<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
STAR GAS PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
<TABLE>
<S> <C> <C>
DELAWARE 5984 06-1437793
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
2187 ATLANTIC STREET
P.O. BOX 120011
STAMFORD, CT 06912-0011
(203) 328-7300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOSEPH P. CAVANAUGH
PRESIDENT
STAR GAS CORPORATION
2187 ATLANTIC STREET
P.O. BOX 120011
STAMFORD, CT 06912-0011
(203) 328-7300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
<TABLE>
<S> <C> <C>
PHILLIPS NIZER BENJAMIN
ANDREWS & KURTH L.L.P. KRIM & BALLON LLP BAKER & BOTTS, L.L.P.
805 THIRD AVENUE 666 FIFTH AVENUE, 28TH FLOOR ONE SHELL PLAZA
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10103-0084 910 LOUISIANA
(212) 850-2800 (212) 977-9700 HOUSTON, TEXAS 77002-4995
ATTN: MICHAEL ROSENWASSER, ATTN: ALAN SHAPIRO, ESQ. (713) 229-1330
ESQ. ATTN: R. JOEL SWANSON, ESQ.
</TABLE>
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and upon
holding of the meetings of securityholders of the Registrant and Petroleum Heat
and Power Co., Inc. described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED
AMOUNT MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Subordinated
Units of limited part-
ner interest 3,676,058 $7.54 $27,717,477 $9,557
- -------------------------------------------------------------------------------------------
Common Units of limited
partner interest 102,773 $7.54 $ 774,909 $ 268
- -------------------------------------------------------------------------------------------
Total................... $9,825
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated in accordance with Rule 457(f)(1) based upon the average of the
high and low sale prices of the Class A Common Stock of Petroleum Heat and
Power Co., Inc. of $0.9844 on October 16, 1998, as reported on the Nasdaq
National Market, as divided by the exchange ratio in the Transaction of
.13064 for the Senior Subordinated Units and the Common Units.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT SPECIFICALLY STATING THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
STAR GAS PARTNERS, L.P.
2187 ATLANTIC STREET
STAMFORD, CONNECTICUT 06902
ACQUISITION PROPOSED -- YOUR VOTE IS VERY IMPORTANT
, 1999
Dear Common Unitholder:
You are cordially invited to attend a special meeting of the Partnership's
Common Unitholders to be held at , New York, New York on , 1999. The
formal Notice of Unitholders Meeting and a Proxy Statement relating to that
meeting are enclosed. The Unitholders Meeting has been called for you to vote
upon the Partnership's acquisition of Petroleum Heat and Power Co., Inc.
("Petro"). We believe that Petro is the nation's largest distributor of home
heating oil and the principal consolidator of that highly fragmented industry.
The details of the acquisition and several related transactions are described
in the enclosed proxy materials. To assist you in understanding the
Transaction, a question and answer section appears on pages 1-11.
We believe this Transaction is an attractive opportunity for the Partnership.
The acquisition has been structured with the intent of providing an increase in
the Partnership's cash flow. Based on this expectation, we are increasing the
annualized minimum quarterly distribution to our Common Unitholders from $2.20
per unit to $2.30 per unit. As a result of Petro's strong position in the home
heating oil industry, we believe that the Transaction will also provide the
Partnership with an additional source of acquisition and expansion
opportunities.
Petro Common Stockholders will be receiving subordinated units on which
quarterly payments are permitted only after Common Unitholders have received
their full quarterly distributions. We also believe the increased size of the
Partnership will improve Common Unit market liquidity, investment community
awareness and securities analyst research coverage. In summary, we see this as
an opportunity to acquire a company that is expected to significantly increase
the Partnership's size and scope of operations, growth prospects and ability to
increase its distributions to Unitholders.
A Special Committee of our Board of Directors, acting on behalf of the Public
Common Unitholders, negotiated the terms of the Transaction. A.G. Edwards &
Sons, Inc. was retained by the Special Committee as independent financial
advisor, and has rendered an opinion that the Transaction is fair, from a
financial point of view, to the Public Common Unitholders. BASED ON THE
RECOMMENDATION OF THE SPECIAL COMMITTEE, THE BOARD OF DIRECTORS OF THE GENERAL
PARTNER UNANIMOUSLY RECOMMENDS THAT THE COMMON UNITHOLDERS VOTE FOR THE
TRANSACTION.
Approval of the Transaction will require the AFFIRMATIVE vote of a majority
of all Common Units (other than those held by Star Gas and its affiliates).
Failure to vote by proxy or in person will have the same effect as a vote
against the Transaction. IT IS, THEREFORE, VERY IMPORTANT THAT YOU VOTE.
Whether or not you plan to attend the Unitholders Meeting, PLEASE TAKE THE TIME
TO VOTE BY COMPLETING AND MAILING THE ENCLOSED PROXY CARD TO US.
<PAGE>
YOU SHOULD CAREFULLY CONSIDER EACH OF THE FACTORS DESCRIBED UNDER "RISK
FACTORS," STARTING ON PAGE 48 OF THE ATTACHED PROXY STATEMENT. THE FACTORS
DISCUSSED INCLUDE THE FOLLOWING:
. THE PARTNERSHIP IS ACQUIRING AN ENTITY WHICH, BASED ON 1997 REVENUES, IS
SEVERAL TIMES ITS SIZE. THEREFORE, THE NATURE OF THE PARTNERSHIP'S BUSINESS
WILL BE SIGNIFICANTLY CHANGED.
. PETRO HAS A HISTORY OF OPERATIONAL AND FINANCIAL DIFFICULTIES AND
ACCOUNTING LOSSES.
. THE SUCCESS OF THE TRANSACTION DEPENDS UPON THE PARTNERSHIP'S ABILITY TO
--CONTINUE TO MAKE ACQUISITIONS AT ATTRACTIVE PRICES;
--CONTINUE TO REDUCE PETRO'S CUSTOMER ATTRITION RATE; AND
--CONTINUE TO IMPROVE PETRO'S PROFIT MARGINS ON A PER GALLON BASIS.
More detailed information about the Unitholders Meeting is included in the
attached Notice of Unitholders Meeting and the Proxy Statement. You are urged
to read carefully the Proxy Statement and the Annexes thereto for more detailed
information concerning Petro, the Partnership, and the Transaction. If you have
any questions or need help in voting your Common Units, please call me directly
or Richard F. Ambury, Vice President Finance at (203) 328-7313.
Very truly yours,
Joseph P. Cavanaugh
President, Star Gas Corporation
-2-
<PAGE>
STAR GAS PARTNERS, L.P.
NOTICE OF
MEETING OF HOLDERS OF COMMON UNITS
TO BE HELD ON , 1999
, 1999
TO THE HOLDERS OF COMMON UNITS:
NOTICE IS HEREBY GIVEN that a meeting of the holders ("Common Unitholders")
of the common units of limited partner interest (the "Common Units") of Star
Gas Partners, L.P., a Delaware limited partnership (the "Partnership"), will be
held at , New York, New York on , 1999 at a.m., New York
City time, and at any adjournment or postponement thereof (the "Unitholders
Meeting"), to consider and vote upon matters related to the proposed
acquisition by the Partnership of Petroleum Heat and Power Co., Inc., a
Minnesota corporation ("Petro"), and related financings as described below. The
following proposals are to be presented at the Unitholders Meeting:
(a) A proposal (the "Acquisition Proposal") to approve and adopt
(i) the Agreement and Plan of Merger dated as of October 22, 1998 attached
hereto as Annex A, pursuant to which a wholly-owned subsidiary of the
Partnership will be merged with and into Petro (the "Merger"), and Petro
Common Stockholders will receive subordinated units of the Partnership; and
(ii) the Exchange Agreement dated as of October 17, 1998 attached hereto as
Annex B, pursuant to which Petro Common Stockholders considered to be
affiliates of Petro will exchange their shares of Petro Common Stock for
subordinated units of the Partnership;
(b) A proposal to amend the Agreements of Limited Partnership of the
Partnership and of the Star Gas Propane, L.P. (the "Operating
Partnership") (the "Amendment Proposal"); and
(c) A proposal to permit Star Gas Corporation ("Star Gas") to
withdraw as the general partner of the Partnership and the Operating
Partnership and to approve the substitution of Star Gas LLC as the new
general partner (the "General Partner Proposal" and, collectively with
the Amendment Proposal and the Acquisition Proposal, the "Star
Proposals").
The Unitholders Meeting has been called by Star Gas for the purpose of
submitting the Star Proposals to the Common Unitholders for their approval, as
well as such other business as may properly come before the meeting. The Board
of Directors of Star Gas has fixed the close of business on , 1999 as the
record date (the "Star Gas Record Date") for determination of the Unitholders
entitled to notice of, and to vote at, the Unitholders Meeting. The AFFIRMATIVE
vote of the holders of a majority of the Common Units (other than Common Units
held by Star Gas and its affiliates) outstanding on the Star Gas Record Date is
required to approve each of the Star Proposals.
Common Unitholders do not have dissenters' rights in connection with the Star
Proposals to be considered at the Unitholders Meeting.
<PAGE>
You are invited to attend the Unitholders Meeting in person. An abstention or
failure to vote or a failure to give instructions to a broker-nominee will have
the same effect as a negative vote. Accordingly, whether or not you currently
plan to attend, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND
RETURN IT PROMPTLY IN THE PREPAID RETURN ENVELOPE. An executed proxy card that
does not indicate how Common Units are to be voted will be voted FOR all the
Star Proposals.
Returning your proxy card now will not prevent you from voting in person at
the Unitholders Meeting, but will assure that your vote is counted if you are
unable to attend. As described in the attached Proxy Statement, a Common
Unitholder may revoke a proxy at any time before it has been voted by (a)
delivering written notice of revocation to Richard F. Ambury, Vice President of
Star Gas, whose address is c/o Star Gas Corporation, 2187 Atlantic Street,
Stamford, Connecticut 06902, (b) executing and submitting a proxy card bearing
a later date, or (c) attending the Unitholders Meeting and voting in person.
If your Common Units are held in the name of a brokerage firm or other
nominee, only it can vote your Units. To ensure that your Common Units are
voted, follow the voting instructions provided to you by such firm or nominee
with the enclosed Proxy Statement or telephone the person responsible for your
account today to obtain instructions on how to direct him or her to execute a
proxy card on your behalf.
We urge you to complete, sign and date the enclosed proxy card and return it
promptly in the prepaid return envelope, whether or not you intend to be
present at the Unitholders Meeting.
By Order of the Board of Directors
of the General Partner
Audrey L. Sevin
Secretary
Dated: , 1999
-2-
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
2187 ATLANTIC STREET
STAMFORD, CONNECTICUT 06902
ACQUISITION PROPOSED--YOUR VOTE IS VERY IMPORTANT
, 1999
Dear Common Stockholder:
You are cordially invited to attend a special meeting of Common Stockholders
to be held at , New York, New York on , 1999. The formal Notice of
Stockholders Meeting and a Proxy Statement relating to that meeting are
enclosed. The Special Meeting has been called for you to vote upon the
acquisition of Petro by Star Gas Partners, L.P. (the "Partnership"). The
details of the acquisition and several related transactions are described in
the enclosed proxy materials. To assist you in understanding the Transaction, a
question and answer section appears on pages 1-11.
We think this Transaction is an attractive opportunity for Petro's Common
Stockholders. We believe Petro is the largest home heating oil distributor in
the U.S. and the principal consolidator of that highly fragmented industry.
However, it does not have the financial flexibility to fully capitalize on this
position. This Transaction will provide Petro with access to lower cost capital
to fund its growth through acquisition strategy and make capital investments
necessary to take advantage of its size. In addition, we believe that as part
of a publicly traded master limited partnership, Petro will receive a better
market valuation and the Partnership will receive more investment community
awareness and securities analyst research coverage. Please note that the
Partnership generally distributes to its partners the available cash it
generates from its operations. We believe that this Transaction will increase
the likelihood of a resumption of annual cash distributions to Petro Common
Stockholders whose dividends have been suspended.
If this Transaction is completed, Public Common Stockholders will receive
.13064 of a Senior Subordinated Unit for each share of their Petro Common
Stock. The Senior Subordinated Units have been approved for listing on the New
York Stock Exchange under the symbol " ". No assurance can be given that an
active trading market for the Senior Subordinated Units will develop or at what
price the Senior Subordinated Units will trade. If the Partnership generates
sufficient available cash, the Minimum Quarterly Distribution with respect to
the Senior Subordinated Units will be $0.575 per Unit ($2.30 on an annual
basis). Actual distributions will be subject, however, to certain limitations
and may not be paid if certain assumptions regarding weather or the
Partnership's operations are not realized.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, was retained
by the Board of Directors of Petro and has rendered an opinion that the
consideration to be received by the Public Common Stockholders is fair, from a
financial point of view, to such holders. Based on a variety of factors,
including the opinion of Dain Rauscher Wessels, THE PETRO BOARD UNANIMOUSLY
RECOMMENDS THAT THE COMMON STOCKHOLDERS VOTE FOR THE TRANSACTION.
Approval of the Transaction will require the AFFIRMATIVE vote of the holders
of a majority of the shares of Class A Common Stock (other than the Class A
Common Stock owned by the directors and executive officers of Petro and their
affiliates). Failure to vote by proxy or in person will have
<PAGE>
the same effect as a vote against the Transaction. IT IS, THEREFORE, VERY
IMPORTANT THAT YOU VOTE. Whether or not you plan to attend the Special Meeting,
PLEASE TAKE THE TIME TO VOTE BY COMPLETING AND MAILING THE ENCLOSED PROXY CARD
TO US.
YOU SHOULD REALIZE THAT THE SENIOR SUBORDINATED UNITS IN THE PARTNERSHIP THAT
YOU WOULD RECEIVE IN THE TRANSACTION ARE VERY DIFFERENT FROM THE SHARES OF
COMMON STOCK THAT YOU CURRENTLY OWN. YOU SHOULD CAREFULLY CONSIDER EACH OF THE
FACTORS DESCRIBED UNDER "RISK FACTORS," STARTING ON PAGE 48 OF THE ATTACHED
PROXY STATEMENT. THE FACTORS DISCUSSED INCLUDE THE FOLLOWING:
. THE PAYMENT OF CASH DISTRIBUTIONS ON THE SENIOR SUBORDINATED UNITS IS
NOT ASSURED AND MAY FLUCTUATE WITH PARTNERSHIP OPERATIONS. DUE TO THE
SUBORDINATION PROVISIONS OF THE PARTNERSHIP AND LIMITATIONS ON THE
PAYMENT OF DISTRIBUTIONS, DISTRIBUTIONS MAY NOT BE PAID ON THE SENIOR
SUBORDINATED UNITS IF CERTAIN ASSUMPTIONS REGARDING WEATHER OR THE
PARTNERSHIP'S OPERATIONS ARE NOT REALIZED.
. THERE IS NO MARKET FOR THE SENIOR SUBORDINATED UNITS, AND THERE IS
UNCERTAINTY AS TO THE PRICE AT WHICH THE SENIOR SUBORDINATED UNITS WILL
TRADE OR WHETHER AN ACTIVE MARKET FOR THE SENIOR SUBORDINATED UNITS WILL
DEVELOP.
. HOLDERS OF SENIOR SUBORDINATED UNITS HAVE SUBSTANTIALLY DIFFERENT, AND
PROBABLY FEWER, LEGAL RIGHTS THAN COMMON STOCKHOLDERS.
. CERTAIN TYPES OF INVESTORS SUCH AS TAX-EXEMPT ENTITIES, REGULATED
INVESTMENT COMPANIES AND FOREIGN TAXPAYERS MAY FACE SPECIAL
DISADVANTAGES IN OWNING PARTNERSHIP INTERESTS SUCH AS THE SENIOR
SUBORDINATED UNITS.
. THE PARTNERSHIP IS SUBJECT TO SIGNIFICANT OPERATING RISKS.
More detailed information about the Special Meeting is included in the
attached Notice of Special Meeting and the Proxy Statement. You are urged to
read carefully the Proxy Statement and the Annexes thereto for more detailed
information concerning Petro, the Partnership, and the Transaction. If you have
any questions or need help in voting your Common Stock, please call Audrey L.
Sevin, Secretary of Petro at (203) 325-5400.
Very truly yours,
Irik P. Sevin
Chairman of the Board
and Chief Executive Officer
-2-
<PAGE>
PETROLEUM HEAT AND POWER CO., INC.
NOTICE OF
SPECIAL MEETING OF HOLDERS OF COMMON STOCK
TO BE HELD ON , 1999
TO THE HOLDERS OF COMMON STOCK:
NOTICE IS HEREBY GIVEN that a special meeting of the holders (the "Common
Stockholders") of Class A Common Stock and Class C Common Stock (collectively,
the "Common Stock") of Petroleum Heat and Power Co., Inc., a Minnesota
corporation ("Petro"), will be held at , New York,
New York on , 1999 at 10:00 a.m., New York City time, and at any
adjournment or postponement thereof (the "Special Meeting"), to consider and
vote upon a proposal relating to the acquisition of Petro by Star Gas Partners,
L.P., a Delaware limited partnership (the "Partnership"), and related
financings (the "Transaction"). The following proposal is to be presented at
the Special Meeting:
A proposal (the "Acquisition Proposal") to approve and adopt (i) the
Agreement and Plan of Merger dated as of October 22, 1998, pursuant to
which a subsidiary of the Partnership will be merged with and into
Petro, and Common Stockholders will receive subordinated units of the
Partnership, and (ii) the Exchange Agreement dated as of October 17,
1998, pursuant to which Common Stockholders considered to be affiliates
of Petro will exchange their shares of Common Stock for subordinated
units of the Partnership.
The Special Meeting has been called by Petro for the purpose of submitting
the Acquisition Proposal to the Common Stockholders for their approval, as well
as such other business as may properly come before the meeting. The Board of
Directors of Petro has fixed the close of business on , 1999 as the
record date (the "Petro Record Date") for determination of the Common
Stockholders entitled to notice of, and to vote at, the Special Meeting. The
AFFIRMATIVE vote of a majority of Class A Common Stock (other than Class A
Common Stock owned by the directors and executive officers of Petro and their
affiliates), and a majority of Class C Common Stock outstanding on the Petro
Record Date is required to approve the Acquisition Proposal.
If the Transaction is consummated, Common Stockholders who do not vote their
shares in favor of the Acquisition Proposal and who strictly comply with the
applicable sections of the Minnesota Business Corporation Act (the "Dissenting
Stockholders") will be entitled to statutory dissenters' appraisal rights. For
a description of the rights of Dissenting Stockholders and of the procedures to
be followed by Dissenting Stockholders in order to assert such rights and
obtain payment for their shares of Common Stock, see Annex F to the
accompanying Proxy Statement, as well as the information set forth under the
caption "Dissenters' Rights" in the accompanying Proxy Statement.
You are invited to attend the Special Meeting in person. An abstention or
failure to vote or a failure to give instructions to a broker-nominee will have
the same effect as a negative vote. Accordingly, whether or not you currently
plan to attend, PLEASE COMPLETE, SIGN AND DATE THE
<PAGE>
ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE PREPAID RETURN ENVELOPE. An
executed proxy card that does not indicate how Common Stock is to be voted will
be voted FOR the Acquisition Proposal.
Returning your proxy card now will not prevent you from voting in person at
the Special Meeting, but will assure that your vote is counted if you are
unable to attend. As described in the attached Proxy Statement, a Common
Stockholder may revoke a proxy at any time before it has been voted by (a)
delivering written notice of revocation to Audrey L. Sevin, Secretary of Petro,
whose address is c/o Petroleum Heat and Power Co., Inc., 2187 Atlantic Street,
Stamford, Connecticut 06902, (b) executing and submitting a proxy card bearing
a later date, or (c) attending the Special Meeting and voting in person.
If your Common Stock is held in the name of a brokerage firm or other
nominee, only it can vote your shares. To ensure that your Common Stock is
voted, follow the voting instructions provided to you by such firm or nominee
with the enclosed Proxy Statement or call the person responsible for your
account today to obtain instructions on how to direct him or her to execute a
proxy card on your behalf.
We urge you to complete, sign and date the enclosed proxy card and return it
promptly in the prepaid return envelope, whether or not you intend to be
present at the Special Meeting.
By Order of the Board of Directors
Audrey L. Sevin
Secretary
Dated: , 1999
-2-
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+ REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+ SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+ OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+ BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+ THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+ SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+ UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
STAR GAS PARTNERS, L.P.
AND
PETROLEUM HEAT AND POWER CO., INC.
JOINT PROXY STATEMENT
-----------
STAR GAS PARTNERS, L.P.
PROSPECTUS
-----------
This Joint Proxy Statement and Prospectus ("Proxy Statement") describes in
detail the proposed acquisition by Star Gas Partners, L.P., a Delaware limited
partnership (the "Partnership"), of Petroleum Heat and Power Co., Inc., a
Minnesota corporation ("Petro"), and certain related transactions (the
"Transaction"). If the Transaction is completed, Petro will become a wholly-
owned indirect subsidiary of the Partnership and the common stockholders of
Petro will become holders of subordinated units of the Partnership.
This Proxy Statement is being furnished to the holders (the "Common
Unitholders") of common units of limited partner interest ("Common Units") in
the Partnership, as of , 1999 (the "Star Gas Record Date"), in
connection with the solicitation of proxies by the Board of Directors (the
"Star Gas Board") of Star Gas Corporation, the general partner of the
Partnership ("Star Gas"), for use at a special meeting of Common Unitholders to
be held at , New York, New York on , 1999, at
a.m., New York City time, and at any and all adjournments or
postponements thereof (the "Unitholders Meeting").
This Proxy Statement is also being furnished to holders (the "Common
Stockholders") of Petro Class A Common Stock and Class C Common Stock
(collectively, the "Common Stock"), as of , 1999 (the "Petro Record
Date"), in connection with the solicitation of proxies by the Board of
Directors of Petro (the "Petro Board") for use at a special meeting of Common
Stockholders to be held at , New York, New York on ,
1999, at 10:00 a.m., New York City time, and at any and all adjournments or
postponements thereof (the "Special Meeting," and together with the Unitholders
Meeting, the "Meetings").
This Proxy Statement also constitutes the Prospectus of the Partnership in
connection with the possible resale by certain persons who may be deemed to be
affiliates of Petro of the Partnership Units to be received by them pursuant to
the Transaction.
The Proxy Statement and the accompanying forms of proxy are first being
mailed to the Common Unitholders and the Common Stockholders on or about ,
1999.
SEE "RISK FACTORS," BEGINNING ON PAGE 48, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY THE COMMON UNITHOLDERS AND THE COMMON
STOCKHOLDERS.
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION. THE SECURITIES AND
EXCHANGE COMMISSION HAS NOT PASSED UPON THE FAIRNESS OR MERITS OF THIS
TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this Proxy Statement is , 1999.
<PAGE>
STATEMENT OF FORWARD-LOOKING DISCLOSURE
Some of the information in this Proxy Statement may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "believe," "expect," "anticipate,"
"estimate," "continue," or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition, or state other "forward-looking" information. When considering such
forward-looking statements, you should keep in mind the risk factors and other
cautionary statements in this Proxy Statement. The risk factors noted under
"Risk Factors" and other factors noted throughout this Proxy Statement,
including certain risks and uncertainties, could cause our actual results to
differ materially from those contained in any forward-looking statement.
CAUTIONARY STATEMENT
All information contained in this Proxy Statement with respect to the
Partnership, the Operating Partnership and its subsidiary, New Petro, Inc.
("Mergeco"), has been provided by Star Gas. All information contained in this
Proxy Statement with respect to Petro and its subsidiaries has been provided by
Petro.
. You should rely only on the information contained in this document or
what we have referred you to. We have not authorized anyone to provide
you with information that is different.
. We are not offering to sell or seeking your offer to buy these
securities in any state where it is illegal to do so.
. We are not seeking your proxy in any state where it is illegal to do so.
. This information may change after , 1999.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
STATEMENT OF FORWARD-LOOKING DISCLOSURE.................................... ii
CAUTIONARY STATEMENT....................................................... ii
QUESTIONS AND ANSWERS...................................................... 1
Questions and Answers About the Acquisition for the Partnership's
Common Unitholders....................................................... 1
Questions and Answers About the Transaction for Petro Common
Stockholders............................................................. 7
PROXY STATEMENT SUMMARY.................................................... 12
Parties................................................................... 12
Potential Advantages to the Common Unitholders............................ 13
Potential Disadvantages and Risks to the Common Unitholders............... 13
Potential Advantages to the Common Stockholders........................... 14
Potential Disadvantages and Risks to the Common Stockholders.............. 14
Recommendations of the Special Committee and Star Gas Board and Opinion of
A.G. Edwards & Sons, Inc................................................. 15
Recommendations of Petro Board and Opinion of Dain Rauscher Wessels....... 16
The Transaction........................................................... 16
The Merger and the Exchange............................................... 17
Related Financing and Refinancing Transactions............................ 17
New General Partner....................................................... 18
Amendment of the Partnership Agreement.................................... 18
Estimated Sources and Uses of Funds of the Equity Offering and Debt
Offering................................................................. 20
Outstanding Partnership Units............................................. 20
Captialization............................................................ 21
Interests of Certain Persons in the Transaction; Conflicts of Interest.... 22
Cash Available for Distribution........................................... 23
Description of the Partnership Units...................................... 25
Partnership Structure and Management Following the Transaction............ 32
Summary Selected Historical Financial and Operating Data of the
Partnership.............................................................. 35
Summary Selected Historical Financial and Operating Data of Petro......... 37
Selected Unaudited Pro Forma Condensed Consolidated Financial
Information.............................................................. 39
</TABLE>
<TABLE>
<S> <C>
Comparative Market Price Information....................................... 41
Certain Federal Income Tax Considerations.................................. 41
Accounting Treatment....................................................... 44
Dissenters' Rights......................................................... 44
The Meetings............................................................... 44
Votes Required; Record Date................................................ 45
Effective Time............................................................. 46
Conditions to the Consummation of the Transaction.......................... 46
Regulatory Matters......................................................... 46
Amendment and Termination of the Merger Agreement.......................... 47
RISK FACTORS................................................................ 48
Risks to the Partnership's Common Unitholders.............................. 48
Tax Risks to Common Unitholders............................................ 54
Risks to Common Stockholders............................................... 55
Tax Risks to Common Stockholders........................................... 62
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION; CONFLICTS OF INTEREST...... 66
The Partnership............................................................ 66
Petro...................................................................... 66
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
OF THE PARTNERSHIP......................................................... 67
Conflicts of Interest...................................................... 67
Fiduciary Duties of the General Partner.................................... 70
PARTIES TO THE TRANSACTION.................................................. 72
The Partnership and the Operating Partnership.............................. 72
Petro...................................................................... 73
THE UNITHOLDERS MEETING..................................................... 75
Date, Time and Place....................................................... 75
Purpose.................................................................... 75
Star Gas Record Date....................................................... 75
Recommendations of the Special Committee and the Star Gas Board............ 75
Proxies and Revocability of Proxies........................................ 75
Cost of Solicitation of Proxies............................................ 76
Voting Rights; Vote Required............................................... 76
Quorum; Adjournment........................................................ 77
THE SPECIAL MEETING......................................................... 78
Date, Time and Place....................................................... 78
Purpose.................................................................... 78
Petro Record Date.......................................................... 78
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Petro Board Recommendation................................................. 78
Proxies and Revocability of Proxies........................................ 78
Cost of Solicitation of Proxies............................................ 79
Voting Rights; Vote Required............................................... 79
Petro Preferred Stock...................................................... 80
Class B Shares............................................................. 80
Quorum; Adjournment........................................................ 80
THE TRANSACTION............................................................. 81
Description of the Transaction............................................. 81
Description of the Merger and the Exchange................................. 81
Related Financing and Refinancing
Transactions.............................................................. 83
Background of and Reasons for the
Transaction............................................................... 85
Reasons for the Transaction; Recommendation of the Special Committee....... 96
Opinion of A.G. Edwards.................................................... 98
Reasons for the Transaction; Recommendation of the Petro Board............. 107
Opinion of Dain Rauscher Wessels........................................... 109
Certain Projections of Petro and the
Partnership............................................................... 119
Description of the Merger Agreement........................................ 125
Restrictions on Resales by Affiliates...................................... 133
Selling Unitholders........................................................ 133
Plan of Distribution....................................................... 134
Accounting Treatment....................................................... 135
Regulatory Matters......................................................... 135
MANAGEMENT OF THE PARTNERSHIP AFTER THE TRANSACTION......................... 136
General Partner............................................................ 136
Board of Directors of Star Gas LLC......................................... 136
Officers and Employees of the Operating Partnership and Petro.............. 137
Reimbursement of Expenses of the General Partner........................... 137
BENEFICIAL OWNERSHIP OF PRINCIPAL UNITHOLDERS AND MANAGEMENT................ 138
AMENDMENTS TO THE PARTNERSHIP AGREEMENTS.................................... 139
Introduction; Required Vote by Unitholders................................. 139
Summary of Amendments to the
Partnership Agreement..................................................... 139
Summary of Amendments to the Operating Partnership Agreement............... 144
THE AMENDED AND RESTATED
PARTNERSHIP AGREEMENT...................................................... 145
Organization and Duration.................................................. 145
</TABLE>
<TABLE>
<S> <C>
Purpose................................................................... 145
Power of Attorney......................................................... 145
Restrictions on Authority of the General Partner with Respect to Extraor-
dinary Transactions; Lack of Dissenters' Rights.......................... 146
Withdrawal or Removal of the General
Partner; Approval of Successor General Partner........................... 146
Transfer of General Partner Interest...................................... 148
Reimbursement for Services................................................ 148
Status as Limited Partner or Assignee..................................... 148
Non-citizen Assignees; Redemption......................................... 149
Issuance of Additional Securities......................................... 149
Limited Call Right........................................................ 150
Amendment of Amended and Restated
Partnership Agreement.................................................... 151
Meetings; Voting.......................................................... 152
Indemnification........................................................... 153
Limited Liability......................................................... 154
Books and Reports......................................................... 155
Right to Inspect Partnership Books and
Records.................................................................. 156
Termination and Dissolution............................................... 156
Liquidation and Distribution of Proceeds.................................. 156
Registration Rights....................................................... 157
CASH DISTRIBUTION POLICY................................................... 158
General................................................................... 158
Quarterly Distributions of Available Cash................................. 159
Distributions of Available Cash from
Operating Surplus During the
Subordination Period..................................................... 159
Distributions of Available Cash from
Operating Surplus After the
Subordination Period..................................................... 161
Incentive Distributions During the
Subordination Period..................................................... 161
Incentive Distributions After the
Subordination Period..................................................... 162
Distributions from Capital Surplus........................................ 163
Limitation on Distributions on Subordinated Interests..................... 163
Adjustment of Minimum Quarterly Distribution and Target Distribution Lev-
els...................................................................... 165
Issuance of Additional Senior Subordinated Units.......................... 165
Distributions of Cash upon Liquidation
During the Subordination Period.......................................... 167
Distributions of Cash upon Liquidation
After the Subordination Period........................................... 168
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
CASH AVAILABLE FOR DISTRIBUTION............................................. 170
DESCRIPTION OF THE UNITS.................................................... 171
The Units.................................................................. 171
Transfer Agent and Registrar............................................... 171
Transfer of Units.......................................................... 172
COMPARISON OF SECURITIES.................................................... 174
Taxation................................................................... 174
Distributions and Dividends................................................ 174
Voting Rights.............................................................. 175
Rights to Call Meetings.................................................... 175
Removal of Directors or the General Partner................................ 175
Liquidation Rights......................................................... 176
Conversion Rights.......................................................... 176
Liability of Holders....................................................... 176
Transferability and Listing................................................ 177
Redemption................................................................. 177
Appraisal Rights........................................................... 177
Preemptive Rights.......................................................... 178
Inspection of Books, Records and List of Holders........................... 178
COMPARATIVE SECURITY PRICE AND DISTRIBUTION INFORMATION..................... 179
Partnership Securities..................................................... 179
Petro Capital Stock........................................................ 180
Comparative Per Share/Per Unit Information (Unaudited)..................... 181
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................... 182
Tax Consequences of the Merger............................................. 182
Tax Consequences of Unit Ownership......................................... 183
Allocation of Partnership Income, Gain, Loss and Deduction................. 189
Tax Treatment of Operations................................................ 190
Disposition of Units....................................................... 193
Uniformity of Units........................................................ 195
Administrative Matters..................................................... 197
State, Local and Other Tax Considerations.................................. 200
</TABLE>
<TABLE>
<S> <C>
DISSENTERS' RIGHTS.......................................................... 202
LEGAL MATTERS............................................................... 206
EXPERTS..................................................................... 206
WHERE YOU CAN FIND MORE INFORMATION......................................... 206
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................. 207
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION............ 209
Star Gas Partners, L.P. and Subsidiary--Pro Forma Condensed Consolidated
Balance Sheet (Unaudited)................................................. 209
Star Gas Partners, L.P. and Subsidiary--Pro Forma Condensed Consolidated
Statement of Operations (Unaudited)--Year Ended September 30, 1997........ 210
Star Gas Partners, L.P. and Subsidiary--Pro Forma Condensed Consolidated
Statement of Operations (Unaudited)--Nine Months Ended June 30, 1998...... 211
GLOSSARY OF TERMS........................................................... 216
APPENDIX A--Application for Transfer of Units............................... A-1
Annexes
A Merger Agreement
B Exchange Agreement
C Amended and Restated Partnership Agreement
D Opinion of A.G. Edwards & Co. Inc.
E Opinion of Dain Rauscher Wessels
F Copy of Sections 302A.471 and 302A.473 of Minnesota Business Corporation
Act
G Calculation of Pro Forma Available Cash from Operating Surplus
</TABLE>
v
<PAGE>
QUESTIONS AND ANSWERS
QUESTIONS AND ANSWERS ABOUT THE ACQUISITION FOR
THE PARTNERSHIP'S COMMON UNITHOLDERS
Q: WHAT IS BEING PROPOSED? WHAT ARE THE REASONS FOR IT?
A: You are considering the acquisition by Star Gas Partners, L.P. (the
"Partnership") of Petroleum Heat & Power Co., Inc. ("Petro"), in exchange
for interests in the Partnership that are subordinated to the Common Units.
We believe that Petro is the largest home heating oil distributor in the
country. In addition, Petro has been the principal consolidator of that
highly fragmented industry, having purchased over 180 retail home heating
oil companies since 1979. Competition for acquisitions in the propane
industry has intensified, decreasing the opportunities available, and
increasing the prices paid, for propane companies. We believe Petro's strong
position in the home heating oil industry will provide the Partnership with
an additional source of attractive acquisition and expansion opportunities.
In addition, the acquisition of Petro has been structured with the intent of
providing an increase in the Partnership's cash flow. Based on this
expectation, we are increasing the annualized Minimum Quarterly Distribution
from $2.20 to $2.30 per Unit.
In summary, we see this as an opportunity to acquire a company that is
expected to significantly increase the Partnership's size and scope of
operations, growth prospects and ability to increase its distributions to
Unitholders.
Q: WHO IS PETRO?
A: . We believe Petro is the nation's largest retail distributor of home
heating oil. It sells approximately 400 million gallons of home heating
oil annually to approximately 340,000 customers through 24 branch
locations located throughout the Northeast and Mid Atlantic regions of the
United States, including the major metropolitan areas of Boston,
Providence, New Haven, New York City, Long Island, Baltimore and
Washington, D.C.
. A publicly-traded corporation whose Common Stock is listed on the Nasdaq
National Market under the symbol "HEAT."
. The current owner of the Partnership's existing general partner, Star Gas,
and the owner of all of the Partnership's outstanding Subordinated Units.
Q: WHAT ARE THE POTENTIAL BENEFITS TO THE COMMON UNITHOLDERS?
A: We believe that the Transaction will offer several potential benefits to
Common Unitholders, including:
. The Minimum Quarterly Distribution to Unitholders will increase from $2.20
to $2.30 per Unit annually, subject to Available Cash to make such
distribution.
. The Transaction has been structured with the intent of providing an
increase in the Partnership's distributable cash flow per Unit. If this
expectation is
<PAGE>
realized, it will provide greater protection of the Minimum Quarterly
Distribution and improve the possibility of future distribution increases.
. The acquisition of Petro should improve the Partnership's growth prospects
by providing the Partnership with an additional source of attractive
acquisition and expansion opportunities.
. Petro Common Stockholders will be receiving subordinated units entitling
them to receive distributions only after the Partnership's Common
Unitholders receive their full Minimum Quarterly Distribution.
. The Subordination Period during which the Common Unit distribution is
senior to the subordinated units has been extended 18 months to July 1,
2002.
. The Transaction will increase the Partnership's market capitalization and
should provide greater Common Unit market liquidity, investment community
awareness and the ability to attract securities analyst research coverage.
Q: WHAT ARE THE POTENTIAL DISADVANTAGES AND RISKS TO COMMON UNITHOLDERS?
A: The following are potential disadvantages and risks of the Transaction:
. The Partnership is acquiring an entity which, based on 1997 revenues, is
several times its size. Therefore, the nature of the Partnership's
business will be significantly changed.
. Petro has a history of operational and financial difficulties (including
high leverage and recent substantial net losses).
. The success of the Transaction depends upon the Partnership's ability to
- -- Continue to make acquisitions at attractive prices;
- -- Continue to reduce Petro's customer attrition rate; and
- -- Continue to improve Petro's profit margins on a per gallon basis.
. The Partnership is making a large investment in a business which, like the
Partnership's propane operations, is negatively affected by warm weather
during the winter months.
. The home heating oil business is not a growth business as a result of
increased competition from alternative energy sources
. In the Transaction, the proportion of subordinated units to total Units
will decline from 37.5% to 26.0%, and the support to Common Units will
therefore be reduced.
. The number of Common Units will increase from approximately 3.9 million to
10.3 million, representing potential significant dilution.
. The income of Petro, unlike the income from the Partnership's propane
operations, will be subject to corporate tax prior to any distributions.
. The ratio of taxable income to cash distributions to be made to the
existing Common Unitholders will increase over time at a greater rate than
if the Transaction does not occur, and dividend income from Petro cannot
be offset with past or future losses generated by the Partnership's
propane operations.
2
<PAGE>
Q: WHAT ARE THE CONFLICTS OF INTEREST IN STRUCTURING THE TRANSACTION?
A: Star Gas, the current general partner of the Partnership, is a wholly-owned
subsidiary of Petro, and Petro owns all of the outstanding Subordinated
Units of the Partnership. All but two of the directors of Star Gas are also
directors or officers of Petro. As a result, Star Gas and Petro's
representatives on the Star Gas Board have interests that are different
from, and in conflict with, the interests of the Common Unitholders.
The officers of Star Gas and members of the Star Gas Board, including the
members of the Special Committee (discussed below), will be indemnified, to
the extent permitted by law, for any and all actions taken in connection
with the Transaction.
Q: WHAT IS THE SPECIAL COMMITTEE?
A: The special committee (the "Special Committee") consists of the two members
of the Star Gas Board, who are neither officers, directors nor employees of
Petro and who were originally elected to the Star Gas Board by Petro. They
were appointed by the Star Gas Board as a Special Committee to negotiate
the acquisition on behalf of the public Common Unitholders (the "Public
Common Unitholders") of the Partnership, for which they will each receive
additional compensation of $40,000.
Q: WHAT ARE THE PURPOSES OF THE UNITHOLDERS MEETING?
A: A Unitholders Meeting has been called to consider and vote upon several
matters, including the Star Proposals (discussed below), which must be
approved in order to consummate the acquisition of Petro. The affirmative
vote of a majority of the Common Units outstanding (excluding the Common
Units owned by Star Gas and its affiliates) on the Star Record Date is
required to approve each of the Star Proposals. None of the Star Proposals
will be effected unless all of them are approved.
Q: WHAT ARE THE STAR PROPOSALS?
A: There are three proposals that Public Common Unitholders are being asked to
approve:
. The Acquisition Proposal. The acquisition consists of an exchange by
certain stockholders of Petro who are considered to be affiliates of
their Common Stock for subordinated units in the Partnership (the
"Exchange") and a merger of a wholly-owned subsidiary of Star Gas into
Petro (the "Merger"), in which the remaining Petro Common Stockholders
will receive subordinated units in the Partnership;
. The Amendment Proposal. Certain amendments to the partnership agreement
to facilitate the Transaction; and
. The General Partner Proposal. The election of Star Gas LLC as the
successor general partner.
Q: WHAT ARE THE AMENDMENTS TO THE PARTNERSHIP AGREEMENT?
A: The material amendments set forth in the Amended and Restated Partnership
Agreement attached hereto as Annex C are as follows:
. Increase the Minimum Quarterly Distribution from $0.55 to $0.575 per
Unit;
. Extend the earliest date upon which the Subordination Period can expire
from January 1, 2001 to July 1, 2002;
3
<PAGE>
. Authorize the issuance of Senior Subordinated Units and Junior
Subordinated Units;
. Redesignate the general partner interests as General Partner Units and
subordinate the distribution rights of the General Partner Units to the
Common Units and the Senior Subordinated Units;
. Limit the amount of distributions that the Partnership can make during
the Subordination Period on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units;
. Authorize the issuance of up to an additional 909,000 Senior Subordinated
Units to the holders of the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units, but only if Petro satisfies
certain financial goals;
. Reallocate the incentive distribution rights previously held by the
General Partner among the Senior Subordinated Units, Junior Subordinated
Units and General Partner Units;
. Eliminate the requirement that the General Partner maintain a fixed
ownership interest in the Partnership and Operating Partnership;
. Eliminate the net worth requirement of the General Partner;
. Increase the $6 million basket in the definition of Operating Surplus
proportionately with the number of Common Units issued in the Equity
Offering;
. Authorize the issuance of Common Units in the Equity Offering and
increase the number of additional Common Units that may be issued during
the Subordination Period without a Unitholder vote from 1,300,000 to
2,500,000; and
. Provide the Senior Subordinated Units and Junior Subordinated Units
(other than Units held by the General Partner and its affiliates) with a
collective class vote on certain matters.
Q: WHY IS THERE A NEW GENERAL PARTNER, AND WHO IS IT?
A: As a result of the Transaction, Petro and its subsidiary, Star Gas (the
current general partner), will become subsidiaries of the Partnership. The
Partnership cannot have its own subsidiary serve as its general partner, so
a new entity must be formed.
The new general partner, Star Gas LLC, will be owned by certain affiliates
of Petro. The Board of Directors of Star Gas LLC (the "Star Gas LLC Board")
will be identical to the existing Star Gas Board as of the date of this
Proxy Statement, except that, at her request, one of the current directors
of Star Gas will withdraw as a director upon consummation of the
Transaction as a result of additional duties associated with a new job.
That director will be replaced by a director selected by the Star Gas LLC
Board, and the new director will not be an officer or employee of Star Gas
or any of its affiliates. The officers of Star Gas LLC will be certain of
the current officers of Star Gas and Petro.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE ACQUISITION?
A: The Transaction will not be taxable to the Common Unitholders. The
Partnership will receive an opinion of counsel to the effect that upon
consummation of the acquisition, the Partnership will continue to be
classified as a partnership for federal income tax purposes.
4
<PAGE>
. The ratio of taxable income to cash distributions to be made to the
existing Common Unitholders will increase over time at a greater rate than
if the Transaction does not occur, and dividend income from Petro cannot
be offset with past or future losses generated by the Partnership's
propane operations. The acquisition will have different tax effects on
different Common Unitholders, depending on when they purchased their
Units.
Q: WHAT FINANCINGS WILL OCCUR IN CONNECTION WITH THE TRANSACTION?
A: The Partnership intends to raise approximately $140 million through a public
offering (the "Equity Offering") of Common Units and approximately $120
million through a debt offering (the "Debt Offering"). The proceeds from
such offerings will be used to redeem certain outstanding debt and preferred
stock of Petro.
Q: WHAT ARE THE CONDITIONS PRECEDENT TO CLOSING THE TRANSACTION?
A: In order for the Transaction to occur, the following conditions, among
others, must be met:
. The holders of a majority of Common Units (other than the Common Units
owned by Star Gas and its affiliates) must approve the Star Proposals.
. The holders of a majority of the shares of Class A Common Stock (other
than Class A Common Stock owned by the directors and executive officers of
Petro and their affiliates) and Class C Common Stock, each voting
separately as a class, must approve the Acquisition Proposal.
. Once the Star Proposals and the Acquisition Proposal are approved, the
Equity Offering and Debt Offering must be completed.
. The Partnership and Petro must receive all necessary regulatory and third
party approvals.
. The holders of no more than 10% of the outstanding shares of Common Stock
shall have perfected their dissenters' rights.
. Petro must meet certain financial tests set forth in the Merger Agreement.
Q: WHEN IS THE TRANSACTION EXPECTED TO OCCUR?
A: The Partnership and Petro are working towards completing the Transaction as
soon as possible. Subject to the conditions set forth above, the Partnership
and Petro anticipate completing the Transaction in early 1999.
Q: WHAT IF THE TRANSACTION DOES NOT HAPPEN?
A: If the required votes to approve each of the Star Proposals and the
Acquisition Proposal are not obtained or other conditions are not satisfied,
the ownership structures of the Partnership and Petro will continue as they
are on the date of this Proxy Statement. Petro will remain the parent of the
current general partner, and the Partnership's Common Units will continue to
be traded on the New York Stock Exchange under the symbol "SGU".
5
<PAGE>
Q: WHAT DO I NEED TO DO RIGHT NOW?
A: Just return your signed proxy card in the enclosed return envelope as soon
as possible in order for your Units to be represented at the meeting. Based
on the recommendation of the Special Committee, the Star Gas Board
unanimously recommends that Common Unitholders vote FOR the Star Proposals.
Q: WHEN IS THE UNITHOLDERS MEETING?
A: The meeting of the Common Unitholders will take place at a.m., New York
City time, on , 1999, at , New York, New York.
Q: DO I SEND IN MY UNIT CERTIFICATES?
A: No. Your Common Units will continue to be listed and traded on the New York
Stock Exchange.
6
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE
TRANSACTION FOR PETRO COMMON STOCKHOLDERS
Q: WHAT IS BEING PROPOSED? WHAT ARE THE REASONS FOR IT?
A: You are considering the acquisition of Petro by the Partnership, as a result
of which you (the "Public Common Stockholders") will receive Senior
Subordinated Units of the Partnership that will be listed on the New York
Stock Exchange in exchange for your shares of Common Stock. We believe Petro
is the largest home heating oil distributor in the U.S. and the principal
consolidator of that highly fragmented industry. However, Petro does not
have the financial flexibility to fully capitalize upon the acquisition,
operating and corporate branding opportunities resulting from this position.
This Transaction will recapitalize Petro providing it with access to lower
cost capital to better realize these growth opportunities.
Q: WHO IS THE PARTNERSHIP?
A:. We believe, the eighth largest retail propane distributor in the United
States.
. A publicly traded master limited partnership ("MLP") whose Common Units
are listed on the New York Stock Exchange under the symbol "SGU."
. A current subsidiary of Petro. The current general partner of the
Partnership, Star Gas, is a wholly-owned subsidiary of Petro and owns all
of the outstanding subordinated units of the Partnership.
Q: WHAT ARE THE POTENTIAL BENEFITS TO THE COMMON STOCKHOLDERS?
A:. This Transaction will provide Petro with the financial structure to
implement its growth-through-acquisition strategy and invest in its
operating and corporate branding opportunities.
. We believe that as part of an MLP, Petro should receive an improved
market valuation. Since MLP's are cash flow oriented and are valued
primarily on a cash distribution basis, the MLP structure corresponds
more closely with Petro's focus on cash flow. We also believe the
Partnership will have greater investment community awareness as compared
to Petro. As the only public home heating oil company, Petro has had
limited securities analyst research coverage.
. Although Petro has historically paid cash dividends to its Common
Stockholders, these dividends have been suspended. The Partnership
generally distributes to its partners the cash it generates from its
operations. While there can be no assurance, this should give Common
Stockholders an increased probability of a resumption of annual
distributions.
. You will receive Senior Subordinated Units that must receive their full
Minimum Quarterly Distribution prior to any payments being made on the
Junior Subordinated Units and the General Partner Units.
7
<PAGE>
. The Senior Subordinated Units will be allocated certain incentive
distribution rights previously held by the General Partner. To the extent
that the Partnership generates cash above certain target distribution
levels, the holders of Senior Subordinated Units may receive greater cash
distributions than the Common Unitholders.
. If Petro meets certain financial goals within the five-year period after
closing, the holders of Senior Subordinated Units, Junior Subordinated
Units and General Partner Units will receive up to an additional 909,000
Senior Subordinated Units. This enables Common Stockholders to continue
to participate in Petro's future performance.
Q: WHAT ARE THE POTENTIAL DISADVANTAGES AND RISKS?
A: The following are potential disadvantages and risks to the Common
Stockholders in the Transaction:
. Unitholders in the Partnership have substantially different, and probably
fewer, legal rights than Common Stockholders.
. There is no current trading market for the Senior Subordinated Units.
Although the Senior Subordinated Units have been approved for listing on
the New York Stock Exchange, there is no assurance that any active
trading market will develop after the closing of the Transaction. It is
expected that the Senior Subordinated Units will trade at a lower price
than the Common Units.
. Distributions on the Senior Subordinated Units, Junior Subordinated Units
and General Partner Units are not guaranteed and are subordinated to
distributions on the Common Units. Further, distributions on the Senior
Subordinated Units, Junior Subordinated Units and General Partner Units
are generally limited to distributable cash generated after the closing
of the Transaction. Therefore, there is significant uncertainty as to the
amount and timing of such distributions.
. Star Gas LLC, the new general partner in the Partnership, may have a
greater number of conflicts of interest than the directors of Petro.
. The Partnership's propane operations, like Petro's home heating oil
business, are negatively affected by warm weather during the winter
months.
. The Partnership may face difficulties in the future in making attractive
acquisitions in the propane industry because of the highly competitive
nature of such industry.
. Common Stockholders that are tax-exempt entities, regulated investment
companies or foreign taxpayers may determine that holding an interest in
the Partnership may be unattractive from a tax perspective. If certain of
these investors sell their Senior Subordinated Units following
the Transaction, the market price of the Senior Subordinated Units could
fall substantially.
Q: WHAT ARE THE CONFLICTS IN STRUCTURING THE TRANSACTION?
A: Certain directors of Petro have interests in the Transaction that are
different from, and in conflict with, the interests of the Public Common
Stockholders, since such directors and their affiliates will receive
consideration in the Transaction that is different from that of the Public
Common Stockholders. These directors and their
8
<PAGE>
affiliates will be exchanging their Common Stock for Junior Subordinated
Units and General Partner Units, while the Public Common Stockholders and
certain other directors and other affiliates will be receiving
Senior Subordinated Units.
The Junior Subordinated Units and General Partners Units will not be
entitled to distributions until the Senior Subordinated Units receive the
Minimum Quarterly Distribution. The Senior Subordinated Units will be
publicly traded and have been approved for listing on the New York Stock
Exchange. The Junior Subordinated Units and General Partner Units have not
been registered and will not be publicly traded.
The affiliates exchanging their Common Stock for Junior Subordinated Units
and General Partner Units will receive .15909 Junior Subordinated Units
or General Partner Units for each share of Common Stock, whereas the
remaining Common Stockholders will exchange their shares for Senior
Subordinated Units at a ratio of .13064 Senior Subordinated Units for each
share of Common Stock.
The Transaction has been structured so that the Public Common Stockholders
will realize a taxable gain or loss on the Transaction, whereas all
affiliates of Petro will exchange their Common Stock without realizing such
a taxable gain or loss. This structure was designed to minimize the tax
effect of the Transaction on Petro. It was also based on the assumption
that certain Petro affiliates have a low tax basis and would prefer not
realizing a taxable gain on the Transaction, whereas Public Common
Stockholders generally have a higher tax basis and would prefer realizing a
tax loss.
The officers and directors of Petro will be indemnified, to the extent
permitted by law, for any and all actions taken in connection with the
Transaction. The officers of Petro will continue to be employed as officers
following the Transaction.
Q: WHAT IS THE PURPOSE OF THE SPECIAL MEETING?
A: The purpose of the Special Meeting is for the holders of each class of
Common Stock to consider and vote upon the Acquisition Proposal. Each class
of Common Stock is entitled to one vote per share for this purpose. The
affirmative vote of a majority of all votes that could be cast by the
holders of each class of shares of Common Stock, outstanding as of the
Petro Record Date, each voting separately as a class, and the holders of a
majority of shares of Class A Common Stock held by the Public Common
Stockholders outstanding as of the Petro Record Date, is required to
approve the Acquisition Proposal.
Q: WHAT ARE THE MERGER AND THE EXCHANGE?
A: The Merger and the Exchange are the methods by which the acquisition will
be effected. The Merger is the aspect of the acquisition in which Petro
becomes a subsidiary of the Partnership. In order to accomplish this, Petro
will be merged with a subsidiary of the Partnership. Pursuant to the
Merger, the Common Stockholders will receive .13064 Senior Subordinated
Units for each outstanding share of Common Stock. Pursuant to the Exchange,
affiliated Common Stockholders will contribute their shares of Common Stock
to the Partnership in exchange for Senior
9
<PAGE>
Subordinated Units, Junior Subordinated Units and General Partner Units.
Q: WHICH PARTS OF THE TRANSACTION AM I CONSIDERING?
A: The Common Stockholders of Petro are only voting on the acquisition of Petro
by the Partnership.
Q: WHAT WILL I RECEIVE FOR MY COMMON STOCK IN THE TRANSACTION?
A: For each of your shares of Common Stock, you will get .13064 Senior
Subordinated Units of limited partner interest in the Partnership. You will
receive a check in payment for any fractional units based on the market
value of Senior Subordinated Units. For example, if you own 100 shares of
Common Stock, you will receive 13 Senior Subordinated Units and a check
for your fractional Unit. In addition, each Common Stockholder will receive:
incentive distributions in excess of those made to the Common Unitholders if
the Partnership generates cash above certain target distribution levels; and
a pro rata distribution of up to an additional 909,000 Senior Subordinated
Units, but only if Petro meets certain financial goals after the acquisition
is consummated.
Q: WHEN CAN I EXPECT TO RECEIVE MY FIRST DISTRIBUTION AS A HOLDER OF SENIOR
SUBORDINATED UNITS?
A: The earliest you could expect to receive your first distribution would be on
or about August 15, 1999 for the period from the closing of the Transaction
through June 30, 1999. Whether the Partnership will make distributions on
the Senior Subordinated Units and the amount of such distributions with
respect to any quarter is dependent on a number of factors including the
following:
. results of operations of the Partnership;
. the ability of the Partnership to satisfy certain restrictions on
distributions in its debt instruments;
. the ability of the Partnership to satisfy certain restrictions on
distributions on Senior Subordinated Units under the Amended and Restated
Partnership Agreement; and
. whether the General Partner determines to distribute available cash to
Senior Subordinated Unitholders or reserve such cash for other uses of the
Partnership.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: The Merger will be a taxable transaction to Public Common Stockholders, to
the extent of the difference, if any, between the value of the Senior
Subordinated Units received and the federal income tax basis such holder has
in the shares of Common Stock that are exchanged.
Q: WHAT FINANCINGS WILL OCCUR IN CONNECTION WITH THE TRANSACTION?
A: The Partnership intends to raise approximately $140 million through the
Equity Offering and approximately $120 million through the Debt Offering.
The proceeds from such offerings will be used to redeem certain outstanding
debt and preferred stock of Petro.
Q: WHAT ARE THE CONDITIONS PRECEDENT TO CLOSING THE TRANSACTION?
A: In order for the Transaction to occur, the following conditions, among
others, must be met:
. The holders of a majority of the shares of Class A Common Stock (other
than Class A Common Stock owned by the
10
<PAGE>
directors and executive officers of Petro and their affiliates) and Class
C Common Stock, each voting separately as a class, must approve the
Acquisition Proposal.
. The holders of a majority of Common Units (other than the Common Units
owned by Star Gas and its affiliates) must approve the Star Proposals.
. Once the Star Proposals and the Acquisition Proposal are approved, the
Equity Offering and the Debt Offering must be completed.
. The Partnership and Petro must receive all necessary regulatory and third
party approvals.
. The holders of no more than 10% of the outstanding shares of Common Stock
shall have perfected their dissenters' rights.
. Petro will meet certain financial tests set forth in the Merger
Agreement.
Q: WHEN IS THE TRANSACTION EXPECTED TO OCCUR?
A: The Partnership and Petro are working towards completing the Transaction as
soon as possible. Subject to the conditions set forth above, the
Partnership and Petro anticipate completing the Transaction in early 1999.
Q: WHAT IF THE TRANSACTION DOES NOT HAPPEN?
A: If the required votes to approve each of the Star Proposals and the
Acquisition Proposal are not obtained or other conditions are not
satisfied, the ownership structures of the Partnership and Petro will
continue as they are on the date of this Proxy Statement. Petro will remain
the parent of the current General Partner, and its Common Stock will
continue to be traded under the symbol "HEAT."
Q: WHAT DO I NEED TO DO RIGHT NOW?
A: Just return your signed proxy card in the enclosed return envelope as soon
as possible in order for your shares of Common Stock to be represented at
the meeting. The Petro Board has approved the Transaction and unanimously
recommends that Common Stockholders vote FOR the Acquisition Proposal.
Q: WHEN IS THE SPECIAL MEETING?
A: The Special Meeting of the Common Stockholders will take place at
a.m., New York City time, on , 1999, at , New York, New
York.
Q: DO I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the Transaction is approved, record holders of Common Stock will
receive written instructions on how to deliver their Petro stock
certificates in exchange for Senior Subordinated Units.
11
<PAGE>
PROXY STATEMENT SUMMARY
This summary highlights selected information from this document and does not
contain all of the information that is important to you. To understand the Star
Proposals and the Acquisition Proposal fully, and for a more complete
description of the legal terms of the Star Proposals and the Acquisition
Proposal, you should read carefully this entire document and the documents to
which we have referred you. See "Where You Can Find More Information" (page
206). We have included page references parenthetically to direct you to a more
complete description of the topics presented in this summary. 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, and the propane operations of Petro. All such operations were
acquired by the Partnership in December 1995. Common Unitholders and Common
Stockholders should carefully read this Proxy Statement in its entirety. For
ease of reference, a glossary (the "Glossary") of certain terms used in this
Proxy Statement is included herein. Certain capitalized terms used in this
summary are defined elsewhere in this Proxy Statement.
PARTIES (SEE PAGE 72)
The Partnership and the Operating Partnership. The Partnership, through the
Operating Partnership, is primarily a retail distributor of propane and related
supplies and equipment to residential, commercial, industrial, agricultural and
motor fuel customers. Propane is used primarily as fuel for space and water
heating and cooking by the Partnership's residential and commercial customers,
which customers constitute the largest portion of its customer base. The
Partnership believes that it is the eighth largest retail propane distributor
in the United States, serving approximately 166,000 customers from 74 branch
locations in 13 states in the Midwest and Northeast with total sales of
approximately $135 million for the fiscal year ended September 30, 1997. In
addition to its retail business, the Partnership serves approximately 50
wholesale customers from its wholesale operation in southern Indiana.
The executive offices of the Partnership are located at 2187 Atlantic Street,
Stamford, Connecticut 06902. The Partnership's telephone number is (203) 328-
7300.
Petro. Petro is primarily a retail distributor of home heating oil in the
Northeast and Mid-Atlantic states. Petro believes that it is the largest
distributor of home heating oil in the United States. Petro serves
approximately 340,000 customers from 24 branch locations in such states, with
total sales of approximately $548.1 million for the fiscal year ended December
31, 1997. To a limited extent, Petro also markets other petroleum products,
including diesel fuel and gasoline, to commercial customers. In addition to its
heating oil business, Petro currently owns a 40.5% equity interest in the
Partnership. Star Gas, a wholly-owned subsidiary of Petro, is the general
partner of the Partnership and the Operating Partnership.
Petro's executive offices are located at 2187 Atlantic Street, Stamford,
Connecticut 06902. Petro's telephone number is (203) 325-5400.
12
<PAGE>
POTENTIAL ADVANTAGES TO THE COMMON UNITHOLDERS (SEE PAGE 96)
The following are the potential advantages of the Transaction to the Common
Unitholders:
. The Minimum Quarterly Distribution to Unitholders will increase from $2.20
to $2.30 per Unit annually, subject to Available Cash to make such
distribution.
. The Transaction has been structured with the intent of providing an
increase in the Partnership's distributable cash flow per Unit. If this
expectation is realized, it will provide greater protection of the Minimum
Quarterly Distribution and improves the possibility of future distribution
increases.
. The acquisition of Petro should improve the Partnership's growth prospects
by providing the Partnership with an additional source of attractive
acquisition and expansion opportunities.
. Common Stockholders will be receiving subordinated units entitling them to
receive distributions only after the Partnership's Common Unitholders
receive their full Minimum Quarterly Distribution.
. The Subordination Period during which the Common Unit distribution is
senior to the subordinated units has been extended 18 months to July 1,
2002.
. The Transaction will increase the Partnership's market capitalization and
should provide greater Common Unit market liquidity, investment community
awareness and the ability to attract securities analyst research coverage.
POTENTIAL DISADVANTAGES AND RISKS TO THE COMMON UNITHOLDERS (SEE PAGES 48 AND
97)
The following are the potential disadvantages and risks of the Transaction
to the Common Unitholders:
. The Partnership is acquiring an entity which, based on 1997 revenues, is
several times its size. Therefore, the nature of the Partnership's
business will be significantly changed.
. Petro has a history of operational and financial difficulties (including
high leverage and recent substantial net losses).
. The success of the Transaction depends upon the Partnership's ability to
--Continue to make acquisitions at attractive prices;
--Continue to reduce Petro's customer attrition rate; and
--Continue to improve Petro's profit margins on a per gallon basis.
. The Partnership is making a large investment in a business which, like the
Partnership's propane operations, is negatively affected by warm weather
during the winter months.
. The home heating oil business is not a growth business as a result of
increased competition from alternative energy sources.
. In the Transaction, the proportion of subordinated units to total Units
will decline from 37.5% to 26%, and the support to Common Units will
therefore be reduced.
. The number of Common Units will increase from approximately 3.9 million to
10.3 million, representing potential significant dilution.
13
<PAGE>
. The income of Petro, unlike the income from the Partnership's propane
operations, will be subject to corporate tax prior to any distributions.
. The ratio of taxable income to cash distributions to be made to the
existing Common Unitholders will increase over time at a greater rate than
if the Transaction does not occur, and dividend income from Petro cannot
be offset with past or future losses generated by the Partnership's
propane operations.
POTENTIAL ADVANTAGES TO THE COMMON STOCKHOLDERS (SEE PAGE 107)
The following are the potential advantages of the Transaction to the Common
Stockholders:
. This Transaction will provide Petro with the financial structure to
implement its growth-through-acquisition strategy and invest in its
operating and corporate branding opportunities.
. We believe that as part of an MLP, Petro should receive an improved
market valuation. Since MLP's are cash flow oriented and are valued
primarily on a cash distribution basis, the MLP structure corresponds
more closely with Petro's focus on cash flow. We also believe the
Partnership will have greater investment community awareness as compared
to Petro. As the only public home heating oil company, Petro has had
limited securities analyst research coverage.
. Although Petro has historically paid cash dividends to its Common
Stockholders, these dividends have been suspended. The Partnership
generally distributes to its partners the cash it generates from its
operations. While there can be no assurance, this should give Common
Stockholders an increased probability of a resumption of annual
distributions.
. You will receive Senior Subordinated Units that must receive their full
Minimum Quarterly Distribution prior to any payments being made on the
Junior Subordinated Units and the General Partner Units.
. The Senior Subordinated Units will be allocated certain incentive
distribution rights previously held by the General Partner. To the extent
that the Partnership generates cash above certain target distribution
levels, the holders of Senior Subordinated Units may receive greater cash
distributions than the Common Unitholders.
. If Petro meets certain financial goals within the five-year period after
closing, the holders of Senior Subordinated Units Junior Subordinated
Units and General Partner Units will receive up to additional 909,000
Senior Subordinated Units. This enables Common Stockholders to continue to
participate in Petro's future performance.
POTENTIAL DISADVANTAGES AND RISKS TO THE COMMON STOCKHOLDERS (SEE PAGES 55 AND
108)
The following are the potential disadvantages and risks of the Transaction to
the Common Stockholders:
14
<PAGE>
. Unitholders in the Partnership have substantially different, and probably
fewer, legal rights than Common Stockholders.
. There is no current trading market for the Senior Subordinated Units.
Although the Senior Subordinated Units have been approved for listing on
the New York Stock Exchange, there is no assurance that any active trading
market will develop after the closing of the Transaction. It is expected
that the Senior Subordinated Units will trade at a lower price than the
Common Units.
. Distributions on the Senior Subordinated Units, Junior Subordinated Units
and General Partner Units are not guaranteed and are subordinated to
distributions on the Common Units. Further, distributions on the Senior
Subordinated Units, Junior Subordinated Units and General Partner Units
are generally limited to distributable cash generated after the closing of
the Transaction. Therefore, there is significant uncertainty as to the
amount and timing of such distributions.
. Star Gas LLC, the new general partner in the Partnership, may have a
greater number of conflicts of interest than the directors of Petro.
. The Partnership's propane operations, like Petro's home heating oil
business, are negatively affected by warm weather during the winter
months.
. The Partnership may face difficulties in the future in making attractive
acquisitions in the propane industry because of the highly competitive
nature of such industry.
. Common Stockholders that are tax-exempt entities, regulated investment
companies or foreign taxpayers may determine that holding an interest in
the Partnership may be unattractive from a tax perspective. If certain of
these investors sell their Senior Subordinated Units following
the Transaction, the market price of the Senior Subordinated Units could
fall substantially.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND STAR GAS BOARD AND OPINION OF A.G.
EDWARDS & SONS, INC. (SEE PAGES 96 AND 98)
All of the directors of Star Gas are also directors or officers of Petro,
except for two directors who have no affiliation with Petro and who were
originally elected to the Star Gas Board by Petro. Because the directors of
Petro who are also directors of Star Gas may be considered to have a conflict
of interest when considering this Transaction and because Petro owns all
outstanding Subordinated Units of the Partnership, the two non-affiliated
directors of Star Gas were appointed as a Special Committee to negotiate the
Transaction on behalf of the Public Common Unitholders, for which they will
each receive additional compensation of $40,000. The Special Committee was
represented by independent legal counsel in such negotiations.
A.G. Edwards & Sons, Inc. ("A.G. Edwards") has served as independent
financial advisor to the Special Committee in connection with the Transaction
and has rendered an opinion to the Special Committee (the "A.G. Edwards
Opinion") that the Transaction is fair, from a financial point of view, to the
Public Common Unitholders. See "The Transaction--Opinion of A.G. Edwards." The
A.G. Edwards Opinion is attached as Annex D to this Proxy
15
<PAGE>
Statement. Common Unitholders and Common Stockholders are urged to read such
opinion in its entirety for descriptions of the procedures followed, matters
considered and limitations on the reviews undertaken in connection therewith.
After considering the advice of its independent legal counsel and financial
advisor and based upon the A.G. Edwards Opinion, the Special Committee believes
that the Transaction is in the best interests of the Public Common Unitholders
and has recommended the Transaction to the Star Gas Board. Based on such
recommendation, the Star Gas Board unanimously recommends that Common
Unitholders vote FOR the Star Proposals. See "The Transaction--Background of
and Reasons for the Transaction."
RECOMMENDATIONS OF PETRO BOARD AND OPINION OF DAIN RAUSCHER WESSELS (SEE PAGES
107 AND 109)
Each of the members of the Petro Board has interests that conflict, or may be
perceived to conflict, with the interests of the Public Common Stockholders. As
a result, the Petro Board could not establish an independent committee. The
Petro Board has determined that the Transaction is fair and in the best
interests of the Common Stockholders and has, therefore, approved the Merger
Agreement and the Exchange Agreement, and unanimously recommends that Common
Stockholders vote FOR the Acquisition Proposal. See "The Transaction--
Background of and Reasons for the Transaction."
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain
Rauscher Wessels"), has rendered an opinion to the Petro Board (the "Dain
Rauscher Wessels Opinion") that the consideration to be received in the Merger
by the Public Common Stockholders is fair, from a financial point of view, to
the Public Common Stockholders. See "The Transaction--Opinion of Dain Rauscher
Wessels." The Dain Rauscher Wessels Opinion is attached as Annex E to this
Proxy Statement. Common Unitholders and Common Stockholders are urged to read
such opinion in its entirety for descriptions of the procedures followed,
matters considered and limitations on the reviews undertaken in connection
therewith. PaineWebber Incorporated has also acted as a financial advisor to
Petro.
THE TRANSACTION (SEE PAGE 81)
The Transaction can be viewed as having four principal parts.
The Merger and Exchange
. The acquisition of Petro by the Partnership which is accomplished through
(i) a merger involving Petro and a wholly-owned subsidiary of the
Partnership, and (ii) an exchange by affiliates of Petro of their Common
Stock for Senior Subordinated Units, Junior Subordinated Units and General
Partner Units, which together will result in Petro becoming a wholly-owned
indirect subsidiary of the Partnership.
Related Financing and Refinancing Transactions
. Public debt and equity offerings by the Partnership and the redemption or
restructuring of the public and private debt and preferred stock of Petro.
New General Partner
. The substitution of a new general partner for the existing general partner
16
<PAGE>
of the Partnership. The new general partner will be owned by certain
affiliates of Petro.
Amendment of the Partnership Agreement
. Amendment of the Partnership Agreement as required by the Merger
Agreement.
THE MERGER AND THE EXCHANGE
The Merger Agreement is attached as Annex A to this Proxy Statement. We
encourage you to read the Merger Agreement as it is the legal document that
governs the Merger.
Under the Merger Agreement, at the Effective Time of the Merger, Mergeco will
be merged with and into Petro, with Petro surviving the Merger as a wholly-
owned, indirect subsidiary of the Operating Partnership. As a result of the
Merger, each outstanding share of Petro Common Stock (other than shares which
have been exchanged pursuant to the Exchange Agreement or as to which
dissenters' rights have been perfected) will be converted into .13064 Senior
Subordinated Units; each outstanding share of junior preferred convertible
stock of Petro (the "Junior Preferred Stock") will be converted into .13064
Common Units; and each outstanding share of Series C exchangeable preferred
stock due 2009 of Petro (the "Public Preferred Stock") will be converted into
the right to receive $23 in cash per share plus accrued and unpaid dividends.
There are 11,228 shares of Class B common stock (the "Class B Shares") of
Petro currently outstanding, representing less than .01% of the issued and
outstanding shares of common stock of Petro, which will remain outstanding
following the Effective Time.
The Exchange Agreement is attached as Annex B to this Proxy Statement. We
encourage you to read the Exchange Agreement as it is the legal document that
governs the Exchange.
The Exchange will occur immediately prior to the Merger and is comprised of
the following elements.
(a) Certain Common Stockholders, consisting of Irik P. Sevin, Audrey L. Sevin
and an entity affiliated with Wolfgang Traber (the "LLC Owners"), will form
Star Gas LLC, to which they will contribute a portion of their shares of Common
Stock in exchange for all of the limited liability company interests in Star
Gas LLC. Star Gas LLC will contribute such shares to the Partnership in
exchange for General Partner Units. In addition, the LLC Owners will contribute
their remaining shares of Common Stock to the Partnership in exchange for
Junior Subordinated Units.
(b) Certain other Common Stockholders who are considered to be affiliates of
Petro will contribute shares of Common Stock to the Partnership in exchange for
Senior Subordinated Units.
RELATED FINANCING AND REFINANCING TRANSACTIONS
An integral element of the Transaction is the refinancing of Petro's
outstanding debt and preferred stock that will substantially reduce Petro's
ongoing borrowing costs. This refinancing will be accomplished through several
related transactions, which will close substantially simultaneously with the
closing of the Transaction.
Key elements in the related financing are a public equity offering by the
Partnership and a debt offering by Petro Holdings Inc. ("Petro
17
<PAGE>
Holdings"). The Partnership will offer for sale to the public pursuant to the
Equity Offering approximately 6.4 million Common Units, the net proceeds of
which are estimated to be $132.1 million. Petro Holdings, a wholly-owned
indirect subsidiary of the Partnership and the direct parent of Petro following
the Transaction, will sell to the public approximately $120.0 million of Notes
("Petro Holdings Senior Subordinated Debt") pursuant to the Debt Offering, the
net proceeds of which are estimated to be $115.4 million. It is expected that
the Partnership will guarantee the Petro Holdings Senior Subordinated Debt.
The net proceeds of the Equity Offering and the Debt Offering will be used to
redeem Petro's outstanding public debt and preferred stock and to pay for the
expenses of the Transaction.
