plus 1%.
Interest paid for the period ended December 31, 1995 and 1996, respectively,
was $12,319 and $12,497. The December 31, 1995 and 1996 interest rate was
9.50% and 9.25%, respectively.
(6) LONG-TERM DEBT
The Company has a $500,000 line of credit agreement with its bank under a
year-to-year agreement. There were no borrowings under the line of credit
agreement at December 31, 1995 and 1996.
The Company's long-term debt at December 31, 1995 consisted of:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Term notes payable to bank, interest at prime plus 1% (9.25% at
December 31, 1995). From January to June of each year, monthly
payments of $33,333 are required. From July to December of each
year, only interest is due on the unpaid balance. The final
maturity date on this note is June 1, 1999..................... $1,200,002
Less current portion............................................ 200,000
----------
Long-term debt.................................................. $1,000,002
==========
</TABLE>
(7) FEDERAL INCOME TAXES
An election has been filed by the Company to be treated as an S Corporation
effective July 1, 1994. As a result of this election, Pearl Gas Co. changed
its fiscal year end of June 30 to a calendar year end. In lieu of corporation
income taxes, the shareholder of an S Corporation is taxed on a proportionate
share of the Company's taxable income. Therefore, no provision or liability
for federal income taxes has been included in the financial statements for the
years ended December 31, 1995 and 1996. Income that has been taxed to the
shareholders but not distributed (Accumulated Adjustments Account) was
$1,790,652 and $3,262,548 as of December 31, 1995 and 1996, respectively.
The Company records depreciation on property and equipment for tax purposes
using the accelerated cost recovery system and the modified accelerated cost
recovery system. Deferred income taxes have been recorded for the excess of
tax depreciation over book depreciation for the period prior to S-election.
(8) RELATED PARTY TRANSACTIONS
The Company entered into a lease with an officer of the Company for the use
of a fleet garage. The lease is renewable on a year-to-year basis and
currently provides for a payment of $14,400 per year.
(9) LEASES
The Company has several non-cancelable operating leases primarily for land
for bulk plants that expire May 21, 2002. Rental expense for these operating
leases (excluding the fleet garage lease noted in footnote 8) was $6,100 for
each of 1995 and 1996. Future minimum lease payments under non-cancelable
leases as of December 31, 1996 are: 1997, $6,100; 1998, $3,600; 1999, $3,600;
2000, $3,600; 2001, $3,600.
F-29
<PAGE>
PEARL GAS CO.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995 AND 1996
(10) PROFIT SHARING PLAN
The Board of Directors annually determines the contribution to the Company's
profit-sharing plan. All employees who work in excess of 1,000 hours per year
are eligible to participate and receive allocations based on total payroll
excluding bonuses. The amounts contributed in the years ended December 31,
1995 and 1996 were $125,000 and $140,000, respectively.
(11) SUBSEQUENT EVENTS
On October 22, 1997, pursuant to a purchase agreement dated as of October
20, 1997, all of the issued and outstanding capital stock of the Company was
sold by the holders of such stock to Star Gas Corporation ("Star Gas").
The purchase price for said stock was $22,552,000 and was paid in cash.
Subsequent to the acquisition of the common stock of Pearl, Pearl was merged
into Star Gas in a tax-free liquidation.
F-30
<PAGE>
PEARL GAS CO.
BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $2,183,738 $ 880,840
Accounts receivable (less allowance for doubtful
accounts at December 31, 1996 and September 30,
1997 of $64,706)................................. 1,977,564 514,230
Other non-trade receivables....................... 25,048 762
Inventories....................................... 400,647 302,217
Prepaid expenses.................................. 480,264 662,878
---------- ----------
Total current assets.......................... 5,067,261 2,360,927
---------- ----------
Property and equipment, net......................... 2,707,537 2,385,789
Investments--stock.................................. 2,951 --
---------- ----------
$7,777,749 $4,746,716
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Deferred revenue.................................. $ 272,171 $ 196,848
Contract payable.................................. 437,000 633,377
Accounts payable.................................. 821,766 187,580
Customer deposits................................. 7,510 7,435
Accrued liabilities:
Employee benefits............................... 108,367 39,700
Interest........................................ 3,369 --
Payroll taxes................................... 38,133 --
Federal income tax.............................. 16,080 --
State and local taxes........................... 144,668 43,406
---------- ----------
310,617 83,106
---------- ----------
Total current liabilities..................... 1,849,064 1,108,346
---------- ----------
Deferred federal income tax......................... 444,920 444,920
Shareholders' equity
Common stock, $100 par value, 750 shares
authorized, 240 shares outstanding............... 24,000 24,000
Retained earnings................................. 6,132,042 3,776,310
Notes receivable--shareholders.................... (672,277) (606,860)
---------- ----------
Total shareholders' equity.................... 5,483,765 3,193,450
---------- ----------
$7,777,749 $4,746,716
========== ==========
</TABLE>
See accompanying notes to financial statements
F-31
<PAGE>
PEARL GAS CO.
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Sales................................................... $9,486,871 $9,101,130
Cost of goods sold...................................... 4,981,107 4,786,676
---------- ----------
Gross profit........................................ 4,505,764 4,314,454
Depreciation and amortization........................... 270,000 270,000
Operating expenses...................................... 2,364,312 2,406,273
Gain on disposal of equipment........................... 45,930 30,478
---------- ----------
Operating income.................................... 1,917,382 1,668,659
Other income (expense):
Interest income....................................... 189,291 140,953
Other................................................. 2,735 2,837
Interest expense...................................... (45,281) (5,632)
---------- ----------
146,745 138,158
---------- ----------
Net income.......................................... $2,064,127 $1,806,817
========== ==========
</TABLE>
See accompany notes to financial statements.
F-32
<PAGE>
PEARL GAS CO.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income......................................... $ 2,064,127 1,806,817
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 270,000 270,000
Gain on disposal of property and equipment....... (45,930) (30,478)
Changes in operating assets and liabilities:
Accounts receivable............................ 495,046 1,463,334
Investments--stock............................. -- 2,951
Other non-trade receivables.................... 16,947 24,286
Inventory...................................... (27,517) 98,430
Prepaid expenses............................... 11,144 13,763
Accounts payable............................... (320,439) (634,186)
Customer deposits.............................. (750) (75)
Accrued liabilities............................ (187,871) (227,511)
Deferred Revenue............................... (81,887) (75,323)
----------- -----------
Net cash provided by operating activities.... 2,192,870 2,712,008
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................ (98,146) (17,521)
Proceeds from sale of property and equipment....... 45,929 99,747
Loans made to shareholders......................... (84,181) (123,483)
Collections on loans to shareholders............... 1,246,346 188,900
----------- -----------
Net cash provided by investing activities.... 1,109,948 147,643
----------- -----------
Cash flows from financing activities:
Principal payments of long-term debt............... (1,200,002) --
Dividends paid..................................... (1,500,000) (4,162,549)
----------- -----------
Net cash used in financing activities........ (2,700,002) (4,162,549)
----------- -----------
Net income (decrease) in cash and cash equivalents... 602,816 (1,302,898)
Cash and cash equivalents at beginning of period..... 1,040,748 2,183,738
----------- -----------
Cash and cash equivalents at end of period........... $ 1,643,564 $ 880,840
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid...................................... $ 68,632 --
Taxes Paid......................................... -- $ 16,080
</TABLE>
Non-cash disclosure:
On September 1, 1996, the remaining balance of the notes receivable
shareholders of $821,926 were converted into new notes.
See accompanying notes to financial statements
F-33
<PAGE>
PEARL GAS CO.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying financial statements have been prepared by management, and
in the opinion of management, contain all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial position of
the Company as of December 31, 1996 and September 30, 1997, and the results of
its operations and cash flows for the nine months ended September 30, 1996 and
1997. The financial statements should be read in conjunction with the
financial statements and notes thereto included elsewhere herein. Results for
interim periods are not necessarily indicative of those to be expected for the
entire year.