NEW GENERAL PARTNER
Since Star Gas is a wholly-owned subsidiary of Petro and will be acquired in
the Transaction by the Partnership, it will no longer be able to serve as
general partner of the Partnership. The new general partner of the Partnership
will be Star Gas LLC, which will be owned by the LLC Owners. Star Gas LLC's
business activities will be limited to those related to being a general partner
of the Partnership. Star Gas LLC is not expected to have a significant net
worth except for its interest in the Partnership. The directors of Star Gas LLC
will be identical to the existing Star Gas Board as of the date of this Proxy
Statement, except that, at her request, one of the current directors of Star
Gas will withdraw as a director upon consummation of the Transaction as a
result of additional duties associated with a new job. That director will
be replaced by a director selected by the Star Gas LLC Board, and the new
director will not be an officer or employee of Star Gas or any of its
affiliates. The officers of Star Gas LLC will be certain of the current
officers of Star Gas and Petro.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
In order to consummate the Transaction, certain amendments must be made to
the Partnership Agreement and Operating Partnership Agreement. If approved, the
Amendment Proposal will, among other matters:
. Increase the Minimum Quarterly Distribution from $0.55 to $0.575 per Unit;
. Extend the earliest date upon which the Subordination Period can expire
from January 1, 2001 to July 1, 2002;
. Authorize the issuance of Senior Subordinated Units and Junior
Subordinated Units;
. Redesignate the general partner interests as General Partner Units and
subordinate the distribution rights of the General Partner Units to the
Common Units and the Senior Subordinated Units;
. Limit the amount of distributions that the Partnership can make during the
Subordination Period on the Senior Subordinated Units, Junior Subordinated
Units and General Partner Units;
. Authorize the issuance of up to an additional 909,000 Senior Subordinated
Units to the holders of the Senior Subordinated Units, Junior Subordinated
Units and General Partner Units, but only if Petro satisfies certain
financial goals;
18
<PAGE>
. Reallocate the incentive distribution rights previously held by the
General Partner among the Senior Subordinated Units, Junior Subordinated
Units and General Partner Units;
. Eliminate the requirement that the General Partner maintain a fixed
ownership interest in the Partnership and Operating Partnership;
. Eliminate the net worth requirement of the General Partner;
. Increase the $6 million basket in the definition of Operating Surplus
proportionately with the number of Common Units issued in the Equity
Offering;
. Authorize the issuance of Common Units in the Equity Offering and increase
the number of additional Common Units that may be issued during the
Subordination Period without a Unitholder vote from 1,300,000 to
2,500,000; and
. Provide the Senior Subordinated Units and the Junior Subordinated Units
(other than the Units held by the General Partner and its affiliates) with
a collective class vote on certain matters. See "Amendments to the
Partnership Agreements--Summary of Amendments to the Partnership
Agreement" and "The Amended and Restated Partnership Agreement."
19
<PAGE>
ESTIMATED SOURCES AND USES OF FUNDS OF THE EQUITY OFFERING AND DEBT OFFERING
As a result of the Transaction, the sources and uses of funds are currently
anticipated to be as follows:
(In thousands)
<TABLE>
<S> <C>
SOURCES
Equity Offering, net(/1/)........................................... $132,100
Debt Offering, net(/1/)............................................. 115,400
--------
$247,500
========
USES
Redeem Petro 10 1/8% Notes.......................................... $ 50,000
Redeem Petro 9 3/8% Debentures...................................... 75,000
Redeem Petro 12 1/4% Debentures(/2/)................................ 84,094
Redeem Petro Public Preferred Stock................................. 27,600
Repurchase Petro 1989 Preferred Stock............................... 4,167
Transaction Fees and Expenses....................................... 6,639
--------
$247,500
========
</TABLE>
- --------
(1) Assumes the sale of 6.4 million Common Units at $22.00 per Common Unit. Net
of underwriting discounts and commissions.
(2) Includes prepayment premium of $2,844.
Such estimated sources and uses may change, depending on market conditions,
the Partnership's and Petro's operations and other factors.
OUTSTANDING PARTNERSHIP UNITS
The following table sets forth the approximate number of Units outstanding
before and after completion of the Transaction:
<TABLE>
<CAPTION>
BEFORE TRANSACTION AFTER TRANSACTION
-------------------- ---------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
COMMON UNITS
Existing Common Units............. 3,858,999 60.5% 3,858,999 27.7%
Issued to Petro Junior Preferred
Stockholders..................... -- -- 102,773 0.7%
Issued in Equity Offering(/1/).... -- -- 6,363,636 45.6%
--------- ---- ---------- -----
Subtotal........................ 3,858,999 60.5% 10,325,408 74.0%
SUBORDINATED UNITS
Existing Subordinated Units....... 2,396,078 37.5% -- --
Senior Subordinated Units......... -- -- 2,767,058 19.8%
Junior Subordinated Units......... -- -- 577,205 4.2%
--------- ---- ---------- -----
Subtotal........................ 2,396,078 37.5% 3,344,263 24.0%
GENERAL PARTNER
INTERESTS/UNITS(/2/)............... 127,655 2.0% 278,973 2.0%
--------- ---- ---------- -----
Total........................... 6,382,732 100% 13,948,644 100.0%
========= ==== ========== =====
</TABLE>
- --------
(1) Estimated based on an assumed offering price of $22.00 per Unit. The exact
number of Common Units to be issued in the Equity Offering will be based on
the public offering price of Common Units at the time of sale.
(2) Stated in equivalent units before the Transaction and includes the General
Partner's interest in the Operating Partnership.
20
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Partnership as of June 30, 1998, (ii) as adjusted to give pro forma effect to
the acquisition of Petro and (iii) as further adjusted to give pro forma effect
to the closing of the Equity Offering and the Debt Offering and the application
by the Partnership of the net proceeds therefrom as described in "Proxy
Statement Summary--Sources and Uses of Funds." The table should be read in
conjunction with the historical and pro forma financial statements and notes
thereto included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------------------
ACTUAL AS ADJUSTED(A) PRO FORMA(A)
-------- -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash....................................... $ 1,551 $ 23,507 $ 20,932
======== ======== ========
Debt:
Star Gas First Mortgage Notes............. $ 96,000 $ 96,000 $ 96,000
Petro Holdings Senior Subordinated Debt... -- -- 120,000
Petro Public Debt(b)...................... -- 209,094 --
Petro Private Debt(c)..................... -- 81,779 81,779
Star Gas Acquisition Facility............. -- 5,000 5,000
-------- -------- --------
Total Long-Term debt................... 96,000 391,873 302,779
-------- -------- --------
Redeemable Preferred Stock:
Public Preferred Stock.................... -- 27,600 --
Private Preferred Stock................... -- 4,167 --
Partners' capital:
Common Unitholders........................ 63,683 66,574 198,674
Subordinated Unitholders.................. 2,056 -- --
Senior Subordinated Unitholders........... -- 20,153 20,153
Junior Subordinated Unitholders........... -- 3,429 3,429
General Partner........................... 281 1,666 1,666
-------- -------- --------
Total partners' capital................ 66,020 91,822 223,922
-------- -------- --------
Total capitalization................... $162,020 $515,462 $526,701
======== ======== ========
</TABLE>
- --------
(a) See the Unaudited Pro Forma Condensed Consolidated Financial Information of
Star Gas Partners, L.P., included elsewhere in this Proxy Statement, for a
discussion of the pro forma adjustments.
(b) The Petro Public Debt consists of $50.0 million of 10 1/8% Subordinated
Notes originally due 2003, $75.0 million of 9 3/8% Subordinated Debentures
originally due 2006 and approximately $84.1 million of 12 1/4% Subordinated
Debentures originally due 2005.
(c) The Petro Private Debt consists of approximately $63.1 million of 9% Senior
Notes with a final maturity of 2002, approximately $4.3 million of 10.25%
Subordinated and Senior Notes with a final maturity in 2001 and
approximately $14.3 million of Notes payable in connection with the
purchase of fuel oil dealers maturing at various dates through 2004.
21
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION; CONFLICTS OF INTEREST
(SEE PAGE 66)
The Partnership
Star Gas, the current General Partner of the Partnership, is a wholly-owned
subsidiary of Petro, and Petro owns all the outstanding Subordinated Units of
the Partnership. All of the directors of Star Gas are also directors or
officers of Petro, except the members of the Special Committee. As a result,
the members of the Star Gas Board who are also members of the Petro Board have
conflicting fiduciary duties to the Common Unitholders, Petro and the Common
Stockholders. Therefore, certain members of the Star Gas Board have interests
that are different from, and in conflict with, the interests of the Public
Common Unitholders.
The officers and directors of Star Gas will be indemnified, to the extent
permitted by law, for any and all actions taken in connection with the
Transaction and are also covered by customary directors' and officers'
liability insurance. Each member of the Star Gas Board will be a member of the
Star Gas LLC Board following the Transaction except that, at her request, one
of the current directors of Star Gas will withdraw as a director upon
consummation of the Transaction as a result of additional duties associated
with a new job. That director will be replaced by a director selected by the
Star Gas LLC Board, and the new director will not be an officer or employee of
Star Gas LLC or any of its affiliates. The current officers of Star Gas will be
employed as officers of the Operating Partnership following the Transaction.
Petro
Certain directors of Petro have interests in the Transaction that are
different from, and in conflict with, the interests of the Public Common
Stockholders, since such directors and their affiliates are receiving
consideration in the Transaction that is different from that of the Public
Common Stockholders. These directors and their affiliates will be exchanging
their Common Stock for Junior Subordinated Units and General Partner Units,
while the Public Common Stockholders and certain other directors and other
affiliates will be receiving Senior Subordinated Units.
The Junior Subordinated Units and General Partners Units will not be entitled
to distributions until the Senior Subordinated Units receive the Minimum
Quarterly Distribution. The Senior Subordinated Units will be publicly traded
and have been approved for listing on the New York Stock Exchange. The Junior
Subordinated Units and General Partner Units have not been registered and will
not be publicly traded.
The affiliates exchanging their Common Stock for Junior Subordinated Units
and General Partner Units will receive .15909 Junior Subordinated Units or
General Partner Units for each share of Common Stock, whereas the remaining
Common Stockholders will exchange their shares for Senior Subordinated Units at
a ratio of .13064 Senior Subordinated Units for each share of Common Stock.
The Transaction has been structured so that the Public Common Stockholders
will realize a taxable gain or loss on the Transaction, whereas all affiliates
of Petro will exchange their Common Stock without realizing such a taxable gain
or loss. This structure was designed to minimize the tax effect of the
Transaction on Petro. It was also based on the assumption that certain Petro
affiliates have a low tax basis and would prefer not realizing a taxable gain
on the Transaction, whereas Public Common Stockholders generally have a higher
tax basis and would prefer realizing a tax loss.
22
<PAGE>
Irik P. Sevin is both the Chairman of the Board and Chief Executive Officer
of Petro and the Chairman of the Board of Star Gas; Audrey L. Sevin is the
Secretary and a director of both Petro and Star Gas; and Messrs. Paul
Biddelman, Thomas J. Edelman and Wolfgang Traber are directors of both Petro
and Star Gas. Messrs. Sevin, Biddelman, Edelman, Cohen and Traber and Mrs.
Sevin are beneficial owners of Class A Common Stock and Class C Common Stock.
As a result, the members of the Petro Board who are also members of the Star
Gas Board have conflicting fiduciary duties to the Public Common Stockholders
and the Public Common Unitholders. Therefore, certain members of the Petro
Board have interests that are different from, and in conflict with, the
interests of the Public Common Stockholders.
The officers and directors of Petro will be indemnified, to the extent
permitted by law, for any and all actions taken in connection with the
Transaction. The current officers of Petro will continue to be employed as
officers following the Transaction.
CASH AVAILABLE FOR DISTRIBUTION (SEE PAGE 170)
The Partnership believes that it will generate sufficient Available Cash from
Operating Surplus for the first full four-quarter period following the
Effective Time to cover the full Minimum Quarterly Distribution for such four-
quarter period on all then outstanding Units. The Partnership's belief is based
on a number of assumptions, including the assumptions that normal weather
conditions will prevail in the Partnership's and Petro's operating areas, that
the Partnership's and Petro'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
materially from that currently expected. See "Risk Factors."
The amount of Available Cash constituting Operating Surplus needed to pay the
Minimum Quarterly Distribution for four quarters on the Common Units, Senior
Subordinated Units, Junior Subordinated Units and General Partner Units to be
outstanding immediately after the Effective Time (assuming no exercise of the
underwriters' overallotment option in the Equity Offering) is approximately
$32.1 million ($23.7 million for the Common Units, $6.4 million for the Senior
Subordinated Units, $1.3 million for the Junior Subordinated Units and $0.6
million for the General Partner Units). After giving pro forma effect to the
Transaction, the amount of pro forma Available Cash constituting Operating
Surplus generated during the twelve months ended September 30, 1997 would have
been approximately $28.3 million, which excludes non-recurring restructuring,
corporate identity and pension curtailment expenses of approximately $7.6
million. The pro forma results for such period also do not reflect certain cost
savings that Petro implemented in fiscal 1998. See "--Selected Unaudited Pro
Forma Condensed Consolidated Financial Information."
23
<PAGE>
The Partnership is required to establish reserves for the future payment of
principal and interest on certain of the Partnership's indebtedness. There are
other provisions in such agreements that will, under certain circumstances,
restrict the Partnership's ability to make distributions to its Unitholders.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Description of Indebtedness" in the Partnership's Annual Report
Form 10-K for the fiscal year ended September 30, 1997 and in the Partnership's
Quarterly Report on form 10-Q for the quarter ended June 30, 1998, which are
incorporated by reference herein. The Petro Holdings Senior Subordinated Debt
is expected to have provisions that will, under certain circumstances,
similarly restrict the Partnership's ability to make distributions
to its Unitholders.
Cash distributions with respect to the quarter ended March 31, 1999 will be
paid to the Common Unitholders on or about May 15, 1999. No distributions will
be paid on such date to the Senior Subordinated Units, Junior Subordinated
Units and General Partner Units. The aggregate amount of distributions that may
be paid on the Senior Subordinated Units, Junior Subordinated Units and General
Partner Units with respect to the quarters ending June 30, 1999 (which, if
made, would include a pro rata distribution for the period from the Effective
Time through March 31, 1999) and September 30, 1999 will depend on whether
the combined results of the Partnership and Petro exceed certain financial
benchmarks. Beginning with the distribution for the quarter ending on December
31, 1999, the aggregate distributions to be paid on the Senior Subordinated
Units, Junior Subordinated Units and General Partner Units will be limited to
the total Operating Surplus generated by the Partnership since October 1, 1999.
24
<PAGE>
DESCRIPTION OF THE PARTNERSHIP UNITS (SEE PAGES 139, 145, 158 AND 171)
(The following summary gives effect to the adoption of the Amendment Proposal)
Distributions of Available
Cash.......................... The Partnership distributes all of its 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. "Available Cash" for any quarter will
consist generally of all cash on hand at the end
of such quarter, as adjusted for reserves. The
definition of Available Cash is set forth in the
Glossary. Available Cash will first be
distributed to Common Unitholders, then to
Senior Subordinated Unitholders, and then pro
rata to Junior Subordinated Unitholders and
General Partner Unitholders, until the Minimum
Quarterly Distribution has been paid. After the
Minimum Quarterly Distribution has been paid,
Available Cash will generally be distributed pro
rata to all Unitholders, except that if
Available Cash exceeds certain Target
Distribution Levels above the Minimum Quarterly
Distribution, the Senior Subordinated Units,
Junior Subordinated Units and General Partner
Units will receive, in the aggregate, a
percentage of such excess distributions that
will increase to up to approximately 49.0% of
distributions in excess of the highest Target
Distribution Level. While the General Partner
has broad discretion in making cash
disbursements and establishing reserves, the
amended and restated partnership agreement of
the Partnership (the "Amended and Restated
Partnership Agreement") provides that, beginning
with the distribution for the quarter ending on
December 31, 1999, the aggregate distributions
to be paid on the Senior Subordinated Units,
Junior Subordinated Units and General Partner
Units, will be limited to the total Operating
Surplus generated by the Partnership since
October 1, 1999. The aggregate amount of
distributions that may be paid on the Senior
Subordinated Units, Junior Subordinated Units
and General Partner Units during the quarter
ending June 30, 1999 and September 30, 1999 will
depend on whether the combined results of the
Partnership and Petro exceed certain financial
benchmarks.
Distributions to
Unitholders................... The Partnership intends, to the extent there is
sufficient Available Cash from Operating
Surplus, to distribute to each holder of Units
at least the Minimum Quarterly Distribution of
$0.575 per Unit ($2.30 per Unit on an annualized
basis). With respect to each quarter during the
25
<PAGE>
Subordination Period (which will generally
not end earlier than July 1, 2002) the
Common Units will have the right to receive
the Minimum Quarterly Distribution, plus
any arrearages thereon, before any
distribution is made on the Senior
Subordinated Units, the Junior Subordinated
Units and the General Partner Units; and
the Senior Subordinated Units will have the
right to receive the Minimum Quarterly
Distribution before any distribution is
made on the Junior Subordinated Units and
the General Partner Units. Common Units
issued in the Equity Offering that are held
of record on the record date for a
distribution will be entitled to receive
the full distribution declared on such
record date, regardless of how many days
such Common Units have been outstanding.
The first distribution permitted to be paid
to the holders of the Senior Subordinated
Units issued in the Transaction will be
paid with respect to the quarter ending
June 30, 1999 and will be paid on or about
August 15, 1999 to holders of record on or
about July 31, 1999. Such distribution, if
paid, will include a pro rata distribution
for the period between the Effective Time
and March 31, 1999. See "Cash Distribution
Policy--Adjustment of Minimum Quarterly
Distribution and Target Distribution
Levels." Senior Subordinated Units, Junior
Subordinated Units and General Partner
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 end
the first day of any quarter beginning on
or after July 1, 2002 provided that certain
financial tests have been satisfied.
Generally, such financial tests will be
satisfied when (i) distributions of
Available Cash from Operating Surplus on
all outstanding Units equaled or exceeded
the sum of the Minimum Quarterly
Distribution on all outstanding 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 Units that
were outstanding during such periods on a
fully diluted basis; and (iii) there are no
arrearages in payment of the Minimum
Quarterly Distribution on the Common Units.
Upon expiration of the Subordination
Period, all Senior Subordinated Units and
26
<PAGE>
Junior Subordinated Units will convert into
Class B Common Units on a one-for-one basis
and each Common Unit will be redesignated
as a Class A Common Unit. The principal
differences between the Class A Common
Units and Class B Common Units are that the
Class B Common Units will have the right to
receive incentive distributions and the
right to receive additional Senior
Subordinated Units but only if certain
financial goals are met. In addition, if
the General Partner is removed as the
general partner of the Partnership other
than for Cause (with certain exceptions),
the Subordination Period will end.
Incentive Distributions....... If quarterly distributions of Available
Cash from Operating Surplus exceed the
Target Distribution Levels, the General
Partner Units, Senior Subordinated Units
and Junior Subordinated Units will receive
up to 49% of distributions of Available
Cash in excess of such Target Distribution
Levels. The Class B Common Units into which
the Senior Subordinated Units and Junior
Subordinated Units convert at the end of
the Subordination Period will include the
same rights to receive Incentive
Distributions as the Senior Subordinated
Units and Junior Subordinated Units.
The following table illustrates the percentage of Available Cash from
Operating Surplus distributed as the Minimum Quarterly Distribution pro rata to
all Unitholders ("Base Distributions") and the percentage of Available Cash
distributed to the holders of Senior Subordinated Units, Junior Subordinated
Units and General Partner Units as incentive distributions ("Incentive
Distributions") at the Target Distribution Levels. The percentages set forth in
the table below are the percentage interests of the Unitholders in Available
Cash from Operating Surplus distributed up to and including the corresponding
amount in the column "Quarterly Distribution Amount Per Common Unit" until
Available Cash distributed reaches the next Target Distribution Level, if any.
<TABLE>
<CAPTION>
PERCENTAGE OF AVAILABLE CASH
DISTRIBUTED AS INCENTIVE
DISTRIBUTIONS TO THE SPECIFIED
PERCENTAGE OF PERCENTAGE OF UNIT CLASS
QUARTERLY AVAILABLE CASH AVAILABLE CASH ---------------------------------
DISTRIBUTION DISTRIBUTED AS DISTRIBUTED AS SENIOR JUNIOR GENERAL
AMOUNT PER BASE INCENTIVE SUBORDINATED SUBORDINATED PARTNER
COMMON UNIT DISTRIBUTIONS DISTRIBUTIONS UNITS UNITS UNITS
------------ -------------- -------------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Minimum Quarterly
Distribution........... $0.575 100.0% -- -- -- --
First Target
Distribution........... 0.604 100.0% -- -- -- --
Second Target
Distribution........... 0.711 86.7% 13.3% 10.2% 2.1% 1.0%
Third Target
Distribution........... 0.926 76.5% 23.5% 18.0% 3.7% 1.8%
Thereafter.............. -- 51.0% 49.0% 37.4% 7.8% 3.8%
</TABLE>
The percentage allocation of Incentive Distributions among Senior
Subordinated Units, Junior Subordinated Units and General Partner Units, will
change in the future if there are additional non pro rata issuances of such
Units.
27
<PAGE>
The following table illustrates the distribution of Available Cash per Unit
among the Common Units, Senior Subordinated Units, Junior Subordinated Units
and General Partner Units at the Target Distribution Levels. The calculations
are based on the assumption that the quarterly distribution amounts shown do
not include any Cumulative Common Unit Arrearages.
<TABLE>
<CAPTION>
QUARTERLY DISTRIBUTION AMOUNT
----------------------------------------
SENIOR JUNIOR GENERAL
COMMON SUBORDINATED SUBORDINATED PARTNER
UNIT UNIT UNIT UNIT
------ ------------ ------------ -------
<S> <C> <C> <C> <C>
Minimum Quarterly Distribution........ $0.575 $0.575 $0.575 $0.575
First Target Distribution............. 0.604 0.604 0.604 0.604
Second Target Distribution............ 0.711 0.774 0.774 0.774
Third Target Distribution............. 0.926 1.243 1.243 1.243
</TABLE>
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 Amended and Restated 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
Incentive Distributions payable on the
Senior Subordinated Units, Junior
Subordinated Units and General Partner
Units will increase to 49% of all amounts
distributed thereafter. See "Cash
Distribution Policy--Distributions from
Capital Surplus" and "--Adjustment of
Minimum Quarterly Distribution and Target
Distribution Levels."
28
<PAGE>
Additional Senior
Subordinated Units...........
The Amended and Restated Partnership
Agreement provides that up to an additional
909,000 Senior Subordinated Units will be
issued pro rata to holders of Senior
Subordinated Units, Junior Subordinated
Units and General Partner Units, but only
if Petro meets certain financial goals
during the five-year period following
closing of the Transaction (the "Closing").
See "Cash Distribution Policy."
Partnership's Ability to
Issue Additional Units.......
The Amended and Restated Partnership
Agreement authorizes the General Partner to
cause the Partnership to issue an unlimited
number of additional Units of limited
partner interests 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. However, prior to the end of
the Subordination Period, the Partnership
may not issue equity securities ranking
senior to the Common Units or more than
2,500,000 additional Common Units
(excluding (a) Common Units issued in the
Equity Offering, (b) Class B Common Units
issued upon conversion of Senior
Subordinated Units and Junior Subordinated
Units as described herein and (c) Common
Units issued in connection with certain
acquisitions or to repay certain
indebtedness), without the approval of at
least a majority of the outstanding Common
Units, excluding Common Units owned by the
General Partner and its affiliates. See
"Risk Factors--The Partnership May Issue
Additional Units--Diluting Existing
Unitholders Interests" and "The Amended and
Restated 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 prices. If at any time
the Partnership acquires in a twelve-month
period more than 66 2/3% of the total Class
B Common Units, the Partnership may
purchase all of the remaining limited
partner interests of such class at
specified prices. See
29
<PAGE>
"The Amended and Restated Partnership
Agreement--Limited Call Right."
Limited Voting Rights......... Unitholders have only limited voting rights
on matters affecting the Partnership's
business. See "The Amended and Restated
Partnership Agreement--Meetings; Voting."
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 Unitholders may be
called only by the General Partner or by
the holders of 20% or more of the
outstanding 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 a Unit
Majority and furnishing an Opinion of
Counsel. See "The Amended and Restated
Partnership Agreement--Withdrawal or
Removal of the General Partner; Approval of
Successor General Partner" and "--Meetings;
Voting."
Transfer Restrictions......... All recipients of Senior Subordinated Units
and Common Units issued in connection with
the Transaction and purchasers of Senior
Subordinated Units and Common Units in the
open market who wish to become limited
partners must deliver an executed Transfer
Application (which may be obtained from the
Transfer Agent) before the transfer of such
Units will be registered and before cash
distributions and federal income tax
allocations will be made to the transferee.
See "Description of the Units--Transfer of
Units" and "Comparison of Securities."
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 Senior Subordinated
Units, the Junior Subordinated Units and
General Partner Units, and the outstanding
Senior Subordinated Units will be entitled
to receive a distribution out of the
remaining
30
<PAGE>
net assets of the Partnership, generally in
preference to liquidating distributions on
the Junior Subordinated Units and General
Partner Units. Following conversion of the
Senior Subordinated Units and the Junior
Subordinated Units into Class B Common
Units, all Units will generally be (to the
extent of the first $22.00 distributed per
Unit, subject to adjustment) treated the
same upon liquidation of the Partnership.
See "Cash Distribution Policy."
Comparison of Securities...... The rights of a holder of Senior
Subordinated Units differ substantially
from the rights of a Common Stockholder.
For a summary of these differences, see
"Comparison of Securities."
Listing....................... The Common Units and the Senior
Subordinated Units to be issued in the
Transaction have been approved for listing,
subject to official notice of issuance, on
the NYSE.
NYSE Trading Symbols
Common Units................ "SGU"
Senior Subordinated Units...
31
<PAGE>
PARTNERSHIP STRUCTURE AND MANAGEMENT FOLLOWING THE TRANSACTION (SEE PAGE 136)
Following the Transaction, the Partnership's activities will be conducted
through the Operating Partnership and its corporate subsidiaries, Petro and
Stellar Propane Corp. ("Stellar"). Star Gas currently serves as general partner
of the Partnership and of the Operating Partnership.
At the Effective Time, the general partner of the Partnership and the
Operating Partnership will be Star Gas LLC. All of the membership interests in
Star Gas LLC are owned by the LLC Owners. The officers of Star Gas LLC will be
certain of the current officers of Star Gas and Petro.
At the Effective Time, the officers and employees of Star Gas will become
officers and employees of the Operating Partnership. In addition, at the
Effective Time, the officers and employees of Petro will continue to be
officers and employees of Petro.
The General Partner does not receive any management fee or other compensation
in connection with its management of the Partnership, but the General Partner
is reimbursed at cost for all direct and indirect expenses incurred on behalf
of the Partnership. The General Partner is also reimbursed for 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.
Conflicts of interest have arisen and could arise between the General Partner
and its affiliates, on the one hand, and the Partnership or any partner
thereof, on the other. Star Gas has an audit committee (the "Audit Committee")
consisting of the two members of the Star Gas Board who are not officers of the
General Partner and are available at the General Partner's discretion to review
matters involving conflicts of interest. Star Gas LLC will establish an audit
committee to review matters involving conflicts of interest. See "Conflicts of
Interest and Fiduciary Responsibility."
The first chart below illustrates the organization and ownership of the
Partnership, the Operating Partnership and its subsidiary and Star Gas prior to
the Transaction. The second chart illustrates the organization and ownership of
the Partnership, the Operating Partnership and its subsidiaries and Star Gas
LLC immediately following the Transaction (without giving any effect to the
issuance of the any additional Senior Subordinated Units). The percentages
reflected in the following chart represent the approximate ownership interests
in each of the Partnership and the Operating Partnership, individually, and not
on an aggregate basis.
32
<PAGE>
[Chart displaying immediately prior to closing flow chart]
33
<PAGE>
[Chart displaying immediately following transaction flow chart]
34
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF THE PARTNERSHIP
The following table sets forth for the periods and dates indicated, selected
historical financial and operating data of the Partnership. The following
selected historical financial data of the Partnership are derived from the
consolidated financial statements of the Partnership and should be read in
conjunction with "Selected Historical and Operating Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Partnership and accompanying notes
in the Partnership's Annual Report on Form 10-K and Quarterly Reports on Form
10-Q incorporated herein by reference. See "Incorporation of Certain Documents
By Reference." The historical financial data for the nine months ended June 30,
1997 and 1998 and the historical other data are unaudited. The results of
operations for the nine months ended June 30, 1997 and 1998 contain all
adjustments that are of a normal and recurring nature necessary to present
fairly the financial condition and results of operation for such periods. These
historical results are not necessarily indicative of the results of operations
to be expected in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------ -----------------
1995 1996(A) 1997 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Sales....................... $104,550 $119,634 $135,159 $117,396 $ 95,971
Gross profit................ 54,890 61,077 62,948 53,818 52,245
Depreciation and amortiza-
tion....................... 10,073 9,808 10,405 7,869 8,644
Operating income............ 2,555 9,802 9,003 12,382 10,688
Interest expense, net....... 8,549 7,124 6,966 5,290 5,834
Net income (loss)........... (6,169) 2,593 2,012 7,074 4,835
Net income per Unit(b)...... -- $ 0.11(c) $ 0.37 $ 1.32 $ 0.79
Cash distribution declared
per Unit................... -- $ 1.17(c) $ 2.20 $ 1.65 $ 1.65
BALANCE SHEET DATA (END OF PE-
RIOD)
Current assets.............. $ 14,266 $ 17,842 $ 14,165 $ 18,632 $ 15,408
Total assets................ 155,393 156,913 147,469 153,767 173,265
Long-term debt.............. 1,389 85,000 85,000 85,000 96,000
Due to Petro................ 86,002 -- -- -- --
Predecessor's
equity/Partners' capital... 44,305 61,398 51,578 59,598 66,020
OTHER DATA
EBITDA(d)................... $ 13,541 $ 19,870 $ 19,703 $ 20,380 $ 19,545
Retail propane gallons
sold....................... 89,133 96,294 94,893 80,845 84,780
Total capital
expenditures(e)............ $ 7,988 $ 5,332 $ 5,279 $ 4,454 $ 3,825
</TABLE>
- --------
(a) Reflects the results of operations of the predecessor of the Partnership
for the period October 1, 1995 through December 20, 1995 and the results of
the Partnership from December 20, 1995 through September 30, 1996.
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 Item 14, page F-4 of the Partnership's 1997 Form 10-K, which is
incorporated by reference herein.
35
<PAGE>
(b) 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.
(c) Represents net income per Unit and cash distributions paid per Unit for the
period December 20, 1995 through September 30, 1996.
(d) "EBITDA" is defined as operating income plus depreciation, amortization and
other non-cash charges, less net gain (loss) on sale of businesses and
equipment. EBITDA should not be considered 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 operating, investing and financing
activities, see the statements of cash flows in the consolidated financial
statements of the Partnership incorporated by reference in this Proxy
Statement.
(e) The net maintenance capital expenditures for the fiscal years ended
September 30, 1996 and 1997 were $2.3 and $3.1 million, respectively.
36
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF PETRO
The following table sets forth for the periods and dates indicated, selected
historical financial and operating data of Petro. The following selected
historical financial data of Petro are derived from the consolidated financial
statements of Petro and should be read in conjunction with "Selected Historical
and Operating Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
of Petro and accompanying notes in Petro's Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q enclosed herewith. From December 8, 1994 to
December 19, 1995 the operations, assets and liabilities of the Partnership
were included in the consolidated financial statements of Petro. Since the
Partnership's initial public offering in December 1995 it has been accounted
for under the equity method of accounting in Petro's financial statements. The
historical financial data for the six months ended June 30, 1997 and 1998 and
the historical other data are unaudited. The results of operations for the six-
month periods ended June 30, 1997 and 1998 contain all adjustments that are of
a normal and recurring nature necessary to present fairly the financial
condition and results of operations for such periods. These historical results
are not necessarily indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------- -----------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales.................... $609,507 $608,161 $548,141 $336,067 $249,366
Gross profit................. 221,682 180,773 168,393 108,004 92,046
Operating expenses........... 164,929 138,703 132,383 67,802 57,668
Restructuring, corporate
identity and pension
curtailment................. -- 4,366 7,640 3,410 687
Depreciation, amortization
and other non-cash
costs(a).................... 40,450 30,818 30,311 15,069 14,671
Operating income (loss)...... 16,303 6,886 (1,941) 21,723 19,020
Interest expense-net......... 38,792 32,412 31,668 16,026 15,272
Other income (expense)-net... 218 1,842 11,445 38 116
Share of income (loss) of
Star Gas.................... 728 2,283 (235) 549 465
Income (loss) before extraor-
dinary item................. (22,043) (21,901) (22,899) 5,934 4,004
Net income (loss)............ $(23,479) $(28,315) $(22,899) $ 5,934 $ 4,004
BASIC AND DILUTED EARNINGS
(LOSSES) PER COMMON SHARE(B)
Class A and Class C Common
Stock....................... $ (1.06) $ (1.20) $ (1.06) $ 0.16 $ 0.06
CASH DIVIDENDS DECLARED PER
COMMON SHARE(B)
Class A and Class C Common
Stock....................... $ 0.60 $ 0.60 $ 0.30 $ 0.15 --
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic(b)
Class A Common Stock......... 22,711 22,983 23,441 23,238 23,958
Class C Common Stock......... 2,598 2,598 2,598 2,598 2,598
Diluted(b)
Class A Common Stock......... 23,260 24,153
Class C Common Stock......... 2,598 2,598
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------ ----------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END
OF PERIOD)
Cash.................. $ 78,285 $ 3,257 $ 2,390 $ 28,172 $ 33,223
Working capital....... 65,408 18,093 12,436 54,179 23,139
Total assets.......... 357,241 275,025 247,846 259,761 229,120
Long-term debt........ 294,429 291,337 288,957 288,956 284,587
Redeemable preferred
stock (long-term
portion)............. 12,500 8,333 32,489 38,333 32,687
Stockholders'
deficiency........... (100,903) (145,733) (177,033) (145,848) (175,066)
OTHER DATA
EBITDA(c)............. $ 56,753(d) $ 37,704 (e) $ 28,370(e)(f) $ 36,792(e) $ 33,691(e)(g)
Heating oil and
propane gallons...... 503,610(d) 456,141 410,291 254,289 203,299(g)
</TABLE>
- --------
(a) Other non-cash costs include provision for supplemental benefits.
(b) For the years ended December 31, 1995, 1996 and 1997 there were 15, 12 and
11 shares of Class B Common Stock outstanding respectively. For the six
months ended June 30, 1997 and 1998 there were 11 shares of Class B Common
Stock outstanding for both periods. For all periods presented, Class B
shares did not receive an allocation of earnings or dividends.
(c) "EBITDA" is defined as operating income before depreciation, amortization,
non-cash charges relating to the grant of stock options to Petro
executives, non-cash charges associated with deferred compensation plans
and other non-cash charges of a similar nature, if any. 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 availability to service debt obligations), but provides additional
information for evaluating Petro's financial performance.
(d) The year ended December 31, 1995 includes $15.2 million of EBITDA and 84.4
million gallons related to the Partnership. Petro's 1995 results include
the operations of the Partnership on a consolidated basis through December
19, 1995. Subsequent to that date, Petro accounted for the Partnership on
the equity basis.
(e) In 1996, Petro undertook a significant operating restructuring and
corporate identity program to improve its efficiency and ultimately reduce
operating costs. For the years ended December 31, 1996 and 1997 and for the
six months ended June 30, 1997 and 1998, Petro recorded expenditures for
these programs of $4.4 million, $7.6 million, $3.4 million and $0.7
million, respectively.
(f) The decline in EBITDA for the year ended December 31, 1997, as compared to
the year ended December 31, 1996 was largely due to warm weather
experienced in 1997.
(g) For the six months ended June 30, 1998, home heating oil volume declined by
20.1% versus the six months ended June 30, 1997 primarily due to the
abnormally warm temperatures associated with the weather phenomenon
generally referred to as "El Nino." While volume declined 20.1%, EBITDA
declined only 14.5% due to a reduction in operating costs largely
attributable to the effects of the restructuring and cost reduction
programs.
38
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth unaudited pro forma condensed consolidated
income statement data and per Unit data for the Partnership and Petro for the
twelve month period ended September 30, 1997 and the nine month period ended
June 30, 1998 as if the Transaction had been consummated at the beginning of
each period presented. Additionally, the balance sheet data below is based on
the consolidated unaudited June 30, 1998 balance sheets of the Partnership and
Petro. The pro forma amounts included below are based on the purchase method of
accounting, a preliminary determination and allocation of the total purchase
price and the assumptions described under "Unaudited Pro Forma Condensed
Consolidated Financial Statements." The information below is based on and
should be read in conjunction with, and is qualified in its entirety by, the
consolidated financial statements of the Partnership and Petro and accompanying
notes of the Partnership and Petro included in the documents described under
"Incorporation of Certain Documents By Reference" and the unaudited pro forma
consolidated financial statements of the Partnership and Petro and accompanying
discussion and notes set forth under "Unaudited Pro Forma Condensed
Consolidated Financial Statements." The unaudited pro forma consolidated
amounts below are not necessarily indicative of the financial condition or the
results of operations of the Partnership and Petro, on a consolidated basis,
that would have actually occurred had the Transaction been consummated at
October 1, 1996. The unaudited pro forma amounts are also not necessarily
indicative of the future financial condition or future results of operations of
the Partnership after giving effect to the Transaction.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 JUNE 30, 1998
---------------------- -------------------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA
Sales.................... $702,338 $510,550
Gross profit............. 239,960 199,013
Depreciation,
amortization and other
non-cash costs(a)....... 37,012 27,771
Operating income......... 26,214 51,669
Interest expense, net.... 26,009 19,229
Net income (loss)........ $ (320) $ 31,946
Net income per Unit(b)... $ (0.02) $ 2.29
OTHER DATA
EBITDA(c)................ $ 60,251 $ 71,662
<CAPTION>
JUNE 30, 1998
-------------
<S> <C> <C>
BALANCE SHEET DATA
Current assets........... $100,906
Total assets............. 659,449
Long-term debt........... 302,779
Total partners' capital.. 223,922
</TABLE>
39
<PAGE>
- --------
(a) Other non-cash costs include provision for supplemental benefits.
(b) 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.
(c) "EBITDA" is defined as operating income plus depreciation, amortization,
restructuring charges, corporate identity expenses, pension curtailment
expense and other non-cash charges (including the impairment of long-lived
assets) less net gain (loss) on sale of businesses and equipment. EBITDA
should not be considered 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 operating, investing and financing activities,
see the statements of cash flows in the consolidated financial statements
of the Partnership incorporated by reference in this Proxy Statement.
In analyzing the historical results of the Partnership and the pro forma
information as provided in the table above, the following matters should be
considered. First, the results for the fiscal 1997 pro forma exclude cost
savings associated with Petro's restructuring program implemented during 1998.
This restructuring program includes reductions in both corporate and field
personnel, the consolidation of employee benefits plan and the rationalization
of branch facilities. Second, while depreciation and amortization expenses
reduce net income, as a non-cash expense, these expenses do not impact
distributable cash flow. Third, while the propane and home heating oil
businesses are both seasonable businesses, the home heating oil business
generates a greater proportion of its profits in the heating season from
October 1 through March 31 as compared to the propane business. Conversely, the
heating oil business experiences greater losses during the period from April 1
through September 30.
40
<PAGE>
COMPARATIVE MARKET PRICE INFORMATION (SEE PAGE 179)
The Common Units are listed on the New York Stock Exchange under the symbol
"SGU." The shares of Class A Common Stock are listed on the Nasdaq National
Market under the symbol "HEAT." On August 13, 1998, the last full trading day
prior to the public announcement of the proposed Transaction, the closing sales
price of the Common Units was $21.063 on the New York Stock Exchange and the
closing sales price of the shares of Class A Common Stock was $1.875 on the
Nasdaq National Market. On October 21, 1998, the Common Units closed at $20 and
the shares of Class A Common Stock closed at $1.00. See "Comparative Security
Price and Distribution Information."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS (SEE PAGE 182)
Tax Consequences of the Merger. The Merger will be a taxable transaction to
the holders of Petro Common Stock, generally, resulting in gain or loss to each
such holder in an amount equal to the difference between the value of the
Senior Subordinated Units received by such holder and the federal income tax
basis such holder has in the shares of Common Stock exchanged for such Units.
Gain or loss will be capital gain or loss if the stock is held by the
stockholder as a capital asset and will be long-term gain or loss if such stock
has been held for more than one year. Long-term capital gains will be taxed at
a maximum rate of 20%. Capital losses can be deducted against capital gains and
thereafter can only be deducted against ordinary income to the extent of $3,000
per year for individuals with any unused capital loss being carried forward
indefinitely. Net capital gain of foreign holders of Petro Common Stock will
generally not be subject to United States federal income tax.
The Merger will result in gain to Petro. Petro expects that its net operating
losses will generally shelter such gain and that, as a consequence, Petro will
incur only minimal federal tax as a consequence of the Transaction. The amount
and use of Petro's net operating losses, and therefore, the ability to shelter
Petro's gains could be subject to challenge by the Internal Revenue Service
(the "IRS"). It is not anticipated by Petro that it or its corporate affiliates
(the "Corporate Group") will pay significant federal income tax during the
several years immediately following the Transaction; however, over time it is
expected that more federal income tax will be paid by the Corporate Group. The
Corporate Group's ability to reduce income for federal income tax purposes
following the Transaction is dependent on the companies' depreciation
deductions and interest deductions with respect to certain debt, all of which
is subject to challenge by the IRS.
See "Risk Factors" and "Certain Federal Income Tax Considerations."
Partnership Status. In the opinion of counsel, based on certain assumptions
and representations, the Partnership has been and will continue to be
classified for federal income tax purposes as a partnership, and the beneficial
owners of Senior Subordinated Units will be considered partners of the
Partnership. Accordingly, the Partnership itself (not including the Corporate
Group, who will pay federal income taxes) will pay no federal income taxes, and
a Senior Subordinated Unitholder will be required to report in his federal
income tax return his share of the Partnership's income, gains, losses and
deductions without regard to the amount of cash distributed to him. In general,
cash distributions to a Senior Subordinated Unitholder will be taxable only if,
and to the
41
<PAGE>
extent that, they exceed such Unitholder's tax basis in his Senior Subordinated
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. Such income or loss will be 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. See "--Ratio of Taxable Income to Distributions." Although
it is not expected by Petro that the Corporate Group will pay significant
federal income tax for several years, it is possible that the Corporate Group
may generate earnings and profits during that time such that distributions from
the Corporate Group to the Partnership may result in taxable dividend income to
the Partnership and, thus, to the Unitholders. Such dividend income cannot
be offset by past or future losses generated by the Partnership's propane
activities.To the extent distributions are not taxable, they decrease a
Unitholder's basis. As a result, upon the sale of a Unit, the Unitholder could
incur tax.
Ratio of Taxable Income to Distributions. The Partnership estimates that a
Common Stockholder who receives Senior Subordinated Units in the Transaction
and holds such Senior Subordinated Units from the Effective Time through
December 31, 2001, will be allocated, on a cumulative basis, an amount of
federal taxable income for such period that will be less than 15% of the cash
distributed with respect to that period. The Partnership further estimates that
for taxable years beginning after December 31, 1998, the taxable income
allocable to such Unitholders will constitute a significantly higher percentage
of cash distributed to them. 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 has followed and intends to follow and with which the IRS could
disagree. Accordingly, no assurance can be given that the estimates will prove
to be correct. The actual percentage of distributions that will constitute
taxable income could be higher or lower, and any such differences could be
material and could materially affect the value of the Senior Subordinated
Units.
The Transaction will result in an increase in taxable income allocated to the
existing Common Unitholders as a percentage of cash expected to be distributed.
However, the Transaction will have different tax effects on different Common
Unitholders, depending on when they purchased their Units.
42
<PAGE>
See "Certain Federal Income Tax Considerations--Tax Consequences of Unit
Ownership--Ratio of Taxable Income to Distributions."
Basis of Senior Subordinated Units. A Unitholder's initial tax basis for a
Senior Subordinated Unit will be the fair market value of the Unit at the
Effective Time. 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 passive income generated by the Partnership
and cannot be used to offset income from other activities, including passive
activities or investments and any dividend or interest income generated by the
Partnership (such as dividends from the Corporate Group). Any losses unused by
virtue of the passive loss rules may be deducted against any income 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. The Partnership will provide
these calculations to Unitholders.
Disposition of Senior Subordinated Units. A Unitholder who sells Senior
Subordinated Units will recognize gain or loss equal to the difference between
the amount realized and his adjusted basis in such Senior Subordinated 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 Hampshire, New Jersey, New York,
Ohio, Pennsylvania, Rhode Island, Texas and West Virginia. Of these states,
only Texas does not currently impose a personal income tax. New Hampshire's
personal income tax applies only to interest and dividend income. 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.
The amount of withholding, 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
43
<PAGE>
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 ownership or sale of Units.
ACCOUNTING TREATMENT (SEE PAGE 135)
The Transaction will be treated as a purchase for accounting purposes. See
"Unaudited Pro Forma Condensed Consolidated Financial Information."
DISSENTERS' RIGHTS (SEE PAGE 202)
The Partnership
The Common Unitholders do not have dissenters' rights.
Petro
Under Sections 302A.471 and 302A.473 of the Minnesota Business Corporation
Act (the "MBCA"), set forth in full as Annex F to this Proxy Statement, Common
Stockholders (other than those who have agreed to vote for the Acquisition
Proposal or who have granted irrevocable proxies to Petro to vote for the
Acquisition Proposal at the Special Meeting) have the right to dissent, and
obtain payment of the "fair value" of their shares, in the event of certain
corporate actions such as the Merger.
Common Stockholders who wish to exercise dissenters' rights must comply fully
with the requirements of Sections 302A.471 and 302A.473 of the MBCA.
Accordingly, Common Stockholders wishing to dissent are urged to read carefully
"Dissenters' Rights" in this Proxy Statement and Annex F hereto, and to consult
their own legal advisors.
Among other things, Section 302A-473 requires that a Common Stockholder
wishing to exercise dissenters' rights must:
(1) file with Petro, before the vote on the Transaction at the Special
Meeting, a written notice of intent to demand payment of fair value for
such holder's Common Stock (a "Dissent Notice"), and
(2) not vote in favor of the Acquisition Proposal.
If the Acquisition Proposal is approved at the Special Meeting, Common
Stockholders wishing to dissent from the Merger must comply fully thereafter
with a series of additional requirements under Section 302A.473 of the MBCA.
FAILURE TO FOLLOW THE PROCEDURES SET FORTH IN ANNEX F MAY RESULT IN A
TERMINATION OR LOSS OF DISSENTERS' RIGHTS UNDER SECTIONS 302A.471 AND 302A.473
OF THE MBCA.
THE MEETINGS (SEE PAGES 75 AND 78)
The Partnership. The Unitholders Meeting will be held at a.m., New York
City time, on , 1999 at , New York, New York. The
purpose of the Unitholders Meeting is to consider and vote upon the Star
Proposals. See "The Unitholders Meeting."
Petro. The Special Meeting will be held at a.m., New York City time, on
,
44
<PAGE>
1999 at , New York, New York. The purpose of the Special
Meeting is to consider and vote upon the Acquisition Proposal. See "The Special
Meeting."
VOTES REQUIRED; RECORD DATE (SEE PAGES 75 AND 78)
The Partnership. Only Common Unitholders of record at the close of business
on , 1999 will be entitled to vote at the Unitholders Meeting. The
affirmative vote of the holders of a Unit Majority as of the Star Gas Record
Date is required to approve each of the Acquisition Proposal, the Amendment
Proposal and the General Partner Proposal. A Unit Majority currently means a
majority of the holders of the Common Units outstanding on the Record Date,
other than Common Units owned by Star Gas and its affiliates. See "The
Unitholders Meeting--Voting Rights; Vote Required." As of the Record Date,
there were 3,858,999 Common Units outstanding held by holders of record,
of which 60,727 Common Units, or 1.6% of the outstanding Common Units, were
beneficially owned by Star Gas and its affiliates (including Petro and
executive officers and directors of Star Gas and Petro and their affiliates).
Petro. Only holders of record of Petro Common Stock at the close of business
on , 1999 will be entitled to vote at the Special Meeting. The affirmative
vote of the holders of a majority of all shares of each class of Common Stock
outstanding as of the Petro Record Date, voting separately as a class, is
required for approval of the Acquisition Proposal. In addition, the approval of
the holders of a majority of the shares of Class A Common Stock outstanding as
of the Petro Record Date (other than shares held by the directors and executive
officers of Petro and their affiliates) is required to approve the Acquisition
Proposal.
As of the Petro Record Date, there were issued and outstanding 23,964,962
shares of Class A Common Stock held by record holders; and 2,597,519 shares of
Class C Common Stock held by 24 record holders. The holders of % of the
shares of Class A Common Stock and % of the shares of Class C Common Stock
outstanding as of the Petro Record Date have agreed to vote for the Acquisition
Proposal at the Special Meeting.
The Acquisition Proposal also requires the approval of the holders of a
majority of all shares of Petro's Junior Preferred Stock, Public Preferred
Stock and Private Preferred Stock (collectively, the "Petro Preferred Stock"),
outstanding as of the Petro Record Date, each voting separately as a class. The
holders of 100% of the Petro Preferred Stock outstanding as of the Petro Record
Date have granted irrevocable proxies to Petro or have agreed to vote their
shares in favor of the Acquisition Proposal.
The directors and executive officers of Petro and affiliates beneficially
owned, as of the Petro Record Date, 11,953,432 shares of Common Stock
(excluding all options to purchase shares of Class A Common Stock and Class C
Common Stock). As of the Petro Record Date, they owned no shares of Petro
Preferred Stock. Directors and executive officers of Star Gas and their
affiliates (other than those persons who were also directors or executive
officers of Petro) did not beneficially own, as of the Record Date, any shares
of Common Stock or Petro Preferred Stock, and no shares of Common Stock or
Petro Preferred Stock were owned by the Partnership or Star Gas.
45
<PAGE>
EFFECTIVE TIME (SEE PAGE 125)
The Merger will become effective (a) on the date that is within three
business days after the last of the conditions to the consummation has been
satisfied or waived or such later date as the parties to the Merger may have
agreed to in writing and (b) (1) at the later of the time a certificate of
merger is filed with the Delaware Secretary of State in accordance with the
requirements of Delaware law and articles of merger are filed with the
Minnesota Department of State in accordance with the requirements of Minnesota
law or (2) at such later time as may be specified by agreement of the parties
in such certificate of merger and articles of merger (the "Effective Time").
Assuming satisfaction of all conditions to consummation of the Merger, it
is expected to become effective on or about , 1999. If the Merger does
not occur prior to April 1, 1999, the Merger Agreement will be terminated
unless the Petro Board and the Special Committee elect to extend such
termination date. See "-- Amendment and Termination of the Merger Agreement"
below.
CONDITIONS TO THE CONSUMMATION OF THE TRANSACTION (SEE PAGE 131)
Consummation of the Transaction is subject to fulfillment of various
conditions precedent that have not yet been satisfied, including:
--the holders of a majority of Common Units (other than the Common Units
owned by Star Gas and its affiliates) must approve the Star Proposals;
--the holders of a majority of the shares of Class A Common Stock (other than
Class A Common Stock owned by the directors and executive officers of
Petro and their affiliates) and Class C Common Stock, each voting
separately as a class, must approve the Acquisition Proposal;
--once the Star Proposals and Acquisition Proposal are approved, the Equity
Offering and Debt Offering must be completed;
--the Partnership and Petro must receive all necessary regulatory and third
party approvals; and
--the holders of no more than 10% of the outstanding shares of Common Stock
shall have perfected their dissenters' rights.
--Petro must meet certain financial tests set forth in the Merger Agreement.
See "The Transaction--Conditions to Consummation of the Merger."
REGULATORY MATTERS (SEE PAGE 135)
Other than (a) the filing of notice of the proposed Transaction with the
United States Department of Justice and the Federal Trade Commission under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSRA")
and the lapse of the relevant waiting period prescribed thereunder; (b)
registration under the Securities Act of the Senior Subordinated Units and the
Common Units to be issued in the Transaction and the Common Units to be offered
in the Equity Offering; (c) certain notifications required to be given by Petro
to state and county authorities pursuant to provisions of certain licenses and
permits; and (d) certain tax filings, no filing with, or approval of any
federal or state governmental entity is required in connection with the
Transaction.
46
<PAGE>
AMENDMENT AND TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 132)
The Merger Agreement provides that, except as otherwise required by law and
without the approval of Common Unitholders or Common Stockholders prior to the
Effective Time, any provision of the Merger Agreement may be waived by the
party benefitted by that provision or by both parties, and the Merger Agreement
may be modified, amended or terminated on behalf of Petro or the Partnership by
action of the Petro Board or the Special Committee, without action by the
Common Stockholders and the Common Unitholders and whether before or after the
Meetings.
The Merger Agreement may be terminated and the Merger abandoned prior to the
Effective Time, whether before or after its approval by Common Stockholders and
Common Unitholders, by mutual consent of the Petro Board and the Special
Committee or by either the Petro Board or Special Committee under certain
specified circumstances described under "Amendment, Waiver and Termination."
Those circumstances include, among other things, failure of the Common
Stockholders or the Common Unitholders to approve the Transaction, a material
breach by a party of its representations, warranties or agreements not cured
within 30 days following written notice, issuance of a non-appealable judgment,
decree or other order precluding consummation of the Transaction, or failure to
consummate the Transaction by April 1, 1999, unless the failure to accomplish
the Transaction by such time is due to the breach of a representation, warranty
or agreement by the party seeking to terminate. See "The Transaction--
Amendment, Waiver and Termination."
47
<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. Common Unitholders and Common Stockholders
should consider the following factors in evaluating the Transaction. All
statements, other than statements of historical facts included in this Proxy
Statement, are forward-looking statements, including, without limitation,
statements regarding the Partnership's (which includes Petro's) business
strategy, plans and objectives of management for future operations and the
statements under "Proxy Statement Summary--Cash Available for Distribution" and
"--Description of Partnership Units--Distributions of Available Cash" and "--
Distributions to Unitholders;" "Cash Available For Distribution;" and "Cash
Distribution Policy." Although the Partnership and Petro believe that the
expectations reflected in such forward-looking statements are reasonable, they
can give no assurance that such expectations will prove to be correct.
Important factors that could cause actual results to differ materially from the
expectations of the Partnership and Petro are discussed below and elsewhere in
this Proxy Statement.
RISKS TO THE PARTNERSHIP'S COMMON UNITHOLDERS
In addition to the other information contained in this Proxy Statement, the
Star Gas Board urges Common Unitholders to carefully consider each of the
factors set forth below.
Conflicts of Interest Were Present in Structuring the Transaction
Petro and Star Gas developed and structured the Transaction. Star Gas is a
wholly-owned subsidiary of Petro. Petro currently owns all the Subordinated
Units of the Partnership, and all of the directors of Star Gas, other than the
members of the Special Committee, are also directors or officers of Petro. As a
result of this and other factors, members of the Petro Board and the Star Gas
Board, other than the two members of the Special Committee, have interests that
are different from, and in conflict with, the interests of the Common
Unitholders. However, the Petro Board originally appointed the two members of
the Special Committee, who have each received an additional fee of $40,000 for
serving on the Special Committee. See "Interests of Certain Persons in the
Transaction; Conflicts of Interest."
Investment in Petro Will Substantially Change the Partnership's Business
The Transaction involves the acquisition by the Partnership of a business
that is substantially larger than the Partnership in terms of assets,
liabilities and revenues. See "Selected Historical Financial and Operating
Data" included in the Partnership's and Petro's Annual Reports on Form 10-K,
which are incorporated by reference herein and/or accompany this Proxy
Statement. As a result of the Transaction, the Partnership's primary business
will shift from the retail distribution of propane to the distribution of home
heating oil. Therefore, the nature of a Common Unitholder's investment will
change substantially and a Common Unitholder will be exposed to all the risks
inherent in the home heating oil business.
Petro Has Significant Recent Net Losses
Petro incurred net losses of approximately $23.5 million, $28.3 million and
$22.9 million for the years ended December 31, 1995, 1996 and 1997,
respectively. These net losses were primarily a
48
<PAGE>
result of the amortization expense associated with the large number of
acquisitions consummated since 1980 and interest expense. In connection with
each acquisition, Petro amortizes, for financial accounting purposes, 90% of
the amount allocated to customer lists over a six-year period and the balance
over a 25-year period. In addition, Petro depreciates fixed assets, on average,
over an eight-year period. The aggregate amortization of customer lists and
deferred charges and depreciation and amortization of property and equipment in
1995, 1996 and 1997 amounted to approximately $39 million, $29.9 million and
$29.7 million, respectively. Petro's net interest expense for 1995, 1996 and
1997 was $38.8 million, $32.4 million and $31.7 million, respectively. Higher
than expected customer attrition, relatively mild recent winters and other
operational factors also affected operating results. Management's strategy is
to maximize EBITDA, rather than net income, and net losses are likely to
continue in the near term. However, continued net losses could adversely affect
Petro.
No Assurance that the Transaction Will Result in Increased Distributions per
Common Unit
The Star Gas Board believes that the Partnership's acquisition of Petro will
result in an increase in cash available to be distributed per Common Unit. This
belief is based, in part, on Petro's anticipated ability (i) to effect a
significant and successful program of acquiring home heating oil distributors
at attractive prices and (ii) to complete its operational restructuring
program, which is designed to reduce customer losses and improve operating
margins. There can be no assurance as to these matters. Petro is not currently
negotiating any potential acquisitions and is not a party to any binding
acquisition agreements. See "--Petro's Ability to Grow Depends on
Acquisitions." Moreover, there can be no assurance that Petro's implementation
of its operational restructuring program will have the desired effect of
reducing customer losses and improving operating margins.
Common Unitholders Are Subject to Dilution of Their Interest
There are currently 3,858,999 Common Units and 2,396,078 Subordinated Units
outstanding, as well as a 2% general partner interest representing
approximately 127,655 Units for a total of 6,382, 732 Units. As a result of the
Common Units to be issued in the Equity Offering and the Units to be issued in
the Merger and the Exchange, upon consummation of the Transaction there are
expected to be outstanding approximately 10,325,408 Common Units, 2,767,058
Senior Subordinated Units, 577,205 Junior Subordinated Units and 278,973
General Partner Units for a total of 13,948,644 Units, an increase of
approximately 119%. The issuance of these additional Units may be dilutive to
the interests of the existing Common Unitholders if the Petro operations do not
generate sufficient distributable cash flow. Furthermore, if Petro meets
certain financial tests during the five-year period following the Closing up to
an additional 909,000 Senior Subordinated Units will be issued to the holders
of Senior Subordinated Units, Junior Subordinated Units and General Partner
Units.
Prior to the Transaction, the Partnership was authorized to issue 1,300,000
additional Common Units or Units on a parity with the Common Units (excluding
issuances that are accretive on a per Unit basis) during the Subordination
Period without a vote of the Common Unitholders. As a result of the Amendment
Proposal, the Partnership will be able to issue 2,500,000 of such Units without
a vote, the effect of which may be to dilute the value of the interests of the
then-existing holders of Common Units in the net assets of the Partnership,
dilute the interests of holders of Common Units in distributions by the
Partnership and reduce the support provided by the subordination feature of the
Senior Subordinated Units, Junior Subordinated Units and General Partner Units.
In addition,
49
<PAGE>
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.
As of the date hereof, the existing Subordinated Units represent a 37.5%
limited partner interest in the Partnership. After the Transaction, the Senior
Subordinated Units, Junior Subordinated Units and General Partner Units will
represent only a 26.0% partner interest. Therefore, the amount of support
provided by these Units for the payment of the Minimum Quarterly Distribution
on the Common Units will decline.
The Common Unitholders Will Experience a Reduction in Voting Power
After the Transaction, certain transactions that previously required only the
consent of a majority of the outstanding Common Units (other than those held by
the General Partner and its affiliates) will also require the consent of the
holders of a majority of the Senior Subordinated Units and Junior Subordinated
Units, voting together as a single class. The matters on which the Senior
Subordinated Units and Junior Subordinated Units will have a class vote include
the merger, consolidation or sale of substantially all of the assets of the
Partnership; the dissolution of the Partnership; certain amendments to the
Partnership Agreement; the withdrawal of the General Partner; and the transfer
by the General Partner of General Partner Units. Thus, there may be matters
that are approved by a majority of the Common Units that are not adopted
because a majority of the Senior Subordinated Units and Junior Subordinated
Units did not vote to approve.
The Partnership's Indebtedness May Affect Its Operations and Limit Its Ability
to Make Distributions
The Partnership is significantly leveraged and has indebtedness that is
substantial in relation to its partners' capital. As a result of the
Transaction, the Partnership's consolidated indebtedness will increase. On a
pro forma basis as of June 30, 1998 (giving effect to the Transaction), the
Partnership's total consolidated indebtedness would have been $302.8 million or
57.5% of total capitalization. Principal and interest payable on such
indebtedness will reduce cash available to make distributions on the Common
Units. Under certain circumstances, the Partnership consolidated indebtedness
will restrict the ability of the Partnership to distribute cash to Common
Unitholders and to borrow additional funds. The limitations and restrictions in
the new debt to be issued by the Partnership may in effect be more restrictive
than those in the Partnership's current indebtedness. Certain of the
Partnership's indebtedness is secured by liens on substantially all of the
assets of the Operating Partnership. In the case of a continuing default by the
Partnership under such indebtedness, the lenders could enforce their liens
against the assets of the Operating Partnership. Any such foreclosure or action
by the Operating Partnership to stay such foreclosure by seeking to reorganize
under the Federal Bankruptcy Code would have a material adverse effect on the
Partnership and the Common Unitholders.
The Partnership Has Debt With Change of Control Provisions
Certain of the Partnership's debt instruments, including the Petro Holdings
Senior Subordinated Debt, contain provisions relating to a "change of control."
If such provisions are triggered, such outstanding indebtedness may become due.
In such event, there is no assurance that the Partnership
50
<PAGE>
and/or Petro Holdings would be able to pay the indebtedness, in which case the
lenders would have the right to foreclose on the Operating Partnership's and
Petro Holdings' 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 that would trigger the change of control provisions.
Weather Conditions Affect the Demand for Heating Oil
Petro's home heating oil operations are more sensitive to temperature levels
than the Partnership's operations since substantially all of Petro's sales of
heating oil are for heating purposes whereas a portion of the Partnership's
sales of propane are for uses other than heating. Accordingly, weather patterns
during the winter months can have a material effect on sales of heating oil by
Petro. Variations in temperature levels occur from year to year. Warmer than
normal weather can adversely affect Petro's results of operations, while colder
than normal weather can favorably affect Petro's results of operations. For the
year ended December 31, 1997, temperatures were approximately 2.0% warmer (on a
heating degree-day basis) than normal in the areas where Petro operates, while
for the year ended December 31, 1996, temperatures were approximately 1.6%
colder (on a heating degree-day basis) than normal in such areas. "Heating
degree-days" measure the amount by which the average of the high and low
temperatures on a given day is below or above 65 degrees Fahrenheit. There can
be no assurance that average temperatures in future years will not be above the
historical average. For example, the average temperatures in the regions in
which Petro operates have been warmer over the last five years than they were
over the preceding ten years. In addition, in situations of extreme weather
conditions, such as prolonged or heavy snow, Petro may incur additional
operating costs.
Petro Has Experienced Significant Customer Losses
Petro's annual net loss of home heating oil customers has been between
approximately 5% to 6% per annum over the past five years, excluding additional
customers obtained through acquisitions. Net customer losses are the result of
various factors, including customers moving, changing suppliers, natural gas
conversions and credit problems. There can be no assurance that Petro will be
able to maintain or reduce its customer net loss rate in the future.
Petro's Ability to Grow Depends upon Acquisitions
The home heating oil industry is not a growth industry as a result of
increased competition from alternative energy sources. Petro's growth in the
past decade has been directly tied to the success of its acquisition program,
and its future financial performance will depend on its ability to continue to
identify and successfully consummate acquisitions at attractive prices.
There is no assurance that Petro will be able to continue to identify
attractive acquisition candidates in the future or that it will be able to
acquire such candidates on attractive terms or obtain financing on acceptable
terms. If Petro is able to make acquisitions there can be no assurance that
51
<PAGE>
any such acquisitions will be profitable, or that any additional debt
requirements will not offset the cash generated. Petro must comply with certain
debt incurrence covenants in certain agreements of Petro and the Partnership
that might restrict Petro's (and the Partnership's) ability to incur
indebtedness to finance acquisitions in the home heating oil industry. In
addition, factors that may adversely affect Petro's operating and financial
results may, in turn, limit Petro's access to capital and its acquisition
activities.
Petro Has Heating Oil Supply Risks
Home heating oil is available from numerous sources, including integrated
international oil companies, independent refiners and independent wholesalers.
While substantially all of Petro's supply in recent years has been from North
American sources, there can be no assurance that disruptions in the supply of
crude oil from foreign sources would not adversely affect Petro's home heating
oil business. Past disruptions of this nature have caused increases in the
price to Petro of home heating oil.
Petro Has Heating Oil Pricing Risks
During periods of sudden and sharp increases in the cost of home heating oil
to Petro, such as those experienced during 1996, Petro may be unwilling or
unable to pass the entire increase in supply costs on to its customers. This
may result in reduced gross profit margin and may adversely affect, in the
short term, Petro's operating results. Significant wholesale price increases
over an extended period of time could have the effect of reducing demand by
encouraging conservation, conversion to alternative energy sources or have the
effect of causing certain customers to switch to delivery-only dealers. If
demand was reduced and Petro was unable to increase its gross profit margin or
reduce its operating expenses, the decrease in volume would adversely affect
Petro's operating results.
Approximately 25% of Petro's heating oil volume is sold to individual
customers under agreements that fix in advance the maximum sales price of oil
over a period of up to 12 months. The maximum price at which oil is sold to
these "capped-price" customers generally is renegotiated in April of each year
in light of then current market conditions. Petro currently enters into forward
purchase contracts for most of the oil it sells to "capped-price" customers.
This practice permits Petro to purchase oil at a fixed price in advance of its
obligations to supply such oil. If events occur after a "capped-price" is
negotiated that increase the cost of oil above the amount anticipated, margins
for the "capped-price" customers whose oil was not purchased under forward
contracts would be lower than expected, while margins for those customers whose
oil was purchased under forward contracts would be unaffected. Conversely, if,
during this period, the cost of oil decreased below the amount anticipated,
margins for the "capped-price" customers whose oil was purchased under forward
contracts could be lower than expected, while margins for those customers whose
oil was not purchased under forward contracts would be unaffected or higher
than expected. In the past few years, the percentage of Petro's customers with
"capped-price" arrangements has increased, and the gross profit margin of oil
sold to these customers has been lower than that of oil sold to Petro's other
retail customers, thereby negatively affecting Petro's operating results. There
can be no assurance that this trend will not continue in the future, and
thereby continue to negatively affect Petro's financial performance.
52
<PAGE>
The Home Heating Oil Business Is Highly Competitive
Petro's business is highly competitive. Petro competes with heating oil
distributors offering a broad range of services and prices, from full service
distributors, like Petro, to those offering delivery only. Competition with
other companies in the home heating oil industry is based primarily on customer
service and price.
Long-standing customer relationships are typical in the industry. Many
companies in the industry, including Petro, deliver home heating oil to their
customers based upon weather conditions and historical consumption patterns,
without the customer making an affirmative purchase decision each time oil is
needed. In addition, most companies, including Petro, provide home heating
equipment repair service on a 24-hour per day basis. As a result of the factors
noted above, among others, it may be difficult for Petro to acquire new retail
customers. In addition, in certain instances, homeowners have formed buying
cooperatives that seek to purchase fuel oil from distributors at a price lower
than individual customers are otherwise able to obtain.
Petro also competes for retail customers with suppliers of alternative energy
products, principally natural gas. Competition from alternative energy sources
has been increasing as a result of reduced regulation of many utilities,
including natural gas and electric utilities. Many of these utilities have
substantially greater financial resources than the Partnership.
Petro Is Subject to Operating and Litigation Risks That May Not Be Insured
Petro's operations are subject to operating hazards and risks incidental to
the holding, storage and transportation of heating oil, a combustible liquid.
As a result, Petro may be a defendant in litigation arising in the ordinary
course of business. Petro maintains insurance policies with insurers in such
amounts and with such coverages and deductibles as it believes are reasonable
and prudent. However, there can be no assurance that such insurance will be
adequate to protect Petro 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 rates. The occurrence of an event
not covered by insurance or indemnification could have a material adverse
effect on Petro's business, operating results and financial condition.
Petro Is Subject to Governmental Regulation and Could Have Significant Costs
With Respect to Environmental and Other Regulatory Matters
Petro's business is subject to the jurisdiction of governmental agencies with
respect to a wide range of environmental and other regulatory matters. Petro
has implemented environmental programs and policies designed to avoid potential
liability and cost under applicable environmental laws. There can be no
assurance, however, that Petro will not be adversely affected by increased
costs due to stricter pollution control requirements or liabilities resulting
from non-compliance with operating or other regulatory permits. New
environmental regulations might adversely impact Petro's operations, including
underground storage and transportation of home heating oil. In addition, the
environmental risks inherently associated with Petro's home heating oil
operations, such as the risks of accidental releases or spills, are greater
than those associated with the Partnership's propane operations. There can be
no assurance that material costs and liabilities will not be incurred,
including those relating to claims for damages to property and persons.
53
<PAGE>
No Dissenters', Appraisal or Similar Rights for Non-consenting Common
Unitholders
If the Common Unitholders approve the Star Proposals, all Common Unitholders
will be bound by such approval even though, individually, they may have voted
against them. Under applicable Delaware law and the terms of the Partnership
Agreement, Common Unitholders will have no dissenters', appraisal or similar
rights in connection with the Transaction, nor will such rights be voluntarily
accorded to Common Unitholders by the Partnership. Therefore, Common
Unitholders will not be entitled to receive cash payment from the Partnership
for the fair value of their Common Units if they dissent and each of the
Proposals is approved. See "Dissenters' Rights".
TAX RISKS TO COMMON UNITHOLDERS
Taxes Payable By Petro Will Reduce Distributions
The Merger will result in income to Petro equal to the excess of the value of
the Units distributed to Common Stockholders in the Merger plus debt relief in
excess of the federal income tax basis of such Units to Petro. It is expected
by Petro that its net operating losses ("NOLs") will generally shelter such
gains and that, as a consequence, Petro will incur only nominal tax as a
consequence of the Transaction. The amount of and use of Petro's NOLs and
therefore the ability to shelter Petro's gains could be subject to challenge by
the IRS. This could reduce the cash available for distribution by the
Partnership. It is not anticipated by the Corporate Group that the Corporate
Group will pay significant federal income tax during the several years
immediately following the Transaction; however, over time it is expected that
more federal income tax will be paid by the Corporate Group, which would reduce
the amount of cash that the Partnership could distribute to Unitholders. The
Corporate Group's ability to reduce income for federal income tax purposes
following the Transaction is dependent on the depreciation and interest
deductions with respect to certain debt, all of which is subject to challenge
by the IRS.
Although it is not expected by Petro that the Corporate Group will pay
significant federal income tax for several years, it is possible that the
Corporate Group may generate earnings and profits during that time such that
distributions from the Corporate Group to the Partnership may result in taxable
dividend income to the Partnership and thus, to the Unitholders. Such dividend
income cannot be offset by past or future losses generated by the Partnership's
propane activities.
Ratio of Taxable Income to Distributions Will Increase
The ratio of taxable income to cash distributions to existing Common
Unitholders will increase over time at a greater rate if the Transaction
occurs. For example, the General Partner estimates that a holder of an Initial
Common Unit would be allocated, in the aggregate, no net passive income and
less than $.05 per Unit per year of portfolio income through December 31, 2004
if the Transaction is not consummated but only through December 31, 2002 if the
Transaction is consummated. In either case, the taxable income allocated to a
Common Unitholder thereafter will constitute an increasingly higher percentage
of cash distributed to him, and distributions in excess of the Minimum
Quarterly Distribution will increase the ratio of taxable income to cash
distributions to an existing Common Unitholder. See "Certain Federal Income Tax
Considerations" for a discussion of assumptions and limitations used in making
these estimates. However, the Transaction will have different tax effects on
different Common Unitholders, depending on when they purchased their Units. In
addition, any
54
<PAGE>
dividends from the Corporate Group cannot be offset by past or future losses
generated by the Partnership's propane operations.
RISKS TO COMMON STOCKHOLDERS
In addition to the other information contained in this Proxy Statement, the
Star Gas Board and the Petro Board urge Common Stockholders to carefully
consider each of the factors set forth below.
Conflicts Were Present in Structuring the Transaction
Petro and Star Gas developed and structured the Transaction. The directors of
Petro have interests in the Transaction which, in most cases, vary
significantly from the interests of Public Common Stockholders. As a result of
this, certain directors of Petro have interests that are different from, and in
conflict with, the interests of the Public Common Stockholders. See "Interests
of Certain Persons in the Transaction; Conflicts of Interest."