(2) INVENTORIES
The major classes of inventory are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Propane gas............................. $324,942 $226,512
Appliances and Equipment................ 75,705 75,705
-------- --------
$400,647 $302,217
======== ========
</TABLE>
(3) SUBSEQUENT EVENTS
On October 22, 1997, pursuant to a purchase agreement dated as of October
20, 1997, all of the issued and outstanding capital stock of the Company was
sold by the holders of such stock to Star Gas Corporation ("Star Gas").
The purchase price for said stock was $22,552,000 and was paid in cash.
Subsequent to the acquisition of the common stock of Pearl, Pearl was merged
into Star Gas in a tax-free liquidation.
F-34
<PAGE>
APPENDIX A
No transfer of the Common Units evidenced hereby will be registered on the
books of the Partnership unless the Certificate evidencing the Common Units to
be transferred is surrendered for registration or transfer and an Application
for Transfer of Common Units has been executed by a transferee either (a) on
the form set forth below or (b) on a separate application that the Partnership
will furnish on request without charge. A transferor of the Common Units shall
have no duty to the transferee with respect to execution of the transfer
application in order for such transferee to obtain registration of the
transfer of the Common Units.
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner
(evidenced by a credit to the account of the undersigned at The Depository
Trust Company in the name of its nominee, Cede & Co.) and agrees to comply
with and be bound by, and hereby executes, the Agreement of Limited
Partnership of Star Gas Partners, L.P. (the "Partnership"), as amended,
supplemented or restated to the date hereof (the "Partnership Agreement") (b)
represents and warrants that the Assignee has all right, power and authority
and, if an individual, the capacity necessary to enter into the Partnership
Agreement, (c) appoints the General Partner and, if a Liquidator shall be
appointed, the Liquidator of the Partnership as the Assignee's attorney-in
fact to execute, swear to, acknowledge and file any document, including,
without limitation, the Partnership Agreement and any amendment thereto and
the Certificate of Limited Partnership of the Partnership and any amendment
thereto, necessary or appropriate for the Assignee's admission as a
Substituted Limited Partner and as a party to the Partnership Agreement, (d)
gives the powers of attorney provided for in the Partnership Agreement and (e)
makes the waivers and gives the consents and approvals contained in the
Partnership Agreement. Capitalized terms not defined herein have the meanings
assigned to such terms in the Partnership Agreement.
Date: _______________________________
- -------------------------------------
Signature of Assignee
- -------------------------------------
Social Security or other identifying
number of Assignee
- -------------------------------------
Name and Address of Assignee
- -------------------------------------
Purchase Price including
commissions, if any
Type of Entity (check one):
[_] Individual [_] Partnership [_] Corporation
[_] Trust [_] Other (specify) ___________
Nationality (check one):
[_] U.S. Citizen, Resident or Domestic Entity
[_] Non-resident Alien
[_] Foreign Corporation
A-1
<PAGE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers
of property if a holder of an interest in the Partnership is a foreign person.
To inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A.Individual Interestholder
1.I am not a non-resident alien for purposes of U.S. income taxation.
2.My U.S. taxpayer identification number (Social Security Number) is _______
3.My home address is _______________________________________________________
B.Partnership, Corporation or Other Interestholder
1. ________________is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as those
terms are defined in the Code and Treasury Regulations).
2.The interestholder's U.S. employer identification number is ______________
3.The interestholder's office address and place of incorporation (if
applicable) is _____________________________________________________________
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct
and complete and, if applicable, I further declare that I have authority to
sign this document on behalf of
-------------------------------------
(Name of Interestholder)
-------------------------------------
Signature and Date
-------------------------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the
above certification as to any person for whom the Assignee will hold the
Common Units shall be made to the best of the Assignee's knowledge.
A-2
<PAGE>
APPENDIX B
GLOSSARY OF TERMS
Acquisition: Any transaction in which any member of the Partnership Group
acquires (through an asset acquisition, merger, stock acquisition or other
form of investment) control over all or a portion of the assets, properties or
business of another person for the purpose of increasing the operating
capacity of the Partnership Group over the operating capacity of the
Partnership Group existing immediately prior to such transaction.
Adjusted Operating Surplus: With respect to any period, Operating Surplus
generated during such period as adjusted to (a) decrease Operating Surplus by
(i) any net increase in working capital borrowings during such period and (ii)
any net reduction in cash reserves for Operating Expenditures during such
period, and (b) increase Operating Surplus by (i) any net decrease in working
capital borrowings during such period and (ii) any net increase in cash
reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium.
Affiliate: With respect to any person, any other person that directly, or
indirectly through one or more intermediaries controls, is controlled by or is
under common control with, the person in question. As used herein, the term
"control" means the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a person, whether
through ownership of voting securities, by contract or otherwise.
Audit Committee: A committee of the board of directors of the General
Partner composed entirely of two or more directors who are neither officers
nor employees of the General Partner nor officers, directors or employees of
any Affiliate of the General Partner.
Available Cash: With respect to any quarter prior to liquidation:
(a) the sum of (i) all cash and cash equivalents of the Partnership Group
on hand at the end of such quarter and (ii) all additional cash and cash
equivalents of the Partnership Group on hand on the date of determination
of Available Cash with respect to such quarter resulting from borrowings
subsequent to the end of such quarter, less
(b) the amount of cash reserves that is necessary or appropriate in the
reasonable discretion of the General Partner to (i) provide for the proper
conduct of the business of the Partnership Group (including reserves for
future capital expenditures) subsequent to such quarter, (ii) provide funds
for Minimum Quarterly Distributions and Cumulative Common Unit Arrearages
in respect of any one or more of the next four quarters, or (iii) comply
with applicable law or any debt instrument or other agreement or obligation
to which any member of the Partnership Group is a party or its assets are
subject.
BTU: British Thermal Unit. The quantity of heat required to raise the
temperature of one pound of water by one degree Fahrenheit.
Capital Account: The capital account maintained for a Partner pursuant to
the Partnership Agreement. The Capital Account in respect of a Common Unit, a
Subordinated Unit or any other specified interest in the Partnership shall be
the amount which such Capital Account would be if such Common Unit,
Subordinated Unit or other interest in the Partnership were the only interest
in the Partnership held by a Limited Partner.
Capital Improvements: Additions or improvements to the capital assets owned
by any member of the Partnership Group or the acquisition of existing or the
construction of new capital assets (including retail distribution outlets,
propane tanks, pipeline systems, storage facilities and related assets), made
to increase the operating capacity of the Partnership Group from the operating
capacity of the Partnership Group existing immediately prior to such addition,
improvement, acquisition or construction.
Capital Surplus: All Available Cash distributed by the Partnership from any
source will be treated as distributed from Operating Surplus until the sum of
all Available Cash distributed since the commencement of
B-1
<PAGE>
the Partnership equals the Operating Surplus as of the end of the quarter
prior to such distribution. Any excess Available Cash will be deemed to be
Capital Surplus.
Cause: Means a court of competent jurisdiction has entered a final, non-
appealable judgment finding the General Partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as a general
partner of the Partnership.
Common Unit Arrearage: With respect to any Common Unit, whenever issued, and
as to any quarter within the Subordination Period, the excess, if any, of (a)
the Minimum Quarterly Distribution with respect to such Common Unit over (b)
the sum of all Available Cash distributed with respect to such Common Unit in
respect of such quarter.
Common Units: A Unit representing a fractional part of the partnership
interests of all limited partners and assignees and having the rights and
obligations specified with respect to Common Units in the Partnership
Agreement.
Cumulative Common Unit Arrearage: With respect to any Common Unit, whenever
issued, and as of the end of any quarter, the excess, if any, of (a) the sum
resulting from adding together the Common Unit Arrearage as to a Common Unit
issued in the IPO for each of the quarters within the Subordination Period
ending on or before the last day of such quarter over (b) the sum of any
distributions of Operating Surplus theretofore made with respect to such
Common Unit (including any distributions to be made in respect of the last of
such quarters).