Cash Distributions on Senior Subordinated Units are Subordinated and Otherwise
Limited
Public Common Stockholders will receive Senior Subordinated Units in exchange
for their shares of Common Stock. During the Subordination Period, which will
generally not end prior to July 1, 2002, no distributions of cash may be made
on the Senior Subordinated Units with respect to any quarter until the Common
Units have received the Minimum Quarterly Distribution for such quarter, plus
any arrearages thereon. Prior to the quarter ending December 31, 1999,
distributions may be made on the Senior Subordinated Units only if the combined
results of the Partnership and Petro exceed certain financial benchmarks. For
the quarter ending December 31, 1999 and thereafter, distributions on the
Senior Subordinated Units will be limited to Operating Surplus generated by the
Partnership since October 1, 1999. Senior Subordinated Units will not accrue
distribution arrearages. There can be no assurance that the Partnership will
generate sufficient Available Cash to make distributions on the Senior
Subordinated Units. In addition, there can be no assurance that the Partnership
will ever meet the requirements necessary for the Subordination Period to end.
Accordingly, there can be no assurance that the Senior Subordinated Units will
ever convert to Class B Common Units. Furthermore, there can be no assurance
that Petro will meet the financial tests necessary for additional Senior
Subordinated Units to be issued to the holders of Senior Subordinated Units.
See "Cash Distribution Policy."
Cash Distributions are Not Guaranteed and May Fluctuate with Partnership
Performance
Cash distributions on the Senior Subordinated Units will not be guaranteed
and may fluctuate based on the performance of the Partnership. The General
Partner may establish reserves that reduce the amount of Available Cash.
Because of the seasonal nature of the Partnership's business, the General
Partner has, historically, made 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. The Partnership Agreement provides that the General Partner may not
establish reserves for distributions on the Senior Subordinated Units unless it
has determined in its judgment that the establishment of such reserves will not
prevent the Partnership from distributing the full Minimum Quarterly
Distribution, plus any arrearages, on the Common Units for the
55
<PAGE>
following four quarters. Cash distributions are dependent 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 income. As a result of these and other factors, there can
be no assurance that the Partnership will be able to distribute the Minimum
Quarterly Distribution or any other amount on the Senior Subordinated Units.
The amount of Available Cash constituting Operating Surplus needed to pay the
Minimum Quarterly Distribution for four quarters on the Common Units, Senior
Subordinated Units, Junior Subordinated Units and General Partner Units to be
outstanding immediately after the Effective Time is approximately $32.1 million
($23.8 million for the Common Units, $6.4 million for the Senior Subordinated
Units, $1.3 million for the Junior Subordinated Units and $0.6 million for the
General Partner Units). The amount of pro forma Available Cash from Operating
Surplus generated during the twelve months ended September 30, 1997 (which
excludes any working capital borrowings) was approximately $28.3 million, which
excludes non-recurring restructuring, corporate identity and pension
curtailment expenses of approximately $7.6 million. As a result, the
Partnership believes that it would have been able to distribute the full
Minimum Quarterly Distribution on all Common Units during the twelve months
ended September 30, 1997, but would not have been able to distribute the full
Minimum Quarterly Distribution on all Senior Subordinated Units, Junior
Subordinated Units or General Partner Units. See "Cash Available for
Distribution." For the calculation of pro forma Available Cash from Operating
Surplus, see Annex G.
There Is No Active Trading Market in, and Uncertainty Regarding Market Prices
of, Senior Subordinated Units
At present there is no trading market for the Senior Subordinated Units.
Although an application has been approved to list the Senior Subordinated Units
on the NYSE under the trading symbol , there can be no assurance that an
active trading market will develop after the Effective Time. While the Petro
Board, based on information received from its financial advisors, believes
that Senior Subordinated Units will trade at a discount to the price per Common
Unit, the actual trading price of the Senior Subordinated Units will depend on
a variety of factors, including market conditions for securities of master
limited partnerships, the trading price of the Common Units, weather in areas
of the Partnership's operations and actual and anticipated amounts of Available
Cash generated by the Partnership. There can be no assurance that holders of
Senior Subordinated Units will be able to sell their Units at favorable prices
or that the Senior Subordinated Units will trade at prices related to the
market prices of the Common Units. If, following the Transaction, a number of
former Common Stockholders sell Senior Subordinated Units, the trading price of
the Senior Subordinated Units could decline significantly.
The Partnership Has Substantial Indebtedness
Although substantially less leveraged than Petro, following the completion of
the Transaction the Partnership will have a substantial amount of indebtedness.
The terms of such indebtedness could restrict the amount of cash distributable
by the Partnership and limit the amount of additional indebtedness the
Partnership might incur to make acquisitions or for other purposes. See "--
Risks to the Partnership's Common Unitholders--The Partnership's Indebtedness
May Affect Its Operations
56
<PAGE>
and Its Ability to Make Distributions" and "--The Partnership Has Debt with
Change of Control Provisions."
Holders of Units Have Limited Voting Rights; the General Partner Manages and
Operates the Partnership
The General Partner manages and operates the Partnership and the Operating
Partnership. Unlike the holders of common stock in a corporation, holders of
outstanding Units have only limited voting rights on matters affecting the
Partnership's business. Unitholders 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 Common Units (excluding those held by the General
Partner and its affiliates) and the Senior Subordinated Units and Junior
Subordinated Units voting as a single class. As a result, Unitholders 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. Although the Amended and Restated Partnership
Agreement provides that the General Partner may not transfer any or all of the
General Partner Units to another person or entity prior to December 31, 2005
without the approval of a Unit Majority (subject to certain exceptions), the
members of Star Gas LLC may sell or otherwise transfer their limited liability
company interests in Star Gas LLC to a third party at any time without the
approval of the Unitholders.
Unlike the holders of Common Units, the holders of Senior Subordinated Units
do not have the right to approve the issuance of additional partnership
interests under certain circumstances. Furthermore, the matters on which the
Senior Subordinated Units may vote require the approval of a Unit Majority. A
Unit Majority means, during the Subordination Period, at least a majority of
the Common Units (excluding Common Units held by the General Partner and its
affiliates) and at least a majority of the Senior Subordinated Units and Junior
Subordinated Units voting as a single class. Thus, there may be matters that
are approved by a majority of the Senior Subordinated Units that are not
adopted either because an insufficient number of Junior Subordinated Units
voted to approve or because a majority of the Common Units did not vote to
approve.
The Partnership May Issue Additional Units Diluting Existing Unitholders'
Interests
The Partnership will have the authority under the Amended and Restated
Partnership Agreement to issue up to 2,500,000 Common Units and, in certain
circumstances, an unlimited number of additional Common Units and an unlimited
number of additional Senior Subordinated Units, Junior Subordinated Units or
other equity securities for such consideration and on such terms and conditions
as are established by the General Partner, in its sole discretion without
obtaining the approval of the Unitholders. See "--Risks to the Partnership's
Common Unitholders--Common Unitholders Are Subject to Dilution of Their
Interest."
The Amended and Restated Partnership Agreement Contains Provisions That May
Discourage a Change of Management
The Amended and Restated Partnership Agreement contains certain provisions
that may discourage a person or group from attempting to remove an incumbent
general partner or otherwise
57
<PAGE>
change the management of the Partnership. The effect of these provisions may be
to diminish the price at which the Senior Subordinated Units will trade under
certain circumstances.
Reimbursement of General Partner Has Priority over Distributions
Prior to making any distributions on the Units, the Partnership will
reimburse the General Partner and its affiliates (including officers and
directors of the General Partner) for all expenses incurred by the General
Partner and its affiliates on behalf of the Partnership (including wages,
salaries, incentive compensation and the cost of employee benefit plans paid or
provided to employees, officers and directors of the General Partner), which
expenses will be determined by the General Partner in its sole discretion. 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.
The General Partner and the Partnership Will Have a Limited Call Right with
Respect to the Units
If, at any time, less than 20% of the then issued and outstanding Units of
limited partner interest of any class (including Senior Subordinated Units and
Junior Subordinated Units) is held by persons other than the General Partner
and its affiliates, the General Partner will have the right to acquire all, but
not less than all, of 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. The General
Partner may assign such right to any of its affiliates or the Partnership. As a
consequence, a holder of Units may be required to sell his 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. Also, upon expiration of the
Subordination Period, if the Partnership acquires more than 66 2/3% of the
Class B Common Units in a twelve-month period, then the Partnership will have a
call right that is similar to that of the General Partner described above.
Unitholders May Not Have Limited Liability in Certain Circumstances
Under certain circumstances, Unitholders could lose their limited liability
and could become liable for amounts improperly distributed to them by the
Partnership. See "The Amended and Restated Partnership Agreement--Limited
Liability."
Petro Common Stockholders Will Have Fewer Ownership Rights
If the Transaction is effected, the Common Stockholders will lose the rights
they hold as stockholders in a Minnesota corporation, but will gain the rights
of limited partners in a Delaware limited partnership. Overall, the Transaction
probably will result in a reduction in Common Stockholder's legal rights. For
example, while Common Stockholders currently have the right to elect directors,
Unitholders do not have the right to elect the directors of the General
Partner. A comparison of these changes in rights is set forth under "Comparison
of Securities."
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
58
<PAGE>
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 from October through March. Actual weather conditions
can vary substantially from year to year, significantly affecting the
Partnership's results of operations.
There can be no assurance that average temperatures in future years will not
be above historical averages. For example, the average temperatures in the
region in which the Partnership operates have been warmer over the last five
years than the preceding ten years. Petro's home heating oil operations are
more sensitive to temperature levels than the Partnership's operations since
substantially all of Petro's sales of heating oil are for heating purposes
whereas a portion of the Partnership's sales of propane are for uses other than
heating.
The Partnership Is Subject to Propane Pricing Risk
The retail propane business is a "margin-based" business in which gross
profits depend on the excess of selling prices over propane supply costs.
Consequently, the Partnership's profitability is sensitive to changes in
wholesale propane prices to the extent they cannot be passed on to its
customers. Propane is a commodity, the market price of which is subject to
fluctuation (which may be volatile) in response to changes in supply or other
market conditions. The Partnership has no control over these market conditions.
As rapid increases in the wholesale cost of propane may not be immediately
passed on to customers by the Partnership, such increases could reduce the
Partnership's gross profits.
The Partnership Is Subject to Inventory Risk and Inflation Risk
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 and 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 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 risks 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 Indiana
underground storage facility 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.
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.
59
<PAGE>
The Partnership Is Dependent 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,
Texas 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 was 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 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. 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.
The Retail Propane Business Is Highly Competitive
The retail propane distribution business is highly competitive. Many of the
Partnership's competitors are larger or have substantially greater financial
and operating resources than the Partnership. Generally, competition in the
last 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, its ability to maintain competitive retail prices and its ability to
acquire propane companies. If a competitor attempts to increase market share by
reducing prices, the Partnership's operating results and financial condition
could be materially and adversely affected. Competition from alternative energy
sources has been increasing as a result of reduced regulation of many
utilities, including natural gas and electricity. Many of these utilities have
substantially greater financial resources than the Partnership.
As a result of long-standing customer relationships, which 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 larger and
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
60
<PAGE>
such 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 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 results, the Partnership's access to capital and its
acquisition activities may be limited.
The Partnership Is Subject to Operating and Litigation Risks That May Not Be
Insured
The Partnership's operations are subject to operating hazards and risks
incidental to the handling, storage and transportation of propane, a
combustible liquid. As a result, the Partnership may be a defendant in
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 rates. The occurrence
of an event not covered by insurance or indemnification could have a material
adverse effect on the Partnership's business, operating results and financial
condition.
The General Partner Has Conflicts of Interest and Limited Fiduciary
Responsibilities
The General Partner and its affiliates may have conflicts of interest with
the Partnership and its limited partners. The Amended and Restated Partnership
Agreement contains certain provisions that limit the liability and reduce the
fiduciary duties of the General Partner to the Unitholders, as well as
provisions that may restrict the remedies available to Unitholders for actions
that might, without such limitations, constitute breaches of fiduciary duty.
Holders of Units are deemed to have consented to certain actions and conflicts
of interest that might otherwise be deemed a breach of fiduciary or other
duties under applicable state law.
Decisions of the General Partner with respect to the amount of and timing of
asset purchases and sales, cash expenditures, borrowings, issuances of
additional Units and the creation, reduction or increases of 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 or
in subsequent quarters.
Except for Irik P. Sevin, who is subject to an agreement limiting his ability
to compete with the Partnership's propane and heating operations, the General
Partner's affiliates will not be prohibited from engaging in other businesses
or activities, including those that might be in direct competition with the
Partnership. There can be no assurance that there will not be competition
between the Partnership and affiliates of the General Partner.
61
<PAGE>
TAX RISKS TO COMMON STOCKHOLDERS
There Are Risks Involving Tax Treatment of the Merger
The Merger will be a taxable transaction to Common Stockholders, generally
resulting in gain or loss to each such holder in an amount equal to the
difference between the value of the Senior Subordinated Units received by him
and the federal income tax basis he has in the shares exchanged for such Units.
Any gain or loss will be capital gain or loss if the stock is held by the
stockholder as a capital asset and will be long term capital gain or loss if
such stock has been held for more than one year. Long-term capital gains will
generally be taxed at a maximum rate of 20%. Capital losses can be deducted
against capital gains and thereafter against ordinary income to the extent of
$3,000 per year for individuals with any unused capital loss being carried
forward indefinitely.
The Merger will also result in income to Petro equal to the excess of the
value of the Units distributed to its Common Stockholders in the Merger and any
debt relief in excess of the federal income tax basis of such Units to Petro.
Although it is expected by Petro that such gain will generally be offset by
Petro's NOLs, the NOLs are subject to challenge by the IRS. This could reduce
the cash available for distribution by the Partnership. Petro does not
anticipate that the Corporate Group will pay significant federal income tax in
the first few years; however, over time more federal income tax will be paid by
the Corporate Group. The Corporate Group's ability to reduce income for federal
income tax purposes is dependent on the depreciation deductions and interest
deductions with respect to certain debt, all of which is subject to challenge
by the IRS. Counsel has not rendered any opinion with respect to these matters.
See "Certain Federal Income Tax Considerations--Tax Consequences of the
Merger."
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 as a partnership for federal income tax purposes. Assuming the
accuracy of certain factual matters as to which the General Partner and the
Partnership have made representations, counsel is of the opinion that, under
current law, the Partnership has been and will be classified as a partnership
for federal income tax purposes. No ruling from the IRS as to classification
has been or is expected to be requested. Instead, the Partnership intends to
rely on such opinion of Counsel, which is not binding on the IRS. Based on the
representations of the Partnership and the General Partner and a review of
applicable legal authorities, Counsel is also of the opinion that at least 90%
of the Partnership's gross income is income derived from the exploration,
development, mining or production, processing, refining, transportation or
marketing of any mineral or natural resource or other items of "qualifying
income," within the meaning of Section 7704 of the Internal Revenue Code of
1986, as amended (the "Code"). 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 "Certain Federal
Income Tax Considerations--Tax Consequences of Unit Ownership--Partnership
Status."
If the Partnership were classified as an association taxable as a corporation
for federal income tax purposes, the Partnership would pay tax on its income at
corporate rates (currently a 35% federal rate), distributions would generally
be taxed again to the Unitholders as corporate distributions, and
62
<PAGE>
no income, gains, losses and 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 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 thus would
likely result in a substantial reduction in the market value of the Units. See
"Certain Federal Income Tax Considerations--Tax Consequences of Unit
Ownership--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 association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level
taxation. The Amended and Restated 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 Amended and Restated Partnership Agreement
will be subject to change, including a decrease in the Minimum Quarterly
Distribution and the 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 Leaves Uncertainty
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 activities generate "qualifying income" under Section
7704 of the Code 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. Any such contest with the IRS
may materially and adversely impact the market for the Units and the prices at
which Units trade. In addition, the costs of any contest with the IRS will be
borne directly or indirectly by some or all of the Unitholders and the General
Partner.
Risk of Tax Liability Exceeding Cash Distributions; Portfolio Income
A Unitholder will be required to pay federal income taxes and, in certain
cases, state and local income taxes on his allocable share of the Partnership's
income, whether or not he receives cash distributions from the Partnership.
There is no assurance 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 "Certain Federal Income Tax Considerations--Tax Consequences
of Unit Ownership" and "--Disposition of Units." Although it is not expected by
the Corporate Group that it will pay significant federal income tax for some
period of time, it is possible that the Corporate Group may generate earnings
and profits during that time such that distributions from the Corporate Group
to the Partnership may result in taxable dividend income to the Partnership
and, thus, to the Unitholders. Any dividend income from the Corporate Group
cannot be offset by past or future losses generated by the Partnership's
propane activities.
63
<PAGE>
Ownership of Units Raises Issues For 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, virtually all of the taxable income derived by a Unitholder that is an
organization exempt from federal income tax (including IRAs and other
retirement plans) is expected by the Partnership in the first few years to be
unrelated business taxable income and thus taxable to such a Unitholder. A
significant portion of the Petro Common Stockholders may, therefore, find it
necessary or advisable to sell the Senior Subordinated Units they acquire in
the Transaction, possibly driving down the market price of such Units. See
"Certain Federal Income Tax Considerations--Uniformity of Units--Tax-Exempt
Organizations and Certain Other Investors."
There Are Limits On Deductibility of Losses
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the Partnership
will only be available to offset future passive income generated by the
Partnership and cannot be used to offset income from other activities,
including passive activities or investments or interest and dividend income
generated by the Partnership (such as dividend income from the Corporate
Group). Passive losses that 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 to an
unrelated party in a fully taxable transaction. Net passive income from the
Partnership may be offset by unused Partnership losses carried over from prior
years, but not by losses from other passive activities, including losses from
other publicly traded companies. See "Certain Federal Income Tax
Considerations--Tax Consequences of Unit Ownership--Limitations on
Deductibility of Partnership Losses."
Tax Shelter Registration Could Increase Risk of Potential IRS Audit
The Partnership is registered with the Secretary of the Treasury as a "tax
shelter." The IRS has issued the following tax shelter registration number to
the Partnership: 96026000016. No assurance can be given that the Partnership
will not be audited by the IRS or that tax adjustments will not be made. Any
Unitholder owning less than a 1% profit interest in the Partnership has very
limited rights to participate in the income tax audit process. Further, any
adjustments in the Partnership's tax returns will lead to adjustments in the
Unitholders' tax returns and may lead to audits of Unitholders' tax returns and
adjustments of items unrelated to the Partnership. Each Unitholder would pay
any tax owed as the result of an examination of his personal tax return.
There is a Possibility of Loss of Tax Benefits Relating to Non-Uniformity of
Units and Non-Conforming Depreciation Covenants
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 will adopt 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
64
<PAGE>
amount of tax benefits available to a purchaser of Units and could have a
negative impact on the value of the Units. See "Certain Federal Income Tax
Considerations--Uniformity of Units."
Tax Gain or Loss on Disposition of Units Could Be Different Than Expected
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 that 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 Unit, even if the price is less than his
original cost. A portion of the amount realized (whether or not representing
gain) may be ordinary income. Furthermore, should the IRS successfully contest
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 Is Complicated and Subject To Audits
The Partnership will furnish each Unitholder with a Schedule K-1 that sets
forth his allocable share of income, gains, losses and deductions. In preparing
these schedules, the Partnership will use 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.
There Are State, Local and Other Tax Considerations
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which 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 Hampshire, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island, Texas and West Virginia. Of these states, only
Texas does not currently impose a personal income tax. New Hampshire's personal
income tax applies only to interest and dividend income. 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 or local tax consequences of ownership or sale of Units.
See "Certain Federal Income Tax Considerations--State, Local and Other Tax
Considerations."
65
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION;
CONFLICTS OF INTEREST
THE PARTNERSHIP
Star Gas, the current general partner of the Partnership, is a wholly-owned
subsidiary of Petro, and Petro owns all the outstanding Subordinated Units of
the Partnership. All of the directors of Star Gas are also directors or
officers of Petro, except the members of the Special Committee. As a result the
members of the Star Gas Board who are also members of the Petro Board have
conflicting fiduciary duties to the Common Unitholders, Petro and the Common
Stockholders. Therefore, certain members of the Star Gas Board have interests
that are different from, and in conflict with, the interests of the Common
Unitholders.
The officers and directors of Star Gas will be indemnified, to the extent
permitted by law, for any and all actions taken in connection with the
Transaction and are also covered by customary directors' and officers'
liability insurance. Each member of the Star Gas Board will be a member of the
Star Gas LLC Board following the Transaction, except that, at her request, one
of the current directors of Star Gas will withdraw as a director upon
consummation of the Transaction as a result of additional duties associated
with a new job. That director will be replaced by a director selected by the
Star Gas LLC Board, and the new director will not be an officer or employee of
Star Gas LLC or any of its affiliates. The current officers of Star Gas will be
employed as officers of the Operating Partnership following the Transaction.
PETRO
Certain directors of Petro have interests in the Transaction that are
different from, and in conflict with, the interests of the Public Common
Stockholders, since certain directors and their affiliates are receiving
consideration that is different from that of the Public Common Stockholders.
All directors and executive officers of Petro have interests in the
Transaction, in addition to their interests as Common Stockholders and they are
exchanging their Common Stock in a tax-free exchange whereas the Public Common
Stockholders must exchange their shares in a taxable transaction. These
directors and their affiliates will be exchanging their Common Stock for Junior
Subordinated Units and General Partner Units, while the Public Common
Stockholders and certain other directors and other affiliates will be receiving
Senior Subordinated Units.
The Junior Subordinated Units and General Partner Units will not be entitled
to distributions until the Senior Subordinated Units receive the Minimum
Quarterly Distribution. The Senior Subordinated Units will be publicly traded
and have been approved for listing on the New York Stock Exchange. The Junior
Subordinated Units and General Partner Units have not been registered and will
not be publicly traded.
The affiliates exchanging their Common Stock for Junior Subordinated Units
and General Partner Units will receive .15909 Junior Subordinated Units
or General Partner Units for each share of Common Stock, whereas the remaining
Common Stockholders will exchange their shares for Senior Subordinated Units at
a ratio of .13064 Senior Subordinated Units for each share of Common Stock.
The Transaction has been structured so that the Public Common Stockholders
will realize a taxable gain or loss on the Transaction, whereas all affiliates
of Petro will exchange their Common
66
<PAGE>
Stock without realizing such a taxable gain or loss. This structure was
designed to minimize the tax effect of the Transaction on Petro. It was also
based on the assumption that certain Petro affiliates have a low tax basis and
would prefer not realizing a taxable gain on the Transaction, whereas Public
Common Stockholders generally have a higher tax basis and would prefer
realizing a tax loss.
Irik P. Sevin is both the Chairman of the Board and Chief Executive Officer
of Petro and the Chairman of the Board of Star Gas; Audrey L. Sevin is the
Secretary and a director of both Petro and Star Gas; and Messrs. Paul
Biddelman, Thomas J. Edelman and Wolfgang Traber are directors of both Petro
and Star Gas. Messrs. Sevin, Biddelman, Edelman, Cohen and Traber and Mrs.
Sevin are beneficial owners of Class A Common Stock and Class C Common Stock.
As a result, the members of the Petro Board who are also members of the Star
Gas Board have conflicting fiduciary duties to the Public Common Stockholders
and the Public Common Unitholders. Therefore, certain members of the Petro
Board have interests that conflict with the interests of the Public Common
Stockholders.
The officers and directors of Petro will be indemnified, to the extent
permitted by law, for any and all actions taken in connection with the
Transaction. The current officers of Petro will continue to be employed as
officers following the Transaction.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITY
OF THE GENERAL PARTNER OF THE PARTNERSHIP
CONFLICTS OF INTEREST
Certain conflicts of interest could arise in the future as a result of the
General Partner's relationships with its security holders, 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
members. In general, the General Partner has a fiduciary duty to manage the
Partnership in a manner beneficial to the Partnership and the Unitholders. The
Amended and Restated 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 security holders of the General
Partner may, therefore, come into conflict with the duties of the General
Partner to the Partnership and the Unitholders. The 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 of the Partnership After the Transaction" and "--Fiduciary
Duties of the General Partner."
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Revised Uniform Limited Partnership Act (the
"DRULPA") 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 Amended and Restated Partnership Agreement that
purport to waive or
67
<PAGE>
restrict fiduciary duties of the General Partner. Common 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 Common 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
Senior Subordinated Units and Junior 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 establishment of 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 Amended and Restated 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 holders of Senior
Subordinated Units, Junior Subordinated Units and General Partner Units to
receive Incentive Distributions, hasten the expiration of the Subordination
Period or the conversion of the Senior Subordinated Units and Junior
Subordinated Units into Class B 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 not be deemed to be
a breach of any duty of the General Partner to the Partnership or the
Unitholders. See "Risk Factors" and "Cash Distribution Policy."
The Partnership Reimburses the General Partner and Its Affiliates for Certain
Expenses
Under the terms of the Amended and Restated 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 Amended and Restated 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 of the Partnership After the Transaction--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 that the Partnership's
liability under contractual arrangements be limited so that the other party has
recourse only as to all or particular assets of the Partnership, with no
recourse against the General Partner or its assets. The Amended and Restated
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.
68
<PAGE>
Unitholders Have No Right to Enforce Obligations of the General Partner and
Its Affiliates Under Agreements with the Partnership
The Partnership will acquire or provide certain services from and/or to the
General Partner and its affiliates on an ongoing basis. The agreements relating
thereto will not grant to the Unitholders, 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 Will Not Be the Result of Arm's-Length
Negotiations
Under the terms of the Amended and Restated 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 that are fair and reasonable to the Partnership) or entering into
additional contractual arrangements with any of them on behalf of the
Partnership. Neither the Amended and Restated 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 are required to be on terms that 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 (although no party
is obligated to seek such approval), (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 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.
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 Unitholder
may have his 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 Units. For a description of such right, see "The
Amended and Restated 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.
In
69
<PAGE>
addition, Irik P. Sevin has an agreement with the Partnership which provides
that following the consummation of the Transaction he will not engage in the
retail propane or retail home heating oil business in the United States so long
as he (a) is a director, officer or employee of the General Partner, the
Partnership or a subsidiary of the Partnership or (b) has access to information
that would put the Partnership at a competitive disadvantage. Further, so long
as Mr. Sevin and his mother, Ms. Audrey Sevin, own in the aggregate more than a
10% voting interest in the General Partner, he will not directly or indirectly
employ in the retail propane business or the retail home heating oil business a
person who was a managerial employee of the General Partner, the Partnership or
a subsidiary of the Partnership during the twelve-month period prior to such
date of employment.
The General Partner Is Not Restricted from Engaging in a Transaction That
Would Trigger Change of Control Provisions
The Partnership's debt instruments contain 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 that would trigger such change of
control provisions.
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 common stockholders of a corporation, the law concerning
the duties owed by general partners to other partners and to partnerships is
relatively undeveloped. Neither the DRULPA nor case law defines with
particularity the fiduciary duties owed by general partners to limited partners
or a limited partnership, but the DRULPA 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
DRULPA, 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 Unitholder 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 DRULPA favoring the
70
<PAGE>
principle of freedom of contract and the enforceability of partnership
agreements. The DRULPA also provides that a partnership agreement is
enforceable even if not signed by a person being admitted as a limited partner
or becoming an assignee in accordance with the terms thereof.
The Amended and Restated 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 Amended and Restated 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 Amended
and Restated 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 Amended and Restated 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 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 DRULPA or other applicable law. The
Amended and Restated 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 DRULPA 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 Amended and Restated Partnership Agreement also provides that any
standard of care and duty imposed thereby or under the DRULPA 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 Amended and Restated Partnership Agreement or
any other agreement contemplated therein and to make any decision pursuant to
the authority prescribed in the Amended and Restated 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,
71
<PAGE>
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 Amended and Restated 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 Amended and Restated 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.
PARTIES TO THE TRANSACTION
THE PARTNERSHIP AND THE OPERATING PARTNERSHIP
The Partnership is a publicly-traded Delaware limited partnership formed in
1995 to acquire and operate the propane business of Star Gas and Petro. The
Partnership's activities are conducted through the Operating Partnership (and a
corporate subsidiary). 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, and the propane
operations of Petro that were acquired from Petro in December 1995.
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. The Partnership believes that it is the
eighth largest retail propane distributor in the United States, serving
approximately 166,000 customers from 74 branch locations in the Midwest and
Northeast, with total sales of approximately $135 million for the fiscal year
ended September 30, 1997. Propane is used primarily as fuel for space and water
heating and cooking by the Partnership's residential and commercial customers,
which customers constitute the largest portion of the Partnership's customer
base. 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. In addition to its retail business, the
Partnership serves approximately 50 wholesale customers from its wholesale
operation in southern Indiana. For the nine months ended June 30, 1998,
approximately 79% of the Partnership's sales (by volume of gallons sold) were
to retail customers (of which approximately 55%, 19%, 19% and 7% were sales to
residential customers, industrial/commercial customers, agricultural customers
and motor fuel customers, respectively) and approximately 21% 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 for the nine
months ended June 30, 1998 accounted for 67% of the
72
<PAGE>
Partnership's gross profit on propane sales, reflecting the higher-margin
nature of this segment of the retail market.
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 that have the potential for generating
attractive returns on investment. The retail propane industry is mature,
experiences only limited growth in total demand for the product and is 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.
To facilitate the Partnership's acquisition strategy, the Operating
Partnership has bank credit facilities, which consist of a $25 million
acquisition facility and a $12 million working capital facility (collectively,
the "Bank Credit Facilities"). As of June 30, 1998, $1.0 million was
outstanding under these facilities. 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.
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 material acquisition other than
the Transaction. The General Partner has broad discretion in making
acquisitions and it is expected that the General Partner will not generally
seek approval by the Partnership's limited partners of acquisitions. See "Risk
Factors."
For information concerning weather conditions, and other factors that could
adversely affect the Partnership's operations, see "Risk Factors--Risks to
Petro Common Stockholders--Weather Conditions Affect the Demand for Propane."
Additional information about the Partnership is included in the Partnership's
Annual Report on Form 10-K for its fiscal year ended September 30, 1997 and the
other documents relating to the Partnership that are incorporated herein by
reference. See "Incorporation of Certain Documents By Reference."
PETRO
Petro is a Minnesota corporation engaged primarily in the retail distribution
of home heating oil in the Northeast and Mid-Atlantic states. Petro serves
approximately 340,000 customers from 24 branch locations in such states,
including metropolitan Boston, New York City, Baltimore, Providence, and
Washington, D.C., with total sales of approximately $548.1 million for the year
ended December 31, 1997. Petro believes that it is the largest retail
distributor of home heating oil in the United States. As an adjunct to its
heating oil business, Petro installs and repairs heating equipment. Petro
considers such services, which are typically not designed to generate profits,
to be an integral part of its basic fuel oil business and generally does not
provide service to any person
73
<PAGE>
who is not a home heating oil customer. To a limited extent, Petro also markets
other petroleum products, including diesel fuel and gasoline, to commercial
customers. In addition, through Star Gas Petro has a 40.5% equity interest in
the Partnership.
The home heating oil industry is large, highly fragmented and undergoing
consolidation, with approximately 3,700 independently owned and operated home
heating oil distributors in the Northeast. Petro has been the principal
consolidator in this industry and, since 1979, when Petro's current management
assumed control, has acquired over 180 retail heating oil distributors. Petro
acquires distributors in both new and existing markets and integrates them into
the existing operations. Economies of scale are realized from these purchases
through its centralization of accounting, data processing, fuel oil purchasing,
credit and marketing functions. Petro is well known in the heating oil industry
and is regularly contacted by potential sellers. As a result of its growth
strategy, heating oil sales volume increased from 59.4 million gallons in 1980
to 410.3 million gallons for the year ended December 31, 1997, a compound
annual growth rate of 12%. Despite its size, Petro estimates that its customer
base represents only approximately 5% of the residential home heating oil
customers in the Northeast.
Petro has been implementing an operational restructuring program, including a
"brand name" identity program to, among other things, reduce customer attrition
and improve operating margins.
Following the completion of the Transaction, Petro will operate as a wholly-
owned indirect subsidiary of the Operating Partnership.
Additional information about Petro is included in Petro's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and other documents
relating to Petro that accompany this Proxy Statement. See "Incorporation of
Certain Documents By Reference."
74
<PAGE>
THE UNITHOLDERS MEETING
DATE, TIME AND PLACE
The Unitholders Meeting will be held on , 1999, at a.m., New
York City time, at New York, New York.
PURPOSE
The purpose of the Unitholders Meeting is to consider and vote upon the
Acquisition Proposal, the Amendment Proposal and the General Partner Proposal.
STAR GAS RECORD DATE
The close of business on , 1999 has been fixed by the Star Gas
Board as the record date (the "Star Gas Record Date") for the determination of
Common Unitholders entitled to notice of, and to vote at, the Unitholders
Meeting and any adjournment or postponement thereof. On the Star Gas Record
Date, there were 3,858,999 Common Units issued and outstanding, held by
approximately holders of record.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE STAR GAS BOARD
The Special Committee believes that the Transaction is in the best interests
of the Public Common Unitholders and has recommended the Transaction to the
Star Gas Board. Based on such recommendation, the Star Gas Board unanimously
recommends that Common Unitholders vote FOR the Star Proposals. See "The
Transaction--Background and Reasons for the Transaction."
PROXIES AND REVOCABILITY OF PROXIES
A proxy card for voting at the Unitholders Meeting is enclosed with this
Proxy Statement, which is being mailed to all holders of Common Units as of the
Star Gas Record Date. When a proxy card is returned, properly completed, signed
and dated, the Common Units represented thereby will be voted in accordance
with the instructions contained on the proxy card. If a Common Unitholder does
not attend the Unitholders Meeting and does not return the signed proxy card,
such holder's shares will not be voted, and this will have the effect of a vote
"AGAINST" the matters to be voted on at the Unitholders Meeting. Common
Unitholders are urged to mark the box on the proxy card to indicate how Common
Units represented by the proxy card are to be voted. An executed proxy card
that does not indicate how Common Units are to be voted will be voted "FOR" all
Star Proposals. Star Gas does not intend to bring any matters before the
Unitholders Meeting, other than approval of the Star Proposals, and does not
know of any other matters sought to be brought before the Unitholders Meeting
by others. If any business other than the Star Proposals is brought before the
Unitholders Meeting, the Common Units represented by a proxy card will be voted
by those persons appointed by Star Gas to vote the Common Units represented by
the proxy card according to their best judgment. The proxy card also confers
discretionary authority on the persons appointed by Star Gas named on the proxy
card to vote the Common Units represented thereby on any other procedural
matter that is properly presented for action at the Unitholders Meeting.
75
<PAGE>
The execution of a proxy card will not affect a Unitholder's right to attend
the Unitholders Meeting and vote in person. A Unitholder who has given a proxy
may revoke it at any time before it is exercised at the Unitholders Meeting by
(a) delivering a written notice of revocation to the Vice President--Finance of
Star Gas, (b) executing and submitting a proxy card bearing a later date or (c)
attending the Unitholders Meeting and voting in person. However, the mere
presence at the Unitholders Meeting by a person who has given a proxy will not
revoke such proxy.
Unless the arrangement between the beneficial owner and a broker or other
nominee holder provides otherwise, brokers and other nominee holders of Common
Units will not have discretionary authorization to vote Common Units on any of
the matters to be voted thereon in the absence of instructions from the
beneficial owners of such Common Units. Beneficial owners are therefore urged
to provide instructions to such brokers or other nominees concerning how they
wish their Common Units to be voted. Abstentions and broker non-votes are each
included in the determination of the number of Common Units present for quorum
purposes. Abstentions and broker non-votes will in effect be votes against the
Star Proposals because approval thereof requires the affirmative vote of the
holders of a majority of all Common Units.
COST OF SOLICITATION OF PROXIES
Petro, which has agreed to reimburse the Partnership for the expenses
incurred by the Partnership in connection with the Transaction, will bear all
costs relating to the solicitation of proxies from the Common Unitholders and
will reimburse banks, brokerage houses, custodians, nominees, fiduciaries, and
other persons holding Common Units in their names or in the names of their
nominees for their reasonable expenses in forwarding proxy material to
beneficial owners of Common Units. The Partnership has engaged
, a professional proxy solicitation firm (the
"Solicitation Agent"), to solicit proxies on behalf of the Partnership. The
Partnership will pay such firm a fee of $ , plus expenses, for so
acting. An additional fee of $ will be paid to such firm if the
Star Proposals are adopted. In addition, certain officers, directors and
regular employees of Star Gas may, without additional compensation, solicit
proxies by personal interview, telephone, telex, telegram, facsimile or similar
means of communication.
VOTING RIGHTS; VOTE REQUIRED
Except for certain limitations discussed below, each person deemed to be a
"Record Holder" of Common Units on the Star Gas Record Date will have a vote
according to their percentage interest in the Partnership on such date. Under
the Partnership Agreement as currently in effect, a "Record Holder" of Common
Units means the person in whose name such Common Units are registered on the
books of the transfer agent for the Common Units at the opening of business on
the Star Gas Record Date, which includes both persons who have been admitted to
the Partnership as limited partners or substitute limited partners and
transferees of Common Units who have executed and delivered to such transfer
agent a transfer application as required by the Partnership Agreement, but who
have not yet been admitted to the Partnership as substitute limited partners.
The Partnership Agreement also provides that Common Units held in nominee or
street name account will be voted by the broker (or other nominee) pursuant to
the instructions of the beneficial
76
<PAGE>
owner, unless the arrangement between the beneficial owner and his nominee
provides otherwise. The Partnership is entitled to assume that such nominee is
acting at the direction of the beneficial owner without further inquiry.
The Partnership Agreement requires, in order to approve and adopt each of the
Star Proposals to be considered at the Unitholders Meeting, the affirmative
vote of at least a Unit Majority. "Unit Majority" is, for this purpose, defined
in the Partnership Agreement to mean those persons holding at least a majority
of the outstanding Common Units (other than Common Units owned by Star Gas or
any of its affiliates).
The Transaction cannot be effected without approval of each of the Star
Proposals by the Common Unitholders.
Holders of Common Units should not send any unit certificates with their
proxy cards.
QUORUM; ADJOURNMENT
The Partnership Agreement provides that the presence at the Unitholders
Meeting, either in person or by proxy, of a Unit Majority is necessary to
constitute a quorum at the Unitholders Meeting. The Partnership Agreement also
provides that, in the absence of a quorum, the Unitholders Meeting may be
adjourned from time to time by the affirmative vote of the holders of a
majority of the Common Units represented either in person or by proxy.
The Partnership Agreement provides that, when a meeting is adjourned to
another time or place, notice need not be given of the adjourned meeting and a
new record date need not be fixed if the time and place of the adjourned
meeting is announced at the meeting at which the adjournment is taken, unless
such adjournment is for more than 45 days. At an adjourned meeting, the
Partnership may transact any business that might have been transacted at the
original meeting.
77
<PAGE>
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting will be held on , 1999, at 10:00 a.m., New York
City time, at , New York, New York.
PURPOSE
The purpose of the Special Meeting is to consider and vote upon the
Acquisition Proposal.
PETRO RECORD DATE
The Petro Board has fixed the close of business on , 1999, as the
record date (the "Petro Record Date") for the determination of stockholders
entitled to notice of, and to vote at, the Special Meeting. Accordingly, only
holders of record of shares of Common Stock at the close of business on the
Petro Record Date will be entitled to vote at the Special Meeting and any
adjournment or postponement thereof. As of the close of business on the Petro
Record Date, there were issued and outstanding 23,964,962 shares of Class A
Common Stock, held by record holders; and 2,597,519 shares of Class C
Common Stock, held by 24 record holders.
PETRO BOARD RECOMMENDATION
The Petro Board has determined that the Transaction is fair and in the best
interests of the Public Common Stockholders and has, therefore, approved the
Merger Agreement and the Exchange Agreement, and unanimously recommends that
the Common Stockholders vote FOR the Acquisition Proposal.
PROXIES AND REVOCABILITY OF PROXIES
A proxy card for voting at the Special Meeting is enclosed with this Proxy
Statement, which is being mailed to all Common Stockholders of record as of the
Petro Record Date. When a proxy card is returned, properly completed, signed
and dated, the shares of Common Stock represented thereby will be voted in
accordance with the instructions on the proxy card. If a Common Stockholder
does not attend the Special Meeting and does not return the signed proxy card,
such holder's shares will not be voted, and this will have the effect of a vote
"AGAINST" the matters to be voted on at the Special Meeting. Common
Stockholders are urged to mark the box on the proxy card to indicate how the
shares represented by the proxy card are to be voted. An executed proxy card
that does not indicate how the shares of Common Stock is to be voted will be
voted "FOR" approval of the Acquisition Proposal. The Petro Board does not
intend to bring any matters before the Special Meeting, other than approval of
the Acquisition Proposal, and does not know of any other matters sought to be
brought before the Special Meeting by others. If any business other than the
Acquisition Proposal is brought before the Special Meeting, the shares of
Common Stock represented by a proxy card will be voted by those persons
appointed by the Petro Board to vote the shares of Common Stock represented by
the proxy card according to their best judgment. The proxy card also confers
discretionary authority on the persons appointed by the Petro Board named on
the proxy card
78
<PAGE>
to vote the shares represented thereby on any other procedural matter that is
properly presented for action at the Special Meeting.
The execution of a proxy card will not affect a Common Stockholder's right to
attend the Special Meeting and vote in person. A Common Stockholder who has
given a proxy may revoke it at any time before it is exercised at the Special
Meeting by (a) delivering a written notice of revocation to the Secretary of
Petro, (b) executing and submitting a proxy card bearing a later date, or (c)
attending the Special Meeting and voting in person. However, the mere presence
at the Special Meeting by a person who has given a proxy will not revoke such
proxy.
Unless the arrangement between the beneficial owner and a broker or other
nominee holder provides otherwise, brokers and other nominee holders of Common
Stock will not have discretionary authorization to vote shares of Common Stock
on any of the matters to be voted thereon in the absence of instructions from
the beneficial owners of such Common Stock. Beneficial owners are therefore
urged to provide instructions to such brokers or other nominees concerning how
they wish their Common Stock to be voted. Abstentions and broker non-votes are
each included in the determination of the number of shares of Common Stock
present for quorum purposes. Abstentions and broker non-votes will in effect be
votes against the Acquisition Proposal because approval thereof requires the
affirmative vote of the holders of a majority of all shares of Common Stock.
COST OF SOLICITATION OF PROXIES
Petro will bear all costs relating to the solicitation of proxies from Common
Stockholders and will reimburse banks, brokerage houses, custodians, nominees,
fiduciaries, and other persons holding Common Stock in their names or in the
names of their nominees for their reasonable expenses in forwarding proxy
material to beneficial owners of Common Stock. Petro has engaged the
Solicitation Agent to solicit proxies on behalf of Petro. Petro will pay such
firm a fee of $ , plus expenses, for so acting. An additional fee of $
will be paid to such firm if a majority of the Common Stockholders vote in
favor of the Acquisition Proposal. In addition, certain officers, directors and
regular employees of Petro may, without additional compensation, solicit
proxies by personal interview, telephone, telex, telegram, facsimile or similar
means of communication.
VOTING RIGHTS; VOTE REQUIRED
All Common Stockholders of record at the close of business on the Petro
Record Date are entitled to vote at the Special Meeting. Holders of each class
of Common Stock, voting as a separate class, will have one vote for each share
with respect to the Acquisition Proposal. The affirmative vote of the holders
of a majority of the Class A Common Stock outstanding as of the Petro Record
Date, voting as a class, the affirmative vote of the holders of the Class C
Common Stock outstanding as of the Petro Record Date, voting as a class, and
the affirmative vote of the holders of a majority of the Class A Common Stock
outstanding as of the Petro Record Date (other than shares held by the
directors and officers of Petro and their affiliates) is required to approve
the Acquisition Proposal.
The directors and executive officers of Petro and affiliates beneficially
owned, as of the Record Date, 11,953,432 shares of Common Stock (excluding all
options to purchase shares of Class A
79
<PAGE>
Common Stock and Class C Common Stock). The holders of % of the shares of
Class A Common Stock and % of the shares of Class C Common Stock have
agreed to vote for the Acquisition Proposal at the Special Meeting.
Directors and executive officers of Star Gas and their affiliates (other than
those persons who were also directors or executive officers of Petro) did not
beneficially own, as of the Petro Record Date, any shares of Common Stock and
no shares of Common Stock were owned by the Partnership or Star Gas.
The Transaction cannot be effected without approval of the Acquisition
Proposal by the Common Stockholders.
Holders of Common Stock should not send any stock certificates with their
proxy cards. If the Transaction is effected, Common Stockholders will be
provided with transmittal materials for the surrender of Petro stock
certificates in exchange for certificates representing Senior Subordinated
Units of the Partnership or cash payments, as applicable.
PETRO PREFERRED STOCK
The Acquisition Proposal also requires the approval of the holders of a
majority of all shares of Petro's Junior Preferred Stock, Public Preferred
Stock and Private Preferred Stock (collectively, the "Petro Preferred Stock"),
outstanding as of the Petro Record Date, voting separately as a class. The
holders of 100% of the Petro Preferred Stock outstanding as of the Petro Record
Date have granted irrevocable proxies to Petro or have agreed to vote their
shares for the Acquisition Proposal.
As of the Petro Record Date, no shares of Petro Preferred Stock were
beneficially owned by any of the directors and executive officers of Petro or
Star Gas or any of their affiliates or by the Partnership or Star Gas.
CLASS B SHARES
There are 11,228 Class B Shares currently outstanding representing less than
.1% of the issued and outstanding shares of common stock of Petro, which will
remain outstanding following the Effective Time.
QUORUM; ADJOURNMENT
Petro's Restated Bylaws provide that the presence at the Special Meeting,
either in person or by proxy, of a majority of the Common Stockholders is
necessary to constitute a quorum at the Special Meeting. Petro's Restated
Bylaws also provide that, in the absence of a quorum, the Special Meeting may
be adjourned from time to time by the affirmative vote of the holders of a
majority of shares of the Common Stock represented either in person or by
proxy.
Petro's Restated Bylaws provide that, when a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting and a new
record date need not be fixed if the time and place of the adjourned meeting is
announced at the meeting at which the adjournment is taken. At an adjourned
meeting at which a quorum is present, the Partnership may transact any business
that might have been transacted at the original meeting.
80
<PAGE>
THE TRANSACTION
The following discussion includes summaries of the principal provisions of
the Merger Agreement and the Exchange Agreement, together with certain
additional information. The descriptions of the Merger Agreement and the
Exchange Agreement contained in this Proxy Statement do not purport to be
complete and are qualified in their entirety by reference to the complete text
of the Merger Agreement and the Exchange Agreement, copies of which (excluding
the exhibits and schedules thereto) are attached hereto as Annexes A and B,
respectively, and incorporated herein by reference. Common Unitholders and
Common Stockholders are urged to read the Merger Agreement, the Exchange
Agreement and other Annexes in their entirety.
DESCRIPTION OF THE TRANSACTION
The Transaction can be viewed as having four principal parts:
(a) The acquisition of Petro by the Partnership, which will be
accomplished through the Exchange and the Merger. In the Exchange, certain
affiliates of Petro will exchange 11,953,432 shares of Common Stock for
approximately 858,532 Senior Subordinated Units, 577,205 Junior
Subordinated Units and 278,973 General Partner Units. In the Merger,
Mergeco, a wholly-owned subsidiary of the Partnership, will merge with and
into Petro, with Petro surviving the Merger. Pursuant to the Merger, the
Public Common Stockholders will exchange their 14,609,049 shares of Common
Stock for approximately 1,908,526 Senior Subordinated Units.
(b) The Equity Offering, pursuant to which the Partnership expects to
sell approximately 6.4 million Common Units, and the Debt Offering,
pursuant to which Petro Holdings expects to sell $120 million of Petro
Holdings Senior Subordinated Debt. The net proceeds of the Equity Offering
and the Debt Offering, which are expected to be approximately $247.5
million (assuming an offering price in the Equity Offering of $22.00 per
Common Unit), will be used to redeem certain debt and preferred stock of
Petro.
(c) The withdrawal of Star Gas as the general partner of the Partnership
and the Operating Partnership and the election of Star Gas LLC as the
successor general partner.
(d) The adoption of certain amendments to the Partnership Agreement and
the Operating Partnership Agreement. See "Amendment of the Partnership
Agreement."
DESCRIPTION OF THE MERGER AND THE EXCHANGE
The Merger
Upon the terms and subject to the conditions of the Merger Agreement, at the
Effective Time, (a) Mergeco will merge with and into Petro, and the separate
corporate existence of Mergeco will cease; (b) Petro will survive and continue
to exist as a Minnesota corporation and as a wholly-owned indirect subsidiary
of the Operating Partnership; (c) each share of the common stock of Mergeco
outstanding immediately prior to the Effective Time will be converted into one
newly issued, fully paid and non-assessable share of common stock of Petro as
the "Surviving Corporation"; (d) each share of Common Stock held by Petro as
Treasury Stock or owned by Mergeco will be canceled and retired and no
consideration will be issued in exchange therefor; (e) each share of Common
Stock held by a dissenting Common Stockholder who has perfected his dissenters'
rights under the MBCA
81
<PAGE>
will represent only the right to receive "fair value" for such shares, as
determined pursuant to the MBCA, unless such dissenting Common Stockholder
withdraws his Fair Value Demand (as defined in the MBCA) or loses his
dissenters' rights, in which case, such shares will be converted into Senior
Subordinated Units as described below in subparagraph (g)(1) below; (f) each
outstanding option to purchase shares of Common Stock granted to employees and
directors of Petro and its subsidiaries that is vested at the Effective Time or
becomes vested by reason of the Merger will cease to represent the right to
acquire shares of Common Stock and will be converted into an option to purchase
.13064 of a Senior Subordinated Unit at an exercise price equal to the quotient
of dividing the original exercise price by .13064, and such options shall
thereupon be assumed by the Partnership; and (g) each share of Common Stock
outstanding immediately prior to the Effective Time (excluding shares as to
which dissenters' rights have been perfected and shares held by Petro or
Mergeco) will cease to be outstanding and will be converted as follows:
(1) each outstanding share of Common Stock will be converted into .13064
of a Senior Subordinated Unit, with cash being paid in lieu of any
fractional Senior Subordinated Unit;
(2) each outstanding share of Junior Convertible Preferred Stock will be
converted into .13064 of a Common Unit, with cash being paid in lieu of any
fractional Common Unit;
(3) each outstanding share of Public Preferred Stock will be converted
into the right to receive cash in the amount of $23.00 plus accrued and
unpaid dividends; and
(4) each outstanding Class B Share will remain unchanged.
Up to an aggregate of 909,000 additional Senior Subordinated Units may be
issued to the holders of Senior Subordinated Units, Junior Subordinated Units
and General Partner Units, on a pro rata basis, but only if Petro satisfies
certain financial goals during the five-year period following the closing of
the Transaction.
Subject to the satisfaction or waiver of the conditions set forth in the
Merger Agreement and described in "--Conditions to Consummation of the Merger,"
the Merger will become effective upon the later to occur of (a) the filing of a
certificate of merger in the office of the Secretary of State of Delaware and
(b) the filing of articles of merger with the Minnesota Department of State, or
such later date and time as may be set forth in such certificate of merger and
articles of merger (the "Effective Time"). The Merger will have the effects
prescribed in the Delaware General Corporation Law (the "DGCL") and the MBCA.
Directors of Petro who are also employees of Petro immediately prior to the
Effective Time and officers of Petro immediately prior to the Effective Time
will be those of Petro following the Effective Time.
If the Partnership changes the number of Common Units outstanding prior to
the Effective Time by reason of a subdivision, dividend in the form of equity
interests, split, reclassification, recapitalization or combination, the
foregoing exchange ratios and the average closing prices of Common Units
applicable to the payment of cash in lieu of fractional Common Units will be
proportionately adjusted.
Consummation of the Merger is subject to various conditions. See "--
Conditions to Consummation of the Merger."
82
<PAGE>
The Exchange
The Exchange will occur immediately prior to the Merger and is comprised of
the following elements:
(a) The LLC Owners will form Star Gas LLC, to which they will contribute
an aggregate of 1,753,546 shares of Common Stock in exchange for all of the
limited liability company interests in Star Gas LLC. Star Gas LLC will
contribute the shares of Common Stock received in the preceding step to
Petro in exchange for 278,973 General Partner Units (representing all of
the General Partner Units) in the Partnership. In addition, the LLC Owners
will contribute 3,628,146 shares of Common Stock to the Partnership in
exchange for 577,205 Junior Subordinated Units.
(b) In addition, certain other Common Stockholders of Petro that are
parties to a shareholders' agreement with the LLC Owners with respect to
the Class C Common Stock will contribute 6,571,740 shares of Common Stock
to the Partnership in exchange for 858,532 Senior Subordinated Units.
RELATED FINANCING AND REFINANCING TRANSACTIONS
An integral element of the Transaction is the refinancing of Petro's
outstanding debt and preferred stock in order to substantially reduce Petro's
ongoing borrowing costs, which is expected to increase the cash flow of the
combined entity. This refinancing will be accomplished through several related
transactions that are described below and will close substantially
simultaneously with the closing of the Transaction.
Public Offerings
Key elements in the related financing are the Equity Offering and the Debt
Offering by the Partnership. The Partnership will offer for sale to the public
approximately 6.4 million Common Units (assuming an offering price of $22.00
per Common Unit) the net proceeds of which are estimated to be $132.1 million.
Petro Holdings will sell to the public approximately $120.0 million of Petro
Holdings Senior Subordinated Debt, the net proceeds of which are estimated to
be $115.4 million. It is expected that the Partnership will guarantee the Petro
Holdings Senior Subordinated Debt.
The net proceeds of the Equity Offering and the Debt Offering will be used to
redeem the Petro public debt and preferred stock and to pay for the expenses of
the Transaction.
Petro Private Debt and Preferred Stock
Petro has entered into agreements (the "Private Debt Agreements") with the
holders (the "Private Noteholders") of
(i) its outstanding 10.90% Senior Notes due 2002 (the "Senior Notes") in
the aggregate principal amount of $60 million; and
(ii) its 14.1% Senior and Subordinated Notes due 2001 (the "14.1% Notes"
and together with the Senior Notes, the "Petro Private Debt") in the
aggregate principal amount of $4.1 million (after payment of the January
1999 installment).
83
<PAGE>
Pursuant to the Private Debt Agreements at the Effective Time:
(a) the holders of the Senior Notes will exchange such Notes for
$63.1 million aggregate principal amount of 9.0% Senior Notes due 2002
of Petro (the "New 9% Notes"); and
(b) the holders of the 14.1% Notes will exchange such notes for $2.2
million aggregate principal amount of 10.25% Senior Notes due 2001 of
Petro and $2.2 million principal amount of 10.25% Subordinated Notes
due 2001 of Petro (collectively, the "New 10.25% Notes"). The New 9%
Notes and the New 10.25% Notes will be guaranteed by the Partnership
and Petro Holdings. (The New 9% Notes and the New 10.25% Notes are
collectively referred to as the "New Private Notes").
Petro has also entered into an agreement with the holder of $4.1 million in
face value of its 1989 Preferred Stock to redeem such 1989 Preferred Stock at
100% of face value plus accrued but unpaid dividends immediately prior to the
Effective Time.
Petro Public Debt and Public Preferred Stock
In September 1998, Petro completed an exchange offer (the "Debt Exchange
Offer") with the holders of Petro's 10 1/8% Subordinated Notes due 2003 ("10
1/8% Notes"), 12 1/4% Subordinated Debentures due 2005 ("12 1/4% Debentures")
and 9 3/8% Subordinated Debentures due 2006 ("9 3/8% Debentures," and together
with the 10 1/8% Notes and the 12 1/4% Debentures, the "Old Public Debt") and
entered into individually negotiated agreements (the "Preferred Stock
Agreements") with the holders of its 12 7/8% Series B exchangeable preferred
stock (the "Old Public Preferred Stock," and together with the Old Public Debt,
the "Old Securities").
Pursuant to the Debt Exchange Offer and the Preferred Stock Agreements the
holders (the "Tendering Holders") of approximately 98.5% in aggregate principal
amount and liquidation preference of the Old Securities exchanged the Old
Securities for a like principal amount and liquidation preference of New Public
Debt and New Public Preferred Stock, the terms of which are in all material
respects the same as the terms of the Old Public Debt and the Old Public
Preferred Stock, except that
(1) the New Public Debt is senior to the Old Public Debt, and
(2) the terms of the New Public Debt and the New Public Preferred Stock
(collectively, the "New Public Securities")
(a) give Petro the right to redeem (the "Redemption Right") the New
Securities in connection with the consummation of the Transaction at
the following redemption prices:
(i) 103.5% of face value for the new 12 1/4% Debentures;
(ii) 100% of face value for the new 10 1/8% Notes and the 9 3/8%
Debentures; and
(iii) $23.00 per share for the new Public Preferred Stock; and
84
<PAGE>
(b) eliminate substantially all covenants from the indentures under
which the Old Public Debt was issued. The Tendering Holders of the Old
Public Preferred Stock have also granted Petro an irrevocable proxy to
vote their shares of New Public Preferred Stock in favor of the
Acquisition Proposal at the Special Meeting.
In connection with the Debt Exchange Offer, Petro issued an aggregate of
786,690 shares of Junior Convertible Preferred Stock (the "Exchange Shares") to
the Tendering Holders. At the Effective Time, pursuant to the Merger, the
Exchange Shares will be converted into an aggregate of 102,773 Common Units.
Holders of Exchange Shares have also granted Petro an irrevocable proxy or have
agreed to vote such Exchange Shares in favor of the Acquisition Proposal.
BACKGROUND OF AND REASONS FOR THE TRANSACTION
Background of the Transaction
In May 1997, Mr. Kevin McCarthy, then of Smith Barney Inc., contacted Irik
Sevin, Chairman of the Board and Chief Executive Officer of Petro, to determine
Petro's interest in a strategic business combination with the Partnership (the
"Proposed Transaction"). Mr. McCarthy, who had previously been associated with
PaineWebber Incorporated ("PaineWebber"), had provided investment banking
services to, and was very familiar with, both Petro and the Partnership.
On May 2 and May 7, 1997, Mr. McCarthy and other Smith Barney bankers
presented the following concept to Mr. Sevin. In their view, Petro's Common
Stock was not fully valued in the public market place due to, in large measure,
a lack of research analyst coverage and investor interest resulting from a
number of factors. Mr. McCarthy noted that despite Petro's preeminent position
in the home heating oil industry, the public market had always had a difficult
time valuing its Common Stock due to (i) there being no other comparable
publicly traded companies, (ii) its being a cash flow oriented company with no
earnings per share, which is a standard measure used to value publicly traded
common stocks, and (iii) its small equity market capitalization. Mr. McCarthy
went on to note that while Petro was the principal consolidator of the home
heating oil industry, its capital structure was limiting its full growth
potential. He suggested that converting Petro into an MLP format would address
these various issues. He noted that Petro would benefit from the relatively
broad research coverage provided the relatively large number of publicly traded
MLPs. In addition, these entities were valued on a cash flow basis, similar to
Petro's financial orientation, and that the combined Petro/Star MLP would have
a significantly increased market capitalization. Also of significance was that
the MLP format would give Petro access to lower cost capital and increase its
financial flexibility to fund its growth through acquisition strategy.
Mr. McCarthy went on to note that he believed that combining the Partnership
and Petro could also significantly benefit the Partnership. While the
Partnership had been performing relatively well operationally, there had been a
significant increase in competition for propane acquisitions, the major source
of the Partnership's growth. This not only was impacting the number of
acquisitions the Partnership could make but was also increasing the purchase
price multiples paid for propane companies. Both of these factors combined to
limit the potential growth in the Partnership's annual cash flow from its
acquisition program. The combination with Petro could provide an additional
source of acquisition opportunities at lower purchase price multiples resulting
from Petro's
85
<PAGE>
preeminent position in the home heating oil industry and the significantly
lower level of competition in that industry for acquisitions. Combining Petro's
acquisition opportunities with the Partnership's access to lower cost capital
suggested the combination of the two companies made strategic sense.
During May and June 1997, Mr. Sevin had several meetings and telephone calls
with representatives of Smith Barney and other financial and legal advisors
concerning various business, tax and regulatory aspects of the Proposed
Transaction.
On June 5, 1997, at a Petro Board meeting, Mr. Sevin described the Proposed
Transaction and its benefits. In addition to the original benefits outlined by
Mr. McCarthy, the Proposed Transaction was now structured to refinance Petro's
relatively high cost long-term debt and preferred stock with lower cost
Partnership equity and a new issue of debt further increasing the combined
entity's distributable cash flow.
Mr. Sevin informed the Petro Board that not all aspects of the Proposed
Transaction had been fully developed and that he had not made any presentation
concerning the combination to the Star Gas Board. After discussing the matter,
a consensus was reached that the Proposed Transaction seemed interesting and
that Mr. McCarthy should be invited to make a formal presentation to the Petro
Board.
Mr. McCarthy Presents the Proposed Transaction to the Petro Board
On July 24, 1997, the Petro Board met to hear Mr. McCarthy make a formal
presentation regarding the Proposed Transaction. Initially, Mr. McCarthy
explained that he had terminated his relationship with Smith Barney and had
reassociated with PaineWebber as a Managing Director in its Investment Banking
Division. Mr. McCarthy then reviewed the overall strategic rationale for the
proposed Transaction.
Mr. McCarthy went on to describe the Proposed Transaction's structure
indicating that it would have two fundamental components. The first was Petro's
becoming a wholly-owned subsidiary of the Partnership, by virtue of the Public
Common Stockholders and a limited number of affiliated Common Stockholders
exchanging their shares for publicly traded Senior Subordinated Units with a
certain number of Petro shares being exchanged for Junior Subordinated Units
that would not be publicly traded. He indicated that in order to provide the
Public Common Stockholders with a publicly traded Partnership unit with
sufficient earnings coverage, there needed to be a certain number of Units
junior to those securities. The second component of the Transaction was the
refinancing of Petro's outstanding, relatively high-cost debt and preferred
stock through the sale of lower-cost, new Partnership equity and debt.
Mr. McCarthy then enumerated the benefits of the Proposed Transaction to
Common Stockholders as well as to the Partnership. Mr. McCarthy briefly
outlined the following benefits to the Partnership's Common Unitholders: (i) a
significant increase in distributable cash flow, (ii) an increase in the
annualized Minimum Quarterly Distribution from $2.20 to $2.30, (iii) improved
distribution coverage, (iv) larger equity market capitalization and resulting
liquidity to Unitholders and (v) improved growth potential in an otherwise
relatively stagnant market. Mr. McCarthy went on to note that the most
important considerations in valuing MLPs are their growth, ability to make
86
<PAGE>
distributions, and size. The combination of the Partnership and Petro would
improve the Partnership's measures in each of these areas.
After review and discussion by the Petro Board of this concept, it authorized
Mr. Sevin to consult further with PaineWebber concerning the Proposed
Transaction, and to present it to the Star Gas Board. In this regard, it was
determined that it would be most appropriate to approach the two members of the
Star Gas Board who were not officers, directors or employees of Petro to
ascertain their views about the Proposed Transaction, since the remaining
members of such Board were also directors or officers of Petro. The Petro Board
recognized that in light of the potential conflict of interest, the Proposed
Transaction should be analyzed and approved by the non-Petro members of the
Star Gas Board.
The Petro Board also instructed Petro's management to closely monitor the
impact of Petro's recently instituted regionalization and product branding
programs as it believed that Petro's ability to operate more efficiently and
with more customer sensitivity would be an important element to the success of
any business combination.
PaineWebber Informally Discusses the Proposed Transaction with the Non-Petro
Directors of Star Gas
On September 2, 1997, at the request of Mr. Sevin, Mr. McCarthy had a meeting
with the non-Petro directors of the Star Gas Board, Mr. William Nicoletti and
Ms. Elizabeth Lanier, concerning the combination of Petro and the Partnership.
Mr. Nicoletti and Ms. Lanier indicated that they had a number of questions
concerning the Proposed Transaction, but that they believed that the
Partnership would be willing to consider such a combination.
Petro Considers Alternative Transactions
In December 1997 and January 1998, Petro also began to explore other
transactions. Mr. Sevin met with representatives of a large natural gas utility
to explore the possibility of forming a joint venture acquisition corporation.
However, such discussions did not progress beyond the preliminary stages. In
addition, Mr. Sevin met with an investment banking firm which had a
relationship with an energy marketing company that was seeking investment
opportunities. Mr. Sevin believed that Petro's large customer base would
provide this company with cross-marketing potential adding to the
attractiveness of forming a joint venture acquisition corporation with Petro.
After discussions held in January 1998, this company indicated that it was not
interested in forming such a joint venture with Petro.
PaineWebber Formally Presents the Proposed Transaction to the Star Gas Board
On January 26, 1998, Mr. McCarthy made a formal presentation concerning the
Proposed Transaction to the Star Gas Board. He first described the underlying
rationale of the Proposed Transaction.
Mr. McCarthy then detailed the Proposed Transaction's structure:
. Petro would combine with the Partnership, becoming a wholly-owned
subsidiary of the Operating Partnership.
87
<PAGE>
. The Public Common Stockholders (as well as certain affiliated Common
Stockholders) would receive publicly traded Senior Subordinated Units.
. Certain affiliated Common Stockholders would be required to exchange
their shares for Junior Subordinated Units that would be junior to the
Senior Subordinated Units offered the Public Common Stockholders and
would not be publicly traded. Mr. McCarthy indicated that this condition
was required to provide sufficient earnings coverage of the Senior
Subordinated Units to make them sufficiently attractive in the
marketplace.
. In determining the exchange ratio for Petro's Common Stock and how many
Partnership Units would be given to the Common Stockholders, the
following values were used:
--Petro's Common Stock was being valued at $3.15/share.
--The Senior Subordinated Units to be given to the Public Common
Stockholders were valued on the basis of their having an 11.5% yield
representing an approximately 10% discount from the Common Unit value.
--The Junior Subordinated Units and General Partner Units were valued at
an assumed 14% yield representing a 250 basis point premium over the
Senior Subordinated Units based on their additional level of
subordination and illiquidity.
. As a result of the anticipated immediate accretion in distributable cash
flow resulting from the Transaction, the Partnership would increase its
quarterly distributions per unit from $0.55 to $0.575 (from $2.20 per
unit or $2.30 per unit annually).
. Incentive payments historically provided to the General Partner upon
meeting certain performance tests would be reallocated to all Common
Stockholders by distributing such rights among the Senior Subordinated
Units, Junior Subordinated Units and General Partner Units pro rata.
. The general partner of the Partnership would be a newly organized limited
liability company that would be owned by affiliates of Petro.
. The Senior Subordinated Units and Junior Subordinated Units would be
subordinated to the distribution and liquidation rights of the Common
Units until such time as the Partnership earned $2.30 per Unit in
distributable cash flow for three years, at which time the subordination
period would end.
Mr. McCarthy then described, as he had done with the Petro Board, the
benefits of the Proposed Transaction to the Public Common Unitholders and the
Public Common Stockholders.
In response to a question from the directors, Mr. McCarthy indicated that,
based on a preliminary review, he did not believe that a combined
propane/heating oil MLP would have a negative perception in the public market.
He considered growth and ability to make distributions the key considerations
for valuing an MLP, and Petro's growth potential would more than offset
any impact of its having non-propane activities. In addition, he pointed out
that several diversified MLPs exist and perform favorably compared to their
peers.
In response to a question concerning Petro's operating performance, Mr.
McCarthy indicated that while the benefits of Petro's regionalization and
branding programs had begun to be realized, the
88
<PAGE>
implied value has yet to be factored into Petro's stock price. However, these
improvements should ultimately benefit the combined entity and its future
value.
The Star Gas Board Appoints the Special Committee to Consider the Proposed
Transaction
Based on this presentation and the ensuing discussion, the Star Gas Board
believed that there was a consensus to proceed with further consideration of
the Proposed Transaction. Because all of the directors of Star Gas were also
directors or officers of Petro, other than Mr. Nicoletti and Ms. Lanier, the
Board assigned the task of exploring the proposal to them. It was decided they
should act as a Special Committee to ensure that the interests of the Public
Common Unitholders were independently represented in connection with the
Proposed Transaction. Ms. Lanier then proposed that the Special Committee
retain independent financial advisors and legal counsel to assist in a review
of the Proposed Transaction. The Star Gas Board authorized the Special
Committee to retain such independent financial advisor and legal counsel as
they deemed appropriate.
In January and February 1998, the Special Committee invited A.G. Edwards
along with one other investment banking firm to present its qualifications to
serve as financial advisor to the Special Committee. Following several meetings
and discussions with A.G. Edwards and the other candidate, on March 23, 1998
the Special Committee engaged A.G. Edwards as its financial advisor. The
Special Committee had previously retained Baker & Botts, L.L.P. as its legal
counsel.
On February 4, 1998, Petro's management met with investment bankers at
Donaldson Lufkin & Jenrette to discuss the proposed terms for the refinancing
or restructuring of Petro's public and private debt and preferred stock in
connection with the Proposed Transaction.
Mr. Sevin Reviews the Status of the Proposed Transaction with the Petro Board
in February 1998
At a February 23, 1998 Petro Board meeting, Mr. Sevin updated the Petro Board
on the discussions with the Special Committee regarding the Proposed
Transaction, as well as developments with other energy companies.
The Petro Board agreed that Mr. Sevin should continue to pursue the Proposed
Transaction, as well as other investment alternatives. The Petro Board then
asked one of its members to assist Mr. Sevin in structuring such alternatives.
In March 1998, Mr. Sevin met with each of Petro's three commercial banks
separately to determine if the mergers and acquisitions or utility departments
of such institutions could identify any public utility that was seeking to
invest in deregulated energy activities or any other party that might be
interested in investing in or forming a joint venture with Petro.
Petro Commences Discussions with the Special Committee
On March 10, 1998, Petro's representatives met with the Special Committee to
discuss certain initial questions that had arisen from its discussions with
potential financial advisors. Petro's representatives wanted to review with the
Special Committee Petro's capitalization structure, the improvement in Petro's
customer attrition rate, and its ability to continue to increase its gross
profit margins and to acquire new businesses at historic rates.
89
<PAGE>
Petro Continues to Pursue Other Investment Alternatives
In March and April 1998, Petro continued to pursue other investment
alternatives. In April 1998, Petro's management met with representatives of two
public utilities to discuss with each a possible joint venture. While one
utility indicated that it was not interested in pursuing the matter, a second,
which had previously expressed an interest in purchasing Petro's heating oil
operations, indicated that it could possibly be interested in a joint venture.
However, its conditions to pursuing further discussions of such a venture were
determined to be unacceptable and discussions were ended.
During May and June 1998, Petro had several discussions and meetings with
representatives of a third public utility concerning a proposed investment in
Petro either pursuant to a joint venture or the purchase of certain of Petro's
operations. However, this utility determined not to proceed with such an
investment and Petro indicated it was not interested in divesting of any
operations.
Petro Retains Dain Rauscher Wessels to Provide a Fairness Opinion to Petro's
Public Common Stockholders
In April 1998, Petro began a search for an independent investment banking
firm with expertise in the area of MLPs which could render an opinion as to the
fairness, from a financial point of view, of the consideration to be received
by the Public Common Stockholders in the Proposed Transaction. On April 22,
1998, Mr. Sevin met with representatives of Dain Rauscher Wessels. On May 14,
1998, Dain Rauscher Wessels was formally engaged, and, on May 28 and May 29,
1998, Dain Rauscher Wessels met separately with the management of the
Partnership and Petro in order to begin its due diligence with respect to the
Partnership and Petro.
A.G. Edwards Prepares Preliminary Status Report
On April 28, 1998, A.G. Edwards met with the Special Committee and members of
the Partnership's management to discuss and present the status of A.G. Edwards'
due diligence efforts and preliminary conclusions. A.G. Edwards recommended
that the Special Committee proceed in its analysis and review of a potential
business combination with Petro and recommended that A.G. Edwards begin
preparation of a preliminary status report (the "Preliminary Status Report")
that could be shared with Petro and PaineWebber. The Preliminary Status Report
would include the Special Committee's preliminary views on the structure of a
potential transaction as well as its preliminary thoughts on a merger agreement
and required changes to the Partnership Agreement. The Special Committee
agreed.
On May 4, 1998, A.G. Edwards delivered the Preliminary Status Report and an
updated and revised preliminary financial analysis to the Special Committee.
The Special Committee authorized A.G. Edwards to discuss the Preliminary Status
Report with both Petro and PaineWebber.
On May 5, 1998, at a meeting of the Board of Directors of Star Gas, the
Special Committee advised the Board as to the status of the Preliminary Status
Report and indicated A.G. Edwards' preliminary views as to the valuation of
Petro.
90
<PAGE>
The Special Committee and Petro Meet to Review the Preliminary Status Report
and to Negotiate the Proposed Transaction
On May 7, 1998, the Special Committee and A.G. Edwards met with Petro and
PaineWebber to discuss the Preliminary Status Report and to begin negotiations
over a potential combination.
The Special Committee took three firm negotiating positions at the May 7
meeting, which were reflected in the Preliminary Status Report. First, the
Special Committee required that the Minimum Quarterly Distribution to be paid
to Common Unitholders be raised from $2.20 annually to $2.30 annually. Second,
the Special Committee took the position that no distributions would be paid to
the holders of Senior Subordinated Units, Junior Subordinated Units and General
Partner Units following a transaction that were not earned by the actual
performance of the combined business following the Transaction. Third, the
Special Committee took the position that the $3.15 valuation per Petro share
was too high, and that the Special Committee would only look at a combination
if the price was in the $2.00 per share range. In support of this third
position, A.G. Edwards discussed with Petro and PaineWebber the basis for its
analysis of Petro's Common Stock at $2.00 per share.
Mr. Sevin responded that he could agree to the revised Minimum Quarterly
Distribution of $2.30 and to the proposal that during the Subordination Period
holders of Senior Subordinated Units, Junior Subordinated Units and General
Partner Units would only receive distributions out of distributable cash
generated following the closing of the Transaction. However, he indicated he
could not agree to valuing Petro's Common Stock at $2.00 per share, indicating
his belief that this valuation was unfairly low. He pointed out that while
there are many criteria that could be used in determining the appropriate
valuation for Petro's Common Stock, he believed the most important was the
accretion to the Partnership resulting from the acquisition of Petro. While Mr.
Sevin questioned certain of the assumptions upon which A.G. Edwards views were
based, he noted that even using the most conservative assumption, a $2.00 value
would (based on the projections available at such time) would result in
projected accretion of approximately $.62 per unit, which could grow to over
$1.00 per unit. Mr. Sevin indicated that this level of accretion was excessive
and unwarranted and that the approximate $.40 per unit projected accretion
resulting from a $3.15 per share price was certainly more appropriate and would
still make this combination significantly attractive to the Common Unitholders.
This was especially true given the greater growth potential provided by Petro
which would, over time, increase the accretion to over $1.00 per Unit even at a
$3.15 valuation.
PaineWebber also indicated to A.G. Edwards that the $3.15 per unit valuation
did not represent an excessive premium to market value (the "merger premium")
when Petro's average stock performance for the last twelve months was
considered. PaineWebber noted that the suspension of Petro's Common Stock
dividends following the unusually warm weather of the first quarter of 1998 had
lowered the short-term trading prices of Petro's Common Stock despite the
significant improvements in Petro's operating results. In addition, PaineWebber
asked A.G. Edwards to consider market statistics prepared by PaineWebber that
indicated that the merger premiums for stocks priced at less than $5.00 per
share were generally greater than the merger premiums for higher priced shares.
In an attempt to bridge the valuation gap, the parties discussed having the
Partnership issue additional Units to the Common Stockholders after
consummation of the Transaction if Petro met certain financial goals.
91
<PAGE>
At the conclusion of this meeting, the parties agreed to review their
respective positions.
On May 19, 1998, representatives of A.G. Edwards met with representatives of
PaineWebber and Petro in an attempt to reach an agreement on the appropriate
price per share to be used to value the consideration paid to the Common
Stockholders. PaineWebber provided A.G. Edwards with information concerning
comparable acquisition multiples to demonstrate that a $3.15 per share price
was appropriate. In addition, PaineWebber indicated that Petro's first quarter
operating performance was better than the budgeted figures originally provided
A.G. Edwards, which further suggested that the $3.15 valuation was appropriate.
In order to bridge the gap in valuation, the parties began discussing a $2.50
per share value with Petro's ability to obtain additional value through the
issuance of additional Senior Subordinated Units after the closing if it met
certain earnings criteria. The concept was that Petro would be able to receive
an additional total 909,000 Units, at a rate of 303,000 per year in each of
three years that Petro provided the Partnership with $.50 per unit of accretion
in distributable cash flow over the level the Partnership would earn had it not
combined with Petro. It was indicated that these additional Units, if earned,
would be issued pro rata to the holders of Senior Subordinated Units, Junior
Subordinated Units and General Partner Units.
A.G. Edwards Prepares a Preliminary Draft Proposal for the Transaction
On May 20, 1998, the Special Committee met by conference telephone call with
A.G. Edwards and Baker & Botts to discuss its preliminary analysis (updated by
A.G. Edwards) and the status of negotiations. The group also discussed a
preliminary draft proposal prepared by A.G. Edwards for submission to Petro.
The Special Committee instructed A.G. Edwards to revise the preliminary draft
proposal. On May 21, the Special Committee met again by conference telephone
call with Baker & Botts to review such proposal. A.G. Edwards submitted a
revised preliminary draft proposal to the Special Committee on May 26, 1998 and
the Special Committee instructed A.G. Edwards to submit such proposal to Petro.
Such proposal dated May 26, 1998 (the "Preliminary Draft Proposal") included
the following principal terms:
. In exchange for all of Petro's issued and outstanding shares of Common
Stock, the Partnership would issue an aggregate of 2,718,000 Senior
Subordinated Units, 524,000 Junior Subordinated Units and 289,000 General
Partner Units (reflecting a valuation for the Petro Common Stock of $2.50
per share). In conjunction with the issuance of these new Units, the
Partnership would in effect cancel the existing 2,396,078 subordinated
units and the 2% combined general partner interest, both owned by Petro.
. The Partnership would issue up to 303,000 additional Senior Subordinated
Units per year (up to a maximum of 909,000 additional Senior Subordinated
Units) pro rata to the holders of the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units in each year that Petro
achieves certain levels of accretion in the future.
. The amount of new equity required to be raised by the Partnership and new
debt required to be raised by a subsidiary of the Partnership in order to
refinance Petro's existing debt and preferred stock could not exceed
certain maximum amounts and were subject to certain price and expense
limitations.
92
<PAGE>
. The Partnership Agreement would be amended to prohibit the payment of
distributions to the holders of Senior Subordinated Units, Junior
Subordinated Units and the General Partner Units from any source other
than distributable cash generated during the last twelve months.
. The cost of refinancing Petro's outstanding debt and redeeming Petro's
preferred stock could not exceed specified limits.
The management of Petro believed that, with some further modifications, the
Preliminary Draft Proposal could form the basis of an agreement. With that in
mind, Petro began focusing its efforts on reaching an agreement with
institutional holders of its long-term debt and preferred stock on a basis that
would comply with the terms of the Preliminary Draft Proposal.
Petro Negotiates the Refinancing of its Public and Private Debt and Preferred
Stock
During June and July 1998, representatives of Petro undertook negotiations
with institutional holders of its public and private debt and preferred stock
to obtain the right to refinance these securities.
In August 1998, Petro reached an agreement with institutional holders of $149
million or 63.1% of Petro's Old Public Debt and Old Preferred Stock (including
the holders of 100% of the Old Preferred Stock) to permit the redemption of
such securities at the closing of the proposed Transaction. This Agreement
allows Petro to redeem its 9 3/8% Debentures, 10 1/8% Notes and 12 1/4%
Debentures at 100%, 100% and 103.5% of principal amount, respectively, and to
redeem its 12 7/8% Preferred Stock at $23 per share. In consideration for this
early redemption right, Petro agreed to issue to such holders 3.3732 shares of
newly issued Junior Convertible Preferred Stock for each $1,000 in principal
amount or liquidation preference of such securities.
Petro subsequently offered to the remaining holders of its Old Public Debt
the same right of early redemption under the same terms and conditions as
agreed to by the consenting holders. This proposal was made through an exchange
offer that terminated on September 24, 1998 with an aggregate acceptance rate
of more than 95% of the Old Public Debt.
Other Activities Undertaken in Connection With The Proposed Transaction
On June 3, 1998, following consultation with a number of Petro Board members,
the management of Petro entered into a formal financial advisory agreement with
PaineWebber.
Also, on June 3, 1998, Mr. Sevin met with the representatives of Hanseatic
Americas LDC, a Bahamian limited duration company indirectly controlled by
Hanseatic Corporation, a majority of the shares of capital stock of which were
owned by Wolfgang Traber, a Petro Board member, and in which another Petro
Board member, Paul A. Biddelman, acts as President. Hanseatic Americas and
Hanseatic Corporation (collectively, "Hanseatic") in the aggregate owned more
than 1.9 million shares of Common Stock. The purpose of the meeting was to
determine Hanseatic's willingness to exchange its Common Stock for Junior
Subordinated Units and General Partner Units, rather than the Senior
Subordinated Units being exchanged with the Public Common Stockholders. Certain
other affiliates had previously indicated an unwillingness to accept such
junior and illiquid securities at the value suggested by PaineWebber.
Hanseatic's assent was necessary, so that when combined with the
93
<PAGE>
shares that Irik Sevin and Audrey Sevin were prepared to convert into Junior
Subordinated Units, and General Partner Units a total of the approximately 5.3
million required by the Partnership's proposal could be accumulated. While Mr.
Traber indicated a willingness to undertake such an exchange, in order to
accommodate consummation of the Transaction he further wanted the independent
assent of Hanseatic's major investors. An agreement was reached that these
representatives would support the exchange.
On July 27, 1998, at a meeting of the Star Gas Board, Mr. Sevin (on behalf of
Petro) and the Special Committee informed the Board of the progress of the
discussions and negotiations between PaineWebber on behalf of Petro and A.G.
Edwards on behalf of the Special Committee. Mr. Sevin also informed the Star
Gas Board of the results of Petro's negotiations with the institutional holders
of its public and private debt and preferred stock.
Mr. Sevin advised the Star Gas Board that it was his understanding that A.G.
Edwards would produce a revised proposal in the form of a draft term sheet (the
"Revised Proposal") to reflect such discussions and negotiations.
Mr. Sevin also informed the Board that he had received a telephone call from
a director of another public propane MLP to inquire as to whether the
Partnership would be interested in being acquired by such MLP. The purchase
price indicated did not reflect any premium over the current market price of
the Common Units and the valuation of Petro's Subordinated Units and general
partner interests was not acceptable to Petro. After discussion, it was decided
that Mr. Sevin should respond that the Partnership was not interested in such a
proposal.
A.G. Edwards Prepares and Forwards the Revised Proposal to Petro
On July 28, 1998, following additional telephonic discussions with
PaineWebber to further refine the terms of the Revised Proposal, A.G. Edwards,
on behalf of the Special Committee forwarded the Revised Proposal to the Star
Gas Board, the Petro Board and PaineWebber for each of their reviews and
consideration. The Revised Proposal clarified that the General Partner Units
would be subordinated to both the Common Units and Senior Subordinated Units,
but was otherwise similar to the Preliminary Draft Proposal.
On July 29, 1998, Dain Rauscher Wessels met with representatives of Petro to
review the Revised Proposal and for Dain Rauscher Wessels to undertake further
due diligence.
The Petro Board Reviews the Revised Proposal
On August 3, 1998, at a meeting of the Petro Board, which was attended
telephonically by Dain Rauscher Wessels as well as PaineWebber and legal
counsel, Mr. Sevin stated that it was important at such time to apprise the
directors of all of the details of the Revised Proposal and to answer any
questions that they may have, since the matter might be brought to a formal
vote within the next week to ten days.
The Petro Board then discussed various aspects of the Proposed Transaction as
well as the fiduciary obligations of the Petro Board and those of the Petro
directors who also serve as directors of Star Gas. In response to questions
regarding these responsibilities, Mr. Michael Rosenwasser, of
94
<PAGE>
Andrews & Kurth L.L.P., co-counsel to Petro, indicated that the Special
Committee would have the overall responsibility for negotiating, reviewing and
deciding whether to recommend the Proposed Transaction to the Star Gas Board
and to the public Common Unitholders. Mr. Rosenwasser further indicated that
the law firms of Phillips Nizer Benjamin Krim & Ballon LLP and Andrews & Kurth
would be representing Petro and its Board and that the law firm of Baker &
Botts would be representing the Special Committee.
A question was raised as to whether it would be advisable to appoint an
independent committee of the Petro Board to represent the Public Common
Stockholders. After discussion, it was determined that there was doubt as to
whether an unquestionably independent committee could be constituted. Instead,
the Board determined that Petro would not proceed with the Proposed Transaction
without the approval of the holders of a majority of the shares of Petro's
Class A Common Stock owned by non-affiliates and unless Petro received a
favorable fairness opinion from Dain Rauscher Wessels as to the consideration
to be received by the Public Common Stockholders.
On August 10, 1998, Petro entered into an agreement with certain affiliated
Class C Common Stockholders to approve the transaction. Such approval was
required pursuant to a stockholders' agreement among the holders of Petro's
Class C Common Stock.
The Special Committee Approves the Revised Proposal
On August 11, 1998, the Star Gas Board by written consent authorized the
Special Committee to assume responsibility for all matters relating to the
Proposed Transaction, including the power and authority to negotiate the terms
of the transaction subject to such additional actions by the Star Gas Board as
may be necessary or advisable under applicable law. Following the grant of such
authority, the Special Committee approved the Revised Proposal and transmitted
the Revised Proposal to the Petro Board.
The Petro Board Approves the Revised Proposal
The Petro Board met on August 13, 1998 to consider and vote upon the Revised
Proposal. Mr. Sevin reviewed with the Petro Board certain minor changes which
had been made to that document subsequent to the August 3, 1998 meeting, and
indicated that it had been approved by the Special Committee earlier in the
week. After discussion, the Petro Board unanimously approved the Revised
Proposal.
On August 14, 1998, Petro and the Partnership issued a joint press release
announcing that they had reached an agreement-in-principle concerning the
Proposed Transaction.
During August, September and October 1998, the Special Committee, in
conjunction with its legal counsel and financial advisors, negotiated the terms
of a definitive Merger Agreement and Exchange Agreement with Petro and its
legal counsel and financial advisors. During the course of these negotiations,
the Special Committee required, and Petro ultimately agreed, as a condition of
the Transaction, that (i) no distributions could be made on any Subordinated
Units until August 15, 1999; (ii) certain earnings tests had to be achieved for
any distributions to be made on that date or on the next anticipated
distribution date of November 15, 1999; and (iii) as of the Closing, Petro
had to have certain minimum working capital levels substantially higher than
was required in the Preliminary Draft Proposal.
95
<PAGE>
The Special Committee Recommends and the Star Gas Board Approves the
Definitive Transaction Documents
On October 16, 1998 the Special Committee met with its financial advisors and
legal counsel to consider the Transaction. At this meeting, A.G. Edwards
delivered its oral and written opinion that the Transaction was fair, from a
financial point of view, to the Public Common Unitholders. The Special
Committee then entered into a full discussion of the financial and legal
aspects of the Transaction with its financial and legal advisors. On October
19, 1998, the Special Committee met again with its financial and legal advisors
and, after discussion and based on the advice of its advisors and the fairness
opinion of A.G. Edwards, unanimously voted to recommend the Transaction to the
Star Gas Board for its approval subject to its legal advisors negotiating the
last remaining details of the Merger Agreement, none of which were deemed
material. On October 19, 1998, based on that recommendation, the Star Gas Board
approved the Merger Agreement and Exchange Agreement and authorized the
officers of Star Gas to execute and deliver the Merger Agreement and Exchange
Agreement.
The Petro Board Approves the Definitive Transaction Documents
On October 6, 1998, Dain Rauscher Wessels presented to the Petro Board its
opinion that the consideration to be provided to the Public Common Stockholders
pursuant to the Transaction was fair from a financial point of view.
PaineWebber and Petro's legal counsel attended that meeting.
On October 19, 1998, the Petro Board held a meeting to consider the
Transaction. Based on a variety of factors, including the Dain Rauscher Wessels
Opinion, the Petro Board unanimously approved the Merger Agreement and Exchange
Agreement and authorized and directed the officers of Petro to execute and
deliver the Merger Agreement and Exchange Agreement.
REASONS FOR THE TRANSACTION; RECOMMENDATION OF THE SPECIAL COMMITTEE
At a meeting of the Special Committee held on October 16, 1998, the Special
Committee received presentations concerning, and reviewed the terms of, the
Transaction with members of management and its legal counsel and financial
advisors. At the meeting, the Special Committee unanimously determined that the
Transaction is fair to, and in the best interests of, the Public Common
Unitholders. Accordingly, the Special Committee unanimously recommends that the
Unitholders vote FOR the Star Proposals at the Unitholders Meeting. Based on
the recommendation of the Special Committee, the Board of Directors of Star Gas
unanimously recommends that the Common Unitholders vote FOR the Star Proposals
at the Unitholders Meeting. See "--Background of the Transaction" and "--
Interests of Certain Persons in the Transaction; Conflicts of Interest."
During the course of its deliberations, the Special Committee, with the
assistance of management and its legal and financial advisors, considered a
number of factors, including the following potential advantages of the
Transaction:
. The Special Committee believes the acquisition of Petro will increase the
Partnership's ability to grow through further acquisitions in the home
heating oil business. Petro is the largest retail distributor of home
heating oil in the country. In addition, Petro has been the principal
96
<PAGE>
consolidator of that highly fragmented industry, having purchased over 180
retail home heating oil companies since 1979. The primary source of growth
in the propane industry is acquisitions. Competition for acquisitions in
the propane industry has intensified, decreasing the opportunities
available, and increasing the prices paid, for propane companies. The
Special Committee believes Petro's strong position in the home heating oil
industry will provide the Partnership with an additional source of
attractive acquisition and expansion opportunities.
. The Special Committee believes the Transaction will be accretive to the
Partnership's distributable cash flow per Unit. The expected increase in
distributable cash flow per Unit resulting from the Transaction will
enable the Partnership to raise the Minimum Quarterly Distribution from
$0.55 to $0.575 (or from $2.20 to $2.30 on an annual basis). If the
expected increase in distributable cash flow is realized, it will provide
greater protection of the Minimum Quarterly Distribution and improves the
possibility of future distribution increases.
. The Transaction will increase the Partnership's market capitalization and
should provide greater Common Unit liquidity, investment community
awareness and the ability to attract securities analyst research
coverage.
. Common Stockholders will receive Senior Subordinated Units which are
subordinated to the distributions on Common Units for a minimum of three
years. The Senior Subordinated Units will remain subordinated to the
Common Units until the Partnership has earned and paid the Minimum
Quarterly Distribution of $2.30 on all Units for three consecutive four-
quarter periods. In addition, the Subordination Period has been extended
at least 18 months from January 1, 2001 to July 1, 2002.
. During the Subordination Period, distributions on the Senior Subordinated
Units, Junior Subordinated Units and General Partner Units will be
generally limited to the amount of distributable cash generated after the
Transaction is effective after October 1, 1997.
. Overall, the Special Committee believes that the Transaction represents
an opportunity to acquire a company that is expected to significantly
increase the Partnership's size and scope of operations, growth prospects
and ability to increase its distributions to Unitholders.
During the course of its deliberations, the Special Committee also considered
the following potential disadvantages of the Transaction:
. The Partnership is acquiring an entity which, based on 1997 revenues, is
several times its size. Therefore, the nature of the Partnership's
business will be significantly changed.
. Petro has a history of operational and financial difficulties (including
high leverage and recent substantial net losses).
. The success of the acquisition depends upon the Partnership's ability to
(i) continue to make acquisitions at attractive prices; (ii) continue to
reduce Petro's customer attrition rate; and (iii) continue to improve
Petro's profit margins on a per gallon basis. There can be no assurance
that each of the three will occur.
. The Partnership is making a large investment in a business which, like
the Partnership's propane operations, is negatively affected by warm
weather during the winter months.
97
<PAGE>
. The income of Petro, unlike the income of the Partnership, will be
subject to corporate tax prior to distributions and dividend income from
Petro cannot be offset with past or future losses generated by the
Partnership's propane operations.
. The ratio of taxable income to cash distributions to be made to the
existing Common Unitholders will increase over time at a greater rate
than if the Transaction does not occur.
. The home heating oil business is not a growth business as a result of
competition from alternative energy sources.
. In the Transaction, the proportion of Subordinated Units to total Units
will decline from 37.5% to 26%, and the support to Common Units will
therefore be reduced.
. The number of Common Units will increase from approximately 3.9 million
to 10.3 million representing a potential significant dilution.
The Special Committee also considered the following factors:
. The A.G. Edwards Opinion and the financial analysis prepared by A.G.
Edwards in connection therewith (see page 98).
. The projections prepared by the Partnership and Petro (see page 119).
. The terms of the Exchange Agreement, Merger Agreement and Amendment to
the Partnership Agreement (see pages 83, 125 and 139).
. The conditions to the consummation of the Transaction (see page 131).
. The background which resulted in the development of the structure of the
Transaction (see page 85).
. The conflicts of interest in structuring the Transaction (see page 66).
. Recent trading prices of the Common Units and the Common Stock (see page
179).
The foregoing discussion of information and factors considered and given
weight by the Special Committee is not intended to be exhaustive. In view of
the wide variety of factors considered in connection with its evaluation of the
Transaction, the Special Committee did not find it practicable to, and did not,
quantify or otherwise attempt to assign relative weights to the specific
factors considered in reaching their determination. In addition, individual
members of the Special Committee may have given different weights to different
factors.
THE SPECIAL COMMITTEE UNANIMOUSLY RECOMMENDS THAT THE PUBLIC COMMON
UNITHOLDERS VOTE FOR THE STAR PROPOSALS.
OPINION OF A.G. EDWARDS
On March 23, 1998, the Special Committee engaged A.G. Edwards to serve as its
financial advisor and to render an opinion as to the fairness, from a financial
point of view, of the Transaction to the Public Common Unitholders.
A.G. Edwards, as part of its investment banking business, is regularly
engaged in, among other things, the valuation of businesses and their
securities in connection with mergers and acquisitions,
98
<PAGE>
initial public offerings, secondary distribution of listed and unlisted
securities, private placements, and valuations for estate, corporate and other
purposes. A.G. Edwards is familiar with the Partnership through acting as
exclusive financial advisor and placement agent in the Partnership's private
placement of 7.17% First Mortgage Notes due 2010 and through its securities
research coverage of the Partnership. A.G. Edwards is not aware of any
relationship between A.G. Edwards and the Partnership, the General Partner or
Petro, which in its opinion, would affect its ability to render a fair and
independent opinion in this matter.
On October 16, 1998, A.G. Edwards rendered its written opinion to the Special
Committee that, as of such date, the Transaction was fair, from a financial
point of view, to the Public Common Unitholders.
THE FULL TEXT OF THE A.G. EDWARDS OPINION, WHICH SETS FORTH ITS PRINCIPAL
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS OF
THE SCOPE OF THE REVIEW UNDERTAKEN BY A.G. EDWARDS IN RENDERING ITS OPINION, IS
ATTACHED AS ANNEX D TO THIS PROXY STATEMENT. THE PUBLIC COMMON UNITHOLDERS ARE
URGED TO, AND SHOULD, READ THE A.G. EDWARDS OPINION CAREFULLY AND IN ITS
ENTIRETY. THE A.G. EDWARDS OPINION WAS DIRECTED TO THE SPECIAL COMMITTEE AND
ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE TRANSACTION
TO THE PUBLIC COMMON UNITHOLDERS, AND DOES NOT CONSTITUTE TAX ADVICE OR A
RECOMMENDATION TO ANY PUBLIC COMMON UNITHOLDER AS TO HOW TO VOTE WITH RESPECT
TO THE TRANSACTION. THE SUMMARY OF THE A.G. EDWARDS OPINION SET FORTH IN THIS
PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THE A.G. EDWARDS OPINION.
For purposes of the A.G. Edwards Opinion with respect to the Transaction,
A.G. Edwards has assumed that the Partnership will be able to complete the Debt
Offering and the Equity Offering and the redemption of certain debt and
preferred stock of Petro (the "Refinancing Transactions") and understands that
the Transaction will not be consummated if the Partnership is unable to
complete the Refinancing Transactions in accordance with the terms set forth in
the Agreement and Plan of Merger. We have also assumed that the General
Partner's withdrawal and the related admission of a successor general partner
will have no financial impact on the Public Common Unitholders.
In connection with rendering the A.G. Edwards Opinion, A.G. Edwards reviewed
(i) the most recently available drafts of the Partnership's Registration
Statement on Form S-4 and exhibits thereto, including the Agreement and Plan of
Merger, the Exchange Agreement, the Amended and Restated Partnership Agreement
and the Conveyance and Contribution Agreements; (ii) certain publicly available
historical audited financial statements and certain unaudited interim financial
statements of the Partnership and Petro; (iii) certain financial analyses and
forecasts of the Partnership prepared by, and reviewed with, management of the
General Partner and the views of management of the General Partner regarding
the Partnership's past and current business operations, results thereof,
financial condition and future prospects, including the impact of the
Transaction, as well as information relating to the retail propane distribution
industry and the potential strategic, financial and operational benefits and
challenges anticipated from the Transaction; (iv) certain financial analyses
and forecasts of Petro prepared by, and reviewed with, management of Petro and
the views of management of Petro regarding Petro's past and current business
operations, results thereof, financial condition and future prospects,
including the impact of the Transaction, as well as information relating to the
home
99
<PAGE>
heating oil distribution industry and the potential strategic, financial and
operational benefits and challenges anticipated from the Transaction; (v) the
pro forma impact of the Transaction on the Partnership and Petro; (vi) the
publicly reported historical price and trading activity for the Common Units
and the Class A Common Stock, including a comparison of certain financial and
stock market information for the Partnership with similar publicly available
information for certain other companies, the securities of which are publicly
traded; (vii) the current market environment generally, and the retail propane
distribution environment and the home heating oil distribution environment in
particular; (viii) information relating to the financial terms of certain
transactions, including selected merger and acquisition transactions; and (ix)
such other information, financial studies, analyses and investigations, and
financial, economic and market criteria that A.G. Edwards considered relevant.
In rendering the A.G. Edwards Opinion, A.G. Edwards has assumed that the
Transaction will be consummated on the terms contained in the Agreement and
Plan of Merger, without any waiver of any material terms or conditions by the
Partnership or Petro.
In rendering the A.G. Edwards Opinion, A.G. Edwards has relied upon and
assumed, without independent verification, the accuracy and completeness of all
financial and other information, publicly available, furnished to, or otherwise
discussed with A.G. Edwards for the purposes of the A.G. Edwards Opinion. With
respect to financial projections and other information provided to or otherwise
discussed with A.G. Edwards, A.G. Edwards assumed and was advised by the
management of the General Partner and Petro, respectively, that such
projections and other information were reasonably prepared on a basis that
reflects the best currently available estimates and judgments of the management
of the General Partner and Petro, respectively. A.G. Edwards did review
numerous
sets of Petro's projections and analyzed what it believed were certain of the
major assumptions embedded within Petro's projections, which are detailed in "-
Certain Projections of Petro and the Partnership." A.G. Edwards requested that
Petro make changes to two of its assumptions and furnish A.G. Edwards with the
resulting projections based on both 15-year weather ("Adjusted 15-Year Weather
Projections for Petro") and 30-year weather ("Adjusted 30-Year Weather
Projections for Petro"), collectively referred to as "Adjusted Projections for
Petro." The two assumptions that A.G. Edwards requested that Petro change were
as follows: (i) A.G. Edwards assumed retail margin growth of $0.01 per gallon
in 1999 and $0.005 per gallon thereafter; and (ii) A.G. Edwards assumed that
Petro would complete $30.0 million of home heating oil company acquisitions
annually at a purchase price of 4.75x the first year earnings before interest
expense, income taxes, depreciation and amortization and any non-recurring
revenues and expenses ("EBITDA"). The Adjusted 30-Year Weather Projections for
Petro resulted in heating oil EBITDA projections that were lower than
the heating oil EBITDA projections from Petro's 30-year weather projections by
the following percentages for 1999, 2000, 2001 and 2002, respectively: 0.4%,
4.4%, 7.7% and 10.5%. The Adjusted 15-Year Weather Projections for Petro
resulted in heating oil EBITDA projections that were higher than the heating
oil EBITDA projection from Petro's 15-year weather projections for 1999 by
0.8%, and lower than the heating oil EBITDA projections from Petro's 15-year
weather projections by the following percentages for 2000, 2001 and 2002,
respectively: 1.4%, 3.4% and 5.2%.
The Special Committee did not, however, engage A.G. Edwards to, and therefore
A.G. Edwards did not, verify the accuracy or completeness of any such
information. A.G. Edwards has relied upon the assurances of the management of
the General Partner and Petro that the respective managements
100
<PAGE>
are not aware of any facts that would make such information inaccurate or
misleading. A.G. Edwards did not conduct a physical inspection of the
properties or facilities of the Partnership or Petro nor did it make or obtain
any independent evaluation or appraisals of any such properties or facilities
or assets and liabilities. A.G. Edwards assumed that the Transaction will be
accounted for as a purchase transaction under generally accepted accounting
principles. A.G. Edwards also assumed that the final form of the Partnership's
Registration Statement on Form S-4, the Agreement and Plan of Merger, the
Exchange Agreement, the Amended and Restated Partnership Agreement and the
Conveyance and Contribution Agreements would be substantially similar to the
last draft reviewed by A.G. Edwards, except for changes requested by the
Special Committee. The A.G. Edwards Opinion is necessarily based on economic,
market and other conditions as in effect on, and the information made available
to A.G. Edwards as of, October 16, 1998.
The preparation of a fairness opinion is a complex process and is not readily
susceptible to partial analysis or summary description. In rendering the A.G.
Edwards Opinion, A.G. Edwards applied its judgment to a variety of complex
analyses and assumptions, considered the results of all of its analyses as a
whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, selecting any portion of its analyses, without
considering all analyses, would create an incomplete view of the process
underlying the A.G. Edwards Opinion. In addition, A.G. Edwards may have given
various analyses and factors more or less weight than other analyses and
factors, and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be A.G. Edwards'
view of the actual value of the Partnership or Petro. In performing its
analyses, A.G. Edwards made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many
of which are beyond the control of the Partnership or Petro. The assumptions
made and judgments applied by A.G. Edwards in rendering the A.G. Edwards
Opinion are not readily susceptible to description beyond that set forth in the
written text of the A.G. Edwards Opinion itself. Any estimates contained herein
are not necessarily indicative of future results or actual values, which may be
significantly more or less favorable than those suggested by such estimates.
A.G. Edwards does not assume responsibility if future results are different
from those projected. The analyses performed were prepared solely as part of
A.G. Edwards' analysis of the fairness, from a financial point of view, to
Public Common Unitholders of the Transaction and were conducted in connection
with the delivery of the A.G. Edwards Opinion. As described above, the A.G.
Edwards Opinion to the Special Committee was one of the many factors taken into
consideration by the Special Committee in making its determination to recommend
the Transaction. The decision to enter into the Transaction was solely that of
the Special Committee and the General Partner's Board.
The following is a summary of the material analyses performed by A.G. Edwards
in arriving at the A.G. Edwards Opinion:
Implied Unit Analysis
The consideration being paid to the Common Stockholders pursuant to the
Transaction will consist of Senior Subordinated Units, Junior Subordinated
Units and General Partner Units. As of the date of the A.G. Edwards Opinion, a
market price did not exist for such Units; subsequent to
101
<PAGE>
the Transaction, a market price will exist only for the Senior Subordinated
Units. In A.G. Edwards' judgment, an analysis of the value per unit of each of
the Senior Subordinated Units, Junior Subordinated Units and General Partner
Units was necessary to evaluate the fairness of the Transaction. In analyzing
the value of the Senior Subordinated Units, A.G. Edwards reviewed estimated
ranges of discount rates, trading yields and relative valuations compared to
the price of the publicly traded Common Units. In determining these estimated
ranges, A.G. Edwards considered, among other factors: (i) during the
Subordination Period, Common Unitholders will have priority in payment of the
full Minimum Quarterly Distribution plus arrearages before any distributions
are made to the Senior Subordinated Unitholders; (ii) the earliest date on
which the Subordination Period would expire is July 1, 2002; (iii) the
Subordination Period would only expire if the Adjusted Operating Surplus
generated during each of the three immediately preceding non-overlapping four-
quarter periods equaled or exceeded the sum of the increased Minimum Quarterly
Distribution of $2.30 on an annualized basis on all outstanding Units during
such period; (iv) during the Subordination Period, distributions on the Senior
Subordinated Units will be limited to the amount of distributable cash
generated; (v) the Senior Subordinated Units will be entitled to receive a pro
rata distribution of additional Senior Subordinated Units, but only if Petro
achieves certain financial goals during the five year period following the
closing of the Transaction; and (vi) the Senior Subordinated Units will receive
a pro rata distribution of the rights to receive Incentive Distributions
previously held by the General Partner. A.G. Edwards' analysis resulted in an
implied valuation range for a Senior Subordinated Unit of $17.04 to $20.00 per
unit, of which A.G. Edwards used the midpoint value of $18.52.
In analyzing the value of the Junior Subordinated Units and General Partner
Units, A.G. Edwards considered, among other factors, certain of the differences
between the Senior Subordinated Units, on the one hand, and the Junior
Subordinated Units and General Partner Units, on the other hand, including:
(i) the lack of marketability of the Junior Subordinated Units and General
Partner Units; (ii) the authority given the General Partner under the Amended
and Restated Partnership Agreement (and reflected in the General Partner Units)
to control the affairs of the Partnership; and (iii) during the Subordination
Period, both the Common Units and Senior Subordinated Units will have priority
in payment of the full Minimum Quarterly Distribution before any distributions
are made on the Junior Subordinated Units and General Partner Units. A.G.
Edwards' analysis resulted in an implied valuation range for the Junior
Subordinated Units and General Partner Units of $14.38 to $16.43 per unit, of
which A.G. Edwards used the midpoint value of $15.41. Based on a value of
$18.52 for each Senior Subordinated Unit and $15.41 for each Junior
Subordinated Unit and General Partner Unit, A.G. Edwards calculated that the
implied consideration paid for each Petro share averaged $2.43.
A.G. Edwards did not express an opinion as to what the value of the Senior
Subordinated Units, Junior Subordinated Units or General Partner Units will be
when issued to the Common Stockholders pursuant to the Transaction, or the
price at which the Common Units or Senior Subordinated Units will trade
subsequent to the Transaction.
Pro Forma Acquisition Analysis
A.G. Edwards analyzed the impact of the Transaction on the Partnership's
distributable cash flow (EBITDA less interest expense, maintenance capital
expenditures and cash taxes) ("DCF")
102
<PAGE>
per unit (DCF divided by the total number of Common Units, Senior Subordinated
Units, Junior Subordinated Units and General Partner Units), the related
accretion, the Partnership's Common Unit coverage (DCF per common unit divided
by the annualized Minimum Quarterly Distribution of $2.20, or $2.30 on a pro
forma basis) and the Partnership's total unit coverage (DCF per total unit
divided by the annualized Minimum Quarterly Distribution of $2.20, or $2.30 on
a pro forma basis). Based on the Adjusted 15-Year Weather Projections for Petro
and the General Partners' management projections for 15-year weather, as well
as other assumptions including certain assumptions regarding the Refinancing
Transactions, A.G. Edwards calculated, pro forma for the Transaction, projected
DCF per Unit, Common Unit coverage and total unit coverage under three
scenarios: (i) adjusted for actual 1998, which was based on historical results
of operations through July 31, 1998 and assumed normal weather for the
remainder of 1998, (ii) normalized 1998, which was based on the 1998 budget and
assumed normal weather and (iii) projected 1999, which assumed normal weather.
Under these three scenarios: (i) DCF per unit would increase by $0.26, $0.53
and $0.54, respectively; (ii) Common Unit coverage would decrease from 0.96x to
0.89x, increase from 1.22x to 1.25x and increase from 1.30x to 1.33x,
respectively; and (iii) total unit coverage would increase from 0.58x to 0.66x,
increase from 0.74x to 0.94x and increase from 0.81x to 1.00x, respectively.
Based on the Adjusted 30-Year Weather Projections for Petro and the General
Partners' management projections for 30-year weather, as well as other
assumptions including certain assumptions regarding the Refinancing
Transactions, A.G. Edwards calculated pro forma for the Transaction, projected
DCF per Unit, Common Unit coverage and total unit coverage, based on adjusted
for actual 1998, normalized 1998 and projected 1999. Under these three
scenarios (i) DCF per unit would increase by $0.26, $0.56 and $0.58,
respectively; (ii) Common Unit coverage would decrease from 0.96x to 0.89x,
increase from 1.38x to 1.39x and remain constant at 1.51x, respectively; and
(iii) total unit coverage would increase from 0.58x to 0.66x, increase from
0.84x to 1.05x and increase from 0.92x to 1.13x, respectively.
Analysis of Acquisition Premiums to Market Value
A.G. Edwards analyzed the premium of the implied consideration to be received
by Common Stockholders using the implied consideration of $2.43 for each Petro
share to the market value of the Class A Common Stock one day, one week, four
weeks, three months and one year prior to August 14, 1998, the day the
agreement in principle relating to the Transaction was announced (the
"Transaction Premiums"). A.G. Edwards reviewed three groups of selected merger
and acquisition transactions of majority or remaining interests involving
public companies and compared these transactions with the Transaction. The
first group included mergers and corporate transactions announced and completed
January 1, 1996 through October 9, 1998 in which the selling company's share
price was equal to or greater than $10 per share one week prior to the
announcement (the "$10 and Greater Transactions"). The second group included
mergers and corporate transactions announced and completed since January 1,
1996 through October 9, 1998 in which the selling company's share price was
less than $10 per share but greater than $5 per share one week prior to the
announcement (the "Greater than $5 and Less than $10 Transactions"). The third
group included mergers and corporate transactions completed since January 1,
1996 through October 9, 1998 in which the selling company's share price was
equal to or less than $5 per share one week prior to announcement (the "$5 and
Less Transactions"). A.G. Edwards compared the mean values for the $10 and
Greater Transactions, the Greater than $5 and Less than $10 Transactions, and
the $5 and
103
<PAGE>
Less Transactions, respectively, to the Transaction Premiums. The premium to
the stock price one day prior to the announcement date was 28.1%, 34.3% and
39.7%, respectively, compared to 29.6% for the Class A Common Stock. The
premium to the stock price one week prior to the announcement date was 32.7%,
42.3% and 48.8%, respectively, compared to 38.9% for the Class A Common Stock.
The premium to the stock price four weeks prior to the announcement date was
39.6%, 48.5% and 55.4%, respectively, compared to 17.8% for the Class A Common
Stock. The premium to the stock price three months prior to the announcement
date was 77.9%, 58.0% and 67.1%, compared to 52.5% for the Class A Common
Stock. The premium to the stock price one year prior to the announcement date
was 53.2%, 45.8% and 53.8%, compared to a discount of 19.0% for the Class A
Common Stock. A.G. Edwards observed that the Class A Common Stock price has
declined since the announcement of the agreement in principle of the
Transaction and that the premium of the implied consideration to be received by
Common Stockholders, based on the Class A Common Stock price as of October 14,
1998, was 135.6%.
Contribution Analysis
A.G. Edwards analyzed the relative pro forma contribution of each of the
Partnership and Petro to the ownership of capital in the Partnership pro forma
for the Transaction based on the Partnership's and Petro's historical results
of operations and the General Partner's management projections and the Adjusted
Projections for Petro. For comparative purposes, A.G. Edwards converted Petro's
historical December 31 fiscal year-end to a September 30 year-end using Petro's
quarterly statements to conform to the Partnership's September 30 year-end.
This analysis indicated, among other things, that the Partnership would have
contributed 24.3% and 31.3% of gross profit and EBITDA, respectively, in fiscal
year 1996, and 29.4% and 39.8% of gross profit and EBITDA, respectively, in
fiscal year 1997. The analysis indicated that the Partnership would contribute
28.6% and 31.7% of gross profit and EBITDA, respectively, for 15-year weather
and 28.4% and 32.1% of gross profit and EBITDA, respectively, for 30-year
weather in normalized 1998 and 29.3% and 33.1% of gross profit and EBITDA,
respectively, for 15-year weather and 29.1% and 33.5% of gross profit and
EBITDA, respectively, for 30-year weather in projected 1999. A.G. Edwards
compared these figures to the percentage of the implied firm value attributable
to the Partnership of 37.1%, which was calculated by subtracting the implied
aggregate purchase price of Petro's heating oil assets, as described in the
Comparable Transactions Analysis, from the pro forma market capitalization of
the Partnership (pro forma Common Units multiplied by the market price of the
Common Units plus the pro forma Senior Subordinated Units, Junior Subordinated
Units and General Partner Units multiplied by their implied values based on the
Implied Unit Analysis plus the pro forma book value of debt less pro forma
cash) divided by the pro forma market capitalization of the Partnership.
Discounted Cash Flow Analyses
A.G. Edwards performed discounted cash flow analysis using the Adjusted
Projections for Petro (the "Petro Cash Flow Analysis"). In performing the Petro
Cash Flow Analysis, A.G. Edwards discounted back to December 31, 1998, using a
discount rate range of 13.4% to 13.9% based upon Petro's weighted average cost
of capital, the sum of (i) the projected tax-adjusted operating cash flows for
1999 to 2002; and (ii) the terminal value for 2002 (the "Petro Terminal
Value"). The Petro
104
<PAGE>
Terminal Value was determined based on projected 2002 EBITDA and a terminal
EBITDA multiple range of 6.0x to 8.0x. The Petro Cash Flow Analysis indicated a
present value of the equity of Petro in the range of $44.8 million to $113.5
million for 15-year weather and $60.1 million to $131.9 million for 30-year
weather, respectively. A.G. Edwards compared the results from the Petro Cash
Flow Analysis to the equity value being paid for Petro's heating oil business,
which A.G. Edwards calculated to be $25.5 million based on the implied
consideration being paid to each of the Common Stockholders less the implied
value of the Subordinated Units and the general partner interest currently
owned by Petro that will be effectively retired as part of this Transaction.
A.G. Edwards also performed discounted cash flow analyses of the Partnership
based on the General Partner's management projections and the Partnership pro
forma for the Transaction based on the General Partner's management projections
and the Adjusted Projections for Petro (the "Partnership Cash Flow Analyses").
In performing the Partnership Cash Flow Analyses, A.G. Edwards discounted back
to September 30, 1998, using a discount rate range of 6.8% to 7.2% for the
Partnership and 7.3% to 7.7% for the Partnership pro forma for the Transaction
based upon the weighted average cost of capital for each, respectively, the sum
of (i) the projected tax-adjusted operating cash flows for 1999 to 2002; and
(ii) the terminal values for 2002 (the "Partnership Terminal Values"). The
Partnership Terminal Values were determined based on 2002 projected EBITDAs and
a terminal EBITDA multiple range of 9.0x to 11.0x. Based on the Partnership
Cash Flow Analyses and the ratio of the Common Units outstanding as of the date
of the A.G. Edwards Opinion (the "Original Partnership Common Units") to total
Units (including the general partner interest) outstanding as of such date,
A.G. Edwards calculated the net present value attributable to the Original
Partnership Common Units and compared it to the present value attributable to
the Original Partnership Common Units pro forma for the Transaction. The range
of values were $90.8 million to $118.3 million for 15-year weather and $101.4
million and $130.7 million for 30-year weather, respectively, for the
Partnership and $126.0 million to $161.1 million for 15-year weather and $136.9
million to $173.9 million for 30-year weather, respectively, for the
Partnership pro forma for the Transaction.
Comparable Transactions Analysis
A.G. Edwards noted that, because Petro is the only publicly traded home
heating oil distribution company, public disclosure regarding transactions in
the home heating oil distribution industry was extremely limited. A.G. Edwards
analyzed the financial terms related to divestitures by Petro of three of its
heating oil branches and compared them to the implied multiples of the implied
aggregate purchase price of Petro's heating oil assets. Petro has sold three
branches for a range of 8.0x to 9.8x purchase price to EBITDA multiple. In
analyzing the implied EBITDA multiple paid for Petro's heating oil assets, A.G.
Edwards considered the following: (i) the implied consideration paid for
the Common Stock; (ii) the implied valuation of the Subordinated Units and
general partner interest of the Partnership currently owned by Petro; (iii) the
redemption value of certain of Petro's indebtedness and preferred stock; (iv)
the value of certain of Petro's indebtedness that will remain outstanding
subsequent to the Transaction; (v) consent fees paid to certain of Petro's debt
holders; (vi) an estimate of all of the transaction costs associated with the
Transaction; and (vii) Petro's normalized 1997 EBITDA, normalized 1998 EBITDA
and projected 1999 EBITDA based on the Adjusted Projections for Petro. Based on
such information, the normalized 1997 EBITDA,
105
<PAGE>
normalized 1998 EBITDA and projected 1999 EBITDA implied multiples paid for
Petro's heating oil assets were 8.3x, 8.0x and 7.7x for 15-year weather,
respectively, and 8.3x, 7.6x and 7.3x for 30-year weather, respectively.
Analysis of Selected Publicly Traded Companies
A.G. Edwards used publicly-available information to compare selected
financial and market trading information for the Partnership to the Partnership
pro forma for the Transaction and to a group of selected retail propane
distributors, all of which are also master limited partnerships (the
"Partnership Comparable Group"). The retail propane distributors in the
Partnership Comparable Group were selected by A.G. Edwards based on the
similarity of their businesses to that of the Partnership. The Partnership
Comparable Group was comprised of: AmeriGas Partners, L.P., Cornerstone Propane
Partners, L.P., Ferrellgas Partners, L.P., Heritage Propane Partners, L.P.,
National Propane Partners, L.P., and Suburban Propane Partners, L.P. No
partnership used in A.G. Edwards' analysis is identical to the Partnership.
A.G. Edwards' analysis involves complex considerations and judgments concerning
differences in the potential financial and operating characteristics of the
Partnership Comparable Group and other factors regarding the trading values of
the Partnership Comparable Group. The financial information reviewed included,
among other things: (i) market capitalization (equity market value (common
units plus subordinated units and implied general partner units multiplied by
the market price of the common units) plus the book value of debt plus minority
interest less cash) to latest twelve month ("LTM") EBITDA and 1999 estimated
EBITDA based on currently available research estimates; (ii) equity market
value to LTM DCF and 1999 estimated DCF based on currently available research
estimates; and (iii) distribution yield. Such analysis for the Partnership and
the Partnership pro forma for the Transaction was based on the General
Partner's management projections and the Adjusted Projections for Petro. A.G.
Edwards compared the market capitalization to LTM EBITDA and 1999 EBITDA of the
Partnership of 12.5x and 10.2x for 15-year weather and 12.5x and 9.6x for 30-
year weather, respectively, to the Partnership pro forma for the Transaction of
10.0x and 8.1x for 15-year weather and 10.0x and 7.7x for 30-year weather,
respectively, and to the range and median of the Partnership Comparable Group
of 9.0x to 12.7x with a median of 11.6x, and 8.4x to 11.1x with a median of
9.2x, respectively. A.G. Edwards compared the equity market value to LTM DCF
and 1999 DCF of the Partnership of 15.4x and 10.6x for 15-year weather and
15.4x and 9.6x for 30-year weather, respectively, to the Partnership pro forma
for the Transaction of 12.5x and 8.1x for 15-year weather and 12.5x and 7.4x
for 30-year weather, respectively, and to the range and median of the
Partnership Comparable Group of 8.1x to 15.3x with a median of 13.4x, and 4.9x
to 12.2x with a median of 9.8x, respectively. Using the closing price of the
Partnership's price per Common Unit on October 14, 1998 of $19.56, A.G. Edwards
compared the distribution yield of the Partnership, assuming a $2.20 annualized
Minimum Quarterly Distribution, of 11.2% to the Partnership pro forma for the
Transaction, assuming a $2.30 annualized Minimum Quarterly Distribution, of
11.8% and to the range and median of the Partnership Comparable Group of 9.1%
to 22.3% with a median of 10.1%, respectively.
Terms of A.G. Edwards' Engagement
The terms of the engagement of A.G. Edwards by the Special Committee are set
forth in a letter agreement between A.G. Edwards and the Special Committee (the
"Engagement Letter").
106
<PAGE>
Pursuant to the terms of the Engagement Letter, as compensation for rendering
its financial advisory services and the A.G. Edwards Opinion to the Special
Committee, the Partnership agreed to pay A.G. Edwards a fee of $575,000, of
which $75,000 has been paid; $250,000 was due upon the delivery of the A.G.
Edwards Opinion; and $250,000 will be due upon the closing of the Transaction.
The Partnership has agreed to reimburse A.G. Edwards for all travel and out-of-
pocket expenses incurred in connection with its engagement. The Partnership has
also agreed to indemnify A.G. Edwards against certain liabilities in connection
with the engagement of A.G. Edwards.
REASONS FOR THE TRANSACTION; RECOMMENDATION OF THE PETRO BOARD
At a special meeting of the Petro Board held on October 6, 1998, the Petro
Board received presentations concerning, and reviewed the terms of, the
Transaction with members of Petro's management and its legal counsel and
financial advisors. At a special meeting held on October 19, 1998, the Petro
Board unanimously determined that the Transaction is fair to, and in the best
interests of, the Public Common Stockholders. Accordingly, the Petro Board has
unanimously approved the Merger Agreement and Exchange Agreement and
unanimously recommends that the Common Stockholders vote FOR the approval of
the Acquisition Proposal at the Special Meeting. See "--Background of the
Transaction" and "--Interests of Certain Persons in the Transaction; Conflicts
of Interest."
During the course of its deliberations, the Petro Board with the assistance
of management and its legal and financial advisors, considered the following
potential advantages of the Transaction:
. Petro is the largest home heating oil distributor in the U.S. and
the principal consolidator of that highly fragmented industry. However,
Petro does not have the financial flexibility to fully capitalize upon
the acquisition, operating and corporate branding opportunities resulting
from this position. This Transaction will recapitalize Petro providing it
with access to lower cost capital to better realize these growth
opportunities.
. As part of an MLP, Petro's home heating oil operations should receive an
improved market valuation. Due to high financing costs and amortization
of customer lists, Petro does not currently generate net income for
financial reporting purposes. Since MLP's are cash flow oriented and are
valued primarily on a cash distribution basis, the MLP structure
corresponds more closely with Petro's focus on cash flow. The Petro Board
also believes the Partnership will have greater investment community
awareness as compared to Petro. As the only public home heating oil
company, Petro has had limited securities analyst research coverage.
. Based on information provided by its financial advisors, the Petro Board
expects the Common Stockholders to receive partnership units that are
expected to trade at an attractive price compared to the recent trading
price of the Common Stock. The actual trading price of the Senior
Subordinated Units will depend on a variety of factors, including overall
market conditions for MLPs, the trading level of the Common Units, the
weather in the Partnership's areas of operations and the actual and
expected levels of Available Cash generated by the Partnership's
activities.
. The Petro Board believes that the Transaction has been structured so the
Common Stockholders will continue to participate in the expected benefits
from Petro's operating
107
<PAGE>
and corporate branding opportunities. If Petro meets certain financial
goals within the five-year period after closing, the holders of Senior
Subordinated Units, Junior Subordinated Units and General Partner Units
will receive up to an additional 909,000 Senior Subordinated Units. This
enables Common Stockholders to continue to participate in Petro's future
performance. While there is no assurance these objectives will be
achieved, the Petro Board believes that they are realistic and, if
achieved, could provide significant additional value to Common
Stockholders.
. Although Petro has historically paid cash dividends to its Common
Stockholders, these dividends have been suspended. The Partnership
generally distributes to its partners the cash it generates from its
operations. While there can be no assurance, this should give Common
Stockholders an increased probability of a resumption of annual
distributions.
. The Senior Subordinated Units will be allocated certain Incentive
Distribution rights previously held by the General Partner. To the extent
that the Partnership generates cash above certain target distribution
levels, the holders of Senior Subordinated Units may receive increased
cash distributions.
. The Public Common Stockholders will receive Senior Subordinated Units
that must receive their full Minimum Quarterly Distribution prior to any
payments being made on the Junior Subordinated Units and the General
Partner Units.
During the course of its deliberations, the Petro Board also considered the
following potential disadvantages of the proposed Transaction:
. Unitholders in the Partnership have substantially different, and probably
fewer, legal rights than Common Stockholders.
. There is no current trading market for the Senior Subordinated Units and
even though they will be listed on the New York Stock Exchange, there are
no assurances that any active trading market will exist after the closing
of the Transaction. It is expected that the Senior Subordinated Units
will trade at a lower price than the Common Units.
. Distributions on the Senior Subordinated Units, Junior Subordinated Units
and General Partner Units are not guaranteed and are subordinated to
distributions on the Common Units. Further, distributions on the Senior
Subordinated Units, Junior Subordinated Units and General Partner Units
are in general limited to the amount of distributable cash generated
after the Transaction. Therefore, there is significant uncertainty as to
the amount and timing of such distributions.
. Star Gas LLC, the new general partner in the Partnership, may have a
greater number of conflicts of interest than the directors of Petro.
. The Partnership's propane operations, like Petro's home heating oil
business, is negatively affected by warm weather during the winter
months.
. The Partnership may face difficulties in the future in making attractive
acquisitions in the propane industry because of the highly competitive
nature of such industry.
108
<PAGE>
. Common Stockholders that are tax-exempt entities, regulated investment
companies or foreign taxpayers may determine that holding an interest in
the Partnership may be unattractive from a tax perspective. If certain of
these investors sell their Senior Subordinated Units following
the transaction, the market price of the Senior Subordinated Units could
fall substantially.
The Petro Board also considered the following factors:
. The Dain Rauscher Wessels Opinion and the financial analysis prepared by
Dain Rauscher Wessels in connection therewith (see page 109).
. The projections prepared by the Partnership and Petro (see page 119).
. The terms of the Exchange Agreement, Merger Agreement and Amendment to
the Partnership Agreement (see pages 83, 125 and 139).
. The conditions to the consummation of the Transaction (see page 131).
. The background which resulted in the development of the structure of the
Transaction (see page 85).
. The conflicts of interest in structuring the transaction (see page 66).
. Recent trading prices for the Common Units and the Common Stock (see page
179).
The foregoing discussion of information and factors considered and given
weight by the Petro Board is not intended to be exhaustive. In view of the wide
variety of factors considered in connection with its evaluation of the
Transaction, the Petro Board did not find it practicable to, and did not,
quantify or otherwise attempt to assign relative weights to the specific
factors considered in reaching their determination. In addition, individual
members of the Petro Board may have given different weights to different
factors.
THE PETRO BOARD UNANIMOUSLY RECOMMENDS THAT THE COMMON STOCKHOLDERS VOTE FOR
THE ACQUISITION PROPOSAL AT THE SPECIAL MEETING.
OPINION OF DAIN RAUSCHER WESSELS
On May 14, 1998, the Petro Board retained Dain Rauscher Wessels to render an
opinion to the Petro Board concerning the fairness, from a financial point of
view, of the consideration to be received by the Public Common Stockholders
pursuant to the Merger. On October 6, 1998, Dain Rauscher Wessels rendered to
the Petro Board the Dain Rauscher Wessels Opinion that, as of the date of the
opinion, and based upon and subject to the factors and assumptions set forth
therein, the consideration to be received by the Public Common Stockholders
pursuant to the Merger was fair, from a financial point of view, to the Public
Common Stockholders.
The full text of the Dain Rauscher Wessels Opinion, which sets forth the
principal assumptions made, matters considered and qualifications and
limitations on the review undertaken by Dain Rauscher Wessels in rendering its
opinion, is attached as Annex E hereto and is incorporated herein by reference.
The summary of the Dain Rauscher Wessels Opinion set forth in this Proxy
Statement
109
<PAGE>
is qualified in its entirety by reference to the full text of such opinion.
Common Stockholders are urged to read such opinion carefully and in its
entirety. The Dain Rauscher Wessels Opinion was provided to the Petro Board for
its information and is directed only to the fairness from a financial point of
view of the consideration to be received by the Public Common Stockholders
pursuant to the Merger. The Dain Rauscher Wessels Opinion does not address the
merits of the underlying decision by Petro to engage in the Merger and does not
constitute a recommendation to any Common Stockholder as to how such holder
should vote on the approval and adoption of the Merger Agreement or any matter
related thereto.
The summary set forth below does not purport to be a complete description of
the analyses underlying the Dain Rauscher Wessels Opinion or the presentation
made by Dain Rauscher Wessels to the Petro Board. The preparation of a fairness
opinion is a complex analytical process involving various determinations as to
the most appropriate and relevant methods of financial analysis and
the application of those methods to the particular circumstances. Therefore,
such an opinion is not readily susceptible to partial analysis or summary
description. In arriving at its opinion, Dain Rauscher Wessels did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, Dain Rauscher Wessels believes that its
analyses must be considered as a whole and that selecting portions of its
analyses, without considering all of its analyses, would create an incomplete
view of the process underlying the Dain Rauscher Wessels Opinion.
In performing its analyses, numerous assumptions were made with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Dain
Rauscher Wessels, Petro or the Partnership. Any estimates contained in the
analyses performed by Dain Rauscher Wessels are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. Additionally, estimates of the value
of businesses or securities do not purport to be appraisals or to reflect the
prices at which such businesses or securities might actually be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. The Dain Rauscher Wessels Opinion and Dain Rauscher Wessels'
presentation to the Petro Board were among several factors taken into
consideration by the Petro Board in making its determination to approve the
Merger Agreement. Consequently, the Dain Rauscher Wessels' analyses described
below should not be viewed as determinative of the decision of the Petro Board
or Petro's senior management to engage in the Merger.
In arriving at the Dain Rauscher Wessels Opinion, Dain Rauscher Wessels
reviewed the most recently available drafts of the Merger Agreement, the
Amended and Restated Partnership Agreement, the Proxy Statement of Petro and
the Partnership filed as a part of the Registration Statement on Form S-4 of
the Partnership, and certain publicly available financial information
concerning Petro and the Partnership. In addition, Dain Rauscher Wessels
reviewed certain internal analyses, forecasts and other internal information
concerning the businesses and operations of Petro and the Partnership prepared
by the respective senior managements of Petro and the Partnership. Dain
Rauscher Wessels also met with the senior managements of Petro and the
Partnership to discuss the businesses, operations and prospects of Petro and
the Partnership. Dain Rauscher Wessels also considered certain long-term
strategic benefits of the Merger, both operational and financial, that
110
<PAGE>
were described to Dain Rauscher Wessels by the senior managements of Petro and
the Partnership. Dain Rauscher Wessels reviewed the terms of the Transaction in
relation to, among other things, current and historical market prices and
trading volume for the Class A Common Stock and the Common Units; the
respective companies' cash flow, net income and book value per share/unit;
the capitalization and financial condition of Petro and the Partnership; the
pro forma financial impact of the Merger on Petro and the Partnership,
including the potential relative ownership of various classes of Units of the
Partnership after the Merger by the current holders of Common Stock and
the current unitholders of the Partnership; and, to the extent publicly
available, the terms of recent merger and acquisition transactions involving
comparable companies. In addition, Dain Rauscher Wessels reviewed the merger
premiums paid in recent stock-for-stock acquisitions of public companies
generally, and energy industry companies in particular. Dain Rauscher Wessels
also analyzed certain financial, stock market and other publicly available
information relating to the business of other companies and partnerships whose
operations Dain Rauscher Wessels considered comparable to the respective
operations of Petro and the Partnership. In addition to the foregoing, Dain
Rauscher Wessels considered such other information, financial studies, analyses
and investigations and financial, economic and market criteria as Dain Rauscher
Wessels deemed relevant in arriving at the Dain Rauscher Wessels Opinion.
In preparing the Dain Rauscher Wessels Opinion, Dain Rauscher Wessels did not
independently verify any of the foregoing information, and relied upon such
information being complete and accurate in all material respects. Dain Rauscher
Wessels assumed, with Petro's consent, that the financial forecasts provided to
Dain Rauscher Wessels and discussed with Dain Rauscher Wessels were reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the senior managements of Petro and the Partnership as to the
respective expected future performance of Petro and the Partnership, and of the
combined companies subsequent to the proposed Merger. In addition, Dain
Rauscher Wessels did not conduct a physical inspection or make an independent
evaluation or appraisal of the assets of Petro or the Partnership, nor was Dain
Rauscher Wessels furnished with any such evaluation or appraisal. Dain Rauscher
Wessels assumed that the Merger will be accounted for as a purchase transaction
under generally accepted accounting principles, and will be a taxable event to
the Public Common Stockholders. In rendering the Dain Rauscher Wessels Opinion,
Dain Rauscher Wessels assumed that in the course of obtaining the necessary
regulatory and governmental approvals for the proposed Merger, no restriction
will be imposed that will have a material adverse effect on the contemplated
benefits of the proposed Merger. Dain Rauscher Wessels also assumed that the
final form of the Merger Agreement would be substantially similar to the
last draft reviewed by Dain Rauscher Wessels. The Dain Rauscher Wessels Opinion
is based on circumstances as they existed and could be evaluated on, and the
information made available to Dain Rauscher Wessels, as of the date of the Dain
Rauscher Wessels Opinion.
For purposes of rendering the Dain Rauscher Wessels Opinion, Dain Rauscher
Wessels assumed, in all respects material to its analyses, that the
representations and warranties of each party to the Merger Agreement and all
related documents and instruments contemplated thereby were true and correct in
all material respects, that each party to such documents will perform all of
the covenants and agreements required to be performed by such party under such
documents, and that all conditions to the consummation of the Merger will be
satisfied without waiver thereof.
111
<PAGE>
The following is a brief summary of the material analyses performed by Dain
Rauscher Wessels in connection with its preparation of the Dain Rauscher
Wessels Opinion.
Unit Reference Value Analysis
Dain Rauscher Wessels performed a unit reference value analysis to determine
ranges of reference values for the Common Units, Senior Subordinated Units and
Junior Subordinated Units/ General Partner Units. In Dain Rauscher Wessels'
judgment, such an analysis was required because the Senior Subordinated Units
and Junior Subordinated Units/General Partner Units are newly-created classes
of Units for which no prior market trading data exists. A range of reference
values was calculated for the Common Units in order that they could be
evaluated on a basis consistent with the other classes of Units. Moreover, the
determination of reference values for the Senior Subordinated Units and Junior
Subordinated Units/General Partner Units was required in order for Dain
Rauscher Wessels to analyze the absolute and relative values of each class of
unit, as well as to evaluate the aggregate value of the consideration being
received by holders of Common Stock pursuant to the Merger.
To determine a reference range of values for each class of unit, Dain
Rauscher Wessels employed a discounted distribution model based upon Petro
senior management's forecasts for the pro forma combined entity from the year
ended September 30, 1998 through the year ended September 30, 2002, assuming
15-year weather ("15-Year Weather Case") and 30-year weather ("30-Year Weather
Case"). Dain Rauscher Wessels also examined a case in which distributions per
unit remained at $2.30 over the forecast period (the "Downside Case"), and a
case in which distributions increased at a slower rate than in the 15-Year
Weather Case and the 30-Year Weather Case (the "Dain Rauscher Wessels Case").
Factors examined included the Indicated Distributions (the Minimum Quarterly
Distribution and other distributions of Available Cash from Operating Surplus);
the additional Senior Subordinated Units to be issued based upon the
performance of Petro; and the Incentive Distributions which are to be shared
pro rata by the Senior Subordinated Units and Junior Subordinated Units/General
Partner Units if distributions of Available Cash exceed Target Distribution
Levels. Dain Rauscher Wessels discounted projected distributions for each class
of Units to a net present value employing discount rates which, in Dain
Rauscher Wessels' professional judgment, reflected (i) prevailing market yields
for the Common Units and publicly-traded Units of other propane distribution
master limited partnerships; (ii) the structural subordination of the various
classes of Units; and (iii) the relative risks associated with the Indicated
Distributions, the additional Senior Subordinated Units to be issued based upon
the performance of Petro and the Incentive Distributions. For each class of
unit, net present terminal values were calculated employing a perpetuity
valuation based upon the discount rate employed for a given class of
distribution and the amount of the projected distributions in the year ending
September 30, 2002. To reflect the lack of marketability of the Junior
Subordinated Units/ General Partner Units, Dain Rauscher Wessels considered a
range of discounts and applied a discount of 22% to the net present values
calculated for the Junior Subordinated Units/General Partner Units.
Common Units. For the Common Units, discount rates of 9.0%-11.3% were applied
to the projected Indicated Distributions. The calculated reference values for
the Downside Case, 15-Year Weather Case, 30-Year Weather Case and Dain Rauscher
Wessels Case were $20.75, $26.33, $31.55 and $22.54 per Common Unit,
respectively.
112
<PAGE>
Senior Subordinated Units. For the Senior Subordinated Units, discount rates
of 9.8%-13.3% were applied to the projected Indicated Distributions, discount
rates of 12.5%-14.3% were applied to the projected additional Senior
Subordinated Units to be issued based upon the performance of Petro and
discount rates of 13.0%-14.8% were applied to the projected Incentive
Distributions. The calculated reference values for the Downside Case, 15-Year
Weather Case, 30-Year Weather Case and Dain Rauscher Wessels Case were $17.74,
$26.90, $35.62 and $22.76 per Senior Subordinated Unit, respectively.
Junior Subordinated Units / General Partner Units. For the Junior
Subordinated Units/General Partner Units, discount rates of 10.5%-14.3% were
applied to the projected Indicated Distributions, discount rates of 12.5%-14.3%
were applied to the projected additional Senior Subordinated Units to be issued
based on the performance of Petro and discount rates of 13.0%-14.8% were
applied to the projected Incentive Distributions. The calculated reference
values for the Downside Case, 15-Year Weather Case, 30-Year Weather Case and
Dain Rauscher Wessels Case were $12.91, $19.53, $26.16 and $16.67 per Junior
Subordinated Unit/General Partner Unit, respectively.
For purposes of performing its other analyses, Dain Rauscher Wessels employed
the unit reference values implied by the Dain Rauscher Wessels Case as
reference values for the subject Units. Dain Rauscher Wessels multiplied the
exchange ratio of .13064 by the $22.76 reference value for the Senior
Subordinated Units to calculate an implied merger value ("Implied Merger
Value") of $2.97 per share of Common Stock held by the Public Common
Stockholders. Dain Rauscher Wessels calculated that the $2.97 Implied Merger
Value was comprised of the sum of net present values of $2.54 attributable to
the Indicated Distributions and $0.43 attributable to the additional Senior
Subordinated Units to be issued based on the performance of Petro and Incentive
Distributions. Dain Rauscher Wessels also multiplied an exchange ratio of
.15913 (the ratio of the number of Junior Subordinated Units/General Partner
Units to be received by holders of Common Stock other than the Public Common
Stockholders ("Affiliate Common Stockholders") to the number of shares of
Common Stock to be exchanged by such holders) by the $16.67 reference value for
the Junior Subordinated Units/General Partner Units to calculate an Implied
Merger Value of $2.65 per share of Common Stock held by the Affiliated Common
Stockholders. Dain Rauscher Wessels calculated that the $2.65 Implied Merger
Value was comprised of the sum of net present values of $2.24 attributable to
the Indicated Distributions and $0.41 attributable to the additional Senior
Subordinated Units to be issued based on the performance of Petro and Incentive
Distributions.
Discounted Cash Flow Analysis
Dain Rauscher Wessels performed a discounted cash flow analysis to calculate
the implied price per share of Petro Common Stock based upon senior
management's projections assuming 15-year weather and 30-year weather from June
30, 1998 through December 31, 2002, and no acquisitions. Using this
information, Dain Rauscher Wessels calculated the net present value of Petro's
unlevered free cash flows from June 30, 1998 through December 31, 2002 using
discount rates ranging from 12.0% to 16.0%. Dain Rauscher Wessels also
calculated the net present terminal value of Petro at December 31, 2002 based
upon multiples of 6.5x to 8.5x EBITDA (earnings before interest, taxes,
depreciation and amortization) in the year ending December 31, 2002, and
discount rates ranging from 12.0% to 16.0%. Dain Rauscher Wessels employed the
capital asset pricing model to determine
113
<PAGE>
a weighted average cost of capital for Petro, and also employed its
professional judgment in determining a range of discount rates for use in the
analysis. The sum of the net present values of the free cash flows and terminal
values, less outstanding debt and preferred stock (net of excess cash), yielded
an implied net present value per share of Common Stock ranging from $(1.81) to
$2.56.
Inherent in any discounted cash flow analysis are the use of a number of
assumptions, including the accuracy of management's projections, and the
subjective determination of an appropriate terminal value and discount rate to
apply to the projected cash flows of the entity under examination. Variations
in any of these assumptions or judgments and variables beyond management's
control, such as the general and regional economies, worldwide oil and gas
prices, adverse weather conditions and the availability of personnel and
equipment, could significantly alter the results of a discounted cash flow
analysis.
Relative Contribution Analysis
Dain Rauscher Wessels performed a relative contribution analysis to examine
the relationship between the percentage ownership of the Partnership that the
Common Stockholders would receive pursuant to the Merger, and the relative
contribution of Petro to the distributable cash flow of the Partnership on a
pro forma combined basis. In considering the percentage ownership of the
Partnership that the Common Stockholders would receive pursuant to the Merger,
Dain Rauscher Wessels performed calculations on both a gross Units basis,
treating all classes of Units as identical, as well as an adjusted Units basis,
in which the number of Units to be received by the Common Stockholders was
adjusted to reflect the different values of various classes of Units implied by
Dain Rauscher Wessels' Unit Reference Value Analysis. In calculating the
relative contributions of Petro and the Partnership to the distributable cash
flow of the Partnership on a pro forma combined basis, Dain Rauscher Wessels
considered that Petro, as the owner of Star Gas and all of the Partnership's
outstanding subordinated units prior to the Merger, was the contributor of the
distributable cash flow accruing to that ownership position.
Based upon senior management's normalized estimates for fiscal 1998 for Petro
and the Partnership, and the 15-Year Weather Case assumptions for the
Partnership on a pro forma combined basis for fiscal 1999, Dain Rauscher
Wessels calculated that Petro would provide 46.8% and 56.8% of the
distributable cash flow of the Partnership on a pro forma combined basis in
fiscal 1998 and 1999, respectively. Dain Rauscher Wessels determined that,
pursuant to the Merger, the Common Stockholders would receive 48.6% of the
ownership of the pro forma combined entity on a gross Units basis, and 47.5% on
an adjusted Units basis. Dain Rauscher Wessels also noted that, based on the
exchange ratio of .13064 and assuming that (i) the Minimum Quarterly
Distribution is $0.575 following the Merger and (ii) the Minimum Quarterly
Distribution is paid to holders of Senior Subordinated Units, the Public Common
Stockholders who receive Senior Subordinated Units would receive an annual
distribution of $0.30 for each share of Common Stock exchanged pursuant to the
Merger. Dain Rauscher Wessels noted that Common Stock does not presently pay a
dividend.
Net Asset Value Analysis
Dain Rauscher Wessels performed a net asset value analysis to examine values
which might be realized by the Common Stockholders if Petro pursued orderly
liquidations of its home heating oil
114
<PAGE>
business and investment in the Partnership, and satisfied Petro's obligations
to its creditors and preferred stockholders. For purposes of this analysis,
Dain Rauscher Wessels selected six criteria for valuing Petro's home heating
oil business: (i) the mean EBITDA multiple paid by Petro in its ten largest
acquisitions of home heating oil businesses in 1996-1997, adjusted for a 10%
size premium; (ii) the mean price per gallon of target annual volume paid by
Petro in such acquisitions, adjusted for a 10% size premium; (iii) the mean
price per target customer paid by Petro in such acquisitions, adjusted for a
10% size premium; (iv) the mean EBITDA multiple paid by the Partnership in its
acquisitions of eleven propane retailers in 1994-1997, adjusted for a 10% size
premium; (v) the mean EBITDA multiple paid in the Selected Transactions
examined in Dain Rauscher Wessels' Comparable Transactions Analysis; and (vi) a
growth rate-adjusted EBITDA multiple implied by an analysis of the public
market multiples of companies engaged in consolidating fragmented industries.
In each scenario, Dain Rauscher Wessels valued Petro's current investment in
the Partnership by multiplying the number of subordinated Units and implied
General Partner Units by the most recent Common Unit price, less a 15% discount
to reflect structural subordination. Outstanding debt and preferred stock were
assumed to be liquidated at par or liquidation value, plus applicable
prepayment penalties, and the analysis further assumed $5.0 million of
transaction costs. The values per share of Common Stock implied by these
analyses ranged from $0.00 to $5.47, with a median of $1.04 and a mean of
$1.64. Dain Rauscher Wessels applied its subjective professional judgment in
comparing these values to the Implied Merger Value to be received pursuant to
the Merger by the Public Common Stockholders.
Comparable Company Trading Analysis
Using publicly available information, Dain Rauscher Wessels compared, based
upon market trading values as of September 25, 1998, multiples of certain
financial criteria, including net income, EBITDA, EBIT (earnings before
interest and taxes), Cash Flow from Operations (net income plus depreciation
and amortization, deferred taxes and other non-cash items, but not including
changes in working capital accounts), revenues and the tangible book value of
equity of Petro to certain other companies which, in Dain Rauscher Wessels'
judgment, were comparable to Petro for purposes of this analysis. Dain Rauscher
Wessels noted that Petro is the only publicly-traded company engaged primarily
in the distribution of home heating oil. Accordingly, Dain Rauscher Wessels
selected for comparison companies engaged to varying degrees in the wholesale
and retail marketing and distribution of energy and fuel. Other factors
considered by Dain Rauscher Wessels in selecting companies for comparison
included size, financial condition and geographic scope of operations. The
group of companies used in the comparison included Adams Resources & Energy,
Inc., Bay State Gas Company, Halstead Energy Corp., Meteor Industries, Inc.,
Midcoast Energy Resources, Inc., National Gas & Oil Company, Streicher Mobile
Fueling, Inc., TransMontaigne Inc. and World Fuel Services Corporation.