Current Market Price: With respect to any class of Units listed or admitted
to trading on any national securities exchange as of any date, the average of
the daily Closing Prices (as hereinafter defined) for the 20 consecutive
Trading Days (as hereinafter defined) immediately prior to such date. "Closing
Price" for any day means the last sale price on such day, regular way, or in
case no such sale takes place on such day, the average of the closing bid and
asked prices on such day, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the principal national securities exchange on
which the Units of such class are listed or admitted to trading or, if the
Units of such class are not listed or admitted to trading on any national
securities exchange, the last quoted price on such day, or, if not so quoted,
the average of the high bid and low asked prices on such day in the over-the-
counter market, as reported by the Nasdaq Stock Market or such other system
then in use, or if on any such day the Units of such class are not quoted by
any such organization, the average of the closing bid and asked prices on such
day as furnished by a professional market maker making a market in the Units
of such class selected by the Board of Directors of the General Partner, or if
on any such day no market maker is making a market in the Units of such class,
the fair value of such Units on such day as determined reasonably and in good
faith by the Board of Directors of the General Partner. "Trading Day" means a
day on which the principal national securities exchange on which Units of any
class are listed or admitted to trading is open for the transaction of
business or, if the Units of a class are not listed or admitted to trading on
any national securities exchange, a day on which banking institutions in New
York City generally are open.
Degree Day: Degree days measure the amount by which the average of the high
and low temperature on a given day is below 65 degrees Fahrenheit. For
example, if the high temperature is 60 degrees and the low temperature is 40
degrees for a National Oceanic and Atmospheric Administration measurement
location, the average temperature is 50 degrees and the number of degree days
for that day is 15.
EBITDA: Operating income plus depreciation and amortization, less net gain
(loss) on sale of businesses and equipment and other cash charges (including
the impairment of long-lived assets). As used in this Prospectus, EBITDA is
not intended to be construed 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.
B-2
<PAGE>
General Partner: Star Gas Corporation, a wholly-owned subsidiary of
Petroleum Heat and Power Co., Inc., and its successors, as general partner of
the Partnership.
Initial Common Units: The Common Units sold in the IPO.
Initial Unit Price: $22.00 per Common Unit, the amount per Unit equal to the
initial public offering price of the Common Units in the IPO.
Interim Capital Transactions: (a) borrowings, refinancings or refundings of
indebtedness and sales of debt securities (other than for working capital
purposes and other than for items purchased on open account in the ordinary
course of business) by any member of the Partnership Group, (b) sales of
equity interests (including the Common Units sold to the Underwriters pursuant
to the exercise of their over-allotment option) by any member of the
Partnership Group and (c) sales or other voluntary or involuntary dispositions
of any assets of any member of the Partnership Group (other than (i) sales or
other dispositions of inventory in the ordinary course of business, (ii) sales
or other dispositions of other current assets, including, without limitation,
receivables and accounts, in the ordinary course of business and (iii) sales
or other dispositions of assets as a part of normal retirements or
replacements), in each case prior to the commencement of the dissolution and
liquidation of the Partnership.
IPO Closing Date: December 20, 1995, the first date on which Common Units
were sold by the Partnership in connection with the IPO.
Minimum Quarterly Distribution: $0.55 per Unit with respect to each quarter,
subject to adjustment as described in "Cash Distribution Policy--Distributions
from Capital Surplus" and "Cash Distribution Policy--Adjustment of Minimum
Quarterly Distribution and Target Distribution Levels."