For the group of comparable energy and fuel marketing and distribution
companies, the range, median and mean for equity market value as a multiple of
each of the indicated statistics were as follows: (a) latest twelve months net
income--7.6x to 47.4x, with a median of 13.8x and a mean of 20.8x; (b) latest
twelve months Cash Flow from Operations--2.8x to 21.9x, with a median of 11.1x
and a mean of 11.5x; and (c) tangible book value of common equity--0.3x to
2.5x, with a median of 1.7x and a mean of 1.6x. Net Market Capitalization
(defined as equity market value plus the book
115
<PAGE>
value of debt and preferred stock, less cash and equivalents in excess of a 1.0
working capital ratio) as a multiple of latest twelve months EBIT ranged from
5.6x-24.1x, with a median of 12.1x and a mean of 14.5x. Dain Rauscher Wessels
was unable to calculate meaningful mathematical comparisons between these
comparable company multiples and corresponding multiples for Petro because
Petro (a) generated negative net income and Cash Flow from Operations for the
latest twelve months ended June 30, 1998; (b) generated EBIT for the latest
twelve months ended June 30, 1998 at a level which rendered the resultant
multiple (478.1x) not meaningful in Dain Rauscher Wessels' judgment; and (c)
had a net stockholders' deficiency at June 30, 1998. In addition, Dain Rauscher
Wessels examined certain other market valuation criteria for which comparisons
could be drawn. The comparable companies' Net Market Capitalization as a
multiple of latest twelve months EBITDA ranged from 2.7x-19.7x, with a median
of 10.7x and a mean of 11.2x, which compared to 9.8x for Petro. Net Market
Capitalization as a multiple of latest twelve months revenues ranged from
0.2x-1.8x, with a median of 0.5x and a mean of 0.7x, which compared to 0.8x for
Petro. Dain Rauscher Wessels applied its subjective professional judgment in
evaluating Petro's results of operations for the twelve months ended June 30,
1998 in relation to the comparable company trading multiples.
In addition, Dain Rauscher Wessels used publicly available information, based
upon market trading values as of September 25, 1998, to compare certain
financial criteria (including multiples of latest twelve months EBITDA and Cash
Flow from Operations, distribution yields and debt to book capitalization
ratios), among a group of propane distribution master limited partnerships
which Dain Rauscher Wessels considered to be comparable to the Partnership. For
purposes of analysis, this group was composed of Amerigas Partners, L.P.,
Cornerstone Propane Partners, L.P., Ferrellgas Partners, L.P., Heritage Propane
Partners, L.P., National Propane Partners, L.P., and Suburban Propane Partners,
L.P. Dain Rauscher Wessels calculated an Adjusted Equity Market Value for
each propane distribution master limited partnership by valuing the common
units of each limited partnership at market value, the subordinated units at
65% of the common unit market value, and the general partner units at 85% of
the common unit market value. Dain Rauscher Wessels also calculated an Adjusted
Market Capitalization for each limited partnership as the sum of Adjusted
Equity Market Value plus the book value of debt, less cash and equivalents in
excess of a 1.0 working capital ratio.
For the group of propane distribution master limited partnerships, Adjusted
Market Capitalization as a multiple of latest twelve months EBITDA ranged from
8.6x-14.0x, with a median of 10.2x and a mean of 10.5x, which compared to 11.9x
for the Partnership. Adjusted Equity Market Value as a multiple of latest
twelve months Cash Flow from Operations ranged from 7.4x-9.6x, with a median of
9.2x and a mean of 8.7x, which compared to 10.1x for the Partnership. Common
unit distribution yields ranged from 8.7%-15.6%, with a median of 10.2% and a
mean of 11.0%, which compared to 10.6% for the Partnership. The ratio of debt
to book capitalization ranged from 46.3%-96.5%, with a median of 77.5% and a
mean of 76.5%, which compared to 65.8% for the Partnership.
The comparable company trading analysis is a valuation methodology used by
Dain Rauscher Wessels to determine whether Petro and the Partnership were
reasonably valued by the public trading market, at existing market prices, in
relation to the public trading markets' valuation of similar companies and
partnerships. Dain Rauscher Wessels did not establish any specific valuation
for Petro or the Partnership in connection with this analysis.
116
<PAGE>
No public company utilized as a comparison is identical to Petro, the
Partnership or the business segment for which a comparison is being made. An
analysis of the results of such a comparison is not mathematical; rather, it
involves complex considerations and judgments concerning differences
in financial and operating characteristics of the comparable companies and
other factors that could affect the public trading value of the comparable
companies to which Petro and the Partnership were being compared.
Comparable Transactions Analysis
Dain Rauscher Wessels conducted a comparable transactions analysis whereby it
examined the terms of recent publicly disclosed acquisitions of businesses and
assets related to the energy marketing and distribution industry. With respect
to the significant majority of these transactions, public disclosure regarding
purchase price and target financial results was insufficient to permit Dain
Rauscher Wessels to draw conclusions regarding value. Sufficient data did exist
with respect to ten transactions (the "Selected Transactions") which Dain
Rauscher Wessels considered reasonably comparable to the Merger:
(Acquisitor/Target) Valero Energy Corporation/Valero Natural Gas Partners,
L.P.; Associated Natural Gas Corporation/Grand Valley Gas Company; K N Energy,
Inc./American Oil & Gas Company; Panhandle Eastern Corp./Associated Natural Gas
Corporation; Natural Gas Clearinghouse/Trident NGL Holding, Inc.; LG&E Energy
Corporation/ Hadson Corporation; El Paso Natural Gas Company/Eastex Energy
Inc.; PacifiCorp Holdings, Inc./TPC Corporation; Enron Corp./Enron Global Power
& Pipelines, L.L.C.; and Kinder Morgan Energy Partners, L.P./ Santa Fe Pacific
Pipeline Partners, L.P.
For the Selected Transactions, total consideration paid for the equity of the
target company as a multiple of target company net income ranged from 15.4x-
55.3x, with a median of 37.2x and a mean of 36.4x. Equity consideration as a
multiple of the target company's tangible book value of equity ranged from
1.4x-4.3x, with a median of 2.5x and a mean of 2.8x. Total transaction value as
a multiple of the target company's latest twelve months EBIT ranged from 10.9x-
23.3x, with a median of 16.7x and a mean of 17.1x. Dain Rauscher Wessels was
unable to calculate meaningful mathematical comparisons between these
comparable transactions multiples and the Implied Merger Value to be received
pursuant to the Merger by the Public Common Stockholders because Petro (a)
generated a net loss for the latest twelve months period ended June 30, 1998;
(b) had a net tangible stockholders' deficiency at June 30, 1998; and (c)
generated EBIT for the latest twelve months ended June 30, 1998 at a level
which rendered the resultant multiple (515.4x) not meaningful in Dain Rauscher
Wessels' judgment. For the Selected Transactions, total transaction value as a
multiple of the target company's latest twelve months EBITDA ranged from 7.3x-
14.6x, with a median of 10.9x and a mean of 11.4x, which compared to 10.6x for
Petro. Dain Rauscher Wessels applied its subjective professional judgment in
evaluating the Implied Merger Value to be received pursuant to the Merger by
the Public Common Stockholders in relation to Petro's results of operations for
the latest twelve months period.
Dain Rauscher Wessels also examined multiples paid by Petro in the
acquisitions of retail distributors of home heating oil during 1996-1997. For
all Petro acquisitions during such period (excluding the ten largest),
transaction value as a multiple of target EBITDA ranged from 3.4x-4.9x, with a
median of 3.9x and a mean of 4.1x. Transaction value per target gallon of
annual volume
117
<PAGE>
ranged from $0.37-$0.87, with a median of $0.55 and a mean of $0.55.
Transaction value per target customer ranged from $334-$1,037, with a median of
$533 and a mean of $630. To examine the effect of target size on transaction
multiples, Dain Rauscher Wessels examined the acquisition multiples paid by
Petro in the ten largest acquisitions in the 1996-1997 period. For this group
of transactions, transaction value as a multiple of target EBITDA ranged from
3.4x-4.6x, with a median of 4.2x and a mean of 4.2x. Transaction value per
target gallon of annual volume ranged from $0.58-$1.02, with a median of $0.89
and a mean of $0.84. Transaction value per target customer ranged from $658-
$2,010, with a median of $1,055 and a mean of $1,194. Based upon the Implied
Merger Values and certain assumptions regarding the value of Petro's current
investment in the Partnership, Dain Rauscher Wessels calculated that the
comparable multiples and values for Petro's home heating oil business implied
in the Merger were 7.4x EBITDA, $0.87 per gallon and $994 per customer,
assuming senior management normalized estimates for fiscal 1998. Dain Rauscher
Wessels noted that Petro generally paid higher multiples and values in its
larger acquisitions and that Petro's home heating oil business is significantly
larger than any similar business acquired by Petro.
Merger Premiums Analysis
Dain Rauscher Wessels examined percentage premiums paid in all publicly-
disclosed stock-for-stock transactions with transaction values of $100-$500
million since January 1, 1998. The analysis indicated median percentage
premiums to the target company's stock price one day, one week and four weeks
prior to announcement, of 20.2%, 30.2%, and 33.3%, respectively. Dain Rauscher
Wessels also examined median percentage premiums paid in all publicly-disclosed
stock-for-stock energy industry transactions with transaction values of $100-
$500 million since January 1, 1994. This analysis indicated median percentage
premiums to the target company's stock price one day, one week and four weeks
prior to the announcement, of 13.7%, 17.6%, and 22.6%, respectively. Dain
Rauscher Wessels calculated that the Implied Merger Value to be received
pursuant to the Merger by the Public Common Stockholders of $2.97 represented
premiums to the market price of the Class A Common Stock one day, one week and
four weeks prior to announcement of 58.6%, 90.3%, and 64.1%, respectively. Dain
Rauscher Wessels further calculated that the portion of the Implied Merger
Value attributable to the net present value of the Indicated Distributions, or
$2.54, represented premiums to the market price of the Class A Common Stock one
day, one week and four weeks prior to announcement of 35.6%, 62.7% and 40.3%,
respectively.
Dain Rauscher Wessels' Engagement Agreement
Dain Rauscher Wessels was retained to render the Dain Rauscher Wessels
Opinion on the basis of Dain Rauscher Wessels' experience with mergers and
acquisitions in the energy industry, and on the basis of Dain Rauscher Wessels'
experience with energy industry master limited partnerships. Dain Rauscher
Wessels is a nationally recognized investment banking firm and is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. In the ordinary course of its
business, Dain Rauscher Wessels and its affiliates may actively trade the debt
and equity securities of Petro and the Partnership for their own account and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
118
<PAGE>
Pursuant to an engagement agreement between Petro and Dain Rauscher Wessels,
Petro paid Dain Rauscher Wessels an engagement fee of $50,000 upon the
execution of the engagement agreement and $375,000 upon the initial delivery of
the written Dain Rauscher Wessels Opinion to the Petro Board. Petro has agreed
to reimburse Dain Rauscher Wessels for its out-of-pocket expenses not to exceed
$50,000, and to indemnify Dain Rauscher Wessels and its controlling persons
against certain liabilities and expenses relating to or arising out of the
consummation of the Transaction, including certain liabilities under U.S.
federal securities laws. No portion of Dain Rauscher Wessels' fee was
contingent upon the closing of the Transaction or whether Dain Rauscher Wessels
rendered a favorable opinion with respect to the proposed Merger. The terms of
Dain Rauscher Wessels' engagement agreement with Petro, which are customary for
transactions of this nature, were negotiated at arm's length between Petro and
Dain Rauscher Wessels, and the Petro Board was aware of such terms at the time
of its approval of the Merger Agreement.
CERTAIN PROJECTIONS OF PETRO AND THE PARTNERSHIP
Petro and the Partnership provided A.G. Edwards and Dain Rauscher Wessels
(the "Financial Advisors") with certain projected financial data for the years
1999 through 2003 (the "Projections"). The Projections were not prepared with a
view to public disclosure or compliance with published guidelines of the
Securities and Exchange Commission or the guidelines established by the
American Institute of Certified Public Accountants regarding projections. The
projections are included in this Proxy Statement only because they were made
available to the Financial Advisors. These projections were prepared as of
September 30, 1998. Neither the Financial Advisors nor KPMG Peat Marwick, LLP,
the Partnership's independent certified public accountants, examined, compiled
or applied any procedures with respect to the Projections or expressed any
opinion or provided any kind of assurance thereon. None of the Financial
Advisors, Petro, the Partnership, the Special Committee nor any of their
respective affiliates or advisors assumes any responsibility for the
reasonableness or completeness of the Projections.
While presented with numerical specificity, the Projections are based on a
variety of assumptions relating to the business of Petro and the Partnership
that, although considered appropriate by Petro and the Partnership at the time,
may not be realized. Moreover, the Projections and the assumptions upon which
they are based are subject to significant uncertainties and contingencies, many
of which are beyond the control of Petro and the Partnership. Consequently, the
Projections and the underlying assumptions are necessarily speculative in
nature and inherently imprecise, and there can be no assurance that projected
financial results will be realized. It is expected that there will be
differences between actual and projected results, and projected results and
actual results are likely to vary materially from those shown, and such
variance will likely increase over time. None of the Financial Advisors, Petro,
the Partnership, the Special Committee nor any of their respective affiliates
or advisors intends to update or otherwise revise the Projections.
The inclusion of the Projections herein should not be regarded as an
indication that the Financial Advisors, Petro, the Partnership, the Special
Committee or any of their respective affiliates or advisors considers the
Projections likely to be an accurate prediction of future results. Common
Unitholders and Common Stockholders are cautioned not to place undue reliance
on the Projections, which should be read in conjunction with the information
relating to the business, assets and financial condition of the Partnership
included herein.
119
<PAGE>
The Projections contain forward-looking information and are subject to a
number of risks discussed elsewhere in this Proxy Statement. See "Risk
Factors." These risks are likely to cause actual results in the future to
differ significantly from results expressed or implied in the Projections.
The Projections described herein are the most recent versions of numerous
projections provided to the Financial Advisors. Petro and the Partnership
believe that discussion of earlier versions would not add materially to the
information provided herein. Earlier versions have, however, been filed as an
exhibit to the Registration Statement.
Set forth below is a summary of the Projections prepared by Petro and the
Partnership as of September 30, 1998 and provided to the Financial Advisors.
Petro Projections on a Stand Alone Basis
In order to develop projections for the fiscal years ending December 31,
1999-2003, Petro first began with formulating a revised 1998 budget (the
"Normalized 1998 Budget"). The Normalized 1998 Budget made certain assumptions
relating to revenues and delivery expenses based on volumes which would be
associated with a "normal" winter. In addition, Petro gave full year impact in
the Normalized 1998 Budget to $11 million in cost reduction initiatives
implemented during 1998. These estimated annual cost reductions include $3.5
million for the elimination of corporate and branch overhead, $3.5 million for
the rationalization of branch operating expenses and $4 million in reduced
benefit plan, personnel and other operating expenses. For these purposes, Petro
ran two cases assuming that "normal" weather ("Weather Normalization") was
based on either (a) the historical average temperature of the relevant
measurement statistics over the 15-year period from 1983 through 1997 derived
from information published by the U.S. Department of Commerce-National Oceanic
and Atmospheric Administration ("NOAA") (the "15-Year Case") or (b) the
historical average temperature of the relevant measurement statistics as
published by the NOAA over the 30-year period from 1961 through 1990 (the "30-
Year Case").
The projections for the fiscal years ending December 31, 1999-2003 were based
on the Normalized 1998 Budget adjusted for the following: (a) base customer
attrition of 4.0% annually, (b) an increase in retail gross margins of $0.01
per gallon annually, (c) an increase in service revenues and expenses (net of
the impact of attrition) of 2.0% annually, (d) an increase in net operating
costs of 2.0% annually, and (e) no additional acquisitions due to capital
constraints.
120
<PAGE>
PETRO PROJECTIONS ON A STAND ALONE BASIS--30-YEAR CASE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION
Heating Oil EBITDA...... $ 46,900 $ 45,548 $ 43,867 $ 42,283 $ 40,766 $ 39,288
MLP Distributions(1).... 4,366 4,387 4,965 5,570 5,575 5,579
-------- -------- -------- -------- -------- --------
Total EBITDA............ 51,266 49,935 48,832 47,853 46,341 44,867
Depreciation and
Amortization........... 28,710 23,500 19,500 15,500 11,500 8,000
-------- -------- -------- -------- -------- --------
EBIT.................... 22,556 26,435 29,332 32,353 34,841 36,867
Interest Expense........ (31,444) (30,971) (30,675) (28,749) (28,083) (28,035)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... (8,888) (4,536) (1,343) 3,604 6,758 8,832
Income Taxes............ (500) (500) (500) (500) (500) (500)
Equity in Partnership
Earnings............... 997 1,291 1,255 1,283 1,375 1,467
MLP Distributions....... (5,684) (4,387) (4,965) (5,570) (5,575) (5,579)
-------- -------- -------- -------- -------- --------
Net Income(2)........... $(12,757) $ (8,132) $ (5,553) $ (1,183) $ 2,058 $ 4,220
======== ======== ======== ======== ======== ========
OTHER INFORMATION
Maintenance
Capital Expenditures... $ 2,776 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000
Net Debt and Preferred
Stock (3).............. 287,935 284,816 273,995 262,227 251,305 241,809
</TABLE>
PETRO PROJECTIONS ON A STAND ALONE BASIS--15-YEAR CASE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION
Heating Oil EBITDA...... $ 44,749 $ 43,392 $ 41,769 $ 40,237 $ 38,770 $ 37,342
MLP Distributions(1).... 4,366 2,739 2,941 3,220 3,527 3,861
-------- -------- -------- -------- -------- --------
Total EBITDA............ 49,115 46,131 44,710 43,457 42,297 41,203
Depreciation and
Amortization........... 28,710 23,500 19,500 15,500 11,500 8,000
-------- -------- -------- -------- -------- --------
EBIT.................... 20,405 22,691 25,210 27,957 30,797 33,203
Interest Expense........ (31,444) (30,971) (30,675) (28,869) (29,283) (29,235)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... (11,039) (8,340) (5,465) (912) 1,514 3,968
Income Taxes............ (500) (500) (500) (500) (500) (500)
Equity in Partnership
Earnings............... 442 791 798 799 857 908
MLP Distributions....... (4,366) (2,739) (2,941) (3,220) (3,527) (3,861)
-------- -------- -------- -------- -------- --------
Net Income(2)........... $(15,463) $(10,788) $ (8,108) $ (3,833) $ (1,656) $ 515
======== ======== ======== ======== ======== ========
OTHER INFORMATION
Maintenance Capital
Expenditures........... $ 2,776 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000
Net Debt and Preferred
Stock(3)............... 290,086 288,620 281,921 274,669 268,992 264,360
</TABLE>
- --------
(1) MLP distributions in 1998 represent actual distributions received on the
Units and General Partner interest owned by Petro; MLP distributions in
1999-2003 represent expected distributions based on the Partnership's
Available Cash, which may be less than the full Minimum Quarterly
Distribution.
(2) Net Income includes Equity in Partnership Earnings but excludes MLP
distributions.
(3) Reflects total debt less net working capital plus preferred stock.
121
<PAGE>
Partnership Projections on a Stand Alone Basis
In order to develop projections for the fiscal years ending September 30,
1999-2003, the Partnership first began with formulating a revised 1998 budget
(the "Normalized 1998 Budget"). The Normalized 1998 Budget made certain
adjustments to revenues and expenses based on the expected increase in volumes
which would be associated with a "normal" winter as well as acquisitions
completed during fiscal 1998. For these purposes, the Partnership ran two cases
assuming that "normal" weather ("Weather Normalization") was based on either
(a) the historical average temperature of the relevant measurement statistics
over the 15-year period from 1983 through 1997 derived from information
published by the NOAA (the "15-Year Case") or (b) the historical average
temperature of the relevant measurement statistics as published by the NOAA
over the 30-year period from 1961 through 1990 (the "30-Year Case").
The Projections for the fiscal year ending September 30, 1999 through 2003
include the following additional assumptions: (a) $10.0 million of acquisitions
are made annually, (b) the acquisitions are made at a purchase price of 6.5x
the first year EBITDA of the acquired assets, (c) additional debt is incurred
at an annual interest rate of 7.25%, (d) acquisitions are financed with debt
and equity such that a pro forma debt to EBITDA ratio of 4.5x is maintained,
(e) Common Units are issued at $22.00 per Unit and (f) maintenance capital
expenditures on the acquired assets are assumed to be approximately 2.2 cents
per retail gallon sold.
PARTNERSHIP PROJECTIONS ON A STAND ALONE BASIS--30-YEAR CASE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION
EBITDA.................. $ 23,722 $ 24,491 $ 26,029 $ 27,566 $ 29,104 $ 30,642
Depreciation and
Amortization........... 12,079 12,358 13,346 14,224 14,938 15,662
-------- -------- -------- -------- -------- --------
EBIT.................... 11,643 12,133 12,683 13,342 14,166 14,980
Interest Expenses....... (8,498) (8,811) (9,377) (9,878) (10,380) (10,882)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... 3,145 3,322 3,306 3,464 3,786 4,098
Income Taxes............ (25) (25) (25) (25) (25) (25)
-------- -------- -------- -------- -------- --------
Net Income.............. $ 3,120 $ 3,297 $ 3,281 $ 3,439 $ 3,761 $ 4,073
======== ======== ======== ======== ======== ========
OTHER INFORMATION
Maintenance Capital
Expenditures........... $ 2,610 $ 2,632 $ 2,679 $ 2,728 $ 2,777 $ 2,827
Total Long Term Debt.... $105,000 $113,668 $120,587 $127,506 $134,425 $141,346
AVERAGE UNITS OUTSTAND-
ING
Common Units............ 3,859 3,925 4,083 4,253 4,395 4,505
Subordinated Units...... 2,396 2,396 2,396 2,396 2,396 2,396
Implied General Partner
Units.................. 128 129 132 136 139 141
-------- -------- -------- -------- -------- --------
Total Units............. 6,383 6,450 6,611 6,785 6,930 7,042
======== ======== ======== ======== ======== ========
</TABLE>
122
<PAGE>
PARTNERSHIP PROJECTIONS ON A STAND ALONE BASIS--15-YEAR CASE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION
EBITDA.................. $ 22,316 $ 23,032 $ 24,465 $ 25,898 $ 27,331 $ 28,764
Depreciation and
Amortization........... 12,079 12,358 13,343 14,217 14,927 15,647
-------- -------- -------- -------- -------- --------
EBIT.................... 10,237 10,674 11,122 11,681 12,404 13,117
Interest Expenses....... (8,498) (8,574) (8,883) (9,351) (9,818) (10,286)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... 1,739 2,100 2,239 2,330 2,586 2,831
Income Taxes............ (25) (25) (25) (25) (25) (25)
-------- -------- -------- -------- -------- --------
Net Income.............. $ 1,714 $ 2,075 $ 2,214 $ 2,305 $ 2,561 $ 2,806
======== ======== ======== ======== ======== ========
OTHER INFORMATION
Maintenance Capital
Expenditures........... $ 2,610 $ 2,657 $ 2,705 $ 2,753 $ 2,803 $ 2,853
Total Long Term Debt.... $105,000 $107,104 $113,548 $119,994 $126,443 $132,891
AVERAGE UNITS OUTSTAND-
ING
Common Units............ 3,859 4,108 4,505 4,795 5,072 5,336
Subordinated Units...... 2,396 2,396 2,396 2,396 2,396 2,396
Implied General Partner
Units.................. 128 133 141 147 152 158
-------- -------- -------- -------- -------- --------
Total Units............. 6,383 6,637 7,042 7,338 7,620 7,890
======== ======== ======== ======== ======== ========
</TABLE>
Star Gas Projections Pro Forma for the Transaction
The Partnership ran two cases of projections pro forma for the Transaction.
The first case assumes that volumes reflect Weather Normalization based on the
historical average temperature of the relevant measurement statistics over the
15-year period from 1983 through 1997 derived from information published by the
NOAA (the "15-Year Case"). The second case reflects Weather Normalization based
on the historical average temperature of the relevant measurement statistics as
published by the NOAA over the 30-year period from 1961 through 1997 (the "30-
Year Case").
The pro forma Projections for the fiscal years ended September 30, 1998
through 2003 include the following additional assumptions: (a) the specific
terms of the merger as set forth in "The Transaction" included herein, (b) $120
million of new debt issued at 8.50%, (c) the redemption of $206.3 million in
senior and subordinated notes, the redemption of $34.2 million in Preferred
Stock, and the restructuring of $66.2 million of senior and subordinated notes,
(d) issuance of approximately $140.0 million of new Common Units at $22.00 per
Common Unit, (e) acquisitions are financed with debt and equity such that a
debt to EBITDA ratio of up to 4.5x is maintained at all times, (f) Common Units
are issued at annualized yields of 9.5% in 1999 and at 9.0% in 2000 and
thereafter, (g) base and projected EBITDA, maintenance capital expenditures,
acquisition and operating assumptions for both Petro and the Partnership are
the same as previously defined in "Petro Projections on a Stand-Alone Basis"
and "Partnership Projections on a Stand-Alone Basis", (h) annual operating
synergies associated with the Transaction of $500,000 and (i) transaction
expenses net of underwriting discounts and commissions of approximately $8.8
million.
123
<PAGE>
The pro forma Projections include the following assumptions regarding Petro's
ability to make acquisitions: (a) $30.0 million of acquisitions are made
annually under the 30-Year Case, and $25.0 million of acquisitions are made
annually under the 15-Year Case, (b) acquisitions are made at a purchase price
of 4.6x the first year EBITDA of the acquired assets, (c) customer attrition
associated with acquisitions is 16.2% in year 1, 12.6% in year 2, 6.8% in year
3, and 6.1% in year 4 and thereafter.
PARTNERSHIP PROJECTIONS
PRO FORMA FOR TRANSACTION--30-YEAR CASE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING SEPTEMBER 30,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INCOME
Propane EBITDA.......... $ 23,722 $ 24,491 $ 26,029 $ 27,566 $ 29,104 $ 30,642
Heating Oil EBITDA...... 46,900 48,881 53,535 57,814 61,900 65,791
Synergistic Savings..... 500 500 500 500 500 500
-------- -------- -------- -------- -------- --------
Pro Forma Combined
EBITDA................. 71,122 73,872 80,064 85,880 91,504 96,933
Depreciation and Amorti-
zation................. 36,097 37,922 41,537 45,047 48,398 51,764
-------- -------- -------- -------- -------- --------
EBIT.................... 35,025 35,950 38,527 40,833 43,106 45,169
Interest Expense........ (27,461) (28,699) (31,028) (33,172) (35,039) (36,842)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... 7,564 7,252 7,499 7,660 8,067 8,327
Income Taxes............ (525) (525) (625) (675) (725) (775)
-------- -------- -------- -------- -------- --------
Net Income.............. $ 7,039 $ 6,727 $ 6,874 $ 6,985 $ 7,342 $ 7,552
======== ======== ======== ======== ======== ========
OTHER INFORMATION
Maintenance Capital
Expenditures........... $ 6,110 $ 6,273 $ 6,393 $ 6,516 $ 6,641 $ 6,768
Total Long Term Debt.... $309,154 $342,861 $375,290 $401,458 $426,768 $451,199
AVERAGE UNITS
OUTSTANDING
Common Units............ 10,326 10,326 10,351 10,523 10,847 11,195
Senior Subordinated
Units.................. 2,767 2,767 3,070 3,373 3,676 3,676
Junior Subordinated
Units.................. 577 577 577 577 577 577
General Partner Units... 279 279 279 279 279 279
-------- -------- -------- -------- -------- --------
Total Units............. 13,949 13,949 14,277 14,752 15,379 15,727
======== ======== ======== ======== ======== ========
</TABLE>
124
<PAGE>
PARTNERSHIP PROJECTIONS
PRO FORMA FOR TRANSACTION--15-YEAR CASE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDING SEPTEMBER 30,
----------------------------------------------------------
1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INCOME
Propane EBITDA.......... $ 22,316 $ 23,032 $ 24,465 $ 25,898 $ 27,331 $ 28,764
Heating Oil EBITDA...... 44,749 46,094 49,605 52,823 55,897 58,821
Synergistic Savings..... 500 500 500 500 500 500
-------- -------- -------- -------- -------- --------
Pro Forma Combined
EBITDA................. 67,565 69,626 74,570 79,221 83,728 88,085
Depreciation and Amorti-
zation................. 36,097 37,723 40,938 44,047 46,997 49,962
-------- -------- -------- -------- -------- --------
EBIT.................... 31,468 31,903 33,632 35,174 36,731 38,123
Interest Expense........ (27,595) (28,068) (29,398) (30,984) (32,478) (33,924)
-------- -------- -------- -------- -------- --------
Pre-Tax Income.......... 3,873 3,834 4,234 4,191 4,253 4,198
Income Taxes............ (525) (525) (525) (525) (525) (525)
-------- -------- -------- -------- -------- --------
Net Income.............. $ 3,348 $ 3,309 $ 3,709 $ 3,666 $ 3,728 $ 3,673
======== ======== ======== ======== ======== ========
OTHER INFORMATION
Maintenance Capital Ex-
penditures............. $ 6,110 $ 6,298 $ 6,419 $ 6,541 $ 6,667 $ 6,794
Total Long Term Debt.... $309,154 $325,470 $347,719 $368,650 $388,931 $408,537
AVERAGE UNITS
OUTSTANDING
Common Units............ 10,326 10,673 11,225 11,635 12,063 12,507
Senior Subordinated
Units.................. 2,767 2,767 3,070 3,373 3,676 3,676
Junior Subordinated
Units.................. 577 577 577 577 577 577
General Partner Units... 279 279 279 279 279 279
-------- -------- -------- -------- -------- --------
Total Units............. 13,949 14,296 15,151 15,864 16,595 17,039
======== ======== ======== ======== ======== ========
</TABLE>
DESCRIPTION OF THE MERGER AGREEMENT
The description of the Merger Agreement set forth below is qualified by
reference to the Merger Agreement itself, which is attached for your review as
Annex A. Under the terms of the Merger Agreement, Mergeco will be merged with
and into Petro, with Petro surviving as an indirect wholly-owned subsidiary of
the Partnership.
THE EFFECTIVE TIME; CLOSING
The Closing of the Merger shall occur after the day on which the last of the
conditions to the Merger have been satisfied or waived (see "--Conditions to
Consummation of the Merger" and "--Amendment, Waiver, Termination and
Expenses") but in no event prior to February 15, 1999. The Merger shall become
effective following the filing of (i) the Certificate of Merger with the
Delaware Secretary of State and (ii) the Articles of Merger with the Minnesota
Department of State (the "Effective Time").
MERGER CONSIDERATION
In the Merger:
(i) Each share of outstanding Common Stock held by a Public Common Holder
immediately prior to the Effective Time shall be converted into the right
to receive .13064 Senior Subordinated Units.
125
<PAGE>
(ii) Each share of outstanding Junior Preferred Stock shall be converted
into the right to receive .13064 Common Units.
(iii) Each share of outstanding Public Preferred Stock shall be converted
into the right to receive $23 in cash plus accrued and unpaid dividends.
(iv) Class B Shares shall remain unchanged.
(v) Treasury Shares and shares held by Mergeco shall be cancelled for no
consideration.
NO FRACTIONAL UNITS
No fractional Senior Subordinated Units or Common Units are to be issued in
the Merger. In lieu thereof, (a) each former holder of Common Stock who would
otherwise be entitled to receive a fractional Senior Subordinated Unit will
receive an amount in cash, without interest, equal to the product (calculated
to the nearest cent) obtained by multiplying such fraction by the closing price
of the Senior Subordinated Units on the first day of trading thereof on the New
York Stock Exchange, as reported in an authoritative source, and (b) each
former holder of Junior Preferred Stock will receive an amount in cash, without
interest, equal to the product (calculated to the nearest cent) obtained by
multiplying such fraction by the average of the daily last sales prices of
Common Units on the New York Stock Exchange, as reported in an authoritative
source, for the five consecutive trading days ending on the second trading day
preceding the Closing Date. No former holder is entitled to distributions or
interest on, or other rights in respect of, any such fraction. Although it is
not possible to quantify the aggregate amount to be paid with respect to
fractional Units, the total amount is estimated to be less than $ .
EXCHANGE OF PETRO STOCK CERTIFICATES FOR PARTNERSHIP UNITS OR CASH
At or prior to the Effective Time, the Partnership will deposit, or cause to
be deposited, with American Stock Transfer & Trust Company (the "Exchange
Agent"), for the benefit of the holders of certificates formerly representing
shares of Common Stock, Junior Preferred Stock and Public Preferred Stock ("Old
Certificates"), (a) in respect of holders of Common Stock and Junior Preferred
Stock, certificates representing Senior Subordinated Units and Common Units
("New Certificates") and an estimated amount of cash payable with respect to
fractional Senior Subordinated Units and Common Units and (b) the amount of
cash necessary to be distributed to the holders of certificates formerly
representing Public Preferred Stock.
For holders of Common Stock and Junior Preferred Stock: Promptly after the
Effective Time, the Exchange Agent will mail transmittal materials to each
holder of record of Common Stock and Junior Preferred Stock outstanding
immediately prior to the Effective Time (other than Petro, Mergeco or
dissenting Common Stockholders) for use by such Common Stockholder in
exchanging Old Certificates for New Certificates. Upon submission to the
Exchange Agent of Old Certificates from a former holder of Common Stock or
Junior Preferred Stock, together with executed transmittal materials and any
other items specified by the letter of transmittal, the Exchange Agent will
deliver to such former holder New Certificates representing Senior Subordinated
Units or Common Units, as appropriate, together with a check for payment of
cash in lieu of any fractional Senior Subordinated Units or Common Units.
126
<PAGE>
NOTE: COMMON STOCKHOLDERS SHOULD NOT SEND IN THEIR OLD CERTIFICATES UNTIL
THEY RECEIVE TRANSMITTAL MATERIALS FROM THE EXCHANGE AGENT.
For holders of Public Preferred Stock: Promptly after the Effective Time, the
Exchange Agent will mail transmittal materials to each holder of Public
Preferred Stock. Upon submission to the Exchange Agent of Old Certificates from
a former holder of Public Preferred Stock, together with executed transmittal
materials and any other items specified by the letter of transmittal, the
Exchange Agent will deliver a check for the aggregate amount payable to such
former holder of Public Preferred Stock. The Exchange Agent may impose
reasonable and customary terms and conditions upon the acceptance of Old
Certificates in order to effect an orderly exchange.
Notwithstanding the foregoing, neither the Exchange Agent nor the
Partnership, Mergeco or Petro shall be liable to any former Common Stockholder
for any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
Holders of record of Common Stock and Junior Preferred Stock immediately
prior to the Effective Time will thereafter be entitled, subject to compliance
with the certificate exchange procedures, including submission of an executed
Transfer Application, to receive distributions from the Partnership in respect
of the number of Senior Subordinated Units or Common Units, as the case may be,
into which their shares of Common Stock or Junior Preferred Stock have been
converted.
COVENANTS OF THE PARTNERSHIP AND PETRO
Article IV of the Merger Agreement sets forth covenants of Petro and the
Partnership, in effect until the Effective Time or until the Merger Agreement
is terminated.
Petro and the Partnership are required to conduct their business in the
ordinary course consistent with past practice, to use reasonable best efforts
to preserve their business organizations intact and to maintain their rights,
franchises, goodwill and assets, keep available the services of their
employees, and preserve their relationships with customers, suppliers and
others.
Certain Negative Covenants of Petro and the Partnership. Petro and the
Partnership have agreed that, unless the prior written consent of the other
party is obtained (which consent will not be unreasonably withheld or delayed)
and except as expressly contemplated by the Merger Agreement, Petro and the
Partnership will not, and will not permit their respective subsidiaries to:
(i) Capital Stock. In the case of Petro, issue, sell or otherwise permit
to become outstanding, or authorize the creation of, any additional shares
of stock, or securities convertible into or exchangeable for shares of
stock, or any rights to subscribe for or acquire any shares of stock, or
enter into any agreement with respect to the foregoing, or permit any
additional shares of stock to become subject to new grants of employee
stock options, stock appreciation rights or similar stock-based employee
rights, except pursuant to the exercise of stock options disclosed in the
Merger Agreement or pursuant to the Petro dividend reinvestment program;
(ii) Dividends, distributions. Make, declare or pay any dividends on any
of its equity securities (except for regular quarterly dividends on Public
Preferred Stock and Private Preferred Stock and regular quarterly
distributions of Available Cash on Common Units, Subordinated
127
<PAGE>
Units and the general partner interest of the Partnership), split, combine
or reclassify any capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of, or in
substitution for shares of capital stock, or repurchase, redeem or
otherwise acquire any shares of capital stock, except as required by the
terms of its securities outstanding on the date of the Merger Agreement or
as contemplated by an existing employee benefit plan;
(iii) Compensation, Employment Agreements. Enter into or amend any
written employment, severance or similar agreements or arrangements with
any of its directors, officers or employees, or grant any salary or wage
increase or increase any employee benefit (including incentive or bonus
payments), except for (a) normal increases in compensation to employees
(other than officers and directors) or (b) such other changes as are
provided for in the Merger Agreement, as may be required by law or to
satisfy contractual obligations existing as of the date of the Merger
Agreement or (c) additional grants or awards to newly hired employees
consistent with past practice;
(iv) Benefit Plans. In the case of Petro, enter into or amend any
pension, retirement, stock option, stock purchase, savings, profit sharing,
deferred compensation, consulting, bonus, group insurance or other employee
benefit, incentive or welfare contract, plan or arrangement, or any trust
agreement related thereto, in respect of any directors, officers or other
employees, including, without limitation, taking any action that
accelerates the vesting or exercise of any benefits payable thereunder;
(v) Acquisitions and Dispositions. In the case of Petro, sell, lease,
dispose of, or discontinue, any portion of its assets, business or
properties material to it and its subsidiaries, or acquire or lease (other
than by way of foreclosure or acquisition of control in a bona fide
fiduciary capacity or in satisfaction of debts previously contracted in
good faith, in each case in the ordinary course of business consistent with
past practice) any assets or all or any portion of the business or property
of any other entity that, in either case, would be likely to have a
material adverse effect on the ability of the parties to the Merger
Agreement to consummate the Merger or that would materially delay the
Effective Time;
(vi) Amendments. In the case of Petro, amend its Articles of
Incorporation or By-laws;
(vii) Accounting Methods. Implement or adopt any changes in accounting
principles, practices or methods, other than as may be required by law or
by generally accepted accounting principles;
(viii) Insurance. Fail to use reasonable best efforts to maintain, with
financially responsible insurance companies, insurance in such amounts and
against such risks and losses as has been customarily maintained by it in
the past;
(ix) Notification. Fail to promptly notify the other party of any
material change in its condition (financial or otherwise) or business, any
material litigation, governmental proceedings or the breach in a material
respect of any of its representations or warranties contained in the Merger
Agreement;
(x) Taxes. Make or rescind any material express or deemed election
relating to taxes, unless it is not reasonable to expect that such action
will not materially adversely affect it; settle or compromise any material
tax claim, litigation, proceeding investigation or audit, except where
128
<PAGE>
such settlement or compromise will not materially adversely affect it; or
change in any material respect any of its methods of reporting income or
deductions for federal income tax purposes from those employed in the
preparation of its federal income tax return for the most recent taxable
year for which a return has been filed, except as may be required by
applicable law or except for changes that it is not reasonable to expect
will materially adversely affect it;
(xi) Debt, Capital Expenditures. In the case of Petro, except for its
obligation to use reasonable best efforts to accomplish the Refinancing
Conditions (as defined), (a) incur any indebtedness for borrowed money
(except for working capital under existing credit facilities) or guarantee
any such indebtedness of others, (b) enter into any material lease (whether
operating or capital), (c) create any material mortgages, liens, security
interests or other encumbrances on its property in connection with any pre-
existing indebtedness, new indebtedness or lease, or (d) make or commit to
make aggregate capital expenditures in excess of $2.0 million over Petro's
fiscal 1998 capital expenditure budget;
(xii) No Dissolution. Authorize, recommend, propose or announce its
intention to adopt a plan of complete or partial liquidation or
dissolution;
(xiii) Adverse Actions. Knowingly take any action that is intended or is
reasonably likely to result in (a) any representations and warranties set
forth in the Merger Agreement being or becoming untrue in any material
respect at any time prior to the Closing, (b) any of the conditions to the
consummation of the Merger set forth in the Merger Agreement not being
satisfied, or (c) a material violation of any provision of the Merger
Agreement, except, in each case, as may be required by applicable law;
(xiv) Agreements. Agree or commit to do anything prohibited by the
covenants in the Merger Agreement.
REPRESENTATIONS AND WARRANTIES
Article V of the Merger Agreement sets forth representations and warranties
of the parties, which will terminate immediately after the Effective Time.
Pursuant to Section 5.2, with certain exceptions, no representation or warranty
of Petro or the Partnership shall be deemed untrue or incorrect, and no party
shall be deemed to have committed a breach of representation or warranty, as a
consequence of the existence of any fact, circumstance or event, unless such
fact, circumstance or event, individually or taken together with all other
facts, circumstances or events has had or is reasonably expected to have a
Material Adverse Effect (as defined).
Petro and the Partnership have made certain representations and warranties as
to themselves and their subsidiaries with respect to, among other things: (i)
corporate organization or partnership formation, existence, qualifications to
do business, permits and authorizations; (ii) capitalization;
(iii) subsidiaries and other equity interests; (iv) corporate or partnership
power and authority to own its assets, conduct its business and to execute,
deliver and perform its obligations under the Merger Agreement; (v) authority
of the equityholders to agree to the Merger Agreement, binding nature of the
Merger Agreement, and authorization of the Merger Agreement by all necessary
corporate action (other than by action of Common Stockholders and Common
Unitholders, not yet voted upon); (vi) that execution of the Merger Agreement
will not constitute a default under any agreement or
129
<PAGE>
judgment; (vii) financial statements and related filings with the Securities
Exchange Commission; (viii) absence of undisclosed litigation, claims,
proceedings, judgments, orders and decrees;(ix) compliance with applicable
laws; (x) absence of undisclosed contracts and defaults under contracts;
(xi) absence of undisclosed brokerage or finders' fee claims in connection with
the Merger Agreement; (xii) employee compensation and benefit plans and related
matters; (xiii) labor matters; (xiv) absence of violations or liabilities under
environmental laws; (xv) filing of material tax returns and the payment or
provision for payment of all taxes shown to be due on such returns; (xvi)
absence of any necessary regulatory approvals as to the Merger, other than
pursuant to the HSRA; (xvii) the conduct of business, and the absence of
certain materially adverse changes, since December 31, 1997 in the case of
Petro, and since September 30, 1997 in the case of the Partnership; (xviii)
certain insurance matters; and (xix) the condition and sufficiency of certain
tangible assets; and (xx) the ownership and adequacy of certain intellectual
property rights.
Indemnification of Officers and Directors.
The Merger Agreement provides that if an actual or threatened claim, suit,
proceeding or investigation in which any person who is, has been at any time
prior to the date of the Merger Agreement, or who becomes prior to the Closing
under the Merger Agreement, a director, officer or employee of Petro or any of
its subsidiaries, including directors of Star Gas (each an "Indemnified
Party"), is, or is threatened to be, made a party, based wholly or partially on
(i) the fact that he/she is or was a director, officer or employee of Petro or
any of its subsidiaries or was prior to the Closing serving at the request of
any such party as a director, officer, employee, fiduciary or agent of another
entity or enterprise, or (ii) the Merger Agreement or any of the transactions
contemplated thereby and all actions taken by an Indemnified Party in
connection therewith, whether, in any case, asserted or arising before or after
the Closing (each, a "Claim"), the Indemnified Party will cooperate and use his
or her best efforts to defend against and respond to any such Claim. In
addition, the Partnership has agreed that following the Closing, it will
indemnify and hold harmless each Indemnified Party against losses, damages,
liabilities, judgments, fines and amounts paid in settlement of any Claim and
expenses (including reasonable attorneys' fees and expenses to be paid to each
Indemnified Party in advance of the final disposition of a Claim) upon receipt
of an undertaking from such Indemnified Party to repay advanced expenses if it
is finally determined that such Indemnified Party was not entitled to such
indemnification. The Partnership's indemnification obligation continues in
effect for a period of six years from the Closing; provided that all rights to
indemnification in respect of a Claim asserted or made within such six year
period continue until the final disposition of such Claim.
The Partnership has also agreed that all rights to indemnification and all
limitations of liability existing in favor of an Indemnified Party under the
articles of incorporation or by-laws of Petro and its subsidiaries, as in
effect on the date of the Merger Agreement, as to matters occurring on or prior
to the Closing, will survive the Merger and will continue in effect for a
period of six years from the Closing; provided that all rights to
indemnification in respect of any Claim asserted or made within such period
continue until the final disposition of the Claim.
The Partnership has agreed to use its best efforts to cause persons serving
as officers and directors of Petro and the General Partner immediately prior to
the Closing to be covered for a period of six years from the Closing by the
directors' and officers' liability insurance policy maintained by Petro with
respect to acts or omissions of such officers and directors in their capacity
as such,
130
<PAGE>
occurring prior to the Closing, provided that the Partnership will not be
required to pay premiums in excess of last annual premium paid by Petro prior
to the date of the Merger Agreement, but, in such case, will buy as much
coverage as is reasonably practicable for such amount.
CONDITIONS TO CONSUMMATION OF THE MERGER
Conditions to Each Party's Obligations. Article VII of the Merger Agreement
provides that the obligation of each of Petro and the Partnership to consummate
the Merger is conditioned upon the accuracy of the other party's
representations and warranties and the compliance of the other party with its
covenants and the satisfaction at or prior to the Closing of, among other
things, the following conditions:
(i) Unitholder and Stockholder Vote. Approvals of the Acquisition
Proposal by the requisite vote of the Common Stockholders and the Star
Proposals by the requisite vote of the Common Unitholders;
(ii) Governmental Approvals. Any waiting period under the HSRA shall have
expired or terminated and all other filings required to be made prior to
the Effective Time with, and all other approvals required to be obtained
prior to the Effective Time from, any governmental authority in connection
with the execution and delivery of the Merger Agreement shall have been
made or obtained, except where the failure to obtain any such approvals
would not be reasonably likely to result in a Material Adverse Effect (as
defined) on the Partnership or Petro or on the ability of the Partnership
or Petro to consummate the transactions contemplated by the Merger
Agreement;
(iii) No Injunction. No order, decree or injunction of any court or
agency of competent jurisdiction shall be in effect, no law or regulation
shall have been enacted or adopted which prohibits, enjoins or makes
illegal the consummation of any of the transactions contemplated by the
Merger Agreement, and no action, proceeding or investigation by any
governmental authority with respect to the Merger shall be pending that
seeks to enjoin or delay consummation of the Merger or to impose any
material restrictions or requirements thereon or on the Partnership or
Petro with respect thereto; provided, however, that prior to invoking this
condition, each party shall have complied fully with its obligations under
the Merger Agreement relating to defending any litigation seeking to enjoin
the Merger;
(iv) Effective Merger Registration Statement. The registration statement
pertaining to the Merger shall have become effective and no stop order and
no proceedings for that purpose shall have been initiated or threatened by
the Securities Exchange Commission or any other governmental authority;
(v) Legal Opinions. The Partnership and Petro will have received (a) an
opinion, as to certain limited partnership and tax matters, from Andrews &
Kurth L.L.P., special counsel to the Partnership, and (b) an opinion, as to
certain corporate matters, from Phillips Nizer Benjamin Krim & Ballon LLP,
counsel to Petro;
(vi) NYSE Listing. The Senior Subordinated Units and the Common Units
issuable in the Merger shall have been approved for listing on the New York
Stock Exchange, subject to official notice of issuance;
131
<PAGE>
(vii) Fairness Opinion. In the case of the Partnership, the A.G. Edwards
Opinion shall not have been withdrawn, and in the case of Petro, the Dain
Rauscher Wessels Opinion shall not have been withdrawn;
(viii) Public Offerings. The Equity Offering and the Debt Offering shall
have been consummated, with a Cost of Capital (as defined in the Merger
Agreement) not to exceed $27.5 million on an annual basis, the Special
Committee shall not have reasonably objected to the restrictive covenants
pertaining to the Petro Holdings Senior Subordinated Debt, and the net
proceeds shall be applied to reduce indebtedness;
(ix) Refinancing Conditions. Certain conditions with respect to
refinancing of debt, cash balances and working capital shall have been met;
(x) Dissenters' Rights. The number of shares of Common Stock held by
dissenting Common Stockholders shall not exceed 10% of the number of shares
of Common Stock outstanding immediately prior to the Effective Time;
(xi) Working Capital Loan. Petro shall have entered into a working
capital credit facility of not less than $30 million on terms reasonably
satisfactory to the Special Committee;
(xii) Custody Agreement. All of the members of the Tax Free Group shall
have executed a custody agreement (with respect to their shares of Common
Stock) on or prior to December 31, 1998.
AMENDMENT, WAIVER, TERMINATION AND EXPENSES
Amendment and Waiver. The Merger Agreement provides that prior to the
Closing, any provision of the Merger Agreement may be (i) waived by the party
benefitted by that provision or (ii) modified or amended at any time by a
written agreement of Petro and the Partnership if approved by the Petro Board
and the Special Committee. The Merger Agreement also provides that prior to
submission of the Merger Agreement for approval at the Special Meeting, the
Partnership may change the method of effecting the combination of Petro with
the Partnership, and Petro has agreed that the Petro Board will approve any
amendments to the Merger Agreement resulting from any such action by the
Partnership, provided that no such change (x) alters or changes the amount or
kind of consideration to be issued to Common Stockholders as provided for in
the Merger Agreement (the "Merger Consideration"), or (y) alters the tax
treatment of Common Stockholders as a result of receiving the Merger
Consideration beyond that which was originally contemplated by the Merger
Agreement, or (z) materially impedes or delays consummation of the Merger.
Termination. The Merger Agreement may be terminated, and the Merger
abandoned, at any time prior to the Effective Time, whether prior to or after
approval of the Merger by the Common Unitholders or the Common Stockholders:
(a) by the mutual consent of Petro and the Partnership, if the Petro
Board and the Special Committee so determine;
(b) by the Partnership, if the Special Committee so determines, or by
Petro, if the Petro Board so determines, in the event of a material breach
by the other party of any representation,
132
<PAGE>
warranty or covenant contained in the Merger Agreement that is not cured or
curable in the prescribed time;
(c) by the Partnership, if the Special Committee so determines, or the
Petro Board, if the Petro Board so determines, in the event (i) the
approval under the HSRA required for consummation of the Merger shall have
been denied by final action of any governmental authority or a court or
other governmental authority shall have issued a final order enjoining or
otherwise prohibiting the consummation of the Merger, provided that the
terminating party shall have observed and performed its covenants contained
in the Merger Agreement; or (ii) Common Stockholders fail to approve the
Acquisition Proposal at the Special Meeting or the Common Unitholders fail
to approve the Star Proposals at the Unitholders Meeting; or
(d) by the Partnership, if the Petro Board has, or by Petro, if the Star
Gas Board has, withdrawn, modified or changed in a manner adverse to the
terminating party its approval or recommendation of the Merger Agreement
and the transactions contemplated thereby.
Furthermore, the Merger Agreement shall be terminated if the Merger shall not
have been consummated on or prior to April 1, 1999 unless the Special Committee
and Petro elect to extend such termination date.
In the event of termination of the Merger Agreement and the abandonment of
the Merger pursuant to the foregoing provisions, neither Petro nor the
Partnership will have any liability or further obligation to any other party
under the Merger Agreement, except that termination will not relieve a
breaching party from liability for any wilful breach of the Merger Agreement
giving rise to such termination.
Expenses. Petro will bear all expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby.
RESTRICTIONS ON RESALES BY AFFILIATES
The Common Units and Senior Subordinated Units issuable to Common
Stockholders upon consummation of the Transaction have been registered under
the Securities Act and may be traded freely without restriction on those Common
Stockholders who are not deemed to be "affiliates" (as defined in the rules
promulgated under the Securities Act) of the Partnership or Petro.
Common Units and Senior Subordinated Units received by those Common
Stockholders who are deemed to be affiliates of the Partnership or Petro at the
time of the Meetings may be resold without registration under the Securities
Act only as permitted by Rule 145 under the Securities Act or as otherwise
permitted thereunder. Common Units and Senior Subordinated Units received by
persons who are deemed to be "affiliates" of the Partnership may be sold by
them only in transactions permitted under the provisions of Rule 144 under the
Securities Act, or as otherwise permitted under the Securities Act.
SELLING UNITHOLDERS
The Registration Statement of which this Proxy Statement forms a part also
covers the reoffering and resale (collectively, the "Offering") by the
following persons (the "Selling
133
<PAGE>
Unitholders") who may be deemed to be "affiliates" of Petro within the meaning
of Rule 145 of the following Senior Subordinated Units (the "Resale Units") to
be received by the Selling Unitholders in connection with the Transaction. The
Partnership will not receive any proceeds from the sale of the Resale Units by
the Selling Unitholders.
<TABLE>
<CAPTION>
NUMBER OF SENIOR MAXIMUM NUMBER NUMBER OF SENIOR
SUBORDINATED UNITS OF SENIOR SUBORDINATED UNITS
OWNED BEFORE SUBORDINATED UNITS TO TO BE OWNED AFTER
SELLING UNITHOLDER THE OFFERING BE SOLD IN THE OFFERING THE OFFERING
------------------ ------------------ ----------------------- ------------------
<S> <C> <C> <C>
Phillip Cohen........... 103,556 103,556 --
Thomas Edelman.......... 102,203 102,203 --
Richard O'Connell....... 186,972 186,972 --
Brentwood Corp. ........ 104,885 104,885 --
Gabes S.A. ............. 94,313 94,313 --
Minneford Corp. ........ 11,188 11,188 --
Fernando Montero........ 4,610 4,610 --
M.M. Warburg & Co. ..... 4,155 4,155 --
Barcel Corp. ........... 98,814 98,814 --
Hubertus Langen......... 96,740 96,740 --
Tortosa GmbH............ 39,024 39,024 --
Paul Biddelman.......... 311 311 --
United Capital Corp. ... 11,758 11,758 --
</TABLE>
- --------
(1) Assumes all Senior Subordinated Units offered herewith are sold by each
Selling Unitholder.
PLAN OF DISTRIBUTION
The Selling Unitholders may from time to time sell all or a portion of their
Resale Units in transactions on the NYSE, in the over-the-counter market, in
negotiated transactions, pursuant to Rule 144 or otherwise, at prices then
prevailing or related to the then current market price or at negotiated prices.
The Resale Units may be sold directly or through brokers or dealers or in a
distribution by one or more underwriters on a firm commitment or best efforts
basis. The methods by which the Resale Units may be sold include (i) a block
trade (which may involve crosses) in which the broker dealer or dealer engaged
will attempt to sell the Resale Units as agent but may position and resell a
portion of the block as principal to facilitate the transaction, (ii) purchases
by a broker or dealer as principal and resales by such broker dealer for its
account pursuant to this Proxy Statement, (iii) ordinary brokerage transactions
and transactions in which the broker solicits purchasers or to or through
marketmakers, (iv) transactions in put or call options or other rights (whether
exchange-listed or otherwise) established after the effectiveness of the
Registration Statement of which this Proxy Statement is a part and (v)
privately negotiated transactions. In addition, any of the Resale Units that
qualify for sale pursuant to Rule 145 under the Securities Act may be sold in
transactions complying with such Rule, rather than pursuant to this Proxy
Statement.
In the case of the sale of the Resale Units effected to or through broker-
dealers, such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Unitholders or the purchasers of
the Resale Units sold by or through such broker-dealers, or both. The
Partnership is not aware as of the date of this Proxy Statement of any
agreements between any of the Selling Unitholders and any broker-dealers with
respect to the sale of the Resale Units. The Selling Unitholders and any
broker-dealers or agents participating in the distribution of the
134
<PAGE>
Resale Units may be deemed to be "underwriters" within the meaning of the
Securities Act and any commissions received by any such broker-dealers or
agents and profits on any resale of the Resale Units may be deemed to be
underwriting commissions under the Securities Act. The commissions received by
a broker-dealer or agent may be in excess of customary compensation. The
Partnership will receive no part of the proceeds from the sale of any of the
shares of the Resale Units by the Selling Unitholders.
The Partnership will pay all costs and expenses incurred in connection with
the registration under the Securities Act of the Resale Units offered by the
Selling Unitholders, including without limitation all registration and filing
fees, listing fees, printing expenses, fees and disbursements of counsel and
accountants for the Partnership. Each Selling Unitholder will pay all brokerage
fees and commissions, if any, incurred in connection with the sale of the
Resale Units owned by him. In addition, the Partnership has agreed to indemnify
the Selling Unitholders against certain liabilities, including liabilities
under the Securities Act.
ACCOUNTING TREATMENT
The parties anticipate that the Transaction will be accounted for as a
purchase for accounting purposes. See "Selected Unaudited Combined Pro Forma
Financial Information."
REGULATORY MATTERS
Other than (a) the filing of notice of the proposed Transaction with the
United States Department of Justice and the Federal Trade Commission under the
HSRA, and the lapse of the relevant waiting period prescribed thereunder; (b)
registration under the Securities Act of the Senior Subordinated Units and the
Common Units to be issued in the Transaction and the Common Units to be offered
in the Equity Offering; (c) certain notifications required to be given by Petro
to state and county authorities pursuant to provisions of certain licenses and
permits, and (d) certain tax filings, no filing with, or approval of any
federal or state governmental entity is required in connection with the
Transaction.
135
<PAGE>
MANAGEMENT OF THE PARTNERSHIP AFTER THE TRANSACTION
GENERAL PARTNER
At the Effective Time, the general partner of the Partnership and the
Operating Partnership will be Star Gas LLC. The membership interests in Star
Gas LLC are owned by the LLC Owners. The officers of Star Gas LLC will be Irik
P. Sevin, Chairman of the Board and Chief Executive; Joseph Cavanaugh,
Executive Vice President--Propane and Member of the Office of President;
William G. Powers, Jr., Executive Vice President--Heating Oil and Member of the
Office of President; George Leibowitz, Treasurer; Richard F. Ambury, Vice
President; James Bottiglieri, Vice President; and Audrey L. Sevin, Secretary.
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.
BOARD OF DIRECTORS OF STAR GAS LLC
At the Effective Time, it is expected that the Star Gas LLC Board will
consist of the following persons, all of whom currently serve as directors of
Star Gas: Irik P. Sevin (Chairman of the Board), Audrey L. Sevin, William G.
Powers, Jr., Thomas J. Edelman, Paul Biddelman, Wolfgang Traber, and William P.
Nicoletti. At her request, one of the current directors of Star Gas will
withdraw as a director upon consummation of the Transaction as a result of
additional duties associated with a new job. That director will be replaced by
a director selected by the Star Gas LLC Board, and the new director will not be
an officer or employee of Star Gas LLC or any of its affiliates.
William P. Nicoletti and an independent director to be selected by the Star
Gas LLC Board, who are neither officers nor employees of any affiliates of the
General Partner, will serve on the Audit Committee of the Star Gas LLC Board
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 procedure 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.
136
<PAGE>
OFFICERS AND EMPLOYEES OF THE OPERATING PARTNERSHIP AND PETRO
Operating Partnership. At the Effective Time, the officers and employees of
Star Gas who currently manage the operations and business of the Partnership
will become officers and employees of the Operating Partnership.
It is expected that the following persons who currently comprise Star Gas'
executive officers will continue to serve as executive officers of the
Operating Partnership: Irik P. Sevin, Chairman of the Board; Joseph P.
Cavanaugh, President and Chief Executive Officer; David R. Eastin, Vice
President-Operations; Richard F. Ambury, Vice President-Finance; and Audrey L.
Sevin, Secretary.
Certain information relating to executive compensation, various benefit plans
(including unit option plans), voting securities and the principal holders
thereof, certain relationships and related transactions and other related
matters as to the Partnership and Star Gas is incorporated by reference or set
forth in the Partnership's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997, and is incorporated herein by reference. Securityholders of
the Partnership or Petro desiring copies of such documents may contact the
Partnership at its address or telephone number indicated under "Where You Can
Find More Information."
Petro. At the Effective Time, the officers and employees of Petro will
continue to be employed by Petro.
It is expected that the following persons who currently comprise Petro's
executive officers will continue to serve as executive officers of Petro: Irik
P. Sevin, Chairman of the Board and Chief Executive Officer; William G. Powers,
Jr., President; C. Justin McCarthy, Senior Vice President-Operations; Audrey L.
Sevin, Secretary; George Leibowitz, Treasurer; Vincent De Palma, Vice President
and General Manager-New York Region; James J. Bottiglieri, Controller; Matthew
J. Ryan, Vice President-Supply; Angelo Catania, Vice President and General
Manager-Mid Atlantic Region; John Ryan, Vice-President-Sales and Marketing; and
Peter B. Terenzio, Jr., Vice President-Human Resources.
Certain information relating to executive compensation, various benefit plans
(including stock option plans), voting securities and the principal holders
thereof, certain relationships and related transactions and other related
matters as to Petro is set forth in Petro's Annual Report on Form 10-K for the
year ended December 31, 1997, and is incorporated herein by reference.
Securityholders of the Partnership or Petro desiring copies of such documents
may contact Petro at its address or telephone number indicated under "Where You
Can Find More Information."
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. 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.
137
<PAGE>
The General Partner will be entitled to distributions on its General Partner
Units and will be entitled to Incentive Distributions in respect of such Units,
as described under "Cash Distribution Policy."
BENEFICIAL OWNERSHIP OF PRINCIPAL UNITHOLDERS AND MANAGEMENT
The following table sets forth the beneficial ownership (as of the Record
Date) of Common Units, Senior Subordinated Units, Junior Subordinated Units and
General Partner Units after giving effect to the Transaction by (i) Star Gas
LLC and certain beneficial owners and all of the directors of Star Gas LLC,
(ii) each of the named executive officers of Star Gas and Petro, and (iii) all
directors and executive officers of Star Gas and Petro as a group.
<TABLE>
<CAPTION>
SENIOR JUNIOR GENERAL PARTNER
COMMON UNITS SUBORDINATED UNITS SUBORDINATED UNITS UNITS
-------------------- ------------------ --------------------- ---------------------
NAME(A) NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
------- ------ ---------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Star Gas LLC............ -- --% -- --% -- --% 278,973(b) 100%
Irik P. Sevin........... -- -- -- -- 101,041 17.5 278,973(e) 100
Audrey L. Sevin......... -- -- -- -- 252,537 43.8 278,973(e) 100
Wolfgang Traber......... 10,400(c) * 1,181 * 222,931(d) 38.6 278,973(e) 100
Paul Biddelman.......... -- -- 103,556 3.7 222,931(d) 38.6 278,973(e) 100
Thomas Edelman.......... -- -- 102,203 3.7 -- -- -- --
Richard F. Ambury....... 625 * 311 * -- -- -- --
George Leibowitz........ -- -- 46 * -- -- -- --
C. Justin McCarthy...... -- -- -- -- -- -- -- --
Vincent De Palma........ -- -- 1,306 * -- -- -- --
Angelo Catania.......... -- -- 327 * -- -- -- --
David Eastin............ -- -- -- -- -- -- -- --
Joseph G. Cavanaugh..... -- -- 65 * -- -- -- --
William G. Powers....... -- -- -- -- -- -- -- --
All officers and
directors and Star Gas
LLC as a group
(14 persons)........... 11,025 * 207,815 7.5% 577,205 99.9% 278,973 100%
</TABLE>
- --------
* Less than 1%.
(a) The address of each such person is c/o the Partnership at 2187 Atlantic
Street, Stamford, CT 06912-0011.
(b) Includes, as deemed General Partner Units, Star Gas LLC's .1% general
partner interest in the Operating Partnership.
(c) 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.
(d) Includes 222,931 Junior Subordinated Units 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.
Messrs. Traber and Biddelman are executive officers of Hanseatic
Corporation and Mr. Traber holds in excess of a majority of the shares of
capital stock of Hanseatic Corporation.
(e) Assumes each member of Star Gas LLC (and Messrs. Traber and Biddelman
through their positions with Hanseatic, a member of Star Gas LLC) may be
deemed to beneficially own all of Star Gas LLC's General Partner Units, as
to which they disclaim beneficial ownership.
138
<PAGE>
AMENDMENTS TO THE PARTNERSHIP AGREEMENTS
SET FORTH BELOW IS A SUMMARY OF THE PROPOSED AMENDMENTS TO THE PARTNERSHIP
AGREEMENT AND OPERATING PARTNERSHIP AGREEMENT TO BE VOTED UPON BY THE
PARTNERSHIP'S COMMON UNITHOLDERS AT THE UNITHOLDERS MEETING. THE FOLLOWING
DISCUSSION OF THE AMENDMENTS AND THE RESULTING AMENDED AND RESTATED PARTNERSHIP
AGREEMENT IS NOT COMPLETE. FOR A MORE COMPLETE UNDERSTANDING OF THE AMENDMENTS,
SEE ANNEX C, WHICH SETS FORTH THE FULL TEXT OF THE PROPOSED AMENDED AND
RESTATED PARTNERSHIP AGREEMENT, AND ALSO SHOWS THE PORTIONS OF THE EXISTING
PARTNERSHIP AGREEMENT THAT WILL BE DELETED OR CHANGED IF THE AMENDMENT PROPOSAL
IS APPROVED AT THE UNITHOLDERS MEETING.
INTRODUCTION; REQUIRED VOTE BY UNITHOLDERS
Pursuant to the Partnership Agreement, the General Partner proposes the
adoption of the amendments to the Partnership Agreement and Operating
Partnership Agreement described herein. In order to become effective, the
Amendment Proposal must receive the approval of the holders of a Unit Majority.
Under the Partnership Agreement, as currently in effect, a Unit Majority means,
during the Subordination Period, at least a majority of the Common Units
outstanding on the record date (other than Common Units owned by the General
Partner or any affiliate). The enclosed proxy affords Unitholders an
opportunity to separately vote for or against the Amendment Proposal by marking
the appropriate box on their proxy card. HOWEVER, THE TRANSACTION WILL NOT BE
EFFECTED UNLESS THE AMENDMENT PROPOSAL IS ADOPTED.
SUMMARY OF AMENDMENTS TO THE PARTNERSHIP AGREEMENT
Increase of Minimum Quarterly Distribution. The Amendment Proposal will
increase the Minimum Quarterly Distribution from $0.55 to $0.575 per quarter
($2.20 to $2.30 on an annualized basis). No changes will be made to the Target
Distribution Levels.
Extension of the Subordination Period. The Amendment Proposal will extend the
earliest date on which the Subordination Period can expire from January 1, 2001
to July 1, 2002. Under the Partnership Agreement, as currently in effect, the
Subordination Period will end upon the removal of the General Partner as the
general partner of the Partnership upon the requisite vote by limited partners
under circumstances where Cause does not exist. The Amendment Proposal provides
that the Subordination Period will end upon the removal of the General Partner
upon the requisite vote by limited partners under circumstances where Cause
does not exist; provided, however, that if the General Partner is removed
during the Subordination Period within 12 months after a six-quarter period in
which the Minimum Quarterly Distribution was not made on the Common Units with
respect to more than one of such quarters (excluding for this purpose the
payment of any Common Unit Arrearages) and the first quarter in such six-
quarter period that the Minimum Quarterly Distribution on the Common Units is
not made occurs after March 31, 2001, then the Subordination Period will not
end. If the General Partner is removed and the Subordination Period does not
end, the Junior Subordinated Units shall convert into Senior Subordinated Units
on a one-for-one basis and the distribution rights on the General Partner Units
with respect to the Minimum Quarterly Distribution and to an extent with
respect to liquidating distributions will rank pari passu with the Senior
Subordinated Units.
139
<PAGE>
Issuance of Senior Subordinated Units. The Amendment Proposal will authorize
the issuance of Senior Subordinated Units. The Senior Subordinated Units will
have distribution rights that are subordinated to all present and future Common
Units with respect to the Minimum Quarterly Distribution and arrearages
thereon, and to an extent with respect to liquidating distributions. The Senior
Subordinated Units will be senior to all present and future Junior Subordinated
Units and General Partner Units with respect to the Minimum Quarterly
Distribution and to an extent with respect to liquidating distributions. Upon
expiration of the Subordination Period, all outstanding Senior Subordinated
Units will convert into Class B Common Units on a one-for-one basis and each
outstanding Common Unit will be redesignated as a Class A Common Unit (all
references herein to Common Units after the expiration of the Subordination
Period are deemed to be references to Class A Common Units and Class B Common
Units unless otherwise indicated). The only differences between the Class A
Common Units and the Class B Common Units is that the Class B Common Units will
have the right to receive Incentive Distributions and the right to receive
additional Senior Subordinated Units if Petro meets certain financial goals.
See "Cash Distribution Policy--Distributions of Available Cash from Operating
Surplus During the Subordination Period."
Issuance of Junior Subordinated Units. The Amendment Proposal will authorize
the issuance of Junior Subordinated Units. The Junior Subordinated Units will
have distribution rights that are subordinate to all present and future Common
Units and Senior Subordinated Units, and that rank pari passu with all present
and future General Partner Units, with respect to the Minimum Quarterly
Distribution and to an extent with respect to liquidating distributions. Upon
expiration of the Subordination Period, all outstanding Junior Subordinated
Units will convert into Class B Common Units on a one-for-one basis. The
existing Subordinated Units held by Star Gas will be cancelled in the
Transaction. See "Cash Distribution Policy--Distributions of Available Cash
from Operating Surplus During the Subordination Period."
Subordination of General Partner Interests. The Amendment Proposal will
redesignate the general partner interests of the General Partner in the
Partnership as General Partner Units and subordinate the distribution rights of
the General Partner Units so that they rank pari passu with the Junior
Subordinated Units with respect to the Minimum Quarterly Distribution and
Liquidation. Currently, the General Partner is entitled to 2% of all payments
of the Minimum Quarterly Distribution made on the Common Units and the existing
Subordinated Units. The General Partner Units shall not convert into any class
of Common Units upon expiration of the Subordination Period; however, at such
time they shall no longer be subordinated and shall rank pari passu with the
Class A Common Units and the Class B Common Units. See "Cash Distribution
Policy--Distributions of Available Cash from Operating Surplus During the
Subordination Period" and "--Distributions of Available Cash from Operating
Surplus After the Subordination Period."
Limitations on Distributions on Subordinated Interests. The Amendment
Proposal will limit distributions during the Subordination Period on the Senior
Subordinated Units, Junior Subordinated Units and General Partner Units in the
following manner:
No distributions will be paid on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units with respect to the time period
beginning on the Effective Time and ending on March 31, 1999 until the
distribution date for the quarter ending on June 30, 1999, which will be on or
about August 15, 1999.
140
<PAGE>
With respect to the time period beginning on the Effective Time and ending on
June 30, 1999, the Partnership may make a distribution of Available Cash on the
Senior Subordinated Units, Junior Subordinated Units and General Partner Units
in an amount up to the Minimum Quarterly Distribution for such period to the
extent the sum of EBITDA less interest, less taxes and less maintenance capital
expenditures on a consolidated basis (the Partnership and Petro combined from
October 1, 1998 until the Effective Time) ("Adjusted Distributable Cash") for
the period beginning October 1, 1998 and ending on June 30, 1999 exceeds the
sum of:
(i) $57,172,000, plus or minus
(ii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending December 31, 1998,
exceeds or is less than 10,544,000, plus or minus
(iii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending March 31, 1999 exceeds or
is less than 10,544,000, plus or minus
(iv) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending June 30, 1999, exceeds or
is less than 10,544,000.
With respect to the quarter ending September 30, 1999, the Partnership may
make a distribution of Available Cash on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units in an amount up to the Minimum
Quarterly Distribution for such period to the extent the Adjusted Distributable
Cash for the time period beginning October 1, 1998 and ending on September 30,
1999 exceeds the sum of:
(i) $25,307,000 plus or minus
(ii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending December 31, 1998,
exceeds or is less than 10,544,000, plus or minus
(iii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending March 31, 1999, exceeds
or is less than 10,544,000, plus or minus
(iv) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending June 30, 1999, exceeds or
is less than 10,544,000, plus or minus
(v) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending September 30, 1999,
exceeds or is less than 10,544,000.
Beginning with the distribution for the quarter ending on December 31, 1999,
no distributions will be made on the Senior Subordinated Units, Junior
Subordinated Units or General Partner Units, except for distributions from
Capital Surplus, unless the aggregate amount of distributions on all
141
<PAGE>
Units with respect to all quarters, beginning with the quarter ended December
31, 1999, shall be equal to or less than the total Operating Surplus generated
by the Partnership since October 1, 1999 (which does not include the portion of
Operating Surplus included in clause (a) (i) of the definition of Operating
Surplus).
The Amendment Proposal does not prohibit the holders of Senior Subordinated
Units, Junior Subordinated Units or General Partner Units from receiving
distributions from Capital Surplus in a partial liquidation during the
Subordination Period.