Operating Expenditures: All Partnership Group expenditures, including taxes,
reimbursements of the General Partner, debt service payments, and capital
expenditures, subject to the following:
(a) Payments (including prepayments) of principal and premium on a debt
shall not be an Operating Expenditure if the payment is (i) required in
connection with the sale or other disposition of assets or (ii) made in
connection with the refinancing or refunding of indebtedness with the
proceeds from new indebtedness or from the sale of equity interests. For
purposes of the foregoing, at the election and in the reasonable discretion
of the General Partner, any payment of principal or premium shall be deemed
to be refunded or refinanced by any indebtedness incurred or to be incurred
by the Partnership Group within 180 days before or after such payment to
the extent of the principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements (as opposed to capital
expenditures made to maintain assets), (ii) payment of transaction expenses
relating to Interim Capital Transactions or (iii) distributions to
partners. Where capital expenditures are made in part for Acquisitions or
Capital Improvements and in part for other purposes, the General Partner's
good faith allocation between the amounts paid for each shall be
conclusive.
Operating Partnership: Star Gas Propane, L.P., a Delaware limited
partnership, and any successors thereto.
Operating Partnership Agreement: The partnership agreement for the Operating
Partnership (the form of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part).
Operating Surplus: As to any period prior to liquidation:
(a) the sum of (i) $6.0 million plus all cash of the Partnership Group on
hand as of the close of business on the Closing Date and (ii) all the cash
receipts of the Partnership Group for the period beginning on the Closing
Date and ending with the last day of such period, other than cash receipts
from Interim Capital Transactions, less
B-3
<PAGE>
(b) the sum of (i) Operating Expenditures for the period beginning on the
Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures.
Opinion of Counsel: An opinion of counsel to the effect that the taking of a
particular action will not result in the loss of the limited liability of the
limited partners of the Partnership or cause the Partnership to be treated as
an association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes.
Partnership: Star Gas Partners, L.P., a Delaware limited partnership, and
any successors thereto.
Partnership Agreement: The partnership agreement for the Partnership (the
form of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part), and unless the context requires otherwise,
references to the Partnership Agreement constitute references to the
Partnership Agreements of the Partnership and of the Operating Partnership,
collectively.
Partnership Group: The Partnership, the Operating Partnership and any
partnership Subsidiary of either such entity, treated as a single consolidated
entity.
Permitted Investments: Securities with a maturity of one year or less that
are (x) direct obligations of the United States of America for the payment of
which its full faith and credit is pledged, (y) obligations of a person
controlled or supervised by and acting as an agency or instrumentality of the
United States of America the payment of which is unconditionally guaranteed as
a full faith and credit obligation by the United States of America, which, in
either case, are not callable or redeemable at the option of the issuer
thereof or (z) securities of mutual or similar funds which invest exclusively
in securities of the type permitted under clauses (x) and (y) above, in each
case having assets in excess of $100 million.
Subordinated Unit: A Unit representing a fractional part of the limited
partner partnership interests of all limited partners of the Partnership and
assignees of any such limited partner interest and having the rights and
obligations specified with respect to Subordinated Units in the Partnership
Agreement.
Subordination Period: The Subordination Period will generally extend until
the first day of any quarter beginning on or after January 1, 2001 in respect
of which (i) distributions of Available Cash from Operating Surplus on the
Common Units and the Subordinated Units equaled or exceeded the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated Units with respect to each of the three non-overlapping four-
quarter periods immediately preceding such date, (ii) the Adjusted Operating
Surplus, generated during each of the three immediately preceding, non-
overlapping four quarter periods equaled or exceeded the sum of Minimum
Quarterly Distribution on all of the outstanding Common Units and Subordinated
Units during such periods and (iii) there are no arrearages in payment of the
Minimum Quarterly Distribution on the Common Units. Prior to the end of the
Subordination Period, a portion of the Subordinated Units will convert into
Common Units on the first day after the record date established for any
quarter ending on or after March 31, 1999 (with respect to 599,020 of the
Subordinated Units) and March 31, 2000 (with respect to an additional 599,020
of the Subordinated Units), on a cumulative basis, in respect of which (i)
distributions of Available Cash from Operating Surplus on the Common Units and
the Subordinated Units equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units
with respect to each of the three non-overlapping four-quarter periods
immediately preceding such date, (ii) the Adjusted Operating Surplus generated
during each of the three immediately preceding, non-overlapping four-quarter
periods equaled or exceeded the sum of the Minimum Quarterly Distribution on
all of the outstanding Common Units and Subordinated Units during such
periods, and (iii) there are no arrearages in payment of the Minimum Quarterly
Distribution on the Common Units. In addition, if the General Partner is
removed other than for Cause, the Subordination Period will end, any then-
existing arrearages on the Common Units will terminate and the Subordinated
Units will immediately convert into Common Units.
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<PAGE>
Target Distribution Levels: See "Cash Distribution Policy--Incentive
Distributions."
Transfer Application: An application for transfer of Units in the form set
forth on the back of a certificate, substantially in the form included in this
Prospectus as Appendix A, or in a form substantially to the same effect in a
separate instrument.
Unitholders: Holders of the Common Units and the Subordinated Units.
Unit Majority: At least a majority of the Common Units (excluding Common
Units held by the General Partner and its Affiliates) during the Subordination
Period and at least a majority of the Outstanding Units (as defined in the
Partnership Agreement) thereafter.
Units: The Common Units and the Subordinated Units, collectively.
Unrecovered Initial Unit Price: At any time, with respect to a class or
series of Units (other than Subordinated Units), the price per Unit at which
such class or series of Units was initially offered to the public for sale by
the Underwriters in respect of such offering, as determined by the General
Partner, less the sum of all distributions theretofore made in respect of a
Unit of such class or series that was sold in the initial offering of Units of
said class or series constituting Capital Surplus and any distributions of
cash (or the net agreed value of any distributions in kind) in connection with
the dissolution and liquidation of the Partnership theretofore made in respect
of a Unit of such class or series that was sold in the initial offering of
Units of such class or series, adjusted as the General Partner determines to
be appropriate to give effect to any distribution, subdivision or combination
of Units.
Unrecovered Subordinated Unit Capital: At any time, with respect to a
Subordinated Unit, prior to its conversion into a Common Unit, the excess, if
any, of (a) the net agreed value (at the time of conveyance) of the undivided
interest in any property conveyed to the Partnership in exchange for such
Subordinated Unit, over (b) any distributions of cash (or the net agreed value
of any distributions in kind) in connection with the dissolution and
liquidation of the Partnership, adjusted as the General Partner determines to
be appropriate to give effect to any distribution, subdivision or combination
of Subordinated Units.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PARTNERSHIP OR THE UNDER-
WRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE PARTNERSHIP SINCE THE DATE HEREOF, OR THAT INFOR-
MATION CONTAINED HEREIN IS CORRECT, AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUM-
STANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary........................................................ 6
Risk Factors.............................................................. 25
Use of Proceeds........................................................... 34
Capitalization............................................................ 35
Price Range of Common Units and Distributions............................. 36
Cash Distribution Policy.................................................. 37
Selected Historical and Pro Forma Financial and Operating Data............ 44
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 46
Business.................................................................. 53
Management................................................................ 61
Certain Relationships and Related Transactions............................ 68
Conflicts of Interest and Fiduciary Responsibility........................ 70
Description of Common Units............................................... 75
The Partnership Agreement................................................. 77
Units Eligible for Future Sale............................................ 87
Tax Considerations........................................................ 89
Investment in the Partnership by Employee Benefit Plans and Individual Re-
tirement Accounts........................................................ 105
Underwriting.............................................................. 106
The Selling Unitholder.................................................... 107
Validity of Common Units.................................................. 107
Experts................................................................... 107
Available Information..................................................... 107
Index to Financial Statements............................................. F-1
</TABLE>
<TABLE>
<S> <C>
Application for Transfer of Common Units............................. Appendix A
Glossary of Terms.................................................... Appendix B
</TABLE>
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832,727 COMMON UNITS
STAR GAS
PARTNERS, L.P.
REPRESENTING
LIMITED PARTNER INTERESTS
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PROSPECTUS
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PAINEWEBBER INCORPORATED
LEHMAN BROTHERS
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DECEMBER 16, 1997
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