Issuance of Additional Senior Subordinated Units. The Amendment Proposal
authorizes the issuance and distribution to holders of the Senior Subordinated
Units, Junior Subordinated Units and General Partner Units of up to an
aggregate of 909,000 additional Senior Subordinated Units or Class B Common
Units. For each full non-overlapping four-quarter period ending on or after the
first anniversary of the Effective Time, but prior to the fifth anniversary of
the Effective Time, in which the dollar amount of Petro Adjusted Operating
Surplus (as defined hereinafter) per Petro Unit (as defined hereinafter) equals
or exceeds $2.90, the Partnership will issue 303,000 Senior Subordinated Units
(or 303,000 Class B Common Units if such issuance occurs after the end of the
Subordination Period) to the holders of the Senior Subordinated Units, Junior
Subordinated Units and the General Partner Units on the record date in respect
of the distribution for the final quarter of such four-quarter period, pro
rata; provided that the Partnership may not issue more than 909,000 Senior
Subordinated Units or Class B Common Units in the aggregate pursuant to this
provision; provided, further, that the Partnership may not issue more than
303,000 Senior Subordinated Units or Class B Common Units pursuant to this
provision in any 365-day period. See "Cash Distribution Policy--Issuance of
Additional Senior Subordinated Units."
Reallocation of Incentive Distribution Rights. The Amendment Proposal will
reallocate the right to receive Incentive Distributions currently held by the
General Partner among the Senior Subordinated Units, Junior Subordinated Units
and General Partner Units. As a result, there may be quarters with respect to
which the holders of Senior Subordinated Units, Junior Subordinated Units and
General Partner Units receive greater distributions than the holders of Common
Units. See "Cash Distribution Policy--Incentive Distributions During the
Subordination Period" and "--Incentive Distributions After the Subordination
Period."
Deletion of the Provision Regarding the Net Worth of the General Partner. The
Amendment Proposal will delete the prohibition against the General Partner from
taking any action that would cause its net worth, independent of its interest
in the Partnership and Operating Partnership, to be less than $6.0 million. The
primary purpose of the net worth requirement was to ensure that the Partnership
would be treated as a partnership and not as an association taxable as a
corporation for federal income tax purposes. Counsel has advised the
Partnership that the failure of the General Partner to maintain a specific net
worth will not result in the Partnership being treated as an association
taxable as a corporation for federal income tax purposes under current
regulations under the Code.
Issuance of Additional Common Units. The Partnership Agreement, as currently
in effect, authorizes the Partnership to issue 1,300,000 Common Units or Units
ranking on a parity with
142
<PAGE>
Common Units (which number does not include Common Units issued in connection
with (i) certain capital improvements, (ii) certain acquisitions that are
accretive on a per Unit basis, (iii) the repayment of certain indebtedness or
(iv) the conversion of the existing Subordinated Units) without the approval of
the Unitholders. The Amendment Proposal will increase the number of Common
Units or Units ranking on a parity with Common Units without further Unitholder
approval to 2,500,000 (which number does not include (a) Common Units issued in
(i), (ii) and (iii) above, (b) Class B Common Units issued in connection with
the conversion of Senior Subordinated Units and Junior Subordinated Units and
(c) the Common Units issued in the Transaction, including the Equity Offering.
Approval of this amendment satisfies the requirement under the Partnership
Agreement, as currently in effect, that the holders of a Unit Majority approve
the issuance of Common Units in the Equity Offering.
Unit Majority. Under the Partnership Agreement as currently in effect,
certain transactions require the approval of a Unit Majority, which is defined
to mean the approval of a majority of the Common Units (other than Common Units
held by the General Partner or any of its affiliates). The Amendment Proposal
will provide that the Senior Subordinated Units and Junior Subordinated Units
have a vote with respect to certain matters by restating the definition of
"Unit Majority" as follows:
"Unit Majority" means, during the Subordination Period, at least (i) a
majority of the outstanding Common Units voting as a class and (ii) a
majority of the outstanding Senior Subordinated Units and Junior
Subordinated Units voting as a single class, in each case excluding Units
owned by the General Partner or any affiliate, and, after the Subordination
Period, at least a majority of the outstanding Common Units.
Proportionate Increase in Operating Surplus Basket. The Amendment Proposal
will increase the basket of $6 million set forth in the definition of
"Operating Surplus" in proportion to the additional number of Common Units to
be issued in the Equity Offering. In lieu of $6 million, such amount shall be a
number equal to the product of (i) $6 million and (ii) a fraction, (x) the
numerator of which is the number of outstanding Common Units at the Effective
Time (assuming the simultaneous closing of the Equity Offering) and (y) the
denominator of which is the number of outstanding Common Units immediately
prior to the Effective Time. Assuming the issuance of approximately 6.4 million
Common Units in the Equity Offering, the basket will be increased to
approximately $16 million. This amendment will keep the dollar amount of the
basket per Common Unit the same as it was immediately before the Transaction.
Deletion of Provisions Relating to Early Conversion of Subordinated
Units. The Amendment Proposal will delete those provisions of the Partnership
Agreement that provide that a portion of the Subordinated Units will convert
into Common Units prior to the expiration of the Subordination Period if
certain levels of Minimum Quarterly Distribution are both earned and
distributed. [Based upon the Partnership's inability to satisfy certain tests
based on distributions and earnings, the early conversion of certain
Subordinated Units is no longer feasible].
General Partner Capital Contribution Requirement. The Amendment Proposal will
relieve the General Partner of its obligation to make contributions of capital
to the Partnership upon the issuance of additional Units in order to maintain a
fixed percentage general partner interest in the Partnership. The General
Partner will retain its preemptive right to maintain its existing ownership
interest. If the
143
<PAGE>
General Partner does not make a contribution of capital upon the issuance of
additional Units, its claim on distributions of Available Cash will be
proportionately reduced.
Additional Capital Contribution Obligation of the General Partner. The
Amendment Proposal will delete the Additional Capital Contribution Obligation
of the General Partner in order for the Partnership to pay the Minimum
Quarterly Distribution on the Common Units. Based upon the satisfaction of
certain tests determined by distributions, this obligation of the General
Partner has expired.
Right to Acquire Units. The Amendment Proposal will provide that if the
Partnership acquires, in a twelve-month period through purchase or exchange, 66
2/3% or more of the total Class B Common Units, the Partnership may purchase
all, but not less than all, of the remaining Class B Common Units then
outstanding during the following twelve-month period.
Registration Rights The Amendment Proposal will provide that the Partnership
must register for resale under the Securities Act the Common Units and Senior
Subordinated Units issued to affiliates of Petro in the Transaction.
SUMMARY OF AMENDMENTS TO THE OPERATING PARTNERSHIP AGREEMENT
Under the Partnership Agreement, as currently in effect, the General Partner
cannot consent to any amendment of the Operating Partnership Agreement that
would have a material adverse effect on the Partnership as a partner of the
Operating Partnership or cause the Partnership to elect a successor general
partner to the Operating Partnership without the approval of the holders of at
least a Unit Majority.
The General Partner consents to and proposes that the Limited Partners
approve (i) the election of Star Gas LLC as successor general partner to the
Operating Partnership, (ii) delete allocation of depreciation to the General
Partner, (iii) delete the prohibition against the General Partner from taking
any action that would cause its net worth to be less than $6 million and (iv)
such other amendments to the Operating Partnership Agreement that the General
Partner deems necessary in connection with the consummation of the Transaction.
CONFORMING CHANGES
Certain additional changes will be required to conform the Partnership
Agreement and the Operating Partnership Agreement to the foregoing amendments
and to facilitate the consummation of the Transaction. It is the good faith
opinion of the General Partner that such conforming changes do not adversely
affect the Unitholders in any material respect, and thus pursuant to the
Partnership Agreement, as currently in effect, the General Partner may make any
or all conforming changes without the consent of the Unitholders.
144
<PAGE>
THE AMENDED AND RESTATED PARTNERSHIP AGREEMENT
IF THE TRANSACTION IS COMPLETED (WHICH WILL NOT OCCUR UNLESS THE ACQUISITION
PROPOSAL, THE AMENDMENT PROPOSAL AND THE GENERAL PARTNER PROPOSAL ARE EACH
APPROVED), ALL HOLDERS OF THE PARTNERSHIP'S UNITS WILL BE BOUND BY THE
PROVISIONS OF THE AMENDED AND RESTATED PARTNERSHIP AGREEMENT, AS IT MAY BE
FURTHER AMENDED FROM TIME TO TIME. THE FOLLOWING PARAGRAPHS DISCUSS CERTAIN
PROVISIONS OF THE AMENDED AND RESTATED PARTNERSHIP AGREEMENT. SUCH DISCUSSION
DOES NOT PURPORT TO BE COMPLETE. FOR A MORE COMPLETE UNDERSTANDING, SEE THE
PROPOSED AMENDED AND RESTATED PARTNERSHIP AGREEMENT SET FORTH IN ANNEX C
HERETO.
Certain provisions of the Amended and Restated 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 "Conflicts of Interest and Fiduciary
Responsibility." With regard to the management of the Partnership, see
"Management of the Partnership After the Transaction." With regard to the
transfer of Units, see "Description of the 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 Amended
and Restated 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 Amended and Restated
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 General Partner will have the ability under the Amended
and Restated 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 and home heating oil 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.
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 Amended
and Restated Partnership
145
<PAGE>
Agreement in accordance with the terms thereof and to make consents and waivers
contained in the Amended and Restated Partnership Agreement.
RESTRICTIONS ON AUTHORITY OF THE GENERAL PARTNER WITH RESPECT TO EXTRAORDINARY
TRANSACTIONS; LACK OF DISSENTERS' RIGHTS
The authority of the General Partner is limited in certain respects under the
Amended and Restated Partnership Agreement. The General Partner is prohibited,
without the prior approval of holders of record of 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, as
currently in effect, or the Amended and Restated Partnership Agreement or
applicable Delaware law in the event of a merger or consolidation of the
Partnership or 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 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 Amended and Restated 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 Amended
and Restated Partnership Agreement permits the General Partner (in certain
limited instances) to sell all of its general partner interest (which is
evidenced by the General Partner Units) 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 (which is evidenced by the General Partner Units) 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 a Unit Majority agrees in writing to continue the business of
146
<PAGE>
the Partnership and to the appointment of a successor general partner. See "--
Termination and Dissolution."
Pursuant to the terms of the Amended and Restated Partnership Agreement, 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 voting together as a single class (other than Units owned by
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. If the General
Partner is removed as General Partner other than for Cause, the Subordination
Period will end, any then-existing arrearages on the Common Units will be
terminated, any Senior Subordinated Units and Junior Subordinated Units held by
the General Partner will immediately convert into Class B Common Units and the
General Partner Units will no longer be subordinated, provided, however, that
if the General Partner is removed during the Subordination Period within 12
months after a six-quarter period in which the Minimum Quarterly Distribution
is not made on the Common Units with respect to more than one of such quarters
(excluding for this purpose the payment of any Common Unit Arrearages) and the
first quarter in such six-quarter period that the Minimum Quarterly
Distribution on the Common Units is not made occurs after March 31, 2001, then
the Subordination Period will not end. If the General Partner is removed and
the Subordination Period does not end, the Junior Subordinated Units shall
convert into Senior Subordinated Units on a one-for-one basis and the
distribution rights on the General Partner Units with respect to the Minimum
Quarterly Distribution and Liquidation will rank pari passu with the Senior
Subordinated 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 Amended and Restated 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 Units 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 the
General Partner Units 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 Units will be converted into
147
<PAGE>
Common Units (or Class A Common Units if any Class B Common Units are then
outstanding) 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, which is evidenced by the General Partner
Units, 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 any or all of the General Partner Units in the
Partnership to another person or entity prior to December 31, 2005, without the
approval of holders of 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 Amended and Restated 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, the members of Star Gas LLC may sell or
otherwise transfer their membership interests in Star Gas LLC to a third party
without the approval of the Unitholders.
REIMBURSEMENT FOR SERVICES
The Amended and Restated 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 Amended and Restated 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.
A person receiving a Common Unit, Senior Subordinated Unit or Junior
Subordinated Unit subsequent to executing and delivering a Transfer
Application, but pending its admission as a substituted limited partner or
additional limited partner, as the case may be, 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, Senior Subordinated
Units and Junior Subordinated Units owned by such person who has not become a
substitute limited partner or additional limited partner, as the case may be,
at the written direction of such person. See "--Meetings; Voting." Persons who
do not execute and deliver a Transfer Application will be treated neither as
assignees nor as record holders of Common Units, Senior
148
<PAGE>
Subordinated Units or Junior Subordinated Units, as the case may be, and will
not receive cash distributions, federal income tax allocations or reports
furnished to record holders of Common Units, Senior Subordinated Units and
Junior Subordinated Units. See "Description of the Units--Transfer of Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If, because of the nationality, citizenship or other related status of any
limited partner or assignee, 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, 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 Amended and Restated 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), (c), (d) and (e) below, during 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 2,500,000 additional Common Units or an equivalent amount of securities
ranking on a parity with the Common Units (the "Parity Units"), without the
approval of at least a majority of the outstanding Common Units (other than
Common Units held by the General Partner and its affiliates); (b) the
Partnership may issue Common Units pursuant to the Transaction, including those
issued in the Equity Offering; (c) the Partnership may issue an unlimited
number of additional Common Units or Parity Units 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; (d) the
Partnership may also issue an
149
<PAGE>
unlimited number of additional Common Units or 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, the Operating Partnership or any subsidiary
thereof; and (e) the Partnership may issue Class B Common Units upon the
conversion of the Senior Subordinated Units and Junior Subordinated Units at
the end of the Subordination Period. In accordance with Delaware law and the
provisions of the Amended and Restated Partnership Agreement, the General
Partner in its sole discretion, may cause the Partnership to issue additional
partnership interests that may have special voting rights.
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,
Senior Subordinated Units and Junior 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 Senior Subordinated Units and Junior
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 (a) 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 or (b) after the expiration of the Subordination
Period, the Partnership acquires, through purchase or exchange, in a twelve-
month period, 66 2/3% or more of the total Class B Common Units, the
Partnership shall then have the right, which it may not assign or transfer,
exercisable in its sole discretion, to purchase all, but not less than all, of
the remaining Units of such class then outstanding during the following twelve-
month period. The purchase price in the event of (a) or (b) above shall be the
greater of (x) the highest cash price paid by the Partnership, 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 Partnership
or the General Partner first mails notice of its election to purchase such
limited partner interests and (y) the Current Market Price as of the date three
days prior to the date such notice is mailed. As a consequence of the
Partnership's or the General Partner's right to purchase outstanding limited
partner interests (including Senior Subordinated Units and Junior Subordinated
Units), 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
150
<PAGE>
the same as a sale by such Unitholder of his Units in the market. See "Certain
Federal Income Tax Considerations--Disposition of Units."
AMENDMENT OF AMENDED AND RESTATED PARTNERSHIP AGREEMENT
Amendments to the Amended and Restated 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.
Prohibited Amendments. 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.
No Unitholder Approval. The General Partner may make amendments to the
Amended and Restated 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 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, 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 the "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 Class A
Common Units, Class B Common Units or other limited or general partner
interests described above, an amendment that
151
<PAGE>
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 Amended and Restated
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 Amended and
Restated 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
Amended and Restated 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 Amended and
Restated 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 Amended and Restated Partnership
Agreement.
Opinion of Counsel and Unitholder Approval. 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 Amended and Restated 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 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 Amended and Restated Partnership Agreement will be entitled
to notice of, and to vote at, meetings
152
<PAGE>
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
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 Units on any matter, vote such Units at the written
direction of such record holder. Absent such direction, such 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, other than the Unitholders Meeting.
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 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 Amended and Restated 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.
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
Amended and Restated 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 Amended and Restated 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
153
<PAGE>
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 only be 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 DRULPA and that he
otherwise acts in conformity with the provisions of the Amended and Restated
Partnership Agreement, his liability under the DRULPA 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 amendments
to the Amended and Restated Partnership Agreement or to take other action
pursuant to the Amended and Restated Partnership Agreement constituted
"participation in the control" of the Partnership's business for the purposes
of the DRULPA, 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 DRULPA, 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 DRULPA 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 DRULPA 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 DRULPA shall be liable to the limited
partnership for the amount of the distribution for three years from the date of
the distribution. Under the DRULPA, 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
154
<PAGE>
is not obligated for liabilities unknown to him at the time he became a limited
partner and that 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
Amended and Restated Partnership Agreement, or to take other action pursuant to
the Amended and Restated 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 with information reasonably required for tax reporting
purposes within 90 days after the close of each calendar year in which the
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.
155
<PAGE>
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Amended and Restated 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/her own
expense, be furnished with (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 Amended and Restated 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 Amended and Restated Partnership Agreement. The
Partnership will be dissolved upon (i) the election of the General Partner to
dissolve the Partnership, if approved by holders of 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 Units in accordance with the Amended and Restated 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 Amended and Restated Partnership
Agreement by forming a new limited partnership on terms identical to those set
forth in the Amended and Restated 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--Distributions of Cash upon Liquidation During the
Subordination Period" and "--Distributions of Cash upon Liquidation After the
Subordination Period." Under certain circumstances and subject to
156
<PAGE>
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.
REGISTRATION RIGHTS
Pursuant to the terms of the Amended and Restated Partnership Agreement and
subject to certain limitations described therein, the Partnership has agreed
(i) to register for resale under the Securities Act and applicable state
securities laws any Units proposed to be sold by the General Partner or its
affiliates (upon their request) if an exemption from such registration
requirements is not otherwise available for such proposed transaction and (ii)
to register for resale under the Securities Act and applicable state securities
laws the Common Units and Senior Subordinated Units issued to affiliates of
Petro in the Transaction (upon their request if an exemption from such
registration requirements is not otherwise available for such proposed
transaction), and to use its best efforts to keep such registration statement
effective for one year, subject to certain exceptions and to such requesting
party providing necessary information. The Partnership is obligated to pay all
expenses incidental to such registration, excluding underwriting discounts and
commissions.
157
<PAGE>
CASH DISTRIBUTION POLICY
The following discussion gives effect to the adoption of the Amendment
Proposal.
GENERAL
In general, 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) in certain circumstances provide funds
for distributions to the Common Unitholders and the Senior Subordinated
Unitholders during the next four quarters. The General Partner may not
establish cash reserves for distributions to the Senior Subordinated Units
unless the General Partner has determined that in its judgment the
establishment of reserves will not prevent the Partnership from distributing
the Minimum Quarterly Distribution on all Common Units and any Common Unit
Arrearages thereon with respect to the next four quarters. The restrictions,
discussed below, on distributions on Senior Subordinated Units, Junior
Subordinated Units and General Partner Units could result in cash that would
otherwise be Available Cash being reserved for other purposes.
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed among different classes of Units. See "--Quarterly Distributions of
Available Cash."
Operating Surplus as currently defined generally refers to (i) the cash
balance of the Partnership on the date the Partnership commenced operations,
plus approximately $16 million, plus all cash receipts of the Partnership
(excluding cash receipts constituting Capital Surplus), 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; provided, however, that Operating Surplus is calculated without any
reduction for costs or expenses incurred in connection with the Transaction.
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 Initial Common Unit in
an aggregate amount per Unit equal to $22.00 per Common Unit (the "Initial Unit
Price"), the distinction between
158
<PAGE>
Operating Surplus and Capital Surplus will cease, and all distributions will be
treated as from Surplus. The General Partner does not expect that there will be
significant distributions from Capital Surplus.
The Senior Subordinated Units and the Junior Subordinated Units are each a
separate class of interests in the Partnership, and the rights of holders of
such interests to participate in distributions Operating differ from the rights
of the holders of Common Units. When issued, the Class B Common Units will also
be a separate class of interests in the Partnership.
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 the applicable record date. If the Partnership
meets certain tests set forth in the Amended and Restated Partnership
Agreement, the first distribution permitted to be paid to the holders of the
Senior Subordinated Units issued in the Transaction will be paid with respect
to the quarter ending June 30, 1999 and will be paid on or about August 15,
1999 to holders of record on or about July 31, 1999. Such distribution, if
paid, will include a pro rata distribution for the period between the Effective
Time and March 31, 1999. The first distribution on the Common Units (including
those issued in the Equity Offering) subsequent to the Effective Time will be
paid with respect to the quarter ending March 31, 1999 on or about May 15, 1999
to holders of record on or about May 4, 1999 regardless of how many days such
Common Units have been outstanding. For a discussion of certain restrictions on
distributions to the holders of subordinated interests, see "--Limitation on
Distributions of Subordinated Interests."
Upon expiration of the Subordination Period, all Senior Subordinated Units
and Junior Subordinated Units will be converted (on a one-for-one basis) into
Class B Common Units (all references herein to Common Units after the
expiration of the Subordination Period are deemed to be references to Class A
Common Units and Class B Common Units, collectively, unless otherwise
indicated) and distributions on the General Partner Units will no longer be
subordinated to distributions on the Common Units. Neither Class A Common Units
nor Class B Common Units will accrue arrearages for any quarter after the
Subordination Period, and Senior Subordinated Units, Junior Subordinated Units
and General Partner 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 OF AVAILABLE CASH FROM OPERATING SURPLUS DURING THE SUBORDINATION
PERIOD
The Subordination Period will generally extend until the first day of any
quarter beginning on or after July 1, 2002 in respect of which (i)
distributions of Available Cash from Operating Surplus on the Common Units,
Senior Subordinated Units, Junior Subordinated Units and General Partner Units
equaled or exceeded the sum of the Minimum Quarterly Distributions on all of
the outstanding
159
<PAGE>
Common Units, Senior Subordinated Units, Junior Subordinated Units and General
Partner 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
Distributions on all of the outstanding Common Units, Senior Subordinated
Units, Junior Subordinated Units and General Partner Units during such periods
on a fully diluted basis with respect to employee options or other employee
incentive compensation (i.e., taking into account for purposes of such
determination all outstanding Common Units, Senior Subordinated Units, Junior
Subordinated Units and General Partner Units and all Common Units issuable upon
exercise of employee options that have, as of the date of determination,
already vested or are scheduled to vest prior to the end of the quarter
immediately following the quarter with respect to which determination is made,
and all Units that have as of the date of determination been earned by but not
yet issued to management of the Partnership in respect of incentive
compensation) and (iii) there are no arrearages in payment of the Minimum
Quarterly Distribution on the Common Units.
In certain circumstances, 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 Senior Subordinated Units and the Junior
Subordinated Units will immediately convert into Class B Common Units and
distributions on the General Partner Units will no longer be subordinated. See
"The Amended and Restated Partnership Agreement--Withdrawal or Removal of the
General Partner; Approval of Successor General Partner."
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, 100% to the Common Units, pro rata, until there has been
distributed in respect of each Common Unit an amount equal to the Minimum
Quarterly Distribution for such quarter;
second, 100% to the Common Units, pro rata, 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, 100% to the Senior Subordinated Units, pro rata, until there has
been distributed in respect of each Senior Subordinated Unit an amount
equal to the Minimum Quarterly Distribution for such quarter;
fourth, 100% to the Junior Subordinated Units and General Partner Units,
pro rata, until there has been distributed in respect of each Junior
Subordinated Unit and General Partner Unit an amount equal to the Minimum
Quarterly Distribution for such quarter; and
thereafter, in the manner described in "--Incentive Distributions During
the Subordination Period" below.
At the Effective Time, the General Partner will have a 1.99% general partner
interest in the Partnership in the form of General Partner Units and a 0.01%
general partner interest in the Operating Partnership. References in this Proxy
Statement to distributions on the General Partner Units disregard the General
Partners' 0.01% general partner interest in the Operating Partnership.
160
<PAGE>
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AFTER THE SUBORDINATION
PERIOD
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter after the Subordination Period will be made in the
following manner:
first, 100% to all Units, pro rata, 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 After
the Subordination Period" below.
INCENTIVE DISTRIBUTIONS DURING THE SUBORDINATION PERIOD
For any quarter for which Available Cash from Operating Surplus is
distributed in respect of each of the Common Units, Senior Subordinated Units,
Junior Subordinated Units and General Partner 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
Units in the following manner:
first, 100% to all Units, pro rata, until each Unit has received (in
addition to any distributions to the Common Units to eliminate any
Cumulative Common Unit Arrearages) a total of $0.604 per Unit for such
quarter in respect of each Unit (the "First Target Distribution");
second, 86.7% to all Units, pro rata, and 13.3% to all Senior
Subordinated Units, Junior Subordinated Units and General Partner Units,
pro rata, until the Common Units have received (in addition to any
distributions to Common Unitholders to eliminate any Cumulative Common Unit
Arrearages) a total of $0.711 per Unit for such quarter in respect of each
Common Unit (the "Second Target Distribution");
third, 76.5% to all Units, pro rata, and 23.5% to all Senior Subordinated
Units, Junior Subordinated Units and General Partner Units, pro rata, until
the Common Units have received (in addition to any distributions to Common
Unitholders to eliminate any Cumulative Common Unit Arrearages and) a total
of $0.926 per Unit for such quarter in respect of each Common Unit (the
"Third Target Distribution"); and
thereafter, 51.0% to all Units, pro rata, and 49.0% to all Senior
Subordinated Units, Junior Subordinated Units and General Partner Units,
pro rata.
The Amended and Restated Partnership Agreement may not be amended (including
in connection with the issuance of additional partnership securities) in any
manner which would increase the aggregate amount of incentive distributions
without the approval of a majority of the outstanding Units of the classes that
would be adversely affected.
The following table illustrates the percentage of Available Cash from
Operating Surplus distributed as the Minimum Quarterly Distribution ("Base
Distributions") pro rata to all Unitholders and the percentage of Available
Cash distributed to the holders of Senior Subordinated Units, Junior
Subordinated Units and General Partner Units as incentive distributions
("Incentive Distributions")
161
<PAGE>
at the Target Distribution Levels. The percentages set forth in the table below
are the percentage interests of the Unitholders in Available Cash from
Operating Surplus distributed up to and including the corresponding amount in
the column "Quarterly Distribution Amount per Common Unit" until Available Cash
distributed reaches the next Target Distribution Level, if any.
<TABLE>
<CAPTION>
PERCENTAGE OF AVAILABLE CASH
DISTRIBUTED AS INCENTIVE
DISTRIBUTIONS TO THE SPECIFIED
UNIT CLASS
---------------------------------
-
PERCENTAGE OF PERCENTAGE OF
QUARTERLY AVAILABLE CASH AVAILABLE CASH
DISTRIBUTION DISTRIBUTED AS DISTRIBUTED AS SENIOR JUNIOR GENERAL
AMOUNT PER BASE INCENTIVE SUBORDINATED SUBORDINATED PARTNER
COMMON UNIT DISTRIBUTIONS DISTRIBUTIONS UNITS UNITS UNITS
------------ -------------- -------------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Minimum Quarterly
Distribution........... $0.575 100.0% -- -- -- --
First Target
Distribution........... 0.604 100.0% -- -- -- --
Second Target
Distribution........... 0.711 86.7% 13.3% 10.2% 2.1% 1.0%
Third Target
Distribution........... 0.926 76.5% 23.5% 18.0% 3.7% 1.8%
Thereafter.............. -- 51.0% 49.0% 37.4% 7.8% 3.8%
</TABLE>
The percentage allocation of Incentive Distributions among Senior
Subordinated Units, Junior Subordinated Units and General Partner Units, will
change in the future if there are additional non pro rata issuances of such
Units.
The following table illustrates the distribution of Available Cash per Unit
among the Common Units, Senior Subordinated Units, Junior Subordinated Units
and General Partner Units at the Target Distribution Levels. The calculations
are based on the assumption that the quarterly distribution amounts shown do
not include any Cumulative Common Unit Arrearages.
<TABLE>
<CAPTION>
QUARTERLY DISTRIBUTION AMOUNT
----------------------------------------
SENIOR JUNIOR GENERAL
COMMON SUBORDINATED SUBORDINATED PARTNER
UNIT UNIT UNIT UNIT
------ ------------ ------------ -------
<S> <C> <C> <C> <C>
Minimum Quarterly Distribution........ $0.575 $0.575 $0.575 $0.575
First Target Distribution............. 0.604 0.604 0.604 0.604
Second Target Distribution............ 0.711 0.774 0.774 0.774
Third Target Distribution............. 0.926 1.243 1.243 1.243
</TABLE>
INCENTIVE DISTRIBUTIONS AFTER THE SUBORDINATION PERIOD
For any quarter for which Available Cash from Operating Surplus is
distributed in respect of each of the Class A Common Units, the Class B Common
Units and General Partner Units in an amount equal to the Minimum Quarterly
Distribution, then any additional Available Cash from Operating Surplus in
respect of such quarter will be distributed among the Unitholders in the
following manner:
first, 100% to all Units, pro rata, until the Units have received the
First Target Distribution;
second, 86.7% to all Units, pro rata, and 13.3% to all Class B Common
Units and General Partner Units, pro rata, until the Class A Common Units
have received the Second Target Distribution;
third, 76.5% to all Units, pro rata, and 23.5% to all Class B Common
Units and General Partner Units, pro rata, until the Class A Common Units
have received the Third Target Distribution; and
162
<PAGE>
thereafter, 51% to all Units, pro rata, and 49% to all Class B Common
Units and General Partner Units, pro rata.
The following table illustrates the distribution of Available Cash per Unit
among the Class A Common Units, Class B Common Units and General Partner Units
at the Target Distribution Levels.
<TABLE>
<CAPTION>
QUARTERLY
DISTRIBUTION
---------------------
CLASS CLASS
A B GENERAL
COMMON COMMON PARTNER
UNIT UNIT UNIT
------ ------ -------
<S> <C> <C> <C>
Minimum Quarterly Distribution............................ $0.575 $0.575 $0.575
First Target.............................................. 0.604 0.604 0.604
Second Target............................................. 0.711 0.774 0.774
Third Target.............................................. 0.926 1.243 1.243
</TABLE>
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions by the Partnership of Available Cash from Capital Surplus will
be made 100% on all Units, pro rata, until the Partnership shall have
distributed, in respect of each Initial Common Unit, Available Cash from
Capital Surplus in an aggregate amount per Initial Common Unit equal to the
Initial Unit Price. Thereafter, all distributions from Capital Surplus will be
distributed as if they were from Operating Surplus.
When 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 on all Initial Common Units (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 holders of the Incentive Distributions will be entitled
with respect to such rights 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.
LIMITATION ON DISTRIBUTIONS ON SUBORDINATED INTERESTS
With respect to the time period beginning on the Effective Time and ending on
June 30, 1999, the Partnership may make a distribution of Available Cash on the
Senior Subordinated Units, Junior Subordinated Units and General Partner Units
in an amount up to the Minimum Quarterly
163
<PAGE>
Distribution for such period to the extent the sum of EBITDA, less interest,
less taxes and less maintenance capital expenditures consolidated (combined
from October 1, 1998 until the Effective Time) for the Partnership and Petro
("Adjusted Distributable Cash") for the time period beginning October 1, 1998
and ending on June 30, 1999 exceeds the sum of
(i) $57,172,000, plus or minus
(ii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending December 31, 1998,
exceeds or is less than 10,544,000, plus or minus
(iii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending March 31, 1999 exceeds or
is less than 10,544,000, plus or minus
(iv) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending June 30, 1999, exceeds or
is less than 10,544,000.
With respect to the quarter ending September 30, 1999, the Partnership may
make a distribution of Available Cash on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units to the extent the Adjusted
Distributable Cash for the time period beginning October 1, 1998 and ending on
September 30, 1999 exceeds the sum of
(i) $25,307,000 plus or minus
(ii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending December 31, 1998,
exceeds or is less than 10,544,000, plus or minus
(iii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending March 31, 1999, exceeds
or is less than 10,544,000, plus or minus
(iv) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending June 30, 1999, exceeds or
is less than 10,544,000, plus or minus
(v) the product of (A) $0.60 and (B) the amount by which the number of
Common Units outstanding on the record date for the distribution of
Available Cash with respect to the quarter ending September 30, 1999,
exceeds or is less than 10,544,000.
Beginning with the distribution for the quarter ending on December 31, 1999,
no distributions will be made on the Senior Subordinated Units, Junior
Subordinated Units or General Partner Units, except for distributions from
Capital Surplus, unless the aggregate amount of distributions on all Units with
respect to all quarters, beginning with the quarter ended December 31, 1999,
shall be equal to or less than the total Operating Surplus generated by the
Partnership since October 1, 1999 (which does not include the portion of
Operating Surplus included in clause (a) (i) of the definition of Operating
Surplus).
164
<PAGE>
The holders of the Senior Subordinated Units, Junior Subordinated Units and
General Partner Units are not prohibited from receiving distributions from
Capital Surplus in a partial liquidation during the Subordination Period.
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 Class B Common Units issuable upon conversion of the Senior
Subordinated Units and the Junior 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 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.
ISSUANCE OF ADDITIONAL SENIOR SUBORDINATED UNITS
The Amended and Restated Partnership Agreement provides that for each full
non-overlapping four-quarter period ending on or after the first anniversary of
the Effective Time, but prior to the fifth anniversary of the Effective Time,
in which the dollar amount of Petro Adjusted Operating Surplus (as defined
hereinafter) per Petro Unit (as defined hereinafter) equals or exceeds $2.90,
the Partnership will issue 303,000 Senior Subordinated Units (or 303,000 Class
B Common Units if such issuance occurs after the end of the Subordination
Period) to the holders of the Senior Subordinated Units, Junior Subordinated
Units and the General Partner Units on the record date in respect of the
distribution for the final quarter of such four-quarter period, pro rata;
provided that the Partnership may not issue more than 909,000 Senior
Subordinated Units or Class B Common Units in the
165
<PAGE>
aggregate pursuant to this provision; provided, further, that the Partnership
may not issue more than 303,000 Senior Subordinated Units or Class B Common
Units pursuant to this provision in any 365-day period. No fractional Senior
Subordinated Units will be issued by the Partnership in connection with the
issuance of the additional Units. The Partnership shall pay to each holder who
would otherwise be entitled to a fractional Senior Subordinated Unit an amount
in cash to be paid in lieu of such fractional Units determined by multiplying
such fraction by the Current Market Price of a Senior Subordinated Unit or a
Class B Common Unit as the case may be, as of the date three days prior to
issuance of the additional Units. On the first day after the record date for
distributions with respect to the first quarter ending on or after the fifth
anniversary of the Effective Time, the right to receive the additional Units
shall lapse and all conversion rights shall cease to exist.
"Petro Adjusted Operating Surplus" means, with respect to any four-quarter
period, the Adjusted Operating Surplus generated by Petro (which for purposes
of this definition includes all subsidiaries of the Partnership primarily
engaged in the home heating oil business) during such four quarter period, as
determined in good faith by a majority of the members of the Board of Directors
of the General Partner (with the concurrence of the Audit Committee). In
calculating Petro Adjusted Operating Surplus, (i) debt service (including the
payment of principal, interest and premium) on all debt incurred or assumed by
Petro or any of its affiliates, the proceeds of which are used by or for the
benefit of Petro (including the proceeds from the Debt Offering), shall be
included to the extent such debt service is included in the calculation of
Operating Surplus, and (ii) debt service (including the payment of principal,
interest and premium) on all debt incurred or assumed by Petro or any of its
affiliates, the proceeds of which are not used by or for the benefit of Petro,
shall be excluded.
"Petro Units", with respect to any date, means the sum of (i) the excess of
the number of Units outstanding at the Effective Time over the number of Units
outstanding immediately prior to the Effective Time (assuming the simultaneous
closing of the Equity Offering), (ii) the number of Units issued by the
Partnership thereafter to the extent the net proceeds of which are contributed
to Petro (which for purposes hereof includes all subsidiaries of the
Partnership primarily engaged in the home heating oil business), (iii) the
number of Senior Subordinated Units or Class B Common Units issued pursuant to
the Amended and Restated Partnership Agreement based on the performance of
Petro and (iv) the deemed number of Units outstanding based upon a contribution
of capital to Petro by the Partnership or any affiliate thereof after the
Effective Time (which contribution is not covered by (ii) above or traceable to
debt proceeds), which number of deemed Units is obtained by dividing (A) the
amount of such contribution by (B) the Current Market Price of a Common Unit
(or of a Class A Common Unit after the termination of the Subordination
Period). If Petro pays down debt of Petro or debt allocated to Petro from
internally generated funds of Petro and if those internally generated funds
exist at Petro only because Petro has not paid dividends up to the Partnership
in an amount equal to the distributions that would have been paid on the Petro
Units had they been actual outstanding Units of the Partnership, then the
amount used to pay down such debt will be treated as if it were contributed to
Petro by the Partnership. The distribution per Senior Subordinated Unit of the
Partnership shall be the amount that the Partnership would have been deemed to
have distributed per Petro Unit had they been actual outstanding Units of the
Partnership. For purposes of the number of deemed outstanding Units in (iv)
above, such Units shall be deemed to be issued on the date of such Capital
Contribution. For this purpose, Common Unit means Class A Common Units upon
expiration of the Subordination Period.
166
<PAGE>
The terms upon which any of the said additional Units may be issued may not
be amended in a manner that would materially adversely affect the rights of the
holders thereof without the affirmative vote of the holders of a majority of
the outstanding Senior Subordinated Units, Junior Subordinated Units and
General Partner Units, voting together as a single class.
DISTRIBUTIONS OF CASH UPON LIQUIDATION DURING THE SUBORDINATION PERIOD
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
Amended and Restated Partnership Agreement and by law and, thereafter, be
distributed on the Units in accordance with respective capital account
balances, as so adjusted.
Partners are entitled to liquidation distributions in accordance with capital
account balances. Although operating losses are allocated on all Units 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 Senior Subordinated Units, Junior Subordinated
Units and General Partner 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 Senior Subordinated Units and Junior
Subordinated Units. The manner of such adjustment is provided in the Amended
and Restated Partnership Agreement, which is attached hereto as Annex C. If the
liquidation of the Partnership occurs before the end of the Subordination
Period, any gain (or unrealized gain attributable to assets distributed in
kind) will be allocated to the partners as follows:
first, to the Partners that have negative balances in their capital
accounts, to the extent of and in proportion to, such negative balances;
second, 100% to the Common Units, pro rata, until the capital account for
each Common Unit is equal to the Unrecovered Initial Unit Price in respect
of such Common Unit (plus 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, 100% to the Senior Subordinated Units, pro rata, until the capital
account for each Senior Subordinated Unit is equal to the Unrecovered
Initial Unit Price (plus the amount of the Minimum Quarterly Distribution
for the fiscal quarter during which the dissolution occurs) in respect of a
Senior Subordinated Unit;
fourth, 100% to the Junior Subordinated Units and General Partner Units,
pro rata, until the Capital Account for each Junior Subordinated Unit is
equal to the Unrecovered Initial Unit Price (plus the amount of the Minimum
Quarterly Distribution for the fiscal quarter during which the dissolution
occurs) in respect of a Junior Subordinated Unit;
167
<PAGE>
fifth, 100% to all Units, pro rata, until there has been allocated under
this clause fifth an amount per Common Unit equal to (a) the excess of the
First Target Distribution per Unit over the then effective Minimum
Quarterly Distribution per Unit for each quarter of the Partnership's
existence, less (b) the amount per Common Unit of any distributions of
Available Cash from Operating Surplus in excess of the then effective
Minimum Quarterly Distribution per Unit that was distributed 100% to all
Units, pro rata, for each quarter of the Partnership's existence;
sixth, 86.7% to all Units, pro rata, 13.3% to Senior Subordinated Units,
Junior Subordinated Units and General Partner Units, pro rata, until there
has been allocated under this clause sixth an amount per Common Unit equal
to (a) the excess of the Second Target Distribution per Common Unit over
the First Target Distribution per Common Unit for each quarter of the
Partnership's existence, less (b) the amount per Common Unit of any
distributions of Available Cash from Operating Surplus in excess of the
First Target Distribution but not in excess of the Second Target
Distribution for each quarter of the Partnership's existence;
seventh, 76.5% to all Units, pro rata, and 23.5% to all Senior
Subordinated Units, Junior Subordinated Units and General Partner Units,
pro rata, until there has been allocated under this clause seventh an
amount per Common Unit equal to (a) the excess of the Third Target
Distribution per Common Unit over the Second Target Distribution per Common
Unit for each quarter of the Partnership's existence, less (b) the amount
per Common Unit of any distributions of Available Cash from Operating
Surplus in excess of the Second Target Distribution but not in excess of
the Third Target Distribution for each quarter of the Partnership's
existence; and
thereafter, 51.0% to all Units, pro rata, and 49.0% to all Senior
Subordinated Units, Junior Subordinated Units and General Partner Units,
pro rata.
Any loss or unrealized loss will be allocated to the Unitholders as follows:
first, 100% to the Junior Subordinated Units and General Partner Units, pro
rata, in proportion to the positive balances in their respective capital
accounts until the positive balances in their respective capital accounts have
been reduced to zero; second, 100% to the Senior Subordinated Units in
proportion to the positive balances in their respective capital accounts until
the positive balances in their respective capital accounts have been reduced to
zero; third, 100% to the Common Units in proportion to the positive balances in
their respective capital accounts Units until the positive balances in the
respective capital accounts have been reduced to zero; and thereafter, to the
General Partner Units.
DISTRIBUTIONS OF CASH UPON LIQUIDATION AFTER THE SUBORDINATION PERIOD.
If the liquidation of the Partnership occurs after the end of the
Subordination Period, any gain (or unrealized gain attributable to assets
distributed in kind) will be allocated to the partners as follows:
first, to the Partners that have negative balances in their capital
accounts to the extent of and in proportion to such negative balances;
second, 100% to all Class A Common Units and Class B Common Units, until
the capital account for each Class A Common Unit and Class B Common Unit is
equal to the Unrecovered Initial Unit Price in respect of such Unit (plus
the amount of the Minimum Quarterly Distribution for the fiscal quarter
during which the dissolution occurs;
168
<PAGE>
third, 100% to all Units, pro rata, until there has been allocated under
this clause third an amount per Class A Common Unit equal to (a) the excess
of the First Target Distribution per Class A Common Unit over the then
effective Minimum Quarterly Distribution for each quarter of the
Partnership's existence, less (b) the amount per Class A Common Unit of any
distributions of Available Cash from Operating Surplus in excess of the
then effective Minimum Quarterly Distribution per Class A Common Unit that
was distributed 100% to Units, pro rata, for each quarter of the
Partnership's existence;
fourth, 86.7% to all Units, pro rata, and 13.3% to Class B Common Units
and General Partner Units, pro rata, until there has been allocated under
this clause four an amount per Class A Common Unit equal to (a) the excess
of the Second Target Distribution per Class A Common Unit over the First
Target Distribution per Class A Common Unit for each quarter of the
Partnership's existence, less (b) the amount per Class A Common Unit of any
distributions of Available Cash from Operating Surplus in excess of the
First Target Distribution but not in excess of the Second Target
Distribution for each quarter of the Partnership's existence;
fifth, 76.5% to all Units, pro rata, and 23.5% to Class B Common Units
and General Partner Units, pro rata, until there has been allocated under
this clause five an amount per Class A Common Unit equal to (a) the excess
of the Third Target Distribution per Class A Common Unit over the Second
Target Distribution per Class A Common Unit for each quarter of the
Partnership's existence, less (b) the amount per Class A Common Unit of any
distributions of Available Cash from Operating Surplus in excess of the
Second Target Distribution but not in excess the Third Target Distribution
for each quarter of the Partnership's existence; and
thereafter, 51.0% to all Units, pro rata, and 49.0% to all Class B Common
Units and General Partner Units, pro rata.
Any loss or unrealized loss will be allocated to the General Partner Units,
the Class A Common Units, Class B Common Units, pro rata, in proportion to the
positive balances in their respective capital accounts, until the positive
balances in the respective capital accounts have been reduced to zero.
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.
169
<PAGE>
CASH AVAILABLE FOR DISTRIBUTION
The Partnership believes that it will generate sufficient Available Cash from
Operating Surplus for the first four-quarter period following the Effective
Time to cover the full Minimum Quarterly Distribution for such four-quarter on
all then outstanding Units.
Even if such amount is generated, the Partnership may, however, not
distribute such cash. In particular, the Partnership may distribute less than
the Minimum Quarterly Distribution on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units because of the subordination
provisions and other limitations on distributions in the Amended and Restated
Partnership Agreement.
The Partnership's belief about the amount of cash it may generate is based on
a number of assumptions, including the assumptions that normal weather
conditions will prevail in the Partnership's and Petro's operating areas, that
the Partnership's and Petro'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 amount of Available Cash constituting Operating Surplus needed to pay the
Minimum Quarterly Distribution for four quarters on the Common Units, Senior
Subordinated Units, Junior Subordinated Units and General Partner Units to be
outstanding immediately after the Effective Time (assuming no exercise of the
underwriters' overallotment option in the Equity Offering) is approximately
$32.1 million ($23.8 million for the Common Units, $6.4 million for the Senior
Subordinated Units, $1.3 million for the Junior Subordinated Units and $0.6
million for the General Partner Units). After giving pro forma effect to the
Transaction, the amount of pro forma Available Cash constituting Operating
Surplus generated during the twelve months ended September 30, 1997, would have
been approximately $28.3 million, which excludes non-recurring restructuring,
corporate identity and pension curtailment expenses of approximately $7.6
million. The pro forma results for such period also do not reflect certain cost
savings that Petro implemented in fiscal 1998. See "Unaudited Pro Forma
Condensed Consolidated Financial Information."
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 that
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" in
the Partnership's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 and in the Partnership's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 which are incorporated herein by reference.
The Petro Holdings Senior Subordinated Debt is expected to have provisions that
will, under certain circumstances, similarly restrict the Partnership's ability
to make distributions to its Unitholders.
170
<PAGE>
DESCRIPTION OF THE UNITS
This discussion gives effect to the adoption of the Amendment Proposal.
The Common Units and Senior Subordinated Units to be issued in connection
with the Transaction have been registered under the Securities Exchange Act of
1934, as amended (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 ("SEC" or the "Commission").
Common Stockholders who receive Common Units or Senior Subordinated Units in
connection with the Transaction and subsequent transferees of Common Units and
Senior Subordinated 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 Proxy Statement and which is also set forth
on the reverse side of the certificate representing Common Units and Senior
Subordinated Units. Unitholders may hold Common Units and Senior Subordinated
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 or
a Senior Subordinated 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, Senior Subordinated Units and Junior
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
Amended and Restated Partnership Agreement. For a description of the relative
rights and preferences of holders of Common Units, Senior Subordinated Units
and Junior Subordinated Units in and to Partnership distributions, together
with a description of the circumstances under which Senior Subordinated Units
and Junior Subordinated Units may convert into Class B Common Units, see "Cash
Distribution Policy." For a description of the rights and privileges of limited
partners under the Amended and Restated Partnership Agreement, see "The Amended
and Restated 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 and the Senior Subordinated 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 and Senior Subordinated Units will be borne by the Partnership and not by
the holders of Common Units or Senior Subordinated 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 or a Senior
Subordinated Unit and other similar fees or charges will be borne by the
affected
171
<PAGE>
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 common stockholders, 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, a Senior Subordinated Unit or a Junior Subordinated 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. Any transfers of a
Common Unit or a Senior Subordinated 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, Senior Subordinated Units or
Junior Subordinated Units (i) becomes the record holder of such Units and shall
be constituted as 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 Amended and Restated Partnership
Agreement, (iv) represents that such transferee has the capacity, power and
authority to enter into the Amended and Restated Partnership Agreement,
(v) grants powers of attorney to the General Partner and any liquidator of
the Partnership as specified in the Amended and Restated Partnership Agreement
and (vi) makes the consents and waivers contained in the Amended and Restated
Partnership Agreement. An assignee will become a substituted limited partner of
the Partnership in respect of the transferred Common Units or Senior
Subordinated Units upon satisfaction of the following two conditions: 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 and Senior Subordinated 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 or Senior
Subordinated Units. A purchaser or transferee of Common Units or Senior
Subordinated Units who does not execute and deliver a Transfer Application
obtains only (a) the right to assign the Common Unit or Senior Subordinated
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 or Senior Subordinated 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 or Senior
172
<PAGE>
Subordinated 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 or Senior Subordinated Units, and may not receive
certain federal income tax information or reports furnished to record holders
of Common Units or Senior Subordinated Units. The transferor of Common Units or
Senior Subordinated 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 or Senior Subordinated Units, but a transferee agrees, by
acceptance of the certificate representing Common Units or Senior Subordinated
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 Amended and
Restated Partnership Agreement--Status as Limited Partner or Assignee."
173
<PAGE>
COMPARISON OF SECURITIES
The following comparison explains the material differences between the
attributes of Class A Common Stock that will be replaced with Senior
Subordinated Units. The summary is necessarily incomplete, and reference is
hereby made to the Amended and Restated Partnership Agreement, a copy of which
is attached hereto as Annex C and to "Certain Federal Income Tax
Considerations."
TAXATION
Class A Common Stock Senior Subordinated Units
Taxable income is realized by the The holders of the Senior
holders of Class A Common Stock when Subordinated Units will be required
Petro makes actual distributions out to report their share of the
of current or accumulated earnings Partnership's income, gains, losses
or, in other cases, if distributions and deductions in their federal
exceed the holder's basis in such income tax return whether or not
stock. distributions are made to them. In
general, cash distributions on the
Senior Subordinated Units will
themselves be taxable only if, and
to the extent that, they exceed the
holder's tax basis in the Senior
Subordinated Units.
DISTRIBUTIONS AND DIVIDENDS
Class A Common Stock Senior Subordinated Units
Shares of Class A Common Stock are The Senior Subordinated Units
entitled to a pro rata share of any generally are entitled to receive
dividends declared by the Petro quarterly distributions from
Board to be made from funds legally Available Cash during the
available therefor; provided, that Subordination Period after the
no dividends may be paid on the Common Units receive the Minimum
shares of Class A Common Stock Quarterly Distribution plus any
until, with respect to the 1989 arrearages thereon. The Senior
Preferred Stock and the New Subordinated Units have the right to
Preferred Stock, all dividends have receive the Minimum Quarterly
been paid (or declared and set Distribution before any distribution
apart) and all mandatory redemption is made on the Junior Subordinated
requirements have been satisfied. Units and the General Partner Units.
No distribution can be paid on
Senior Subordinated Units unless the
Partnership meets certain cash
generation requirements. In
addition, the Senior Subordinated
United have the right to receive
distributions in addition to the
Minimum Quarterly Distribution if
quarterly distributions of Available
Cash exceed the Target Distribution
Levels.
174
<PAGE>
VOTING RIGHTS
Class A Common Stock
Senior Subordinated Units
The holders of shares of Class A All Units have limited voting rights
Common Stock are entitled to one on matters affecting the
vote per share on all matters partnership. The matters that
submitted to the Common do require Unitholder approval
Stockholders. Generally, for passage generally require the approval of
or adoption of actions that require the holders of a Unit Majority,
a vote of the Common Stockholders, a which prior to the expiration of the
majority of each class of stock Subordination Period, includes the
represented at the meeting is approval of a majority of the Senior
required. The Petro Restated Subordinated Units and Junior
Articles of Incorporation do not Subordinated Units voting together
provide for cumulative voting. as a single class as well as the
approval of a majority of the Common
Units. Unitholders in the
Partnership do not elect the
directors of the General Partner.
RIGHTS TO CALL MEETINGS
Class A Common Stock
Senior Subordinated Units
Petro is required to hold an annual The Partnership does not have annual
stockholders meeting each year. meetings. A meeting of Unitholders
Special meetings of the stockholders may be called only by the General
may be called (and business proposed Partner or by the holders of 20% or
at such meetings) by the Chairman more of the outstanding Units of the
of the Petro Board or by the class for which the meeting is
Secretary upon the written request proposed.
of a majority of the total number of
Directors that Petro would have if
there were no vacancies.
REMOVAL OF DIRECTORS OR THE GENERAL PARTNER
Class A Common Stock
Senior Subordinated Units
The business and affairs of Petro The business and affairs of the
are managed by or under the Partnership are managed by or under
direction of the Petro Board, whose the direction of the General
members are elected by a plurality Partner. Subject to certain
of the votes cast by stockholders. conditions, the General Partner may
Stockholders may remove a director be removed upon the approval of the
or the entire Petro Board with or holders of at least 66 2/3% of
without cause, and such removal the outstanding Units (excluding
requires the affirmative vote of a Units owned by the General Partner
majority of the outstanding voting and its affiliates).
stock.
175
<PAGE>
LIQUIDATION RIGHTS
Senior Subordinated Units
Class A Common Stock
In the event of any liquidation of
In the event of any complete the Partnership during the
liquidation, dissolution or winding Subordination Period, the Senior
up of the business of Petro, each Subordinated Units will be entitled
Class B Share would be entitled to a to receive a distribution out of the
distribution equal to $5.70 per net assets of the Partnership after
share, as adjusted, before any liquidating distributions are made
distribution is made with respect to on the Common Units. The Senior
any other class of Petro Stock. Subordinated Units will be entitled
Thereafter, each share of 1989 to receive a distribution out of the
Preferred Stock and each share of net assets of the Partnership in
Public Preferred Stock would be preference to liquidating
entitled to distributions equal to distributions on the Junior
$100 per share and $23 per share, Subordinated Units and General
respectively, plus accrued and Partner Units.
unpaid dividends. Thereafter, each
share of Junior Convertible
Preferred Stock would be entitled to
a distribution of $0.10 per share.
Thereafter, each share of Class A
Common Stock, Class B Share, Class C
Common Stock and Junior Convertible
Preferred Stock would participate
equally in all liquidating
distributions.
CONVERSION RIGHTS
Class A Common Stock Senior Subordinated Units
The Class A Common Stock is not The Senior Subordinated Units will
convertible into any other security. convert into Class B Common Units
upon the expiration of the
Subordination Period. The
Subordination Period will extend
until the first day of any quarter
beginning July 1, 2002 in respect of
which certain amounts of Available
Cash were distributed and earned in
previous quarters.
LIABILITY OF HOLDERS
Class A Common Stock Senior Subordinated Units
The liability of a holder of Class A So long as a holder of a Senior
Common Stock for the debts and Subordinated Unit does not
obligations of Class A Common Stock participate in the control of the
is limited to such holders' business of the Partnership and acts
investment in the stock. All Class A in accordance with the Amended and
Common Stock is fully paid and non- Restated Partnership Agreement,
assessable. liability is limited to the holder's
investment in the Senior
Subordinated Units. Except under
limited exceptions, all Senior
Subordinated Units are fully paid
and non-assessable.
176
<PAGE>
TRANSFERABILITY AND LISTING
Class A Common Stock
Senior Subordinated Units
Shares of Class A Common Stock are The Senior Subordinated Units are
freely transferrable and are quoted freely transferable and listed on
on the Nasdaq National Market. the New York Stock Exchange.
REDEMPTION
Class A Common Stock
Senior Subordinated Units
There are no redemption rights with If at any time not more than 20% of
respect to shares of Class A Common the then issued and outstanding
Stock. 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
to an affiliate or the Partnership,
to acquire all, but not less than
all, of the remaining limited
partner interests of such class.
If at any time after the expiration
of the Subordination Period the
Partnership acquires, through
purchase or exchange, in a twelve-
month period, 66 2/3% or more of the
total Class B Common Units, the
Partnership shall have the right,
which it may not assign, to purchase
all, but not less than all, of the
remaining Class B Common Units of
such class during the following
twelve-month period.
APPRAISAL RIGHTS
Class A Common Stock
Senior Subordinated Units
Under Sections 302A.471 and 302A.473 The holders of the Senior
of the MBCA, set forth in full as Subordinated Units (as well as the
Annex F to this Proxy Statement, holders of all other Units) are not
Common Stockholders (other than who entitled to dissenters' rights under
have agreed to vote for the the Amended and Restated Partnership
Acquisition Proposal or who have Agreement or applicable Delaware law
granted irrevocable powers to Petro in the event of a merger or
to vote for the Transaction at the consolidation of the Partnership, or
Special Meeting) have the right to a sale, exchange or other
dissent, and obtain payment of the disposition of substantially all of
"fair value" of their shares, in the the Partnership's assets.
event of certain corporate actions
such as the Transaction.
177
<PAGE>
PREEMPTIVE RIGHTS
Class A Common Stock
Senior Subordinated Units
Holders of Class A Common Stock have The holders of the Senior
no preemptive rights, rights to Subordinated Units do not have
maintain their respective percentage preemptive rights with respect to
ownership interests or other rights the issuance of any securities of
to subscribe for additional Petro the Partnership.
Stock.
INSPECTION OF BOOKS, RECORDS AND LIST OF HOLDERS
Class A Common Stock
Senior Subordinated Units
Under Section 302A.461 of the MBCA, So long as there exists a purpose
any stockholder, in person or by reasonably related to a limited
attorney or other agent, has the partner's interest, the holders of
right, upon written demand under Senior Subordinated Units may, upon
oath stating the purpose thereof, reasonable demand and at their own
during the usual hours of business expense, have furnished to them (i)
to inspect for any proper purpose a current list of the name and last
the corporation's stock ledger, a known address of each partner, (ii)
list of its stockholders, and its a copy of the Partnership's tax
other books and records, and to make returns, (iii) certain information
copies or extracts therefrom. A with respect to the value of
proper purpose means a purpose contributions to the Partnership,
reasonably related to such person's (iv) copies of the Amended and
interest as a stockholder. Restated Partnership Agreement,
certificate of limited partnership
and powers of attorney,
(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.
178
<PAGE>
COMPARATIVE SECURITY PRICE AND DISTRIBUTION INFORMATION
PARTNERSHIP SECURITIES
Common Units. Since May 29, 1998, the Common Units have been listed and
traded on the New York Stock Exchange under the symbol "SGU." From December 20,
1995 through May 28, 1998, the Common Units were listed on the Nasdaq National
Market. The following table sets forth the closing high and low sales prices
per Common Unit on the Nasdaq National Market through May 28, 1998 and
thereafter on the New York Stock Exchange and the cash distributions declared
per Common Unit for the periods indicated.
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------- -------------------------- --------------------------
FISCAL CASH CASH CASH
QUARTER ENDED HIGH LOW DISTRIBUTION HIGH LOW DISTRIBUTION HIGH LOW DISTRIBUTION
------------- --------- --------- ------------ ------ ------ ------------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31,............ $21.00(a) $18.13(a) -- $23.88 $20.50 $0.55 $23.88 $21.75 $0.55
March 31,............... -- -- -- 24.75 21.38 0.55 24.63 20.75 0.55
June 30,................ -- -- -- 23.00 20.50 0.55 21.88 19.00 0.55
September 30,........... -- -- -- 21.00 18.13 0.55(b) 23.50 21.00 0.55
</TABLE>
- --------
(a) From October 1, 1998 through October 20, 1998.
(b) The General Partner announced on October 21, 1998 its intention to pay
Common Unitholders a cash distribution of $0.55 per Unit for the three
months ended September 30, 1998 to be paid on November 13, 1998 to Common
Unitholders of record as of November 3, 1998.
On August 13, 1998, the last full trading day prior to the public
announcement of the proposed Transaction, the closing sales price of the Common
Units was $21.063 on the NYSE. On October 20, 1998, the closing sales price of
the Common Units was $21.000.
Subordinated Units. There is no trading market for the Partnership's
2,396,078 Subordinated Units, all of which are held by Star Gas.
Senior Subordinated Units. There are no Senior Subordinated Units outstanding
as of the date of this Proxy Statement.
Junior Subordinated Units. There are no Junior Subordinated Units outstanding
as of the date of this Proxy Statement.
179
<PAGE>
PETRO CAPITAL STOCK
Class A Common Stock. Shares of Class A Common Stock are listed and traded on
the Nasdaq National Market under the symbol "HEAT". The following table sets
forth the last reported high and low sale prices per share of Class A Common
Stock and dividends declared on shares of Class A Common Stock for the periods
indicated:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ----------------------- -----------------------
FISCAL QUARTER ENDED HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
- -------------------- ------ ------- --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31,............. $ 3 $1 7/16 $0.075(b) $6 3/4 $3 3/8 $0.075 $8 1/4 $6 1/2 $0.15
June 30,.............. 2 1/16 1 1/2 -- 3 7/8 2 1/2 0.075 7 3/4 6 1/2 0.15
September 30,......... 2 1/16 1 5/16 -- 3 1/2 2 5/8 0.075 7 3/4 6 1/4 0.15
December 31,.......... 1 3/8 (a) 15/16 (a) -- 3 1/2 2 1/8 0.075 7 3/4 5 5/8 0.15
</TABLE>
- --------
(a) From October 1, 1998 through October 20, 1998.
(b) Petro declared a dividend of $.075 per share of Class A Common Stock which
was paid on January 2, 1998 to holders of record on December 15, 1997. On
February 24, 1998, Petro announced that it will suspend its regularly
scheduled quarterly common stock dividend and that it did not expect to pay
common stock dividends for the remainder of the year. In arriving at this
decision, the Petro Board considered the impact of unusually warm winter
weather on its earnings and cash flow, as well as a variety of other facts.
On August 13, 1998, the last full trading day prior to the public
announcement of the proposed Transaction, the closing sales price of the Class
A Common Stock was $1.875 on the Nasdaq National Market. The last sale price of
the Class A Common Stock on October 20, 1998 was $1.000 per share. As of
, 1998, Petro had holders of record of Class A Common Stock.
Class C Common Stock. There is no established trading market for Class C
Common Stock. As of , 1998, Petro had holders of record of
Class C Common Stock.
Public Preferred Stock. There is no established trading market for the Public
Preferred Stock. As of , 1998, Petro had holders of record of
Public Preferred Stock.
Private Preferred Stock. There is no established trading market for the
Private Preferred Stock. As of , 1998, Petro had holders of
record of the Private Preferred Stock.
Junior Convertible Preferred Stock. There is no established trading market
for the Junior Convertible Preferred Stock. As of , 1998, Petro had
holders of record of Junior Convertible Preferred Stock.
180
<PAGE>
COMPARATIVE PER SHARE/PER UNIT INFORMATION (UNAUDITED)
The following table sets forth, for Units and shares of Class A Common Stock,
certain historical, pro forma and pro forma equivalent per Unit financial
information for the latest fiscal years of the Partnership and Petro, the
latest interim periods of the Partnership and Petro and the pro forma results
as of and for the nine months ended June 30, 1998. The pro forma data do not
purport to be indicative of the results of future operations or the results
that would have occurred had the Transaction been consummated on October 1,
1997. This information should be read in conjunction with and is qualified in
its entirety by the financial statements and accompanying notes of the
Partnership and Petro included in the documents described under "Incorporation
of Certain Documents By Reference" and the pro forma combined financial
statements and accompanying discussion and notes set forth under "Unaudited Pro
Forma Condensed Consolidated Financial Statements."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED INTERIM PERIODS
------------------------------------------------ ------------------------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
PARTNERSHIP(A)(J) PETRO(B)(K) EQUIVALENT(C)(J) PARTNERSHIP(D)(J) PETRO(E)(K) EQUIVALENT(F)(J)
----------------- ----------- ---------------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net Income.............. $0.37 $(1.06) $(0.02) $ 0.79 $ 0.06 $ 2.29
Cash Distributions...... $2.20 $ 0.30 $ 2.20 $ 2.20 $ 0.00 $ 1.65
Book Value.............. $9.59(g) $ (6.76)(h) -- $10.39(i) $(6.61)(i) $16.05(i)
</TABLE>
- --------
(a) For the fiscal year ended September 30, 1997.
(b) For the fiscal year ended December 31, 1997.
(c) For the fiscal year ended September 30, 1997.
(d) For the nine months ended June 30, 1998.
(e) For the six months ended June 30, 1998.
(f) For the nine months ended June 30, 1998.
(g) As of September 30, 1997.
(h) As of December 31, 1997.
(i) As of June 30, 1998.
(j) Per Unit limited partner interest.
(k) Per share of Common Stock.
181
<PAGE>
CERTAIN FEDERAL INCOME 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 Andrews & Kurth L.L.P., 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 Code, existing and proposed regulations thereunder
and current administrative rulings and court decisions, all of which are
subject to change with and without retroactive effect. 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 Units.
TAX CONSEQUENCES OF THE MERGER
The Merger will be a taxable transaction to the Petro Common Stockholders
generally resulting in gain or loss to each such holder in an amount equal to
the difference between the value of the Senior Subordinated Units received by
him and the federal income tax basis he has in the shares exchanged for Senior
Subordinated Units. The gain or loss will be capital gain or loss if the stock
is held by the Common Stockholder as a capital asset and will be long-term gain
or loss if such stock has been held for more than one year. Long-term capital
gain will generally be taxed at a maximum rate of 20%. Capital losses can be
deducted against capital gains and thereafter against ordinary income to the
extent of $3,000 per year for individuals with any unused capital loss being
carried forward indefinitely. Net capital gain of foreign holders of Common
Stock should generally not be subject to United States federal income tax.
Common Stockholders participating in the Merger will have a basis in their
Senior Subordinated Units equal to the fair market value of such Units at the
time of the Merger and their holding period will begin on the day after the
Merger. Counsel has not rendered any opinion with respect to these matters.
The Merger will also result in gain to Petro equal to the excess of the value
of the Senior Subordinated Units distributed to the Common Stockholders in the
Merger and any debt relief over the federal income tax basis of such Units to
Petro. Although it is expected by Petro that such gain will generally be offset
by Petro's NOLs, the NOLs are subject to challenge by the IRS. The Corporate
Group does not anticipate that it will pay significant federal income tax at
the outset; however, over time more federal income tax will be paid by the
Corporate Group. The Corporate Group's ability to reduce income for federal
income tax purposes is dependent on depreciation deductions and interest
deductions with respect to certain debt, all of which is subject to scrutiny by
the IRS. Counsel has not rendered any opinion with respect to these matters.
182
<PAGE>
TAX CONSEQUENCES OF UNIT OWNERSHIP
Legal Opinions and Advice. Counsel is of the opinion that, based on 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 have been and will each be treated as a
partnership and (ii) owners of 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.
No ruling has been or will be requested from the IRS with respect to
classification of the Partnership as a Partnership for federal income tax
purposes, whether the Partnership's 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 Units and the prices at
which 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 modifications 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 Units are loaned to a short seller to cover a
short sale of Units (see "--Tax Treatment of Operations--Treatment of Short
Sales"), (ii) whether a Unitholder acquiring Units in separate transactions
must maintain a single aggregate adjusted tax basis in his Units (see "--
Disposition of Units--Recognition of Gain or Loss"), (iii) whether the
Partnership's monthly convention for allocating taxable income and losses is
permitted by existing Treasury Regulations (see "--Disposition of 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 (see "--Allocation of Partnership Income, Gain, Loss and Deduction").
Tax Rate. The top marginal income tax rate for individuals for 1998 is 39.6%.
Net capital gains of an individual are generally subject to a maximum 20% tax
rate if the asset was held for more than 12 months at the time of disposition.
Partnership Status. A partnership is not a taxable entity and incurs no
federal income tax liability. Instead, each partner is required to take into
account his allocable share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of
whether cash distributions are made. Distributions by a partnership to a
partner are generally not taxable unless the amount of cash distributed is in
excess of the partner's adjusted basis in his partnership interest.
183
<PAGE>
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 and certain representations set forth below, the
Partnership and the Operating Partnership have been and will each be classified
as a partnership for federal income tax purposes.
In rendering its opinion, Counsel has relied on certain factual
representations made by the Partnership and the General Partner. Such factual
matters for taxable years beginning before December 31, 1996 are as follows:
(a) With respect to the Partnership and the Operating Partnership, the
General Partner, at all times while acting as general partner of the
relevant partnership, had a net worth, computed on a fair market value
basis, excluding its interest in the Partnership and the Operating
Partnership and any notes or receivables due from such partnerships, equal
to at least $6.0 million;
(b) The Partnership has been operated in accordance with (i) all
applicable partnership statutes, (ii) the Partnership Agreement and (iii)
the description thereof in this Proxy Statement;
(c) The Operating Partnership has been operated in accordance with (i)
all applicable partnership statutes, (ii) the limited partnership agreement
for the Operating Partnership and (iii) the description thereof in this
Proxy Statement;
(d) The General Partner has at all times acted independently of the
Limited Partners; and
(e) For each taxable year, less than 10% of the gross income of the
Partnership has been derived from sources other than (i) 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.
Such factual matters for taxable years beginning after December 31, 1996 are
as follows:
(a) Neither the Partnership nor the Operating Partnership has elected, or
will elect, to be treated as an association or corporation;
(b) The Partnership has been and will be operated in accordance with (i)
all applicable partnership statutes, (ii) the Partnership Agreement, and
(iii) the description thereof in this Prospectus;
(c) The Operating Partnership has been and will be operated in accordance
with (i) all applicable partnership statutes, (ii) the Operating
Partnership Agreement, and (iii) the description thereof in this
Prospectus; and
(d) For each taxable year, more than 90% of the gross income of the
Partnership has been and 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.
184
<PAGE>
Section 7704 of the Code provides that publicly-traded partnerships will, as
a general rule, be taxed as corporations. However, an exception (the
"Qualifying Income Exception") exists with respect to publicly-traded
partnerships of which 90% or more of the gross income for every taxable year
consists of "qualifying income." Qualifying income includes interest (from
other than a financial business), dividends and income and gains from the
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 least 90% of the Partnership's
gross income will constitute qualifying income. The Partnership estimates that
less than % of its gross income for each taxable year will not constitute
qualifying income.
If the Partnership fails to meet the Qualifying Income Exception (other than
a failure that is determined by the IRS to be inadvertent and 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 that corporation, and then
distributed that 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 treated as an
association taxable as a corporation in any taxable year, either as a result of
a failure to meet the Qualifying Income Exception or otherwise, its items of
income, gain, loss and deduction would be reflected only on its tax return
rather than being passed through to the Unitholders, and its net income would
be taxed to the Partnership or the Operating Partnership 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 Units) or taxable capital gain (after the Unitholder's tax basis in the
Units is 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 of the opinion that (a) assignees who have executed
and delivered Transfer Applications, and are awaiting admission as limited
partners and (b) Unitholders whose 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 Units will be treated as
partners of the Partnership for federal income tax purposes. As there is no
direct authority addressing assignees of Units who are entitled to execute and
deliver Transfer Applications and thereby become entitled to direct the
exercise of
185
<PAGE>
attendant rights, but who fail to execute and deliver Transfer Applications,
Counsel's opinion does not extend to these persons. (Furthermore, a purchaser
or other transferee of 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 Units unless the 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 Units.)
A beneficial owner of Units whose Units have been transferred to a short
seller to complete a short sale would appear to lose his status as a partner
with respect to such Units for federal income tax purposes. See "--Tax
Treatment of Operations--Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
Unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by such a Unitholder would therefore be fully taxable as
ordinary income. These holders should consult their own tax advisors with
respect to their status as partners in the Partnership for federal income tax
purposes.
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 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.
Although Petro Holdings and Petro do not expect that either Petro Holdings or
Petro will pay significant federal income tax for some period of time, it is
possible that Petro Holdings may generate earnings and profits during that time
such that distributions from Petro Holdings to the Partnership may result in
taxable dividend income to the Partnership and, thus, to the Unitholders.
Counsel has not rendered any opinion with respect to these matters.
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 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 Units,
taxable in accordance with the rules described under "Disposition of 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
186
<PAGE>
basis in his 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
holder who acquires Units through the Transaction and holds such Units through
December 31, 2001, will be allocated, on a cumulative basis, an amount of
federal taxable income for such period that will be less than 15% of the cash
distributed with respect to that period. The Partnership further estimates that
for taxable years after the taxable year ending December 31, 2001, 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
Units.
Consummation of the Transaction and related transactions will result in an
increased allocation of taxable income to the Common Unitholders as a
percentage of cash being distributed although the Partnership expects that
suspended losses will be available to offset such income for some period of
time. Counsel has not rendered any opinion with respect to this matter.
Basis of Units. A person who acquires his Units pursuant to the Transaction
will generally have an initial tax basis for his Units equal to the fair market
value of the Units received. A holder's 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
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
nonrecourse liabilities. See "--Disposition of 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
187
<PAGE>
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 passive income generated by the Partnership and will not be available to
offset income from other passive activities or investments (including other
publicly-traded companies), interest and dividend income generated by the
Partnership, such as dividends from the Corporate Group, 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 companies. The IRS has announced
that Treasury Regulations will be issued that 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
188
<PAGE>
indebtedness properly allocable to property held for investment, (ii) the
Partnership's interest 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 the Common Units and not to the Senior
Subordinated Units or Junior Subordinated Units, or that Incentive
Distributions are made to holders of Senior Subordinated Units, Junior
Subordinated Units or General Partner Units or to holders of Senior
Subordinated Units and not to Junior Subordinated Units or General Partner
Units, gross income will be allocated to the recipients to the extent of such
distributions. If the Partnership has a net loss, items of income, gain, loss
and deduction will generally 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, second, 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 contributed or deemed contributed to the Partnership
by each of the partners ("Contributed Property"). The effect of these
allocations to a Unitholder will be essentially the same as if the tax basis of
the Contributed Property were equal to their fair market value at the time of
contribution or deemed contribution. In addition, certain items of recapture
income will be allocated to the extent possible to the partner allocated the
deduction giving rise to the treatment of such gain as recapture income in
order to minimize the recognition of ordinary income by some Unitholders.
Finally, although 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
189
<PAGE>
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 allocations under the Partnership Agreement,
with the exception of the allocation of recapture income discussed above, 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 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 taxable 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 a date other than December 31 and who disposes of all of his
Units following the close of 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 Units--Allocations Between Transferors and
Transferees."
Initial Tax Basis, Depreciation and Amortization. The tax basis of the 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 federal income tax burden associated with the difference between
the fair market value of property contributed and the tax basis established for
such property will be borne by the contributors of such property. See "--
Allocation of Partnership Income, Gain, Loss and Deduction."
To the extent allowable, the Partnership may elect to use the depreciation
and cost recovery methods that will result in the largest deductions in the
early years of the Partnership. The Partnership will not be entitled to any
amortization deductions with respect to goodwill conveyed to the Partnership on
formation. Property subsequently acquired or constructed by the Partnership may
be depreciated using accelerated methods permitted by the Code.
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 "--Allocation of Partnership Income, Gain, Loss and Deduction"
and "--Disposition of Units--Recognition of Gain or Loss."
Section 754 Election. The Partnership has made the election permitted by
Section 754 of the Code, which generally permits the Partnership to adjust a
Unit purchaser's tax basis in the Partnership's assets ("inside basis")
pursuant to Section 743(b) of the Code to reflect his purchase price. That
election is irrevocable without the consent of the IRS. The Section 743(b)
adjustment
190
<PAGE>
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 ("Basis") and (2) his Section 743(b) adjustment to that basis.)
Proposed Treasury regulations under Section 743 of the Code require, if the
remedial allocation method is adopted (which the Partnership has done), a
portion of the Section 743(b) adjustment attributable to recovery property to
be depreciated over the remaining cost recovery period for the Section 704(c)
built-in gain. Nevertheless, the proposed regulations under Section 197
indicate that the Section 743(b) adjustment attributable to an amortizable
Section 197 intangible should be treated as a newly-acquired asset placed in
service in the month when the purchaser acquires the 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. Although the proposed regulations under Section 743 will likely
eliminate many of the problems if finalized in their current form, the
depreciation and amortization methods and useful lives associated with the
Section 743(b) adjustment may differ from the methods and useful lives
generally used to depreciate the basis in such properties. Pursuant to the
Partnership Agreement, the General Partner is authorized to adopt a convention
to preserve the uniformity of Units even if such convention is not consistent
with Treasury Regulation Section 1.167(c) -1(a)(6) and 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 Contributed
Property (to the extent of any unamortized Book-Tax Disparity) using a rate of
depreciation or amortization derived from the depreciation or amortization
method and useful life applied to the Basis of such property, or treat that
portion as non-amortizable to the extent attributable to property the Basis of
which is not amortizable. This method is consistent with the proposed
regulations under Section 743 but is arguably inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6) and Proposed Treasury Regulation Section
1.197-2(g)(3) (neither of which is expected to directly apply to a material
portion of the Partnership's assets). 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 and legislative history. 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 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.
191
<PAGE>
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
the Partnership income, gain, deduction, or loss for purposes of the
alternative minimum tax. The minimum tax rate for noncorporate taxpayers is 26%
on the first $175,000 of alternative minimum taxable income in excess of the
exemption amount 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.
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
192
<PAGE>
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 Units--Recognition of Gain or Loss."
DISPOSITION OF 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.
Prior Partnership distributions in excess of cumulative net taxable income in
respect of a Unit that 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 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 held for more than one year will generally be
taxable as capital gain or loss. Capital gain recognized on the sale of Units
held more than 12 months will generally be taxed 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 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 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
193
<PAGE>
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 Units, a Unitholder
will be unable to select high or low basis Units to sell as would be the case
with corporate stock. It is not clear whether the ruling applies to the
Partnership, because, as is the case with 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 Units or a sale of Units
purchased in separate transactions should consult his tax advisor as to the
possible consequences of such ruling.
Certain provisions of the Code affect 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 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, or (iii) a futures or
forward contract with respect to the partnership interest or substantially
identical property. Moreover, if a taxpayer has previously entered into a short
sale, an offsetting notional principal contract or a futures or forward
contract with respect to a partnership interest, the taxpayer will be treated
as having sold such position if the taxpayer or a related party then acquires
the partnership interest or substantially identical property. The Secretary of
Treasury is also authorized to issue regulations that treat a taxpayer who or
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 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 Units in the open market
may be allocated income, gain, loss and deduction accrued after the date of
transfer.
The use of this allocation 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 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.
194
<PAGE>
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 transferor and a transferee of a Unit will be
required to furnish statements to the IRS, filed with their income tax returns
for the taxable year in which the sale or exchange occurred, that set forth the
amount of the consideration received for the Unit that is allocated to goodwill
or going concern value of the Partnership. 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. Electing large partnerships do 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
tax year of the Partnership 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
195
<PAGE>
application of Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed
Treasury Regulation Section 1.197-2(g)(3). Any non-uniformity could have a
negative impact on the value of the Units. See "--Tax Treatment of Operations--
Section 754 Election."
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 basis of
such property, or treat that portion as nonamortizable, to the extent
attributable to property the basis of which is not amortizable consistent with
the proposed regulations under Section 743 (but despite its inconsistency with
Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed Treasury Regulation
Section 1.197-2(g)(3) (neither of which is expected to directly apply to a
material portion of the Partnership's assets)). 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
and legislative history. 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 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 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 individual retirement
accounts ("IRAs") and other retirement plans) are subject to federal income tax
on unrelated business taxable income. Virtually all 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 company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of the Partnership's gross income will
include that type of income.
196
<PAGE>
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 that 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 on a Form W-8 in order to
obtain credit for the taxes withheld. A change in applicable law may require
the Partnership to change these procedures.
Because a foreign corporation that 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 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 "U.S. net equity") which are
effectively connected with the conduct of a United States trade or business.
That tax may be reduced or eliminated by an income tax treaty between the
United States and the country 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 or subject to
withholding 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 that 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.
197
<PAGE>
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, 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.
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.
Each partner in a partnership that elects to be treated as a "large
partnership" takes 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 are not passed through to the
partners and 30% of such deductions are used at the partnership level.
A number of changes have also been made to the tax compliance and
administrative rules relating to electing large partnerships. One provision
would require that each partner in a large
198
<PAGE>
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, 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. It is not expected that the Partnership will elect
to have the large partnership provisions apply because of the cost of their
application.
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
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 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.
Accuracy-related Penalties. An additional tax equal to 20% of the amount of
any portion of an underpayment of tax which is attributable to one or more of
certain listed causes, including negligence or disregard of rules or
regulations, substantial understatements of income tax and
199
<PAGE>
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 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 the Partnership does business or owns property. Although
an analysis of those various taxes is not presented here, each prospective
Unitholder should consider their potential impact on his investment in the
Partnership. Star Gas believes that substantially all of the Partnership's
income will be generated in the following states: Connecticut, Indiana,
Kentucky, Maine, Massachusetts, Michigan, New Hampshire, New Jersey, New York,
Ohio, Pennsylvania, Rhode Island, Texas and West Virginia. Of these states,
only Texas does not currently impose a personal income tax. New Hampshire's
personal income tax applies only to interest and dividend income. A Unitholder
will be required to file state income tax returns and to pay state income taxes
in some or all of these states and may be subject to penalties for failure to
comply with those requirements. In certain states, tax losses may not produce a
tax benefit in the year incurred (if, for example, the Partnership has no
income from sources within that state) and also may not be available to offset
income in subsequent taxable years. Some of the states may require the
Partnership, or the Partnership may elect, to withhold a percentage of income
from amounts to be distributed to a Unitholder who is not a resident of the
state. Withholding, the amount of which may be greater or less than a
particular Unitholder's income tax liability to the state, generally does not
relieve the non-resident Unitholder from the obligation to file an income tax
return. Amounts withheld may be treated as if distributed to Unitholders for
purposes of determining the amounts
200
<PAGE>
distributed by the Partnership. See "--Disposition of 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.
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.
201
<PAGE>
DISSENTERS' RIGHTS
Sections 302A.471 and 302A.473 of the MBCA provide to each Common Stockholder
the right to dissent from the Acquisition Proposal and obtain payment for the
"fair value" of such Common Stockholder's shares following the consummation of
the Transaction. Common Unitholders do not have dissenters' rights under the
DRULPA or the Partnership Agreement.
The following summary of the applicable provisions of Sections 302A.471 and
302A.473 of the MBCA is not intended to be a complete statement of such
provisions and is qualified in its entirety by reference to such sections, the
full texts of which are attached as Appendix E to this Proxy Statement. These
Sections should be reviewed carefully by any Common Stockholder who wishes to
exercise dissenters' rights or who wishes to preserve the right to do so, since
failure to comply with the procedures described herein and set forth therein
will result in the loss of dissenters' rights.
Under the MBCA, Common Stockholders will have the right, by fully complying
with the applicable provisions of Sections 302A.471 and 302A.473, to dissent
with respect to the Transaction and to receive from Petro payment in cash of
the "fair value" of their shares of Common Stock after the Transaction is
completed. The term "fair value" means the value of such shares of Common Stock
immediately before the Effective Time. Pursuant to the Merger Agreement, the
Partnership has agreed to make payment of the fair value of the shares of
dissenting Common Stockholders.
All references in Sections 302A.471 and 302A.473 of the MBCA to a
"shareholder" are to a record holder of shares of Common Stock as to which
dissenters' rights are asserted by such Common Stockholder. A person having
beneficial ownership of shares of Common Stock that are held of record in the
name of another person, such as a broker, nominee, trustee or custodian, must
act promptly to cause the record holder to follow the steps summarized below
properly and in a timely manner in order to perfect whatever dissenters' rights
such beneficial owner may have.
Common Stockholders who desire to exercise their dissenters' rights must
satisfy all of the following conditions:
A written notice of intent to demand fair value (a "Dissent Notice") for his
or its shares of Common Stock must be delivered by such a Common Stockholder to
Petro at the address specified below before the taking of the vote of
shareholders on the Acquisition Proposal. Such Dissent Notice is in addition to
and separate from any proxy or vote against the Transaction Proposal. Voting
against, abstaining from voting or failing to vote on the Acquisition Proposal
does not constitute a Dissent Notice or demand for appraisal within the meaning
of the MBCA. Only Common Stockholders of record as of the Record Date, and
beneficial owners of Common Stock as of such date who hold through such Common
Stockholders, are entitled to exercise dissenters' rights.
Holders of Common Stock electing to exercise dissenters' rights under the
MBCA must not vote for the Transaction Proposal. A Common Stockholder's failure
to vote against the Acquisition Proposal will not constitute a waiver of
dissenters' rights. However, if a Common Stockholder returns a signed proxy but
does not specify a vote against the Acquisition Proposal or a direction to
202
<PAGE>
abstain, the proxy will be voted for the Acquisition Proposal, which will have
the effect of waiving that Common Stockholder's dissenters' rights.
A Common Stockholder may not assert dissenters' rights as to less than all of
the shares of Common Stock registered in such holder's name and/or beneficially
owned by such Common Stockholder, except where shares are beneficially owned by
another person but registered in such Common Stockholder's name. If a Common
Stockholder, such as a broker, nominee, trustee or custodian, wishes to dissent
with respect to shares of Common Stock beneficially owned by another person,
such Common Stockholder must dissent with respect to all of such shares and
must disclose the name and address of the beneficial owner on whose behalf the
dissent is made. A beneficial owner of shares of Common Stock who is not the
record owner of such shares may assert dissenters' rights as to shares held on
such person's behalf, provided that such beneficial owner submits a written
consent of the record owner to Petro at or before the time such rights are
asserted.
A Common Stockholder who elects to exercise dissenters' rights must send a
Dissent Notice to Petro at the following address before the taking of the vote
on the Acquisition Proposal: Petroleum Heat and Power Co., Inc., P.O. Box 1457,
Stamford, CT 06902, Attention: Treasurer. The Dissent Notice should specify the
Common Stockholder's name and mailing address, the number of shares of each
class of Common Stock owned by such Common Stockholder and that the Common
Stockholder intends to demand the fair value of such shares.
If the Acquisition Proposal is approved by Common Stockholders at the Special
Meeting, Petro will send a written notice to each Common Stockholder (the
"Advisory Notice") who filed a Dissent Notice. The Advisory Notice will contain
the address to which the Common Stockholder should send a demand for the
payment of the fair value of his or its shares of Common Stock (the "Fair Value
Demand") and the certificates representing such shares in order to obtain
payment and the date by which they must be received by Petro, a form to be used
to make such Fair Value Demand and other related information.
In order to receive fair value for his or its shares of Common Stock, a
dissenting Common Stockholder must, within 30 days after the date the Advisory
Notice was given, send his or its stock certificates, a Fair Value Demand and
all other information specified in the Advisory Notice from Petro, to the
address specified in the Advisory Notice. A dissenting Common Stockholder will
retain all rights as a Common Stockholder until the Effective Time. After the
later of (1) the date of receipt by Petro of a valid Fair Value Demand and the
related stock certificates and other information are received and (2) the
Effective Time, the Partnership, on behalf of Petro, will remit to each
dissenting Common Stockholder who has complied with the statutory requirements
the amount that Petro estimates to be the fair value of such Common
Stockholder's shares of Common Stock, with interest commencing five days after
the Effective Time at a rate prescribed by statute. Remittance will be
accompanied by Petro's balance sheet and statement of operations for a fiscal
year ending not more than 16 months before the Effective Time, together with
the latest available interim financial data, an estimate of the fair value of
such dissenting Common Stockholder's shares of Common Stock and a brief
description of the method used to reach such estimate, a brief description of
the procedure to be followed if such holder is demanding supplemental payment
and copies of Sections 302A.471 and 302A.473 of the MBCA.
203
<PAGE>
If the dissenting Common Stockholder believes that the amount remitted by the
Partnership, on behalf of Petro, is less than the fair value of such Common
Stockholder's shares, plus interest, the dissenting Common Stockholder may give
written notice to Petro of such Common Stockholder's own estimate of the fair
value of the shares, plus interest, within 30 days after the mailing date of
the remittance and demand payment of the difference (a "Supplemental Payment
Demand"). Such Supplemental Payment Demand must be given to Petro at the
address specified in the Advisory Notice. A Common Stockholder who fails to
give such written notice within this time period is entitled only to the amount
remitted by the Partnership.
Within 60 days after receipt of a Supplemental Payment Demand, Petro must
either (1) pay the Common Stockholder the amount demanded or agreed to by such
Common Stockholder after discussion with Petro or (2) petition a state court in
Hennepin County, Minnesota for the determination of the fair value of the
shares, plus interest. The petition must name as parties all Common
Stockholders who have demanded supplemental payment and have not reached an
agreement with Petro. The court, after determining that the dissenting Common
Stockholder or Stockholders in question have complied with all statutory
requirements, may use any valuation method or combination of methods it deems
appropriate, whether or not used by Petro or the dissenting Common Stockholder,
and may appoint appraisers to recommend the amount of the fair value of the
class of Common Stock to be valued. The court's determination will be binding
on all Common Stockholders who properly exercised dissenters' rights and did
not agree with Petro as to the fair value of such shares. Dissenting Common
Stockholders are entitled to judgment for the amount by which the court-
determined fair value per share, plus interest, exceeds the amount per share,
plus interest, remitted to the Common Stockholders by the Partnership. The
Common Stockholders will not be liable to Petro or the Partnership for any
amounts paid by Petro or the Partnership that exceed the fair value of the
shares as determined by the court, plus interest. The costs and expenses of
such a proceeding, including the expenses and compensation of any appraisers,
will be determined by the court and assessed against Petro, except that the
court may, in its discretion, assess part or all of those costs and expenses
against any Common Stockholder whose action in demanding supplemental payment
is found to be arbitrary, vexatious or not in good faith. The court may award
fees and expenses to an attorney for the dissenting Common Stockholders out of
the amount, if any, awarded to such Common Stockholders. Fees and expenses of
experts or attorneys may also be assessed against any person who acted
arbitrarily, vexatiously or not in good faith in bringing the proceeding.
The Partnership may withhold the remittance of the estimated fair value, plus
interest, for any shares of Common Stock owned by any person who was not a
Common Stockholder, or who is dissenting on behalf of a person who was not a
beneficial owner, on August 14, 1998, the date on which the proposed
Transaction was first announced to the public (the "Public Announcement Date").
Petro will forward to any such dissenting Common Stockholder who has complied
with all requirements in exercising dissenters' rights the Advisory Notice and
all other materials sent after approval by the Common Stockholders of the
Acquisition Proposal to all Common Stockholders who have properly exercised
dissenters' rights, together with a statement of the reason for withholding the
remittance and an offer to pay the dissenting Common Stockholder the amount
listed in the materials, if such Common Stockholder agrees to accept that
amount in full satisfaction. A dissenting Common Stockholder may decline such
offer and demand payment by following the same procedure as that
204
<PAGE>
described for a Supplemental Payment Demand by Common Stockholders who owned
their shares as of the Public Announcement Date. Any Common Stockholder who did
not own shares on the Public Announcement Date and who fails properly to demand
payment will be entitled only to the amount offered by Petro. Upon proper
demand by any such Common Stockholder, rules and procedures applicable in
connection with receipt by the Partnership of a Supplemental Payment Demand
given by a dissenting Common Stockholder who owned shares on the Public
Announcement Date will also apply to any Common Stockholder properly giving a
demand for payment but who did not own shares of record or beneficially on the
Public Announcement Date, except that any such Common Stockholder is not
entitled to receive any remittance from Petro or the Partnership until the fair
value of the shares, plus interest, has been determined pursuant to such rules
and procedures.
Common Stockholders considering exercising dissenters' rights should bear in
mind that the fair value of their shares determined under Sections 302A.471 and
302A.473 of the MBCA could be more than, the same as or, in certain
circumstances, less than the consideration they would receive pursuant to the
Acquisition Proposal if they do not seek appraisal of their shares, and that
the opinion of any investment banking firm as to fairness, from a financial
point of view, is not an opinion as to fair value under Sections 302A.471 and
302A.473.
Cash received pursuant to the exercise of dissenters' rights may be subject
to federal or state income tax. See "Certain Federal Income Tax
Considerations."
A COMMON STOCKHOLDER WHO FAILS TO COMPLY FULLY WITH THE STATUTORY PROCEDURE
SUMMARIZED ABOVE WILL FORFEIT HIS OR HER RIGHTS OF DISSENT AND WILL RECEIVE THE
TRANSACTION CONSIDERATION FOR HIS OR HER SHARES. SEE APPENDIX E.
Pursuant to the Merger Agreement, from and after the Effective Time, the
Partnership will be responsible for the payment of any and all consideration
that may be determined pursuant to Section 320a-473 to be due to the holders of
Common Stock who have perfected their rights to receive the fair value of their
shares as described above.
205
<PAGE>
LEGAL MATTERS
The validity of the Common Units and the Senior Subordinated Units to be
issued in connection with the Transaction will be passed upon for the
Partnership by Phillips Nizer Benjamin Krim & Ballon LLP, New York, New York.
Certain tax matters will be passed upon for the Partnership by Andrews & Kurth
L.L.P., New York, New York.
EXPERTS
The consolidated financial statements and schedules of Star Gas Partners,
L.P. and its 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, incorporated by reference in this Proxy Statement, have been incorporated
by reference in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, given on the authority of that firm as experts in
accounting and auditing.
The consolidated financial statements and schedules of Petroleum Heat and
Power Co., Inc. as of December 31, 1996 and 1997 and for the fiscal years ended
December 31, 1995, 1996 and 1997, have been included in this Proxy Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing herein and upon the authority of that firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
The Partnership and Petro file annual, quarterly and special reports, proxy
statements (Petro only) and other information with the Commission. You may read
and copy any reports, statement or other information that the Partnership and
Petro file with the Commission at the Commission's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information on the public reference
rooms. These Commission filings are also available to the public from
commercial document retrieval services and at the Internet world wide web site
maintained by the Commission at "http://www.sec.gov." Reports and other
information concerning the Partnership should also be available for inspection
at the offices of the NYSE.
The Partnership filed a Registration Statement on Form S-4 (the "Registration
Statement") to register with the Commission the Common Units and Senior
Subordinated Units to be issued in the Transaction. This Proxy Statement is a
part of that Registration Statement and constitutes a prospectus of the
Partnership. As allowed by Commission rules, this Proxy Statement does not
contain all the information you can find in the Partnership's Registration
Statement or the exhibits to the Registration Statement.
The Commission allows the Partnership and Petro to "incorporate by reference"
information into this Proxy Statement, which means that they can disclose
important information to you by referring you to another document filed
separately with the Commission. The information incorporated by reference is
considered part of this Proxy Statement, except for any information superseded
by information contained directly in this Proxy Statement or in later filed
documents incorporated by reference in this Proxy Statement.
206
<PAGE>
This Proxy Statement includes information required by the Commission to be
disclosed pursuant to Rule 13e-3 under the Exchange Act which governs so-called
"going private" transactions by certain issuers or their affiliates. In
accordance with that rule, Petro filed with the Commission under the Exchange
Act, a Schedule 13E-3 with respect to the Transaction. This Proxy Statement
does not contain all of the information set forth in the Schedule 13E-3, parts
of which are omitted in accordance with the regulations of the Commission. The
Schedule 13E-3, and amendments thereto, including exhibits filed with it, will
be available for inspection and copying at the offices of the Commission as set
forth above.
This Proxy Statement incorporates by reference the documents set forth below
that the Partnership and Petro have previously filed with the Commission. These
documents contain important information about the Partnership and Petro and
their finances.
<TABLE>
<S> <C>
THE PARTNERSHIP COMMISSION FILINGS
(FILE NO. 33-78490) PERIOD/AS OF DATE
---------------------------------- -----------------
Annual Report on Form 10-K Year ended September 30, 1997
Quarterly Report on Form 10-Q Quarter ended June 30, 1998
PETRO COMMISSION FILINGS (FILE NO. 1-9358) PERIOD/AS OF DATE
------------------------------------------ -----------------
Annual Report on Form 10-K Year ended December 31, 1997
Quarterly Report on Form 10-Q Quarter ended June 30, 1998
Proxy Statement April 30, 1998
</TABLE>
You should rely only on the information contained or incorporated by
reference in this Proxy Statement. We have not authorized anyone to provide you
with information that is different from what is contained in this Proxy
Statement. This Proxy Statement is dated . You should not assume
that the information contained in this Joint Proxy Statement-Prospectus is
accurate as of any date other than the date of the Proxy Statement. Neither the
mailing of this Proxy Statement to Securityholders nor the issuance of Units in
the Transaction creates any implication to the contrary.
207
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Partnership with the Commission (File
No. 33-98490) are incorporated by reference in this Proxy Statement:
(1) the Partnership's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997;
(2) the Partnership's Quarterly Reports on Form 10-Q for the fiscal
quarters ended December 31, 1997, March 31, 1998 and June 30, 1998; and
(3) the Partnership's Current Reports on Form 8-K filed on October 22,
1997, as amended on October 30, 1997 and November 24, 1997.
In addition, all other reports and documents filed by the Partnership
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date hereof and prior to the Unitholders Meeting and the Special Meeting
shall be deemed incorporated by reference into this Proxy Statement from the
date of filing of such reports and documents. Any statement contained herein or
in a document, all or a portion of which is incorporated or deemed to be
incorporated by reference herein, shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein (and, in case of any statement in an incorporated document prior to the
date of this Proxy Statement), or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Proxy Statement.
The following documents filed by Petro with the Commission are also
incorporated by reference in this Proxy Statement:
(i) Petro's Annual Report in Form 10-K for the fiscal year ended December
31, 1997, which accompanies this Proxy Statement; and
(ii) Petro's Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 1998 and June 30, 1998, which accompanies this Proxy Statement.
(iii) Petro's Proxy Statement dated April 30, 1998.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
INCLUDED WITH THIS PROXY STATEMENT. SUCH DOCUMENTS (EXCLUDING EXHIBITS TO SUCH
DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE, UPON ORAL OR WRITTEN REQUEST BY ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT IS
DELIVERED. FOR DOCUMENTS RELATING TO THE PARTNERSHIP, CONTACT STAR GAS
CORPORATION, 2187 ATLANTIC STREET, STAMFORD, CONNECTICUT 06902, ATTENTION:
RICHARD F. AMBURY, VICE PRESIDENT-FINANCE, TELEPHONE (203) 328-7313. FOR
DOCUMENTS RELATING TO PETRO, CONTACT PETROLEUM HEAT AND POWER CO., INC., 2187
ATLANTIC AVENUE, STAMFORD, CONNECTICUT 06902, ATTENTION: GEORGE LEIBOWITZ,
TREASURER, TELEPHONE (203) 325-5470. TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY , 1999.
208
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
STAR GAS
PARTNERS, L.P.
STAR GAS PROPANE PETRO PRO FORMA PRO FORMA THE ADJUSTED
PARTNERS, L.P. ACQUISITIONS(A) ACQUISITION(B) ADJUSTMENTS COMBINED OFFERINGS PRO FORMA
-------------- --------------- -------------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash.................. $ 1,551 $ 33,223 $ (4,167)(c) $ 23,507 $ 115,400 (k) $ 20,932
(7,100)(i) 132,100 (l)
(250,075)(m)
Accounts receivable... 5,041 46,960 52,001 52,001
Inventories........... 7,777 11,063 18,840 18,840
Prepaid expenses and
other current
assets............... 1,039 8,094 9,133 9,133
-------- --------- -------- -------- --------- --------
Total current assets.. 15,408 99,340 (11,267) 103,481 (2,575) 100,906
-------- --------- -------- -------- --------- --------
Cash collateral
account.............. 11,800 11,800 11,800
Property and
equipment, net....... 108,298 $2,914 29,964 10,136 (j) 151,312 151,312
Intangible and other
assets, net.......... 49,559 2,686 88,016 5,366 (e) 390,831 4,600 (k) 395,431
2,291 (f)
249,450 (g)
1,100 (h)
(7,637)(j)
-------- ------ --------- -------- -------- --------- --------
Total assets.......... $173,265 $5,600 $ 229,120 $249,439 $657,424 $ 2,025 $659,449
======== ====== ========= ======== ======== ========= ========
LIABILITIES AND
PARTNERS' CAPITAL
-----------------
Current liabilities
Current debt and
preferred stock...... $ 6,558 $ (4,167)(c) $ 2,391 $ 2,391
Bank credit facility
borrowings........... $ 950 -- 950 950
Accounts payable...... 2,697 5,688 8,385 8,385
Unearned service
contract revenue..... 12,736 12,736 12,736
Accrued expenses and
income taxes......... 2,866 30,338 4,600 (h) 37,804 37,804
Accrued interest and
dividends............ 2,248 10,557 872 (d) 13,677 (9,214)(m) 4,463
Customer credit
balances............. 2,405 10,324 12,729 12,729
-------- --------- -------- -------- --------- --------
Total current
liabilities.......... 11,166 76,201 1,305 88,672 (9,214) 79,458
-------- --------- -------- -------- --------- --------
Long-term debt......... 96,000 $5,000 284,587 6,286 (e) 391,873 120,000 (k) 302,779
(209,094)(m)
Deferred income taxes.. 46,000 (j) 46,000 46,000
Other long-term
liabilities........... 79 10,711 (3,500)(h) 7,290 7,290
Redeemable and
exchangeable preferred
stock................. 32,687 (920)(e) 31,767 (31,767)(m) --
Partners' capital
Common unitholders.... 63,683 600 2,291 (f) 66,574 132,100 (l) 198,674
Subordinated
unitholders.......... 2,056 62,030 (g) 23,582 23,582
(40,504)(j)
General partner....... 281 4,382 (g) 1,666 1,666
(2,997)(j)
Petro's Stockholders'
deficiency........... (175,066) (872)(d) -- --
(7,100)(i)
183,038 (g)
-------- ------ --------- -------- -------- --------- --------
Total Partners'
Capital.............. 66,020 600 (175,066) 200,268 91,822 132,100 223,922
-------- ------ --------- -------- -------- --------- --------
Total Liabilities and
Partners' Capital.... $173,265 $5,600 $ 229,120 $249,439 $657,424 $ 2,025 $659,449
======== ====== ========= ======== ======== ========= ========
</TABLE>
209
<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
STAR GAS PARTNERS, L.P.
PARTNERS, L.P. PROPANE PETRO PRO FORMA PRO FORMA THE ADJUSTED
ADJUSTED(N) ACQUISITIONS(O) ACQUISITION(P) ADJUSTMENTS COMBINED OFFERINGS PRO FORMA
-------------- --------------- -------------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................... $149,766 $4,431 $548,141 $702,338 $702,338
Cost of sales........... 80,370 2,260 379,748 462,378 462,378
-------- ------ -------- -------- --------
Gross profit.......... 69,396 2,171 168,393 239,960 239,960
Operating expenses...... 46,408 918 132,383 179,709 179,709
Restructuring charges... 2,850 2,850 2,850
Corporate identity
expenses............... 4,136 4,136 4,136
Pension curtailment
expense................ 654 654 654
Provision for
supplemental benefits.. 565 565 565
Depreciation and
amortization........... 11,495 596 29,746 (5,132)(s) 36,705 307 (u) 37,012
Net gain (loss) on sales
of assets.............. (265) -- 11,445 11,180 11,180
-------- ------ -------- ------ -------- ------- --------
Operating income...... 11,228 657 9,504 5,132 26,521 (307) 26,214
Interest income
(expense), net......... (7,766) (373) (31,668) (39,807) 13,798 (v) (26,009)
-------- ------ -------- -------- ------- --------
Income (loss) before
income taxes........... 3,462 284 (22,164) 5,132 (13,286) 13,491 205
-------- ------ -------- ------ -------- ------- --------
Income tax expense...... 25 -- 500 525 525
--------
Income (loss) before
equity interest in Star
Gas.................... -- -- (22,664) -- -- -- --
Share of income (loss)
of Star Gas............ -- -- (235) 235 (t) -- -- --
-------- ------ -------- ------ -------- ------- --------
Net income (loss)....... $ 3,437 $ 284 $(22,899) $5,367 $(13,811) $13,491 $ (320)
======== ====== ======== ====== ======== ======= ========
General Partner's
interest in net income
(loss)................. 69 (508) (6)
-------- -------- --------
Limited Partners'
interest in net income
(loss)................. $ 3,368 (13,303) (314)
======== ======== ========
Net income (loss) per
Limited Partner unit... $ 0.54 $ (1.82) $ (0.02)
======== ======== ========
Weighted average number
of Limited Partner
Units outstanding...... 6,228 27 (a) 103 (f) 2,767 (g) 7,306 6,364 (l) 13,670
577 (g) (2,396)(j)
</TABLE>
210
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
STAR GAS
PARTNERS, L.P.
STAR GAS PROPANE PETRO PRO FORMA PRO FORMA THE ADJUSTED
PARTNERS, L.P. ACQUISITIONS(Q) ACQUISITION(R) ADJUSTMENTS COMBINED OFFERINGS PRO FORMA
-------------- --------------- -------------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................... $95,971 $3,927 $410,652 $510,550 $510,550
Cost of sales........... 43,726 2,012 265,799 311,537 311,537
------- ------ -------- -------- --------
Gross profit........... 52,245 1,915 144,853 199,013 199,013
Operating expenses...... 32,700 892 93,759 127,351 127,351
Restructuring charges... 2,085 2,085 2,085
Corporate identity
expenses............... 1,100 1,100 1,100
Provision for supplemen-
tal benefits........... 320 320 320
Depreciation and
amortization 8,644 437 21,998 $(3,538)(s) 27,541 $ 230 (u) 27,771
Net gain (loss) on sales
of assets.............. (213) 11,496 11,283 11,283
------- ------ -------- ------- -------- ------- --------
Operating income....... 10,688 586 37,087 3,538 51,899 (230) 51,669
Interest
income(expense), net (5,834) (301) (23,163) (29,298) 10,069 (v) (19,229)
------- ------ -------- ------- -------- ------- --------
Income (loss) before
income taxes........... 4,854 285 13,924 3,538 22,601 9,839 32,440
------- ------ -------- ------- -------- ------- --------
Income tax expense...... 19 -- 475 494 494
--------
Income before equity
interest in Star Gas... -- -- 13,449 -- -- -- --
Share of income (loss)
of Star Gas............ -- -- 2,038 (2,038)(t) -- -- --
------- ------ -------- ------- -------- ------- --------
Net income.............. $ 4,835 $ 285 $ 15,487 $ 1,500 $ 22,107 $ 9,839 $ 31,946
======= ====== ======== ======= ======== ======= ========
General Partner's
interest in net
income................. 69 813 639
------- -------- --------
Limited Partners'
interest in net
income................. $ 4,766 21,294 31,307
======= ======== ========
Net income per Limited
Partner unit........... $ 0.77 $ 2.91 $ 2.29
======= ======== ========
Weighted average number
of Limited Partner
Units outstanding...... 6,228 27 (a) 103 (f) 2,767 (g) 7,306 6,364 (m) 13,670
577 (g) (2,396)(j)
</TABLE>
211
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma adjustments give effect to (i) the acquisition of
Petro, (ii) the Debt Offering, and (iii) the Equity Offering, as if each
transaction had taken place on June 30, 1998, 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, or as of October 1, 1997 in the case of the pro forma
condensed consolidated statement of operations for the nine months ended June
30, 1998. The condensed consolidated statements of operations for the year
ended September 30, 1997 and nine months ended June 30, 1998 each include the
results of operations for the three months ended December 31, 1997 of Petro.
The pro forma adjustments are based upon currently available information,
certain estimates and assumptions and a preliminary determination and
allocation of the total purchase price and therefore the actual results may
differ from the pro forma results. However, the Partnership's 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.
BALANCE SHEET
ACQUISITIONS
(a) Adjustment to reflect the acquisition and purchase price allocation in
connection with three acquisitions by the Partnership in the fourth fiscal
quarter of 1998. These acquisitions with an aggregate value of $5.6 million
were financed with $5.0 million of borrowings under the Partnership's
acquisition line and $0.6 million of Common Units issued to a seller.
(b) Represents the actual balance sheet of Petro as of June 30, 1998.
TRANSACTION RELATED ADJUSTMENTS
(c) Adjustment to reflect the redemption in August 1998 of Petro's 1989
Preferred Stock.
(d) Adjustment to reflect the accrued dividends payable on Petro's redeemable
and exchangeable preferred stock.
(e) Adjustment to carrying values to reflect the negotiated premium of $6.3
million to refinance Petro's Private Debt and Petro's Public Debt and
negotiated discount of $0.9 million to redeem Petro's public preferred stock.
(f) Reflects the issue of 0.8 million shares of Junior Preferred Stock of
Petro, which upon consumption of the Transaction will be converted into 0.1
million Common Units at an assumed value of $22.00 per Unit as consideration to
the holders of Petro's 9 3/8% Subordinated Debentures, 10 1/8% Subordinated
Notes, and 12 1/4% Subordinated Debentures, and 12 7/8% exchangeable Preferred
stock to permit the early redemption of such securities.
212
<PAGE>
THE TRANSACTION (MERGER AND EXCHANGE)
(g) Represents the exchange of 26.6 million shares of Petro's Class A Common
Stock and Class C Common Stock for 2.8 million Senior Subordinated Units, 0.6
million Junior Subordinated Units and 0.3 million General Partner Units.
(h) Represents the estimated amount of federal and state taxes to be incurred
in connection with the acquisition of certain assets by the Partnership from
Petro.
(i) Reflects the payment by Petro of legal, professional and advisory fees
for costs incurred by Petro and the Partnership as a result of the transaction.
(j) The preliminary allocation of the excess of purchase price over the book
value of Petro in connection with the Petro acquisition. The allocation of the
purchase price was based on the results of a preliminary appraisal of the
assets and the business to be acquired. The preliminary allocation is as
follows (in thousands):
<TABLE>
<S> <C>
Assumed value of Units issued...................................... $ 66,412
Book value of Petro, adjusted for accrued dividends of $872 and
transaction costs of $7,100..................................... (183,038)
---------
Preliminary excess of purchase price over net book value........... 249,450
Allocation to property, plant and equipment........................ (10,136)
Allocation to Subordinated Units, redeemed......................... (43,501)
Recognition of current and net deferred tax liabilities incurred in
connection with the
acquisition....................................................... 47,100
Costs associated with the renegotiation of various debt instruments
and preferred stock directly related to the Transaction........... 7,657
---------
Estimated intangibles, including customer lists and goodwill....... $ 250,570
=========
</TABLE>
THE DEBT OFFERING AND THE EQUITY OFFERING
(k) Reflects the net proceeds to Petro of approximately $115.4 million from
the $120.0 million Note Offering, net of underwriting discounts and commissions
(estimated to be $3.6 million) and offering expenses (estimated to be $1.0
million).
(l) Reflects the net proceeds to the Partnership of approximately $132.1
million from the issuance and sale of 6.4 million Common Units at an assumed
offering price of $22.00 per Common Unit, net of underwriting discounts and
commissions ($7.0 million) and offering expenses (estimated to be $0.9
million).
(m) Reflects the use of the net proceeds from the Equity Offering and the
Debt Offering to pay $9.2 million in accrued interest and preferred dividends,
to repay $209.1 million of Petro Public Debt, including $2.8 million of
premiums and to retire $31.8 million of Petro's exchangeable preferred stock.
STATEMENT OF OPERATIONS
Estimated expenses of $7.1 million to be incurred by Petro as a direct result
of its acquisition by the Partnership, which will be included in Petro's actual
statement of operations subsequent to June 30, 1998, have not been included as
pro forma operating adjustments to the pro forma condensed consolidated
statements of operations for the twelve months and nine months ended September
30, 1997 and June 30, 1998, respectively.
213
<PAGE>
ACQUISITIONS
n) Represents the Partnership's previously reported unaudited results for
fiscal 1997 adjusted to reflect the Pearl Gas acquisition on October 22, 1997,
the December 22, 1997 Common Unit Offering of 0.8 million Units and $11.0
million of debt incurred to finance a portion of the Pearl Gas acquisition as
previously disclosed in the Partnership's December 1997 offering on Form S-1.
o) Represents the results of certain propane distribution assets acquired by
the Partnership subsequent to September 30, 1997 adjusted for:
i) Certain cost savings of $0.3 million, primarily salary and benefit
expenses relating to selling shareholders.
ii) Additional depreciation and amortization of $0.5 million.
iii) Additional interest expense of $0.3 million.
p) Represents the results of operations of Petro for the twelve months ended
December 31, 1997.
q) Represents the results of certain propane distributors acquired by the
Partnership in fiscal 1998 from October 1, 1997 to their dates of acquisition.
Results of such distributors from the dates of acquisition to June 30, 1998 are
included in the Partnership's nine months ended June 30, 1998 results adjusted
for:
i) Certain cost savings of $0.4 million, primarily salary and benefit
expenses relating to selling shareholders.
ii) Additional depreciation and amortization of $0.1 million.
iii) Additional interest expense of $0.3 million.
THE TRANSACTION (MERGER AND EXCHANGE)
r) Represents the results of Petro for the nine months ended June 30, 1998.
s) Adjustment to depreciation and amortization attributable to the Petro
acquisition.
t) Reflects the elimination of Petro's equity interest in the Partnership.
THE OFFERINGS
u) Amortization of debt insurance costs attributable to the Debt Offering.
v) Reflects the net reduction to interest expense of $13.8 million and $10.1
million for fiscal 1997 and for the nine months ended June 30, 1998,
respectively, which reflects interest expense on the $120.0 million Debt
Offering at an assumed interest rate of 8.5% ($10.2 million of additional
expense annually) offset by an annual reduction in interest expense of $24.0
million due to the repayment of $206.3 million of Petro Public Debt and a
reduction in the interest rate/increase in principal on Petro's Private Debt.
214
<PAGE>
ANALYSIS OF PRO FORMA RESULTS OF OPERATIONS
Overview
In analyzing the historical results of the Partnership and the pro forma
information as provided, the following matters should be considered. First, the
results for the fiscal 1997 pro forma exclude cost savings associated with
Petro's restructuring program implemented during 1998. This restructuring
program includes reductions in both corporate and field personnel, the
consolidation of employee benefits plan and the rationalization of branch
facilities. Second, while depreciation and amortization expenses reduce net
income, as a non-cash expense, these expenses do not impact distributable cash
flow. Third, while the propane and home heating oil businesses are both
seasonal businesses, the home heating oil business generates a greater
proportion of its profits in the heating season from October 1 through March 31
as compared to the propane business. Conversely, the heating oil business
experiences greater losses during the period from April 1 through September 30.
The following discussion pertains to pro forma net income per limited partner
unit for the year ended September 30, 1997 and the nine months ended June 30,
1998.
Year Ended Fiscal 1997
For fiscal 1997, adjusted net income per limited partner unit decreases by
$.56 per unit from $0.54 per unit to a loss of $0.02 per unit, on a pro forma
basis. This decline is primarily due to a higher level of non-cash charges
associated with the Petro acquisition of $0.76 per unit, offset in part by a
net non recurring benefit of $0.23 per unit. This net non recurring benefit is
due to the gain recorded by Petro associated with the disposal of certain
assets, which was reduced by certain one-time non recurring charges associated
with Petro's branding, corporate identity and restructuring programs.
Nine Months Ended June 30, 1998
For the nine months ended June 30, 1998, net income per limited partner unit
increases from $0.77 per limited partner unit to $2.29 per limited partner
unit, on a pro-forma basis. This increase during this period was attributable
to the net non recurring benefit of $8.0 million or $0.57 per unit, the impact
of certain propane acquisitions and the Petro acquisition. This increase is
greater than the expected annual increase in net income due to the seasonality
of the Petro acquisition.
215
<PAGE>
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 not relating to an Operating Expenditure made 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. Adjusted Operating Surplus
does not include that portion of Operating Surplus included in clause (a)(i) of
the definition of Operating Surplus.
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 members, officers
nor employees of the general partner or members, stockholders (other than
holders of Common Units or Senior Subordinated Units), 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 Working
Capital 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; provided, however, that the General Partner may not establish cash
reserves for distributions to the Senior-Subordinated Units unless the
General Partner has determined that in its judgment the establishment of
reserves will not prevent the Partnership from distributing the Minimum
Quarterly Distribution on all Common Units and any Common Unit Arrearages
thereon with respect to the next four quarters; and,
216
<PAGE>
provided further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such Quarter
but on or before the date of determination of Available Cash with respect
to such quarter shall be deemed to have been made, established, increased
or reduced, for purposes of determining Available Cash, within such quarter
if the General Partner so determines.
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, a Junior Subordinated Unit, a General Partner 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, Junior
Subordinated Unit, General Partner Unit or other interest in the Partnership
were the only interest in the Partnership held by a 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 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: 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.
Class A Common Unit: 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 Class A Common Units in this Agreement;
no Class A Common Units shall be outstanding until the expiration of the
Subordination Period, at which time all Common Units Outstanding immediately
prior to the expiration of the Subordination Period shall be redesignated as
Class A Common Units.
Class B Common Unit: 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 Class B Common Units in this Agreement;
no Class B Common Units shall be outstanding until the expiration of the
Subordination Period, at which time each Outstanding Senior Subordinated Unit
and Junior Subordinated Unit shall convert into one Class B Common Unit.
Common Unit: 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
217
<PAGE>
in the Partnership Agreement. All references in the Amended and Restated
Partnership Agreement to Common Units after the expiration of the Subordination
Period shall be deemed to be references to both Class A Common Units and Class
B Common Units, unless otherwise indicated.
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.
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 Initial Offering 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, amortization and non-cash charges
(excluding expenses related to the consummation of the Merger and the
transactions contemplated thereby). As used in this Proxy Statement, EBITDA is
not intended to be construed as an alternative to net income
218
<PAGE>
as an indicator of operating performance, or as an alternative to cash flow as
a measure of liquidity or ability to service debt obligations.
General Partner: Star Gas Corporation, a Delaware Corporation, until the
Effective Time and Star Gas LLC, a Delaware limited liability company, and its
successors, following the Effective Time.
General Partner Interest: The ownership interest of the General Partner in
the Partnership (in its capacity as a general partner without reference to any
Limited Partner Interest held by it) which after the Closing will be evidenced
by General Partner Units and includes any and all benefits to which the General
Partner is entitled as provided in this Agreement, together with all
obligations of the General Partner to comply with the terms and provisions of
this Agreement.
General Partner Unit: A Unit representing a fractional part of the General
Partner Interest and having the rights and obligations specified with respect
to the General Partner Interest.
Initial Common Units: The Common Units sold in the Initial Offering.
Initial Unit Price: With respect to each Common Unit, Senior Subordinated
Unit, Junior Subordinated Unit and General Partner Unit, $22.00 or with respect
to any other class or series of Units, the price per Unit at which such class
or series of Units is initially sold by the Partnership, as determined by the
General Partner, in each case adjusted as the General Partner determines to be
appropriate to give effect to any distribution, subdivision or combination of
Units.
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 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.
Initial Closing Date: December 20, 1995.
Initial Offering: The initial offering and sale of Common Units to the public
on December 20, 1995.
Junior Subordinated Unit: 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 Junior Subordinated Units in
the Amended and Restated Partnership Agreement.
Limited Partner Interest: The ownership interest of a Limited Partner in the
Partnership which is evidenced by Common Units, Senior Subordinated Units and
Junior Subordinated Units or other
219
<PAGE>
Partnership Securities and includes any and all benefits to which a Limited
Partner is entitled as provided in the Amended and Restated Partnership
Agreement, together with all obligations of a Limited Partner to comply with
the terms and provisions of the Amended and Restated Partnership Agreement.
Minimum Quarterly Distribution: $0.575 per Unit per Quarter; provided,
however, the Minimum Quarterly Distribution with respect to the Senior
Subordinated Units, Junior Subordinated Units and General Partner Units for the
period commencing on the Effective Time and ending on June 30, 1999, shall be
equal to the product of $0.575 multiplied by a fraction of which the numerator
is the number of days in such period and of which the denominator is 91,
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 (iii) payment of transaction
expenses related to the Merger and the transactions contemplated thereby or
(iv) 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 Amended and Restated Partnership
Agreement for the Operating Partnership (the form of which has been filed as an
exhibit to the Registration Statement of which this Proxy Statement 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 Initial Closing Date, (ii) all the
cash receipts of the Partnership Group for the period beginning on the
Initial Closing Date and ending with the last day of such period, other
than cash receipts from Interim Capital Transactions (except to the extent
specified in the
220
<PAGE>
Amended and Restated Partnership Agreement and (iii) all cash receipts of
the Partnership Group after the end of such period but on or before the
date of determination of Operating Surplus with respect to such period
resulting from borrowings for working capital purposes, less
(b) the sum of (i) Operating Expenditures for the period beginning on the
Initial 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; provided, however, that disbursements made
(including contributions to a Group Member or disbursements on behalf of a
Group Member) or cash reserves established, increased or reduced after the
end of such period but on or before the date of determination of Available
Cash with respect to such period shall be deemed to have been made,
established, increased or reduced, for purposes of determining Operating
Surplus, within such period if the General Partner so determines.
Notwithstanding the foregoing, "Operating Surplus" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
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, as
currently in effect, 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
subsidiary of either such entity, treated as a single consolidated entity.
Petro Adjusted Operating Surplus: With respect to any four-quarter period,
the Adjusted Operating Surplus generated by Petro (which for purposes of this
definition includes all subsidiaries of the Partnership primarily engaged in
the home heating oil business) during such four-quarter period, as determined
in good faith by a majority of the members of the Board of Directors of the
General Partner (with the concurrence of the Audit Committee). In calculating
Petro Adjusted Operating Surplus, (i) debt service (including the payment of
principal, interest and premium) on all debt incurred or assumed by Petro or
any of its affiliates, the proceeds of which are used by or for the benefit of
Petro (including the proceeds from the Debt Offering), shall be included to the
extent such debt service is included in the calculation of Operating Surplus,
and (ii) debt service (including the payment of principal, interest and
premium) on all debt incurred or assumed by Petro or any of its affiliates, the
proceeds of which are not used by or for the benefit of Petro, shall be
excluded.
Petro Units: With respect to any date, means the sum of (i) the excess of the
number of Units outstanding at the Effective Time over the number of Units
outstanding immediately prior to the
221
<PAGE>
Effective Time (assuming the simultaneous closing of the Equity Offering), (ii)
the number of Units issued by the Partnership thereafter to the extent the net
proceeds of which are contributed to Petro (which for purposes hereof includes
all subsidiaries of the Partnership primarily engaged in the home heating oil
business), (iii) the number of additional Senior Subordinated Units or Class B
Common Units issued pursuant to the Amended and Restated Partnership Agreement
if Petro meets certain financial targets, and (iv) the deemed number of Units
outstanding based upon a contribution of capital to Petro by the Partnership or
any affiliate thereof after the Effective Time (which contribution is not
covered by (ii) above or traceable to debt proceeds), which number of deemed
Units is obtained by dividing (A) the amount of such contribution by (B) the
Current Market Price of a Common Unit (or of a Class A Common Unit after the
termination of the Subordination Period). If Petro pays down debt of Petro or
debt allocated to Petro from internally generated funds of Petro and if those
internally generated funds exist at Petro only because Petro has not paid
dividends up to the Partnership in an amount equal to the distributions that
would have been paid on the Petro Units had they been actual outstanding Units
of the Partnership, then the amount used to pay down such debt will be treated
as if it were contributed to Petro by the Partnership. The distribution per
Senior Subordinated Unit of the Partnership shall be the amount that the
Partnership would have been deemed to have distributed per Petro Unit had they
been actual outstanding Units of the Partnership. For purposes of the number of
deemed outstanding Units in (iv) above, such Units shall be deemed to be issued
on the date of such Capital Contribution. For this purpose, Common Unit means
Class A Common Units upon expiration of the Subordination Period.
Senior Subordinated Unit: 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 Senior Subordinated Units in
the Amended and Restated Partnership Agreement.
Subordination Period: The Subordination Period will extend from the Initial
Closing Date until the first day of any quarter beginning on or after July 1,
2002 in respect of which (i) distributions of Available Cash from Operating
Surplus on each of the outstanding Common Units, Senior Subordinated Units,
Junior Subordinated Units and General Partner Units equaled or exceeded the sum
of the Minimum Quarterly Distribution on all of the outstanding Common Units
and Junior 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 Common Units, Senior Subordinated Units,
Junior Subordinated Units and General Partner Units that were outstanding
during such periods on a fully diluted basis with respect to employee options
or other employee incentive compensation (i.e., taking into account for
purposes of such determination all outstanding Common Units, Senior
Subordinated Units, Junior Subordinated Units and General Partner Units and all
Common Units issuable upon exercise of employee options that have as of the
date of determination, already vested or are scheduled to vest prior to the end
of the quarter immediately following the quarter with respect to which
determination is made, and all Units that have as of the date of determination
been earned by but not yet issued to management of the Partnership in respect
of incentive compensation) and (iii) there are no arrearages in payment of the
Minimum Quarterly Distribution on the Common Units.
Target Distribution Levels: See "Cash Distribution Policy--Incentive
Distributions."
222
<PAGE>
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
Proxy Statement as Appendix A, or in a form substantially to the same effect in
a separate instrument.
Unit: A Partnership Interest of a Partner or Assignee in the Partnership
representing a fractional part of the Partnership Interests of all Partners and
Assignees and shall include Common Units (Class A Common Units and Class B
Common Units after the expiration of the Subordination Period), Senior
Subordinated Units, Junior Subordinated Units and General Partner Units;
provided, that each Unit at any time Outstanding shall represent the same
fractional part of the Partnership Interests of all Partners and Assignees
holding Units as each other Unit. A Unit shall not include a Petro Unit.
Unitholders: Holders of Units.
Unit Majority: During the Subordination Period, at least (i) a majority of
the outstanding Common Units voting as a class and (ii) a majority of the
outstanding Senior Subordinated Units and Junior Subordinated Units voting as a
single class, in each case excluding Units owned by the General Partner or any
Affiliate, and, after the Subordination Period has ended, at least a majority
of the outstanding Common Units.
Unrecovered Initial Unit Price: At any time, with respect to Common Units,
Senior Subordinated Units, Junior Subordinated Units or General Partner Units,
the Initial Unit Price less the sum of all distributions constituting Capital
Surplus theretofore made in respect of an Initial Common Unit 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 an Initial Common Unit, adjusted as the General Partner
determines to be appropriate to give effect to any distribution, subdivision or
combination of Units.
Working Capital Borrowings: Borrowings pursuant to a facility or other
arrangement requiring all borrowings thereunder to be reduced to a relatively
small amount each year for an economically meaningful period of time.
Borrowings that are not intended exclusively for working capital purposes shall
not be treated as Working Capital Borrowings.
223
<PAGE>
APPENDIX A
No transfer of the Units evidenced hereby will be registered on the books of
the Partnership unless the Certificate evidencing the Units to be transferred
is surrendered for registration or transfer and an Application for Transfer of
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 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 Units.
APPLICATION FOR TRANSFER OF UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the 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
- -------------------------------------
- -------------------------------------
- -------------------------------------
A-1
<PAGE>
Name and Address of Assignee
- -------------------------------------
Purchase Price including commissions, if any
Type of Entity (check one):
[_] Individual
[_] Trust
[_] Partnership
[_] Other (specify) _______________________________________________
[_] Corporation
Nationality (check one):
[_] U.S. Citizen, Resident or Domestic Entity
[_] Foreign Corporation
[_] Non-resident Alien
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. (Name of Interestholder) is not a foreign 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 _________________________________________________________
------------------------------------------------------------------------
A-2
<PAGE>
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 Units shall
be made to the best of the Assignee's knowledge.
A-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PETROLEUM HEAT AND POWER CO., INC.
STAR GAS PARTNERS L.P.
PETRO/MERGECO, INC.
AND
STAR GAS PROPANE, L.P.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I.
CERTAIN DEFINITIONS
<TABLE>
<C> <S> <C>
1.1. Certain Definitions................................................. 1
ARTICLE II.
THE MERGER; EFFECTS OF THE MERGER
2.1. The Merger.......................................................... 11
2.2. Effective Date And Closing.......................................... 12
ARTICLE III.
MERGER CONSIDERATION; EXCHANGE PROCEDURES
3.1. Merger Consideration................................................ 12
3.2. Rights As Stockholders; Stock Transfers............................. 13
3.3. Fractional Shares................................................... 13
3.4. Exchange Procedures................................................. 14
3.5. Anti-Dilution Provisions............................................ 16
3.6. Shares of Dissenting Common Holders................................. 16
3.7. Options............................................................. 16
ARTICLE IV.
ACTIONS PENDING MERGER
4.1. Ordinary Course..................................................... 17
4.2. Capital Stock....................................................... 17
4.3. Dividends, Distributions............................................ 17
4.4. Compensation; Employment Agreements................................. 18
4.5. Benefit Plans....................................................... 18
4.6. Acquisitions And Dispositions....................................... 18
4.7. Amendments.......................................................... 19
4.8. Accounting Methods.................................................. 19
4.9. Insurance........................................................... 19
4.10. Notification........................................................ 19
4.11. Taxes............................................................... 19
4.12. Debt, Capital Expenditures and the Like............................. 19
4.13. No Dissolution...................................................... 19
4.14. Adverse Actions..................................................... 20
4.15. Agreements.......................................................... 20
ARTICLE V.
REPRESENTATIONS AND WARRANT
5.1. Disclosure Schedule................................................. 20
5.2. Standard............................................................ 20
5.3. Representations And Warranties...................................... 20
ARTICLE VI.
COVENANTS
6.1. Best Efforts........................................................ 31
6.2. Equityholder Approvals.............................................. 31
6.3. Registration Statements............................................. 32
6.4. Modification of Petro Indentures and Preferred Stock................ 33
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
6.5. Press Releases..................................................... 34
6.6. Access; Information................................................ 34
6.7. Acquisition Proposals.............................................. 35
6.8. Affiliate Arrangements............................................. 35
6.9. Takeover Laws...................................................... 36
6.10. No Rights Triggered................................................ 36
6.11. Senior Subordinated Units Listed................................... 36
6.12. Third Party Approvals.............................................. 36
6.13. Indemnification; Directors' and Officers' Insurance................ 37
6.14. Benefit Plans...................................................... 39
6.15. Notification Of Certain Matters.................................... 40
6.16. New Director for Star Gas LLC...................................... 40
ARTICLE VII.
CONDITIONS TO CONSUMMATION OF THE MERGER
7.1. Shareholder Vote................................................... 40
7.2. Governmental Approvals............................................. 40
7.3. No Injunction...................................................... 40
7.4. Representations, Warranties And Covenants Of Star Partners......... 41
7.5. Representations, Warranties And Covenants Of Petro................. 41
7.6. Effective Merger Registration Statement............................ 41
7.7. Opinion............................................................ 42
7.8. Opinion of Petro's Counsel......................................... 42
7.9. NYSE Listing....................................................... 43
7.10. Affiliate Arrangements............................................. 43
7.11. Fairness Opinion................................................... 43
7.12. Public Offerings................................................... 43
7.13. Refinancing Conditions............................................. 43
7.14. Dissenters' Rights................................................. 45
7.15. Covenant Not to Compete............................................ 45
7.16. Working Capital Loan............................................... 45
7.17. Debt Offering...................................................... 45
7.18. Restructuring Transactions......................................... 45
7.19. Special Committee.................................................. 45
7.20. Custody Agreement.................................................. 45
ARTICLE VIII.
TERMINATION
8.1. Termination........................................................ 45
8.2... Effect Of Termination And Abandonment.............................. 46
ARTICLE IX
MISCELLANEOUS
9.1. Survival........................................................... 47
9.2. Waiver; Amendment.................................................. 47
9.3. Counterparts....................................................... 47
9.4. Governing Law...................................................... 47
9.5. Expenses........................................................... 47
9.6. Confidentiality.................................................... 47
9.7. Notices............................................................ 47
9.8. Entire Understanding; No Third Party Beneficiaries................. 48
9.9. Headings........................................................... 49
</TABLE>
ii
<PAGE>
EXHIBITS
<TABLE>
<C> <S>
Exhibit A Amended and Restated Partnership Agreement
Exhibit B Amended and Restated Operating Partnership Agreement
Exhibit C Petro Conveyance Agreement
Exhibit D Star LLC Conveyance Agreement
Exhibit E Covenant Not To Compete of Irik P. Sevin
</TABLE>
iii
<PAGE>
DISCLOSURE SCHEDULES
<TABLE>
<C> <C> <S>
(S) 4.2 (Petro only) Capital stock; issuance of additional shares
(S) 4.4 (Petro only) Compensation; Employment Agreements
(S) 4.6 (Petro only) Acquisition and Dispositions
(S) 4.12 (Petro only) 1998 Capital Budget
Shares; Shares/Units reserved for issuance;
(S) 5.3 (b) stock options
(S) 5.3 (c) Subsidiaries
(S) 5.3 (f) No defaults
(S) 5.3 (h) Litigation
Compliance with laws (exception for no
(S) 5.3 (i) Material Adverse Effect)
(S) 5.3 (l) (i) Compensation and Benefit Plans
Disclosures concerning pension plans, multi-
(S) 5.3 (l) (iv) employer plans
Excess of benefit liabilities over current
(S) 5.3 (l) (vi) value of assets
(S) 5.3 (l) (viii) Golden parachutes, etc.
(S) 5.3 (m) Collective bargaining agreement
(S) 5.3 (p) Regulatory approval
(S) 5.3 (t) Intellectual property
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of October 22, 1998 (this
"Agreement"), by and among PETROLEUM HEAT AND POWER CO., INC., a Minnesota
corporation ("Petro"), STAR GAS PARTNERS, L.P., a Delaware limited partnership
("Star Partners"), STAR GAS PROPANE, L.P., a Delaware limited partnership
("Star Propane"), and PETRO/MERGECO, INC., a Minnesota corporation ("Mergeco")
and an indirect, wholly owned subsidiary of Star Partners.
WITNESSETH:
WHEREAS, the Board of Directors of Petro and the Board of Directors of Star
Gas Corporation, the general partner of Star Partners and Star Propane, upon
the recommendation of the Special Committee of the Board of Directors of the
General Partner, have determined that it is in the best interests of their
respective companies and their equity holders to consummate the business
combination provided for herein pursuant to which Mergeco will, subject to the
terms and conditions set forth herein, merge (the "Merger") with and into
Petro, with Petro surviving as an indirect, wholly owned subsidiary of Star
Partners;
WHEREAS, on or prior to the date hereof, the Tax Free Group (as defined
herein) and Star Partners have executed the Exchange Agreement (as defined
herein);
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I.
CERTAIN DEFINITIONS
1.1. Certain Definitions. As used in this Agreement, the following terms
shall have the meanings set forth below:
"Affiliate" shall have the meaning set forth in Section 6.8(a).
"Agreement" shall have the meaning set forth in the introductory paragraph to
this Agreement.
"Amended and Restated Operating Partnership Agreement" shall mean the Amended
and Restated Operating Partnership Agreement substantially in the form attached
hereto as Exhibit B.
"Amended and Restated Partnership Agreement" shall mean the Amended and
Restated Partnership Agreement substantially in the form attached hereto as
Exhibit A.
"Articles of Merger" shall have the meaning set forth in Section 2.1(b).
"Certificate of Merger" shall have the meaning set forth in Section 2.1(b).
"Certificates" shall have the meaning set forth in Section 3.4(b).
A-1
<PAGE>
"Closing" shall have the meaning set forth in Section 2.2.
"Closing Date" shall have the meaning set forth in Section 2.2.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Units" shall mean the common units representing limited partner
interests of Star Partners having the rights and obligations specified with
respect to Common Units in the Amended and Restated Partnership Agreement.
"Compensation and Benefit Plans" shall have the meaning set forth in Section
5.3(1).
"Cost of Capital" shall mean the sum of (a) the number of Common Units and
Subordinated Units issued in the Equity Offering (excluding any Common Units or
Subordinated Units issued pursuant to the exercise of an over-allotment option)
multiplied by $2.30 and (b) the principal amount of debt issued in the Debt
Offering multiplied by the interest rate on such debt.
"Custody Agreement" shall mean the Custody Agreement among the members of the
Tax Free Group and American Stock Transfer and Trust substantially in the form
annexed to the Exchange Agreement.
"Dain Rauscher Wessels" shall mean Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated.
"Debt Offering" shall mean a public offering by a wholly owned subsidiary of
Star Propane of nonconvertible debt securities with gross proceeds of not more
than $120 million with total underwriting discounts and commissions not to
exceed 3% of the aggregate principal amount offered to the public, the proceeds
of which shall be used to refinance a portion of the Public Debt.
"Debt Registration Statement" shall have the meaning set forth in Section
6.3(a).
"Designated Percentage" shall mean a percentage of between 0% and 100%
recommended by the Chief Financial Officer of Petro and approved by the Special
Committee, not more than 10 business days and not less than two business days
before the Closing Date.
"DGCL" shall mean the Delaware General Corporation Law.
"Disclosure Schedule" shall have the meaning set forth in Section 5.1.
"Dissenting Common Holders" shall mean Petro shareholders who comply with all
provisions of the MBCA concerning their right to object to and dissent from the
Merger and demand "fair value" for their shares.
"Effective Time" shall have the meaning set forth in Section 2.1(b).
"Environmental Laws" shall mean all applicable local, state and federal
environmental, health and safety laws and regulations, including, without
limitation, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation, and Liability Act, the
A-2
<PAGE>
Clean Water Act, the Federal Clean Air Act, and the Occupational Safety and
Health Act, each as amended, regulations promulgated thereunder, and state
counterparts.
"Equity Registration Statement" shall have the meaning set forth in Section
6.3(a).
"Equity Offering" shall mean a public offering by Star Partners of Common
Units or Senior Subordinated Units with gross proceeds of not less than $110
million and not more than $140 million, as determined by Petro (excluding any
proceeds received from the exercise of the underwriters' over-allotment option,
which will not exceed 15% of the number of Common Units or Senior Subordinated
Units initially issued in the public offering), with total underwriting
discounts and commissions not to exceed 5% of the aggregate price to the
public.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" shall have the meaning set forth in Section 5.3(1)(iv).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"Exchange Agent" shall mean American Stock Transfer & Trust Company or such
other entity as may be selected by Star Partners subject to the reasonable
approval of Petro.
"Exchange Agreement" shall mean the Exchange Agreement among the members of
the Tax Free Group and Star Partners dated as of October 17, 1998.
"Exchange Fund" shall have the meaning set forth in Section 3.4(a).
"General Partner" shall mean Star Gas Corporation, a Delaware corporation,
and its successors and permitted assigns as general partner of Star Partners
and Star Propane.
"General Partner Units" shall mean the general partner units representing a
general partner interest in Star Partners having the rights and obligations
specified with respect to General Partner Units in the Amended and Restated
Partnership Agreement.
"HSRA" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations thereunder.
"Indemnified Party" shall have the meaning set forth in Section 6.13(a).
"Joint Proxy Statement" shall have the meaning set forth in Section 6.3(a).
"Junior Preferred Stock" shall mean Petro's 1998 Junior Convertible Preferred
Stock.
"Junior Subordinated Units" shall mean the junior subordinated units
representing limited partner interests of Star Partners having the rights and
obligations specified with respect to Junior Subordinated Units in the Amended
and Restated Partnership Agreement.
"Lien" shall mean any charge, mortgage, pledge, security interest,
restriction, claim, lien, or encumbrance.
A-3
<PAGE>
"MBCA" shall mean the Minnesota Business Corporation Act.
"Material Adverse Effect" shall mean, with respect to either Petro or Star
Partners, any effect that (i) is material and adverse to the financial
position, results of operations, business or prospects of Petro and its
Subsidiaries taken as a whole, or Star Partners and its Subsidiaries taken as a
whole, respectively, or (ii) would materially impair the ability of Petro or
Star Partners, respectively, to perform its obligations under this Agreement or
otherwise materially threaten or materially impede the consummation of the
Merger and the other transactions contemplated by this Agreement; provided,
however, that Material Adverse Effect shall not be deemed to include the impact
of (a) actions or omissions of Petro or Star Partners taken with the prior
written consent of Petro or the Special Committee, as applicable, in connection
with the transactions contemplated hereby (as long as the material facts known
to the requesting party concerning such actions or omissions were disclosed to
the consenting party at the time it gave its consent), (b) circumstances
affecting home heating oil companies or propane companies generally, and (c)
the effects of the Merger and compliance by either party with the provisions of
this Agreement on the business, financial condition or results of operations of
such party and its Subsidiaries, or the other party and its Subsidiaries, as
the case may be.
"Meeting" shall have the meaning set forth in Section 6.2.
"Merger" shall have the meaning set forth in the recitals to this Agreement
and in Section 2.1(a).
"Merger Consideration" shall have the meaning set forth in Sections 2.1(a)
and 3(1).
"Merger Registration Statement" shall have the meaning set forth in Section
6.3(a).
"Multiemployer Plans" shall have the meaning set forth in Section
5.3(1)(iii).
"New Certificates" shall have the meaning set forth in Section 3.4(a).
"Newco" shall mean Petro Holdings Inc., a Minnesota corporation and a wholly
owned subsidiary of Parentco."
"Non-Compliance Event" shall have the meaning set forth in Section
5(3)(i)(i).
"Non-Compliance Notification" shall have the meaning set forth in Section
5(3)(i)(iii).
"NYSE" shall mean the New York Stock Exchange.
"Old Subordinated Units" shall mean the subordinated units representing
limited partner interests of Star Partners having the rights and obligations
specified with respect to Subordinated Units in the Partnership Agreement.
"Operating Partnership Agreement" shall mean the Agreement of Limited
Partnership of Star Propane, as in effect immediately prior to the Effective
Time.
"Operating Partnership Agreement Amendments" shall mean the amendments to the
Operating Partnership Agreement effected in the Amended and Restated Operating
Partnership Agreement.
A-4
<PAGE>
"Parentco" shall mean Star/Petro, Inc., a Minnesota corporation and a wholly
owned subsidiary of the Star Propane.
"Partnership Agreement" shall mean the Agreement of Limited Partnership of
Star Partners, as in effect immediately prior to the Effective Time.
"Partnership Agreement Amendments" shall mean the amendments to the
Partnership Agreement effected in the Amended and Restated Partnership
Agreement.
"Pension Plan" shall have the meaning set forth in Section 5.3(1)(iii).
"Permitting Violation" shall have the meaning set forth in Section
5(3)(i)(ii).
"Person" or "person" shall mean any individual, bank, corporation,
partnership, limited liability company, association, joint-stock company,
business trust or unincorporated organization.
"Petro Class A Common Stock" means the Class A Common Stock, par value $.10
per share of Petro.
"Petro Class B Common Stock" means the Class B common Stock, par value $.10
per share of Petro.
"Petro Class C Common Stock" means the Class C Common Stock, par value $.10
per share of Petro.
"Petro Common Stock" shall mean shares of Petro Class A Common Stock and
Class C Common Stock without distinction as to class.
"Petro Conveyance Agreement" shall mean the Conveyance and Contribution
Agreement among Petro, Star Partners and Star Propane to be entered into as of
the Closing Date substantially in the form of Exhibit C.
"Petro Directors" shall mean the members of the Board of Directors of Petro.
"Petro's Disclosure Schedule" shall mean the Disclosure Schedule delivered by
Petro pursuant to Section 5.1.
"Petro Insiders" shall mean Irik P. Sevin, Audrey L. Sevin, Phillip Ean
Cohen, Thomas J. Edelman, Richard O'Connell, Brentwood Corp., Gabes S.A.,
Minneford Corp., Fernando Montero, M.M. Warburg & Co., Hanseatic Corp.,
Hanseatic Americas LDC, Barcel Corp., Hubertus Langen, Tortosa GmbH, Paul
Biddelman and United Capital Corp.
"Petro Meeting" shall have the meaning set forth in Section 6.2.
"Petro Preferred Stock" shall mean collectively the Junior Preferred Stock,
the Private Preferred Stock and the Public Preferred Stock.
"Petro Stock Option" shall have the meaning set forth in Section 3.7.
A-5
<PAGE>
"Petro Stock Option Plans" shall have the meaning set forth in Section 3.7.
"Plans" shall have the meaning set forth in Section 5(3)(l)(iii).
"Previously Disclosed" by a party shall mean information set forth in its
Disclosure Schedule.
"Private Debt" means Petro's 11.85% Senior Notes due October 1, 2002, Petro's
12.17% Senior Notes due October 1, 2002 and Petro's 12.18% Senior Notes due
October 1, 2002.
"Private Preferred Stock" shall mean Petro's 1989 Preferred Stock due 1999.
"Public Debt" means Petro's 10 1/8% Subordinated Notes due 2003, Petro's 9
3/8% Subordinated Debentures due 2006 and Petro's 12 1/4% Subordinated
Debentures due 2005.
"Public Preferred Stock" means Petro's 12 7/8% Series B and Series C
Exchangeable Preferred Stock due 2009.
"Registration Statements" shall have the meaning set forth in Section 6.3.
"Regulatory Authorities" shall have the meaning set forth in Section
5.3(h)(ii).
"Restructuring Transactions" shall mean the following, collectively:
1. the sale of the Designated Percentage of certain assets (the
"Transferred Assets") by Petro or Subsidiaries of Petro to Star Propane in
exchange for a note (the "Bridge Note"), as contemplated by the Petro
Conveyance Agreement;
2. the sale by the General Partner of its general partnership interests
in Star Partners and Star Propane and its subordinated limited partnership
interests and common limited partnership interests in Star Partners to
Petro for a note in the principal amount of $41,146,000;
3. the contribution by Petro of (i) all of its general partner interest
in Star Propane (other than a portion of such interest with a value of
approximately $1,000) to Star Partners in exchange for 54,316 newly issued
Senior Subordinated Units and (ii) all of its general partner interest in
Star Partners (other than a portion of such interest with a value of
approximately $1,000) to Star Partners in exchange for 54,316 newly issued
Senior Subordinated Units) as contemplated by the Petro Conveyance
Agreement;
4. the conversion of all of Petro's Old Subordinated Units into 1,992,673
newly issued Senior Subordinated Units and 42,046 newly issued Common
Units;
5. the contribution by certain Petro Insiders of 1,753,546 shares of
Class A Common Stock Class C Common Stock (the "Insider Stock") to a newly
formed Delaware limited liability company ("Star Gas LLC") in exchange for
all the member interests in Star Gas LLC as contemplated in the Exchange
Agreement, the formation certificate and operating agreement to be subject
in form and substance to the approval of the Special Committee;
6. the contribution by Star Gas LLC of 9,244 of its Class A Common Stock
to Star Propane in exchange for a .01% general partner interest in Star
Propane as contemplated by the Star LLC Conveyance Agreement;
A-6
<PAGE>
7. the contribution by Star Gas LLC of 1,744,302 of its Class A and Class
C Common Stock to Star Partners in exchange for a 1.99% general partner
interest in Star Partners as contemplated by the Star LLC Conveyance
Agreement;
8. the contribution by certain members of the Tax Free Group of 8,733,735
their Class A and Class C Common Stock to Star Partners in exchange for
577,205 Junior Subordinated Units and 666,994 Senior Subordinated Units, as
contemplated in the Exchange Agreement;
9. the contribution by Star Partners of the Petro Common Stock owned by
it to Star Propane;
10. the contribution by Star Propane to Parentco of the Transferred
Assets, the stock of Petro and the stock of Stellar Propane Corp. in
exchange for all the capital stock of Parentco and the assumption by
Parentco of $85 million of Star Propane's 8.04% First Mortgage Notes and
$11 million of Star Propane's 7.17% First Mortgage Notes.
11. the contribution by Parentco of the Petro Common Stock and the
Transferred Assets owned by it to Newco free of any liability with respect
to the outstanding First Mortgage Notes of Star Partners; and
12. the contribution by Newco of the Petro Common Stock owned by it to
Mergeco.
"Rights" shall mean, with respect to any person, securities or obligations
convertible into or exchangeable for, or giving any person any right to
subscribe for or acquire, or any options, calls or commitments relating to,
equity securities of such person.
"SEC" shall mean the Securities and Exchange Commission.
"SEC Documents" shall have the meaning set forth in Section 5.3(g).
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Senior Subordinated Units" shall mean the senior subordinated units
representing limited partner interests of Star Partners having the rights and
obligations specified with respect to Senior Subordinated Units in the Amended
and Restated Partnership Agreement.
"Significant Subsidiaries" shall have the meaning ascribed to such term in
Section 1-01(w) of Regulation S-X under the Securities Act.
"Special Committee" means the special committee of the Board of Directors of
the General Partner consisting of William Nicoletti and Elizabeth Lanier.
"Star Gas LLC" shall mean Star Gas LLC, a newly-created Delaware limited
liability company that will succeed Star Gas Corporation as the general partner
of the partnership.
"Star LLC Conveyance Agreement" shall mean the Conveyance and Contribution
Agreement among Star Gas LLC, Star Propane and Star Partners to be entered into
as of the Closing Date substantially in the form of Exhibit D.
A-7
<PAGE>
"Star Partners" shall have the meaning set forth in the introductory
paragraph to this Agreement.
"Star Partners' Disclosure Schedule" shall mean the Disclosure Schedule
delivered by Star Partners pursuant to Section 5.1.
"Star Partners Meeting" shall have the meaning set forth in Section 6.2.
"Star Propane" shall have the meaning set forth in the introductory paragraph
to this Agreement.
"Star Propane Debt Conditions" shall mean the Holders of Star Propane's 8.04%
First Mortgage Notes due 2009 and Star Propane's outstanding bank credit
facilities shall have consented to the execution, delivery and performance of
this Agreement by Star Propane or shall have entered into amendments permitting
the execution, delivery and performance of this Agreement by Star Propane
without violation of the terms of such indebtedness and without a requirement
that such indebtedness be repurchased (or an offer be made to purchase such
indebtedness).
"Subsidiary" shall have the meaning ascribed to such term in Rule 1-02 of
Regulation S-X under the Securities Act.
"Surviving Corporation" shall have the meaning set forth in Section 2.1(a).
"Takeover Law" means any "fair price", "moratorium", "control share
acquisition" or any other anti-takeover statute or similar statute enacted
under state or federal law.
"Takeover Proposal" shall mean, with respect to Petro, any tender or exchange
offer, proposal for a merger, consolidation or other business combination
involving Petro or any of its Subsidiaries or any proposal or offer to acquire
in any manner a substantial equity interest in, or a substantial portion of the
assets of, Petro or any of its Subsidiaries other than the transactions
contemplated or permitted by this Agreement.
"Tax Returns" shall have the meaning set forth in Section 5.3(o).
"Taxes" shall mean all taxes, charges, fees, levies or other assessments,
including, without limitation, all net income, gross income, gross receipts,
sales, use, ad valorem, goods and services, capital, transfer, franchise,
profits, license, withholding, payroll, employment, employer health, excise,
estimated, severance, stamp, occupation, property or other taxes, custom
duties, fees, assessments or charges of any kind whatsoever, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any taxing authority.
"Treasury Shares" shall mean shares of Petro Common Stock owned by Petro at
the Effective Time.
"Working Capital" when applied to Petro, shall mean Petro's current assets
minus current liabilities determined in accordance with generally accepted
accounting principles applied on a consistent basis, provided, that (i)
restricted cash shall be excluded from current assets to the extent such
restricted cash remains restricted immediately following the Effective Time and
relates to
A-8
<PAGE>
indebtedness due in more than one year, (ii) draws under Petro's bank working
capital facility shall be included in current liabilities, (iii) the current
maturities of all other Petro long-term indebtedness and preferred stock shall
be excluded from current liabilities, and (iv) expenses of the type described
in Section 7.13(d) shall be included as a current liability to the extent not
financed in the Debt Offering or the Equity Offering.
ARTICLE II.ARTICLE II.
THE MERGER; EFFECTS OF THE MERGER
2.1. The Merger.
(a) The Surviving Corporation. Subject to the terms and conditions of this
Agreement, at the Effective Time, Mergeco shall merge with and into Petro (the
"Merger"), the separate corporate existence of Mergeco shall cease and Petro
shall survive and continue to exist as a Minnesota corporation (Petro, as the
surviving corporation in the Merger, sometimes being referred to herein as the
"Surviving Corporation"). Star Partners, with the consent of the Special
Committee, may at any time change the method of effecting the Merger
(including, without limitation, the provisions of this Article II) if and to
the extent it deems such change to be desirable; provided, however, that no
such change shall (A) alter or change the amount or kind of consideration to be
issued to holders of Petro Common Stock or Petro Preferred Stock as provided
for in this Agreement (the "Merger Consideration"), (B) adversely affect the
tax treatment of Petro's stockholders as a result of receiving the Merger
Consideration or (C) materially impede or delay consummation of the
transactions contemplated by this Agreement.
(b) Effectiveness And Effects Of The Merger. Subject to the satisfaction or
waiver of the conditions set forth in Article VII in accordance with this
Agreement, the Merger shall become effective upon the later to occur of (i) the
filing in the office of the Secretary of State of Delaware of a properly
executed certificate of merger (the "Certificate of Merger") and (ii) the
filing with the Department of State of Minnesota of properly executed articles
of merger (the "Articles of Merger"), or such later date and time as may be set
forth in the Certificate of Merger and the Articles of Merger (the "Effective
Time"), in accordance with the DGCL and the MBCA. The Merger shall have the
effects prescribed in DGCL and the MBCA.
(c) Certificate Of Incorporation And By-Laws. The certificate of
incorporation and by-laws of Petro in effect immediately prior to the Effective
Time shall be the certificate of incorporation and bylaws of the Surviving
Corporation, until duly amended in accordance with applicable law.
(d) Directors of the Surviving Corporation. The directors of Petro who are
also employees of Petro immediately prior to the Effective time shall be the
directors of the Surviving Corporation as of the Effective Time.
(e) Officers of the Surviving Corporation. The officers of Petro immediately
prior to the Effective Time shall be the officers of the Surviving Corporation
as of the Effective Time.
2.2. Effective Date And Closing. Subject to the satisfaction or waiver of the
conditions as set forth in Article VII in accordance with this Agreement, the
closing of the Merger and the other
A-9
<PAGE>
transactions contemplated hereby (the "Closing") shall occur on (a) the third
business day to occur after the day on which the last of the conditions set
forth in Article VII shall have been satisfied or waived in accordance with the
terms of this Agreement, provided that such date shall not be earlier than
February 15, 1999 or (b) such other date to which the parties may agree in
writing. The date on which the Closing occurs is referred to as the "Closing
Date." The Closing of the transactions contemplated by this Agreement shall
take place at the offices of Phillips Nizer Benjamin Krim & Ballon LLP, 666
Fifth Avenue, New York, New York 10103 at 10:00 a.m. New York City time on the
Closing Date.
ARTICLE III.
MERGER CONSIDERATION; EXCHANGE PROCEDURES
3.1. Merger Consideration. Subject to the provisions of this Agreement, at
the Effective Time, by virtue of the Merger and without any action on the part
of any holder of capital stock of any party:
(a) Each share of the common stock, par value $.01 per share, of Mergeco
outstanding immediately prior to the Effective Time shall be converted into
and become one fully paid and nonassessable share of Common Stock, par
value $.10, of the Surviving Corporation.
(b) Each Treasury Share and each share of Petro Common Stock owned by
Mergeco shall cease to be outstanding and shall be canceled and retired
without payment of any consideration therefor, and no partnership interest
of Star Partners or other consideration shall be delivered in exchange
therefor.
(c) Each share of Petro Common Stock issued and outstanding immediately
prior to the Effective Time (other than Treasury Shares, shares held by
Mergeco, and shares of Dissenting Common Holders) shall be converted into
the right to receive .13064 fully paid and nonassessable Senior
Subordinated Units.
(d) Each share of Junior Preferred Stock issued and outstanding
immediately prior to the Effective Time shall be converted into the right
to receive .13064 fully paid and nonassessable Common Units.
(e) Each share of Public Preferred Stock issued and outstanding
immediately prior to the Effective Time shall be converted into the right
to receive $23 in cash plus accrued and unpaid dividends as of the
Effective Time.
(f) Each share of Petro's Class B Common Stock, $.10 par value,
outstanding immediately prior to the Effective Time, shall be unchanged and
shall remain outstanding with the same relative rights, preferences and
privileges which it had immediately prior to the Effective Time.
3.2. Rights As Stockholders; Stock Transfers. At the Effective Time, holders
of Petro Common Stock, Junior Preferred Stock and Public Preferred Stock shall
cease to be, and shall have no rights, as stockholders of Petro, other than to
receive (a) any dividend or other distribution with respect to such Petro
Common Stock, Junior Preferred Stock or Public Preferred Stock with a record
A-10
<PAGE>
date occurring prior to the Effective Time that may have been declared or made
by Petro on such shares of Petro Common Stock, Junior Preferred Stock or Public
Preferred Stock in accordance with the terms of this Agreement or prior to the
date hereof and which remain unpaid at the Effective Time and (b) the
consideration provided under this Article III. After the Effective Time, there
shall be no transfers on the stock transfer books of the shares of Petro Common
Stock or Petro Preferred Stock.
3.3. Fractional Shares. No certificates or scrip representing fractional
Common Units or Senior Subordinated Units shall be issued upon the surrender
for exchange of Certificates pursuant to this Article III, and, except as
provided in Section 3.2 and this Section 3.3, no dividend or other
distribution, stock split or interest shall relate to any such fractional
security, and such fractional interests shall not entitle the owner thereof to
vote or to any rights of a security holder of Star Partners. In lieu thereof,
each holder of shares of Petro Common Stock who would otherwise have been
entitled to a fraction of a Senior Subordinated Unit upon surrender of
Certificates for exchange pursuant to this Article III will be paid an amount
in cash (without interest) equal to the closing price of the Senior
Subordinated Units on the first day of trading thereof on the NYSE (as reported
in The Wall Street Journal or, if not reported therein, in another
authoritative source) multiplied by the fractional interest the holder would
otherwise be entitled to receive, and each holder of shares of Junior Preferred
Stock who would otherwise have been entitled to a fraction of a Common Unit
upon surrender of Certificates for exchange pursuant to this Article III will
be paid an amount in cash (without interest) equal to such fraction multiplied
by the average of the last sales prices of the Common Units on the New York
Stock Exchange Composite Transactions tape (as reported in The Wall Street
Journal or, if not reported therein, in another authoritative source) for the
five consecutive trading days ending immediately prior to the second trading
day prior to the Closing Date.
3.4. Exchange Procedures. (a) At or prior to the Effective Time, Star
Partners shall deposit, or shall cause to be deposited, with the Exchange
Agent, for the benefit of the holders of the Petro Common Stock and the Junior
Preferred Stock for exchange in accordance with this Article III (i)
certificates representing the Senior Subordinated Units and Common Units ("New
Certificates") issuable pursuant to Section 3.1 in exchange for outstanding
shares of Petro Common Stock and Junior Preferred Stock, (ii) the amount of
cash necessary to be distributed to the holders of Public Preferred Stock in
accordance with the foregoing sections of this Article III and (iii) an amount
of cash to be paid in lieu of fractional Senior Subordinated Units and Common
Units as provided herein (such cash and New Certificates, together with any
dividends or distributions with respect thereto (but without any interest
thereon), being hereinafter referred to as the "Exchange Fund").
(b) Promptly after the Effective Time, the Exchange Agent shall mail to each
holder of record of a certificate or certificates which, immediately prior to
the Effective Time, represented outstanding shares of Petro Common Stock and
Junior Preferred Stock (the "Certificates"), which holder's shares of Petro
Common Stock or Junior Preferred Stock were converted into the right to receive
Senior Subordinated Units or Common Units pursuant to Section 3.1 (i) a letter
of transmittal, which shall specify that delivery shall be effected and risk of
loss and title to the Certificates shall pass only upon delivery of the
Certificates to the Exchange Agent, and shall be in such form and have such
other provisions as Star Partners may reasonably specify and (ii) instructions
for use in effecting the
A-11
<PAGE>
surrender of the Certificates in exchange for certificates representing Senior
Subordinated Units and Common Units. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly executed, and any other required documents, the holder of such Certificate
shall be entitled to receive in exchange therefor a New Certificate
representing the number of whole Senior Subordinated Units or Common Units that
such holder has the right to receive pursuant to this Article III, and cash in
lieu of any fractional Senior Subordinated Units or Common Units, as
contemplated by Section 3.3, and the Certificate so surrendered shall forthwith
be canceled. In the event of a transfer of ownership of Petro Common Stock or
Junior Preferred Stock that is not registered in the transfer records of Petro,
a certificate representing the proper number of Senior Subordinated Units or
Common Units may be issued to a transferee only on the condition that the
Certificate formerly representing such shares of Petro Common Stock or Junior
Preferred Stock is presented to the Exchange Agent, properly endorsed, and
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid or that no
such taxes are applicable. The Exchange Agent shall not be entitled to vote or
exercise any rights of ownership with respect to Senior Subordinated Units or
Common Units held by it from time to time hereunder, except that it shall
receive and hold all dividends or other distributions paid or distributed with
respect thereto for the account of persons entitled thereto.
(c) If any Certificate shall have been lost, stolen, mislaid or destroyed,
upon the making of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen, mislaid or destroyed, and if required by Star
Partners, the posting by such Person of a bond in such reasonable amount as
Star Partners may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen, mislaid or destroyed Certificate the
consideration deliverable in respect thereof as determined in accordance with
this Article III.
(d) Notwithstanding the foregoing, neither the Exchange Agent nor any party
hereto shall be liable to any former holder of Petro Common Stock or Junior
Preferred Stock for any amount properly delivered to a public official pursuant
to applicable abandoned property, escheat or similar laws.
(e) No distributions with respect to the Common Units or Senior Subordinated
Units declared or made after the Effective Time with a record date occurring
after the Effective Time shall be paid to the holder of any unsurrendered old
Certificate, and no cash payment in lieu of fractional Senior Subordinated
Units or Common Units shall be paid to any such holder pursuant to Section 3.3
until the holder thereof shall surrender such Certificates in accordance with
this Article III. After the surrender of certificates in accordance with this
Article III, and subject to the effect of applicable laws, there shall be paid
to the holder of Senior Subordinated Units or Common Units issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of
distributions with a record date after the Effective Time theretofore payable
with respect to such Senior Subordinated Units or Common Units and not paid,
less the amount of any withholding taxes which may be required thereon, and
(ii) at the appropriate payment date, the amount of distributions with a record
date after the Effective Time but prior to surrender and a payment date
subsequent to surrender payable with respect to such Senior Subordinated Units
or Common Units, less the amount of any withholding taxes which may be required
thereon.
A-12
<PAGE>
(f) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of Petro for twelve months after the Closing shall be paid to Star
Partners. Any stockholders of Petro who have not theretofore complied with this
Article III shall thereafter look only to Star Partners for payment of the
Common Units or Senior Subordinated Units, cash in lieu of any fractional
Common Units or Senior Subordinated Units and unpaid distributions on the
Common Units and the Senior Subordinated Units deliverable in respect of each
share of Petro Common Stock and Junior Preferred Stock such stockholder holds
as determined pursuant to this Agreement, in each case, without any interest
thereon.
3.5. Anti-Dilution Provisions. In the event of any subdivisions,
reclassifications, recapitalizations, splits, combinations or dividends in the
form of equity interests with respect to the Common Units, and the Petro Common
Stock (in each case, as permitted pursuant to Section 4.3) the number of Senior
Subordinated Units and Common Units to be issued in the Merger and the average
closing sales prices of the Common Units determined in accordance with Section
3.3 will be correspondingly adjusted.
3.6. Shares of Dissenting Common Holders. Any issued and outstanding shares
of Petro Common Stock held by Dissenting Common Holders shall not be converted
as described in Section 3.1(c) but shall from and after the Effective Time
represent only the right to receive such consideration as may be determined to
be due to such Dissenting Common Holder pursuant to the MBCA; provided,
however, that shares of Petro Common Stock outstanding immediately prior to the
Effective Time and held by a Dissenting Common Holder who shall, after the
Effective Time, withdraw his demand for fair value or lose his dissenters'
rights pursuant to the MBCA, shall be deemed to be converted, as of the
Effective Time, into the right to receive Senior Subordinated Units as
specified in Section 3.1(c), without interest.
3.7. Options. (a) At the Closing, all employee and director stock options to
purchase shares of Petro Common Stock (each, a "Petro Stock Option"), which are
then outstanding and unexercised, shall cease to represent a right to acquire
shares of Petro Stock. To the extent any such stock option is not vested at the
Effective Time and does not become vested by reason of the Merger, such stock
option shall be cancelled. To the extent that any stock option is vested as of
the Effective Time or becomes vested by reason of the Merger, such stock option
to the extent so vested shall be converted automatically into options to
purchase .13064 Senior Subordinated Units at a price equal to the original
exercise price divided by .13064 and Star Partners shall assume each such Petro
Stock Option subject to the terms of any of the stock option plans listed under
"Stock Option Plans" in Section 5.3 of Petro's Disclosure Schedule
(collectively, the "Petro Stock Option Plans"), and the agreements evidencing
grants thereunder, including but not limited to the accelerated vesting of such
options which shall occur in connection with and by virtue of the Merger as and
to the extent required by such plans and agreements.
A-13
<PAGE>
ARTICLE IV.
ACTIONS PENDING MERGER
From the date hereof until the Effective Time, except as expressly contemplated
by this Agreement, (a) without the prior written consent of the Special
Committee (which consent shall not be unreasonably withheld or delayed) Petro
will not, and will cause each of its Subsidiaries not to, and (b) without the
prior written consent of Petro (which consent shall not be unreasonably
withheld or delayed) Star Partners will not, and will cause each of its
Subsidiaries not to:
4.1. Ordinary Course. Conduct the business of it and its Subsidiaries other
than in the ordinary and usual course or, to the extent consistent therewith,
fail to use reasonable best efforts to preserve intact its business
organizations, goodwill and assets and maintain its rights, franchises and
existing relations with customers, suppliers, employees and business
associates, or take any action that would (a) adversely affect the ability of
any party to obtain any approvals required under the HSRA for the transactions
contemplated hereby or (b) adversely affect its ability to perform any of its
material obligations under this Agreement.
4.2. Capital Stock. In the case of Petro and its Subsidiaries, other than (a)
pursuant to stock options Previously Disclosed in its Disclosure Schedule, (b)
pursuant to the Petro dividend reinvestment program or (c) as otherwise set
forth on Section 4.2 of Petro's Disclosure Schedule, (i) issue, sell or
otherwise permit to become outstanding, or authorize the creation of, any
additional shares of capital stock, any stock appreciation rights or any
Rights, (ii) enter into any agreement with respect to the foregoing or (iii)
permit any additional shares of capital stock to become subject to new grants
of employee stock options, stock appreciation rights or similar stock-based
employee rights.
4.3. Dividends, Distributions. (a) Make, declare or pay any dividend (other
than (i) in the case of Star Propane, distributions of Available Cash (as
defined in the Operating Partnership Agreement) to its partners, (ii) in the
case of Star Partners, regular quarterly cash distributions of Available Cash
on the Common Units, Subordinated Units and general partner interest of Star
Partners and (iii) in the case of Petro, regular quarterly dividends on the
Petro Preferred Stock), in each case in the ordinary course consistent with
past practice), on or in respect of, or declare or make any distribution on any
shares of its equity securities other than as Previously Disclosed, (b) split,
combine or reclassify any of its capital stock or issue or authorize or propose
the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or (c) repurchase, redeem or
otherwise acquire, or permit any of its Subsidiaries to purchase, redeem or
otherwise acquire any shares of its capital stock, except as required by the
terms of its securities outstanding on the date hereof or as contemplated by
any existing Compensation and Benefit Plan.
4.4. Compensation; Employment Agreements. In the case of Petro and its
Subsidiaries, except as set forth on Section 4.4 of Petro's Disclosure
Schedule, enter into or amend any written employment, severance or similar
agreements or arrangements with any of its directors, officers or employees, or
grant any salary or wage increase or increase any employee benefit (including
incentive or bonus payments), except for (a) normal individual increases in
compensation to employees (other than officers and directors) in the ordinary
course of business consistent with past practice or (b) other changes as are
provided for herein or as may be required by law or to satisfy
A-14
<PAGE>
contractual obligations existing as of the date hereof or (c) additional grants
of awards to newly hired employees consistent with past practice.
4.5. Benefit Plans. In the case of Petro and its Subsidiaries, except as set
forth on Section 4.5 of the Petro Disclosure Schedule, enter into or amend
(except as may be required by applicable law, to satisfy contractual
obligations existing as of the date hereof or amendments which, either
individually or in the aggregate, would not reasonably be expected to result in
a material liability to Petro or its Subsidiaries) any pension, retirement,
stock option, stock purchase, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust agreement related thereto,
in respect of any of its directors, officers or other employees, including,
without limitation, taking any action that accelerates the vesting or exercise
of any benefits payable thereunder.
4.6. Acquisitions And Dispositions. In the case of Petro and its
Subsidiaries, and except for the sale of the Transferred Assets to Star
Propane, sell, lease, dispose of or discontinue any portion of its assets,
business or properties, which is material to it and its Subsidiaries taken as a
whole, or acquire, by merger or otherwise, or lease (other than by way of
foreclosures or acquisitions of control in a bona fide fiduciary capacity or in
satisfaction of debts previously contracted in good faith, in each case in the
ordinary and usual course of business consistent with past practice) any assets
or all or any portion of, the business or property of any other entity which,
in either case, is material to it and its Subsidiaries taken as a whole, or
would be likely to have a Material Adverse Effect on the ability of the parties
to consummate the transactions contemplated by this Agreement or to delay
materially the Effective Time. In the case of Star Partners, Star Partners will
not, and will cause its Subsidiaries not to, make any acquisition or take any
other action which would have a Material Adverse Effect on its ability to
consummate the transactions contemplated by this Agreement.
4.7. Amendments. In the case of Petro, amend its Articles of Incorporation or
By-laws.
4.8. Accounting Methods. Implement or adopt any change in its accounting
principles, practices or methods, other than as may be required by law or
generally accepted accounting principles.
4.9. Insurance. Fail to use reasonable best efforts to maintain with
financially responsible insurance companies, insurance in such amounts and
against such risks and losses as has been customarily maintained by it in the
past.
4.10. Notification. Fail to promptly notify the other of any material change
in its condition (financial or otherwise) or business or any material
litigation or material governmental complaints, investigations or hearings or
the breach in any material respect of any of its representations or warranties
contained herein.
4.11. Taxes. (a) Make or rescind any material express or deemed election
relating to Taxes unless it is reasonably expected that such action will not
materially and adversely affect it, including elections for any and all joint
ventures, partnerships, limited liability companies, working interests or other
investments where it has the capacity to make such binding election, (b) settle
or compromise any material claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes, except
where such settlement or compromise will not materially and adversely
A-15
<PAGE>
affect it or (c) change in any material respect any of its methods of reporting
income, or deductions for federal income tax purposes from those employed in
the preparation of its federal income tax return for the most recent taxable
year for which a return has been filed, except as may be required by applicable
law or except for such changes that are reasonably expected not to materially
adversely affect it.
4.12. Debt, Capital Expenditures and the Like. In the case of Petro, except
as provided in Section 6.4, (a) incur any indebtedness for borrowed money
(except for working capital under existing credit facilities) or guarantee any
such indebtedness of others, (b) enter into any material lease (whether
operating or capital), (c) create any material mortgages, liens, security
interests or other encumbrances on the property of Petro or its Subsidiaries in
connection with any pre-existing indebtedness, new indebtedness or lease or (d)
make or commit to make aggregate capital expenditures in excess of $2.0 million
over Petro's fiscal 1998 capital expenditure budget identified in Section 4.12
of the Petro Disclosure Schedule and Previously Disclosed to Star Gas.
4.13. No Dissolution. Authorize, recommend, propose or announce an intention
to adopt a plan of complete or partial dissolution or liquidation.
4.14. Adverse Actions. Knowingly take any action that is intended or is
reasonably likely to result in (a) any of its representations and warranties
set forth in this Agreement being or becoming untrue in any material respect at
any time prior to the Closing, (b) any of the conditions to the Merger set
forth in Article VII not being satisfied or (c) a material violation of any
provision of this Agreement except, in each case, as may be required by
applicable law.
4.15. Agreements. Agree or commit to do anything prohibited by Sections 4.1
through 4.14.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
5.1. Disclosure Schedule. On or prior to the date hereof, Star Partners has
delivered to Petro and Petro has delivered to Star Partners a schedule
(respectively, its "Disclosure Schedule") setting forth, among other things,
items the disclosure of which is necessary or appropriate in relation to any or
all of its representations and warranties; provided, however, that (a) no such
item is required to be set forth in a Disclosure Schedule as an exception to a
representation or warranty if its absence is not reasonably likely to result in
the related representation or warranty being deemed untrue or incorrect under
the standard established by Section 5.2, and (b) the mere inclusion of an item
in a Disclosure Schedule shall not be deemed an admission by a party that such
item represents a material exception or fact, event or circumstance or that
such item is reasonably likely to result in a Material Adverse Effect.
5.2. Standard. No representation or warranty of Star Partners or Petro
contained in Section 5.3 (except Sections 5.3(b), 5.3(c)(i), 5.3(c)(ii), 5.3(d)
and 5.3(e)) shall be deemed untrue or incorrect, and no party hereto shall be
deemed to have breached a representation or warranty, as a consequence of the
existence of any fact, circumstance or event unless such fact, circumstance or
event, individually or taken together with all other facts, circumstances or
events inconsistent with any paragraph of Section 5.3, has had or is reasonably
expected to have a Material Adverse Effect.
A-16
<PAGE>
5.3. Representations and Warranties. Subject to Sections 5.1 and 5.2 and
except as Previously Disclosed, Petro hereby represents and warrants to Star
Partners, and Star Partners hereby represents and warrants to Petro, to the
extent applicable, in each case with respect to itself and its Subsidiaries, as
follows:
(a) Organization, Standing and Authority. Such party is a corporation, or in
the case of Star Partners and Star Propane, a limited partnership, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Such party (i) is duly qualified to do
business and is in good standing in the states of the United States where its
ownership or leasing of property or the conduct of its business requires it to
be so qualified and (ii) has in effect all federal, state, local, and foreign
governmental authorizations and permits necessary for it to own or lease its
properties and assets and to carry on its business as it is now conducted.
Such party (i) is duly qualified to do business and is in good standing in the
states of the United States where its ownership or leasing of property or the
conduct of its business requires it to be so qualified and (ii) has in effect
all federal, state, local, and foreign governmental authorizations and permits
necessary for it to own or lease its properties and assets and to carry on its
business as it is now conducted.
(b) Shares. (i) In the case of Petro, as of the date hereof, the authorized
capital stock of Petro consists solely of 81,909,722 shares of stock, $.10 par
value, of which, as of the date hereof, 23,964,962 shares of Class A Common
Stock, 11,228 shares of Class B Common Stock, 2,597,519 shares of Class C
Common Stock, 41,668 shares of Private Preferred Stock, no more than 797,000
shares of Junior Preferred Stock and 1,200,000 shares of Public Preferred Stock
are issued and outstanding. Such outstanding shares were duly authorized and
are validly issued and fully paid and non-assessable and are not subject to any
preemptive or similar rights (and were not issued in violation of any
preemptive or similar rights). The holder of the Petro Private Preferred Stock
has consented to the redemption thereof on or prior to the Closing Date at a
price equal to $4.167 million plus accrued and unpaid dividends.
(ii) In the case of Star Partners, as of the date hereof, there are
3,858,999 Common Units and 2,396,078 Old Subordinated Units issued and
outstanding, and all of such Common Units and Old Subordinated Units and
the limited partner interests represented thereby were duly authorized and
validly issued in accordance with the Partnership Agreement and are fully
paid (to the extent required under the Partnership Agreement) and
nonassessable (except as such nonassessability may be affected by matters
described in the Merger Registration Statement under the caption
"Description of the Partnership Agreement--Limited Liability"). As of the
date hereof, the General Partner owns a 1% general partner interest in Star
Partners, and such general partner interest was duly authorized and validly
issued in accordance with the Partnership Agreement. As of the date hereof,
Star Partners owns a 98.9899% limited partner interest in Star Propane, and
such limited partner interest was duly authorized and validly issued in
accordance with the Operating Partnership Agreement and is fully paid (to
the extent required under the Operating Partnership Agreement) and
nonassessable (except as such nonassessability may be affected by matters
described in the Merger Registration Statement under the caption
"Description of the Partnership Agreement--Limited Liability"). As of the
date hereof, the General Partner owns a 1.0101% general partner interest in
Star Propane, and such general
A-17
<PAGE>
partner interest was duly authorized and validly issued in accordance with
the Operating Partnership Agreement.
(iii) As of the date hereof, except as Previously Disclosed in Section
5.3(b) of a party's Disclosure Schedule, there are no shares of capital
stock (in the case of Petro) or interests (in the case of Star Partners),
of such party's equity securities authorized and reserved for issuance,
such party does not have any Rights issued or outstanding with respect to
its equity securities, and such party does not have any commitment to
authorize, issue or sell any such equity securities or Rights, except
pursuant to this Agreement. Since December 31, 1997, Petro has not issued
any shares of its capital stock or rights in respect thereof or reserved
any shares for such purposes except pursuant to plans or commitments
Previously Disclosed in Section 5.3(b) of its Disclosure Schedule.
(iv) The number of shares of Petro Common Stock which are issuable and
reserved for issuance upon exercise of Petro Stock Options as of the date
hereof are Previously Disclosed in Section 5.3(b) of Petro's Disclosure
Schedule, and the number of Common Units and Subordinated Units that are
issuable upon exercise of any employee or director options to purchase
Common Units or Subordinated Units as of the date hereof are Previously
Disclosed in Section 5.3 of Star Partners' Disclosure Schedule.
(c) Subsidiaries. (i) (A) Such party has Previously Disclosed in Section
5.3(c) of its Disclosure Schedule a list of all of its Subsidiaries together
with the jurisdiction of organization of each such Subsidiary, (B) it owns,
directly or indirectly, all of the equity interests of each of its
Subsidiaries, (C) no equity interests of any of its Subsidiaries are or may
become required to be issued by reason of any Rights, (D) there are no
contracts, commitments, understandings or arrangements by which any of such
Subsidiaries is or may be bound to sell or otherwise transfer any equity
interests of any such Subsidiaries, (E) there are no contracts, commitments,
understandings, or arrangements relating to its rights to vote or to dispose of
such equity interests, and (F) all of the equity interests of each such
Subsidiary held by it or its Subsidiaries are fully paid and nonassessable and
are owned by it or its Subsidiaries free and clear of any Liens.
(ii) In the case of the representations and warranties of Petro, other
than ownership of its Subsidiaries, Petro does not own beneficially,
directly or indirectly, any equity securities or similar interests of any
person, or any interest in a partnership or joint venture of any kind.
(iii) Each of such party's Subsidiaries has been duly organized and is
validly existing in good standing under the laws of the jurisdiction of its
organization and (a) is duly qualified to do business and in good standing
in the jurisdictions where its ownership or leasing of property or the
conduct of its business requires it to be so qualified and (b) has in
effect all federal, state, local, and foreign governmental authorizations
and permits necessary for it to own or lease its properties and assets and
to carry on its business as it is now conducted.
(d) Corporate or Partnership Power. Such party and each of its Subsidiaries
has the corporate power and authority, or in the case of Star Partners and Star
Propane the partnership power and authority to carry on its business as it is
now being conducted and to own all its properties and assets; and it has the
corporate power and authority or, in the case of Star Partners and Star
Propane, the partnership power and authority, to execute, deliver and perform
its obligations under this Agreement and to consummate the transactions
contemplated hereby.
A-18
<PAGE>
(e) Equityholder Authority. Subject in the case of this Agreement to approval
by the holders of a majority of the shares of Petro Class A and Class C Common
Stock and Petro Preferred Stock entitled to vote thereon, voting separately by
classes the approval of the holders of a majority of the Petro Class A Common
Stock which is not owned by Petro Insiders or Affiliates, and by the holders of
a majority of the Common Units of Star Partners, excluding Common Units held by
Petro and its Affiliates, this Agreement and the transactions contemplated
hereby have been authorized by all necessary corporate action (partnership
action in the case of Star Partners and Star Propane), and this Agreement has
been duly executed and delivered and is a legal, valid and binding agreement of
it, enforceable in accordance with its terms (except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to or
affecting creditors' rights or by general equity principles). In the case of
Petro, the holders of 100% of the Public Preferred Stock, 100% of the Private
Preferred Stock and 100% of the Junior Preferred Stock have granted Petro an
irrevocable proxy to vote their shares in favor of the Merger.
(f) No Defaults. Except as Previously Disclosed, subject to receipt of the
HSRA approval, the approval of the holders of the Private Debt and 1998
Preferred Stock, the approval of Petro's bank group, the required filings under
federal and state securities laws and the approvals contemplated by Article
VII, the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby does not and will not (i)
constitute a breach or violation of, or result in a default (or an event that,
with notice or lapse of time or both, would become a default) under, or result
in the termination or in a right of termination or cancellation of, or
accelerate the performance required by, any note, bond, mortgage, indenture,
deed of trust, license, franchise, lease, contract, agreement, joint venture or
other instrument or obligation to which it or any of its Subsidiaries is a
party or by which it or any of its Subsidiaries or properties is subject or
bound, (ii) constitute a breach or violation of, or a default under, in the
case of Petro its articles of incorporation or by-laws and in the case of Star
Partners and Star Propane its Agreement of Limited Partnership, (iii)
contravene or conflict with or constitute a violation of any provision of any
law, rule, regulation, judgment, order or decree binding upon or applicable to
it or any of its Subsidiaries, (iv) result in the creation of any Lien on any
of its assets or its Subsidiaries' assets or (v) cause the transactions
contemplated by this Agreement to be subject to Takeover Laws.
(g) Financial Reports And SEC Documents. Its Annual Report on Form 10-K, for
the fiscal year ended December 31, 1997 in the case of Petro and for the fiscal
year ended September 30, 1997 in the case of Star Partners, and all other
reports, registration statements, definitive proxy statements or information
statements filed or to be filed by it or any of its Subsidiaries subsequent to
December 31, 1995 under the Securities Act, or under Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act, in the form filed, or to be filed (collectively,
its "SEC Documents"), with the SEC (i) complied or will comply in all material
respects as to form with the applicable requirements under the Securities Act
or the Exchange Act, as the case may be, and (ii) did not and will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading; and
each of the balance sheets contained in or incorporated by reference into any
such SEC Document (including the related notes and schedules thereto) fairly
presents the financial position of the entity or entities to which it relates
as of its date, and each of the statements of
A-19
<PAGE>
income and changes in stockholders' equity and cash flows or equivalent
statements in the case of Star Partners in such SEC Documents (including any
related notes and schedules thereto) fairly presents the results of operations,
changes in stockholders' equity and changes in cash flows, as the case may be,
of the entity or entities to which it relates for the periods to which it
relates, in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except in each
case as may be noted therein, subject to normal year-end audit adjustments in
the case of unaudited statements. Except as and to the extent set forth on its
balance sheet as of September 30, 1997 (in the case of Star Partners) and
December 31, 1997 (in the case of Petro), as of such date, neither it nor any
of its Subsidiaries had any liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) that would be required to be
reflected on, or reserved against in, a balance sheet or in the notes thereto
prepared in accordance with generally accepted accounting principles
consistently applied.
(h) Litigation; Regulatory Action. (i) No litigation, claim or other
proceeding before any court or governmental agency is pending against it or any
of its Subsidiaries and, to the best of its knowledge, no such litigation,
claim or other proceeding has been threatened, other than normal and routine
litigation which is either covered by insurance in amounts sufficient to
discharge any likely exposure. There are no outstanding judgments, decrees,
injunctions, awards or orders against it or any of its Subsidiaries. Section
5.3(h) of its Disclosure Schedule contains, as of the date of this Agreement,
an accurate and complete list of all actions, suits and proceedings pending or,
to the best of its knowledge, threatened against it, except as to routine law
suits arising in the ordinary course of business involving customer complaints
or vehicular accidents which are fully covered by insurance (except for
deductible amounts under such insurance policies which if required to be paid
would not individually or in the aggregate have a Material Adverse Effect).
(ii) Except as Previously Disclosed, neither it nor any of its
Subsidiaries or properties is a party to or is subject to any order,
decree, agreement, memorandum of understanding or similar arrangement with,
or a commitment letter or similar submission to, any federal or state
governmental agency or court or authority or body or the supervision or
regulation of it or any of its Subsidiaries (collectively, the "Regulatory
Authorities").
(iii) Neither it nor any of its Subsidiaries has been advised by any
Regulatory Authority that such Regulatory Authority is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such order, decree, agreement, memorandum of understanding,
commitment letter or similar submission.
(i) Compliance With Laws. Except as set forth in Section 5.3(i) of its
Disclosure Schedule, it and each of its Subsidiaries:
(i) in the conduct of its business, is in compliance with all applicable
federal, state, local and foreign statutes, laws, regulations, ordinances,
rules, judgments, orders or decrees applicable thereto or to the employees
conducting such businesses, (any instance of failure to so comply is
referred to herein as a "Non-Compliance Event").
(ii) has all permits, licenses, authorizations, orders and approvals of,
and has made all filings, applications and registrations with, all
Regulatory Authorities that are required in order to permit it to conduct
its businesses substantially as presently conducted; all such permits,
A-20
<PAGE>
licenses, certificates of authority, orders and approvals are in full force
and effect and, to the best of its knowledge, no suspension or cancellation
of any of them is threatened (any instance or failure to obtain any of the
foregoing and to maintain them in full force and effect is referred to
herein as a ("Permitting Violation"); and
(iii) has not received, since December 31, 1994, any notification or
communication from any Regulatory Authority asserting that it or any of its
Subsidiaries is not in compliance with any of the statutes, regulations, or
ordinances which such Regulatory Authority enforces or threatening to
revoke any license, franchise, permit, or governmental authorization (nor,
to its knowledge, do any grounds for any of the foregoing exist), any
instance of the foregoing referred to herein as a "Non-Compliance
Notification";
(j) Defaults. Neither it nor any of its Subsidiaries is in default under any
contract, agreement, commitment, arrangement, lease, insurance policy, or other
instrument to which it is a party, by which its respective assets, business, or
operations may be bound or affected, or under which it or its respective
assets, business, or operations receives benefits, and there has not occurred
any event that, with the lapse of time or the giving of notice or both, would
constitute such a default.
(k) No Brokers. No action has been taken by it that would give rise to any
valid claim against any party hereto for a brokerage commission, finder's fee
or other like payment with respect to the transactions contemplated by this
Agreement, excluding, in the case of Petro, fees to be paid to PaineWebber
Incorporated and Dain Rauscher Wessels, and, in the case of Star Partners, fees
to be paid to A.G. Edwards & Sons, Inc., in each case pursuant to letter
agreements which have been heretofore disclosed to the other party.
(l) Compensation and Benefit Plans. (i) Section 5.3(l)(i) of a party's
Disclosure Schedule contains a complete list of all material bonus, vacation,
deferred compensation, pension, retirement, profit-sharing, thrift, savings,
employee stock ownership, stock bonus, stock purchase, restricted stock and
stock option plans, all employment or severance contracts, all medical, dental,
disability, health and life insurance plans, all other employee benefit and
fringe benefit plans, contracts or arrangements and any applicable "change of
control" or similar provisions in any plan, contract or arrangement maintained
or contributed to by it or any of its Subsidiaries for the benefit of officers,
former officers, employees, former employees, directors, former directors, or
the beneficiaries of any of the foregoing, including all "employee benefit
plans" as defined in ERISA (collectively, "Compensation and Benefit Plans").
(ii) True and complete copies of its Compensation and Benefit Plans,
including, but not limited to, any trust instruments and/or insurance
contracts, if any, forming a part thereof, and all amendments thereto and,
if applicable, the most recent Form 5500 and annual reports for such plans
have been made available to the other party.
(iii) Each of its Compensation and Benefit Plans has been administered in
all material respects in accordance with the terms thereof. All "employee
benefit plans" within the meaning of Section 3(3) of ERISA, other than
"multiemployer plans" within the meaning of Section 3(37) of ERISA
("Multiemployer Plans"), covering employees or former employees of it and
its Subsidiaries (its "Plans"), to the extent subject to ERISA, are in
material compliance with ERISA, the Code, the Age Discrimination in
Employment Act and other applicable laws and no
A-21
<PAGE>
prohibited transaction has occurred with respect to any such employee
benefit plan that would result in any such excise tax or other liability
under ERISA or the Code. Each Compensation and Benefit Plan of it or its
Subsidiaries which is an "employee pension benefit plan" within the meaning
of Section 3(2) of ERISA ("Pension Plan") and which is intended to be
qualified under Section 401(a) of the Code has received a favorable
determination letter from the Internal Revenue Service, and it is not aware
of any circumstances reasonably likely to result in the revocation or
denial of any such favorable determination letter. There is no pending or,
to its knowledge, threatened litigation or governmental audit, examination
or investigation relating to the Plans.
(iv) Except as Previously Disclosed in Section 5.3(l)(iv) of a Party's
Disclosure Schedule, no material liability under Title IV of ERISA has been
or is expected to be incurred by it or any of its Subsidiaries with respect
to any ongoing, frozen or terminated "single-employer plan", within the
meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained
by any of them, or the single-employer plan of any entity which is
considered one employer with it under Section 4001(a)(15) of ERISA or
Section 414 of the Code (an "ERISA Affiliate"). Except as Previously
Disclosed in Section 5.3(l)(iv) of a party's Disclosure Schedule, neither
it nor any of its Subsidiaries presently contributes to a Multiemployer
Plan, nor have they contributed to such a plan within the past five
calendar years. No notice of a "reportable event", within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not
been waived, has been required to be filed for any Pension Plan of it or
any of its Subsidiaries or by any ERISA Affiliate within the past 12
months.
(v) All contributions, premiums and payments required to be made under
the terms of any Compensation and Benefit Plan of it or any of its
Subsidiaries have been made. Neither any Pension Plan of it or any of its
Subsidiaries nor any single-employer plan of an ERISA Affiliate of it or
any of its Subsidiaries has an "accumulated funding deficiency" (whether or
not waived) within the meaning of Section 412 of the Code or Section 302 of
ERISA. Neither it nor any of its Subsidiaries has provided, or is required
to provide, security to any Pension Plan or to any single-employer plan of
an ERISA Affiliate pursuant to Section 401(a)(29) of the Code.
(vi) Except as Previously Disclosed in Section 5.3(l)(vi) of a party's
Disclosure Schedule, under each Pension Plan of it or any of its
Subsidiaries which is a single-employer plan, as of the last day of the
most recent plan year ended prior to the date hereof, the actuarially
determined present value of all "benefit liabilities", within the meaning
of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in the Plan's most recent actuarial
valuation) did not exceed the then current value of the assets of such
Plan, and there has been no adverse change in the financial condition of
such Plan (with respect to either assets or benefits) since the last day of
the most recent Plan year.
(vii) Neither it nor any of its Subsidiaries has any obligations under
any Compensation and Benefit Plans to provide benefits, including death or
medical benefits, with respect to employees of it or its Subsidiaries
beyond their retirement or other termination of service other than (i)
coverage mandated by Part 6 of Title I of ERISA or Section 4980B of the
Code, (ii) retirement or death benefits under any employee pension benefit
plan (as defined under Section 3(2) of ERISA), (iii) disability benefits
under any employee welfare plan that have been fully provided for by
insurance or otherwise, or (iv) benefits in the nature of severance pay.
A-22
<PAGE>
(viii) Except as Previously Disclosed under Section 5.1(l)(viii) of a
party's Disclosure Schedule, neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby will
(i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute or otherwise) becoming due to
any director or any employee of it or any of its Subsidiaries under any
Compensation and Benefit Plan or otherwise from it or any of its
Subsidiaries, (ii) increase any benefits otherwise payable under any
Compensation and Benefit Plan or (iii) result in any acceleration of the
time of payment or vesting of any such benefit.
(m) Labor Matters. Except as set forth in Section 5.3(m) of a party's
Disclosure Schedule, neither it nor any of its Subsidiaries is a party to, or
is bound by, any collective bargaining agreement, contract or other agreement
or understanding with a labor union or labor organization, nor is it or any of
its Subsidiaries the subject of a proceeding asserting that it or any such
Subsidiaries has committed an unfair labor practice (within the meaning of the
National Labor Relations Act) or seeking to compel it or such Subsidiaries to
bargain with any labor organization as to wages and conditions of employment.
(n) Environmental Matters. Neither (a) the past or present conduct nor
operation of such party or its Subsidiaries nor any condition of any property
or asset presently or previously owned, leased or operated by any of them,
including but not limited to on-site or off-site disposal or release of any
chemical substance, product or waste, violates or violated Environmental Laws,
and no condition has existed or event has occurred with respect to any of them
or any such property that, with notice or the passage of time, or both, is
reasonably likely to result in liability or obligations for any clean-up,
remediation, disposal or corrective action under Environmental Laws or claims
for personal injury, property damage or damage to natural resources and (b)
such party nor any of its Subsidiaries has received any notice from any person
or entity that it or its Subsidiaries or the operation or condition of any
property or asset ever owned, leased, operated, held as collateral or held as a
fiduciary by any of them is or was in violation of or otherwise are alleged to
have liability under any Environmental Law or has entered into any consent
decree or order or is subject to any order of any court or governmental
authority or tribunal under any Environmental Law or relating to the clean-up
of any hazardous materials contamination, including, but not limited to,
responsibility (or potential responsibility) for the cleanup or other
remediation of any pollutants, contaminants, or hazardous or toxic wastes,
substances or materials at, on, beneath, or originating from any such property.
(o) Tax Matters. (i) All material returns, declarations, reports, estimates,
information returns and statements required to be filed under federal, state,
local or any foreign tax laws ("Tax Returns") with respect to it or any of its
Subsidiaries, have been timely filed, or requests for extensions have been
timely filed and have not expired; (ii) all Tax Returns filed by it are
complete and accurate in all material respects; (iii) all Taxes shown to be due
on such Tax Returns and all other Taxes, if any, required to be paid by it or
its Subsidiaries for all periods ending through the date hereof have been paid
or adequate reserves have in accordance with generally accepted accounting
principles been established for the payment of such Taxes; and (iv) no material
(A) audit or examination or (B) refund litigation with respect to any Tax
Return is pending. As of the date hereof, neither it nor any of its
Subsidiaries (x) has granted any requests, agreements, consents or waivers to
extend the statutory period of limitations applicable to the assessment of any
taxes with
A-23
<PAGE>
respect to any tax returns, (y) is a party to any tax sharing or tax indemnity
agreement or (z) is a party to an agreement that provides for the payment of
any amount that would constitute a "parachute payment" within the meaning of
Section 280G of the Code.
(p) Regulatory Approvals. Except as set forth in Section 5.3(p) of a party's
Disclosure Schedule, the only approval of any governmental agency necessary to
consummate the transactions contemplated by this Agreement (other than filings
under the Securities Act) is pursuant to the HSRA. As of the date hereof,
neither Petro nor the Star Partners is aware of any reason why the approvals
under the HSRA will not be received.
(q) No Material Adverse Change. Since September 30, 1997, in the case of Star
Partners, and since December 31, 1997, in the case of Petro, except as
disclosed in its SEC Documents filed with the SEC on or before the date hereof,
(i) it and its Subsidiaries have conducted their respective businesses in the
ordinary and usual course (excluding the incurrence of expenses related to this
Agreement and the transactions contemplated hereby), (ii) it has not made any
material change in its accounting methods, principles or practices or its tax
methods, practices or elections and (iii) no event has occurred or circumstance
arisen that, individually or taken together with all other facts, circumstances
and events is reasonably likely to result in a Material Adverse Effect.
(r) Insurance. It has previously delivered to the other party a schedule
listing the officers' and directors' liability insurance policies, primary and
excess casualty and liability insurance policies providing coverage for bodily
injury and property damage maintained by it and its Subsidiaries. It and its
Subsidiaries maintain insurance coverage reasonably adequate for the operation
of their respective businesses taking into account the cost and availability of
such insurance.
(s) Condition and Sufficiency of Assets. The vehicles, equipment and other
assets used in the business of it and its Subsidiaries are in operating
condition and repair consistent with normal industry standards and are adequate
for the uses to which they are being put and none of such vehicles, equipment
and assets are in need of replacement, maintenance or repairs except for
ordinary and routine maintenance and repairs that are not material in nature or
cost, except for vehicles and equipment which are not in service and the use of
which are not required to conduct the business of it and its Subsidiaries in
the ordinary course consistent with past practices. The vehicles, equipment and
assets in service are sufficient for the continued conduct of its business
after the Closing.
(t) Intellectual Property. Except as may be disclosed in Section 5.3(t) of
its Disclosure Schedule, it and its Subsidiaries own or possess adequate
licenses and other valid rights to use all patents, patent rights, trademarks,
trademark rights and proprietary information used or held for use in connection
with their respective businesses as currently being conducted, and there are no
assertions or claims challenging the validity of any of the foregoing which are
likely to have, individually or in the aggregate, a Material Adverse Effect.
The computer software operated or licensed by it that is material to its
business or its internal operations is capable of providing or is being adapted
to provide uninterrupted millennium functionality to record, store, process and
present calendar dates falling on or after January 1, 2000 in substantially the
same manner and with substantially the same functionality as such software
records, stores, processes and presents such calendar dates falling on or
before December 31, 1999. The costs of the adaptations referred to in the prior
sentence will not have a Material Adverse Effect.
A-24
<PAGE>
ARTICLE VI.
COVENANTS
Petro hereby covenants to and agrees with Star Partners, and Star Partners
hereby covenants to and agrees with Petro, that:
6.1. Best Efforts. (a) Subject to the terms and conditions of this Agreement,
it shall use its commercially reasonable best efforts in good faith to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper, desirable or advisable under applicable laws, so as to
permit consummation of the Merger promptly and otherwise to enable consummation
of the transactions contemplated hereby, including, without limitation,
obtaining (and cooperating with the other party hereto to obtain) HSRA approval
and any other third party approval that is required to be obtained by Petro or
Star Partners or any of their respective Subsidiaries in connection with the
Merger and the other transactions contemplated by this Agreement, and using
reasonable efforts to lift or rescind any injunction or restraining order or
other order adversely affecting the ability of the parties to consummate the
transactions contemplated hereby, and using reasonable efforts to defend any
litigation seeking to enjoin, prevent or delay the consummation of the
transactions contemplated hereby or seeking material damages, and each shall
cooperate fully with the other parties hereto to that end, and shall furnish to
the other party copies of all correspondence, filings and communications
between it and its affiliates and any governmental or regulatory authority with
respect to the transactions contemplated hereby. In complying with the
foregoing, neither it nor its Subsidiaries shall be required to take measures
that would have a Material Adverse Effect on it and its Subsidiaries taken as a
whole.
6.2. Equityholder Approvals. Each of them shall take, in accordance with
applicable law, applicable stock exchange rules and its restated articles or
certificate of incorporation and by-laws, in the case of Petro, and Agreement
of Limited Partnership, in the case of Star Partners, all action necessary to
convene, respectively, an appropriate meeting of the holders of the Common
Units of Star Partners to consider and vote upon the approval of the Merger
Agreement, the Amended and Restated Partnership Agreement, the Amended and
Restated Operating Partnership Agreement, and any other matters required to be
approved by them for consummation of the Merger (including any adjournment or
postponement, the "Star Partners Meeting"), and an appropriate meeting of
stockholders of Petro to consider and vote upon the approval of the Merger and
any other matters required to be approved by Petro's stockholders for
consummation of the Merger (including any adjournment or postponement, the
"Petro Meeting"; and each of the Star Partners Meeting and Petro Meeting, a
"Meeting"), respectively, promptly after the date hereof. The Board of
Directors of Petro and the Special Committee shall (subject in the case of
Petro to compliance with its fiduciary duties as advised by counsel) recommend
such approval, and each of Star Partners and Petro shall take all reasonable
lawful action to solicit such approval by its respective equityholders.
6.3. Registration Statements. (a) Each of Star Partners and Petro agrees to
cooperate in the preparation of (i) a registration statement on Form S-4 (the
"Merger Registration Statement") to be filed by Star Partners with the SEC in
connection with the issuance of Senior Subordinated Units and Common Units in
the Merger and the Junior Subordinated and Senior Subordinated Units to be
issued by Star Partners to certain Affiliates of Petro as described under
subparagraph 9 of the definition of "Restructuring Transactions" (including the
joint proxy statement and prospectus and
A-25
<PAGE>
other proxy solicitation materials of Star Partners and Petro constituting a
part thereof (the "Joint Proxy Statement") and all related documents), (ii) a
registration statement on Form S-3 to be filed by Star Partners with the SEC in
connection with the Equity Offering (the "Equity Registration Statement") and
(iii) a registration statement to be filed by Star Partners or a subsidiary of
Star Partners with the SEC in connection with the Debt Offering (the "Debt
Registration Statement" and together with the Merger Registration Statement and
the Equity Registration Statement, the "Registration Statements"). Provided
Petro has cooperated as required above, Star Partners agrees to file the
Registration Statements with the SEC as promptly as practicable. Each of Petro
and Star Partners agrees to use all reasonable efforts to cause the
Registration Statements to be declared effective under the Securities Act as
promptly as practicable after filing thereof. Star Partners also agrees to use
commercially reasonable efforts to obtain all necessary state securities law or
"Blue Sky" permits and approvals required to carry out the transactions
contemplated by this Agreement. Petro agrees to furnish to Star Partners all
information concerning Petro, its Subsidiaries, officers, directors and
stockholders and to take such other action as may be reasonably requested in
connection with the foregoing.
(b) Each of Petro and Star Partners agrees, as to itself and its
Subsidiaries, that (i) none of the information supplied or to be supplied by it
for inclusion or incorporation by reference in the Registration Statements
will, at the time the Registration Statements and each amendment or supplement
thereto, if any, becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and (ii) the Joint
Proxy Statement and any amendment or supplement thereto will, at the date of
mailing to stockholders and at the times of the Star Partners Meeting and Petro
Meeting, not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Each of Petro and Star Partners further agrees that if it shall
become aware prior to the Closing Date of any information that would cause any
of the statements in the Registration Statements to be false or misleading with
respect to any material fact, or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not false or misleading, it will promptly inform the other party
thereof and take the necessary steps to correct the Joint Proxy Statement.
(c) Star Partners will advise Petro, promptly after Star Partners receives
notice thereof, of the time when each of the Registration Statements has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of the Common Units or Senior
Subordinated Units for offering or sale in any jurisdiction, of the initiation
or threat of any proceeding for any such purpose, or of any request by the SEC
for the amendment or supplement of a Registration Statement or for additional
information.
(d) Each of Star Partners and Petro will use its best efforts to cause the
Joint Proxy Statement to be mailed to its unitholders and stockholders,
respectively, as soon as practicable after the effective date thereof.
6.4. Modification of Petro Indentures and Preferred Stock. Immediately upon
execution of this Agreement, Petro agrees to use its reasonable best efforts in
good faith to accomplish the following prior to the Effective Date:
A-26
<PAGE>
(a) As to the Private Debt. The Private Debt consists of (i) $60.0
million of Notes due 2002 at 11.96% interest per annum which shall be
restructured to $63.12 million of Notes due 2002 at 9.0% per annum and (ii)
$4.1 million of Notes due 2001 at 14.1% interest per annum to be
restructured to $2.2 million of Senior Notes due 2001 at 10.25% interest
per annum and $2.2 million of Subordinated Notes due 2001 at 10.25%
interest per annum (the "Private Debt Conditions").
(b) As to the 12 7/8% Series B Exchange Preferred Stock. The 12 7/8%
Series B Exchangeable Preferred Stock will be repurchased at $22 per share
plus accrued and unpaid dividends (the "12 7/8% Preferred Stock
Conditions").
(c) As to the Public Debt. At least 90% of (a) Petro's 9 3/8%
Subordinated Notes due 2003 and 10 1/8% Subordinated Notes due 2003 will be
repurchased at 100% of par plus accrued interest and (b) Petro's 123%
Subordinated Notes due 2005 will be repurchased at 103.5% of par plus
accrued interest (the "Public Debt Conditions").
(d) As to the 1989 Preferred Stock. The 1989 Preferred Stock will be
repurchased for an aggregate of $4.167 million plus accrued and unpaid
dividends (the "1989 Preferred Stock Conditions").
(e) As to the outstanding Star Propane Debt. The Holders of Star
Propane's 8.04% First Mortgage Notes due 2009, Star Propane's 7.17% First
Mortgage Notes due 2010 and Star Propane's outstanding Bank credit
facilities shall have consented to the execution, delivery and performance
of this Agreement by Star Propane or shall have entered into amendments
permitting the execution, delivery and performance of this Agreement by
Star Propane without violation of the terms of such indebtedness and
without a requirement that such indebtedness be repurchased (or an offer be
made to purchase such indebtedness) (the "Star Propane Debt Conditions").
6.5. Press Releases. It will not, without the prior approval of the other
party hereto, issue any press release or written statement for general
circulation relating to the transactions contemplated hereby, except as
otherwise required by applicable law or regulation or the rules of the NYSE, in
which case it will consult with the other party before issuing any such press
release or written statement.
6.6. Access; Information. (a) Upon reasonable notice and subject to
applicable laws relating to the exchange of information, it shall, and shall
cause its Subsidiaries to, afford the other parties and their officers,
employees, counsel, accountants and other authorized representatives, access,
during normal business hours throughout the period prior to the Effective Date,
to all of its properties, books, contracts, commitments and records, and to its
officers, employees, accountants, counsel or other representatives, and, during
such period, it shall, and shall cause its Subsidiaries to, furnish promptly to
such other parties and representatives (i) a copy of each material report,
schedule and other document filed by it pursuant to the requirements of federal
or state securities law (other than reports or documents that Star Partners or
Petro, or their respective Subsidiaries, as the case may be, are not permitted
to disclose under applicable law) and (ii) all other information concerning the
business, properties and personnel of it as the other may reasonably request.
Neither Star Partners nor Petro nor any of its respective Subsidiaries shall be
required to provide access to or to disclose
A-27
<PAGE>
information where such access or disclosure would violate or prejudice the
rights of its customers, jeopardize the attorney-client privilege of the
institution in possession or control of such information or contravene any law,
rule, regulation, order, judgment, decree, fiduciary duty or binding agreement
entered into prior to the date of this Agreement. The parties hereto will make
appropriate substitute disclosure arrangements under the circumstances in which
the restrictions of the preceding sentence apply.
(b) It will not use any information obtained pursuant to this Section 6.6 for
any purpose unrelated to the consummation of the transactions contemplated by
this Agreement and, if this Agreement is terminated, will hold all information
and documents obtained pursuant to this paragraph in confidence. No
investigation by either party of the business and affairs of the other shall
affect or be deemed to modify or waive any representation, warranty, covenant
or agreement in this Agreement, or the conditions to either party's obligation
to consummate the transactions contemplated by this Agreement.
6.7. Acquisition Proposals. Without the prior written consent of Star
Partners, Petro shall not, and shall cause its Subsidiaries and its and its
Subsidiaries' officers, directors, agents, advisors and affiliates not to,
solicit or encourage inquiries or proposals with respect to, or engage in any
negotiations concerning, or provide any confidential information to, or have
any discussions with, any such person relating to, any tender offer or exchange
offer for, or any proposal for the acquisition of a substantial equity interest
in, or a substantial portion of the assets of, or any merger or consolidation
with, Petro or any of its Significant Subsidiaries; provided, however, that
Petro may, and may authorize and permit its officers, directors, employees or
agents to, furnish or cause to be furnished confidential information and may
participate in such discussions and negotiations with a person or entity who
has made an unsolicited bona fide acquisition proposal for Petro or such assets
or Significant Subsidiaries that is superior to the Merger and is reasonably
capable of being financed if Petro's Board of Directors, after having consulted
with and considered the advice of outside counsel, has determined that the
failure to provide such information or participate in such negotiations and
discussions could cause the members of such Board of Directors to breach their
fiduciary duties under applicable laws. Petro shall promptly (within 24 hours)
advise Star Partners of its receipt of any such proposal or inquiry, of the
substance thereof, and of the identity of the person making such proposal or
inquiry. Nothing in this Section 6.7 shall permit Petro to enter into any
agreement with respect to an acquisition proposal during the term of this
Agreement other than a confidentiality and standstill agreement in reasonably
customary form.
6.8. Affiliate Arrangements. (a) Not later than the 15th day after the
mailing of the Joint Proxy Statement, Petro shall deliver to Star Partners a
schedule of each person that, to the best of its knowledge, is or is reasonably
likely to be, as of the date of the relevant Meeting, deemed to be an
"affiliate" of it (an "Affiliate") as that term is used in Rule 145 under the
Securities Act.
(b) Petro shall use its reasonable best efforts to cause its Affiliates not
to sell any securities received under the Merger or Exchange Agreement in
violation of the registration requirements Securities Act, including Rule 145
thereunder.
6.9. Takeover Laws. Neither party shall take any action that would cause the
transactions contemplated by this Agreement to be subject to requirements
imposed by any Takeover Laws, and
A-28
<PAGE>
each of them shall take all necessary steps within its control to exempt (or
ensure the continued exemption of) the transactions contemplated by this
Agreement from, or if necessary challenge the validity or applicability of, any
shareholder rights plan adopted by such party or any applicable Takeover Law,
as now or hereafter in effect, including, without limitation, Takeover Laws of
any state that purport to apply to this Agreement. the transactions
contemplated hereby.
6.10. No Rights Triggered. Each of Petro and Star Partners shall take all
steps necessary to ensure that the entering into of this Agreement and the
consummation of the transactions contemplated hereby and any other action or
combination of actions, or any other transactions contemplated hereby, do not
and will not result in the grant of any Rights to any person (i) in the case of
Petro under its articles or certificate of incorporation or by-laws and in the
case of Star Partners under its Agreement of Limited Partnership or (ii) under
any material agreement to which it or any of its Subsidiaries is a party.
6.11. Senior Subordinated Units Listed. In the case of Star Partners, Star
Partners shall use its reasonable best efforts to list, prior to the Closing,
on the NYSE, upon official notice of issuance, the Senior Subordinated Units to
be issued to the holders of Petro Common Stock in the Merger and to certain
Petro Affiliates pursuant to the Exchange Agreement.
6.12. Third Party Approvals. (a) Star Partners and Petro and their respective
Subsidiaries shall cooperate and use their respective commercially reasonable
best efforts to prepare all documentation, to effect all filings, to obtain all
permits, consents, approvals and authorizations of all third parties and HSRA
approval necessary to consummate the transactions contemplated by this
Agreement and to comply with the terms and conditions of such permits,
consents, approvals and authorizations and to cause the Merger to be
consummated as expeditiously as practicable. Each of Star Partners and Petro
shall have the right to review in advance, and to the extent practicable each
will consult with the other, in each case subject to applicable laws relating
to the exchange of information, with respect to, all material written
information submitted to any third party or any Regulatory Authorities in
connection with the transactions contemplated by this Agreement. In exercising
the foregoing right, each of the parties hereto agrees to act reasonably and
promptly. Each party hereto agrees that it will consult with the other parties
hereto with respect to the obtaining of all material permits, consents,
approvals and authorizations of all third parties and Regulatory Authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement, and each party will keep the other parties apprised of the status of
material matters relating to completion of the transactions contemplated
hereby.
(b) Each party agrees, upon request, to furnish the other party with all
information concerning itself, its Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with the Registration Statement, the Joint Proxy Statement or any
filing, notice or application made by or on behalf of such other party or any
of its Subsidiaries to any Regulatory Authority in connection with the
transactions contemplated hereby.
6.13. Indemnification; Directors' and Officers' Insurance. (a) In the event
of any threatened or actual claim, action, suit, proceeding or investigation,
whether civil, criminal or administrative, including, without limitation, any
such claim, action, suit, proceeding or investigation in which any person who
is now, or has been at any time prior to the date of this Agreement, or who
becomes
A-29
<PAGE>
prior to the Closing, a director, officer or employee of Petro or any of its
Subsidiaries, including, without limitation, the directors of Star Gas (the
"Indemnified Parties" or, individually, an "Indemnified Party") is, or is
threatened to be, made a party based in whole or in part on, or arising in
whole or in part out of, or pertaining to (i) the fact that he is or was a
director, officer or employee of Petro, any of Petro's Subsidiaries or any of
their respective predecessors or was prior to the Closing serving at the
request of any such party as a director, officer, employee, fiduciary or agent
of another corporation, partnership, trust or other enterprise or (ii) this
Agreement or any of the transactions contemplated hereby and thereby and all
actions taken by an Indemnified Party in connection herewith or therewith,
whether in any case asserted or arising before or after the Closing, the
parties hereto agree to cooperate and use their best efforts to defend against
and respond thereto. It is understood and agreed that after the Closing, Star
Partners shall indemnify and hold harmless, as and to the fullest extent
permitted by law, each such Indemnified Party against any losses, claims,
damages, liabilities, costs, expenses (including reasonable attorney's fees and
expenses in advance of the final disposition of any claim, suit, proceeding or
investigation to each Indemnified Party to the fullest extent permitted by law
upon receipt of an undertaking from such Indemnified Party to repay such
advanced expenses if it is finally and unappealably determined that such
Indemnified Party was not entitled to indemnification hereunder), judgments,
fines and amounts paid in settlement in connection with any such threatened or
actual claim, action, suit, proceeding or investigation, and in the event of
any such threatened or actual claim, action, suit, proceeding or investigation
(whether asserted or arising before or after the Closing), the Indemnified
Parties may retain counsel reasonably satisfactory to them after consultation
with Star Partners; provided, however, that (1) Star Partners shall have the
right to assume the defense thereof and upon such assumption Star Partners
shall not be liable to any Indemnified Party for any legal expenses of other
counsel or any other expenses subsequently incurred by any Indemnified Party in
connection with the defense thereof, except that if Star Partners elects not to
assume such defense, or counsel for the Indemnified Parties reasonably advises
the Indemnified Parties that there are or may be (whether or not any have yet
actually arisen) issues which raise conflicts of interest between Star Partners
and the Indemnified Parties, the Indemnified Parties may retain counsel
reasonably satisfactory to them, and Star Partners shall pay the reasonable
fees and expenses of such counsel for the Indemnified Parties, (2) Star
Partners shall be obligated pursuant to this paragraph to pay for only one firm
of counsel for all Indemnified Parties, (3) Star Partners shall not be liable
for any settlement effected without its prior written consent (which consent
shall not be unreasonably withheld) and (4) Star Partners shall have no
obligation hereunder to any Indemnified Party when and if a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final and nonappealable, that indemnification of such Indemnified Party
in the manner contemplated hereby is prohibited by applicable law. Any
Indemnified Party wishing to claim indemnification under this Section 6.13,
upon learning of any such claim, action, suit, proceeding or investigation,
shall notify Star Partners thereof, provided that the failure to so notify
shall not affect the obligations of Star Partners under this Section 6.13
except (and only) to the extent such failure to notify materially prejudices
Star Partners. Star Partners's obligations under this Section 6.10 shall
continue in full force and effect for a period of six (6) years from the
Closing; provided, however, that all rights to indemnification in respect of
any claim (a "Claim") asserted or made within such period shall continue until
the final disposition of such Claim.
A-30
<PAGE>
(b) Without limiting any of the obligations under paragraph (a) of this
Section 6.13, Star Partners agrees that all rights to indemnification and all
limitations of liability existing in favor of the Indemnified Parties as
provided in Petro's Amended and Restated Articles of Incorporation or Bylaws or
in the governing documents of any of Petro's Subsidiaries as in effect as of
the date of this Agreement with respect to matters occurring on or prior to the
Closing shall survive the Merger and shall continue in full force and effect,
without any amendment thereto, for a period of six (6) years from the Closing;
provided, however, that all rights to indemnification in respect of any Claim
asserted or made within such period shall continue until the final disposition
of such Claim; provided further, however, that nothing contained in this
Section 6.13(b) shall be deemed to preclude the liquidation, consolidation or
merger of Petro or any Company Subsidiary, in which case all of such rights to
indemnification and limitations on liability shall be deemed to so survive and
continue notwithstanding any such liquidation, consolidation or merger and
shall constitute rights which may be asserted against Star Partners. Nothing
contained in this Section 6.13(b) shall be deemed to preclude any rights to
indemnification or limitations on liability provided in Petro's Amended and
Restated Articles of Incorporation or Bylaws or the governing documents of any
of Petro's Subsidiaries with respect to matters occurring subsequent to the
Closing to the extent that the provisions establishing such rights or
limitations are not otherwise amended to the contrary.
(c) Star Partners shall use its reasonable best efforts to cause the persons
serving as officers and directors of Petro and Star Gas immediately prior to
the Closing to be covered for a period of six (6) years from the Closing by the
directors' and officers' liability insurance policy maintained by Petro
(provided that Star Partners may substitute therefor policies of at least the
same coverage and amounts containing terms and conditions which are not less
advantageous to such directors and officers of Petro than the terms and
conditions of such existing policy) with respect to acts or omissions occurring
prior to the Closing which were committed by such officers and directors in
their capacity as such provided that Star Partners shall not be required to pay
annual premiums in excess of the last annual premium paid by Petro prior to the
date hereof but in such case shall purchase as much coverage as reasonably
practicable for such amount.
(d) In the event Star Partners or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of Star
Partners shall assume the obligations set forth in this Section 6.13.
(e) The provisions of this Section 6.13 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs
and representatives.
6.14. Benefit Plans. The parties agree to take such actions with respect to
compensation and employee benefit plans, programs, arrangements and other
perquisites as are set forth on Section 6.14 of Petro's Disclosure Schedule.
6.15. Notification Of Certain Matters. Each of Petro and Star Partners shall
give prompt notice to the other of any fact, event or circumstance known to it
that (i) is reasonably likely, individually or taken together with all other
facts, events and circumstances known to it, to result in
A-31
<PAGE>
any Material Adverse Effect with respect to it or (ii) would cause or
constitute a material breach of any of its representations, warranties,
covenants or agreements contained herein.
6.16. New Director for Star Gas LLC. As soon as reasonably practicable
following the Effective Time, Star Gas LLC will appoint a new independent
director to serve on the Audit Committee of Star Gas LLC, provided that Star
Gas LLC shall not appoint any such director to which William P. Nicoletti shall
have reasonably objected.
ARTICLE VII.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of each of the parties to consummate the Merger is
conditioned upon the satisfaction at or prior to the Closing of each of the
following:
7.1. Shareholder Vote. The Merger, the Partnership Agreement Amendments and
the other transactions contemplated hereby shall have been approved and adopted
by the affirmative vote of a Unit Majority (as defined in the Partnership
Agreement), and the Merger and the other transactions contemplated hereby shall
have been approved and adopted by the affirmative vote of the holders of a
majority of each class of Petro Common Stock and Petro Preferred Stock and a
majority of the Petro Class A Common Stock held by Persons other than Petro and
Affiliates of Petro. Holders of at least 100% of the Private Preferred Stock
and 90% of the Junior Preferred Stock shall have voted in favor of the Merger.
7.2. Governmental Approvals. Any waiting period (including any extended
waiting period arising as a result of a request for additional information by
the Federal Trade Commission or the U. S. Department of Justice) under the HSRA
shall have expired or been terminated. All other filings required to be made
prior to the Effective Time with, and all other consents, approvals, permits
and authorizations required to be obtained prior to the Effective Time from,
any Regulatory Authority in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby by the
parties hereto or their affiliates shall have been made or obtained, except
where the failure to obtain such consents, approvals, permits and
authorizations would not be reasonably likely to result in a Material Adverse
Effect on Star Partners or Petro or on the ability of Star Partners or Petro to
consummate the transactions contemplated by this Agreement.
7.3. No Injunction. No order, decree or injunction of any court or agency of
competent jurisdiction shall be in effect, and no law, statute or regulation
shall have been enacted or adopted, that enjoins, prohibits or makes illegal
consummation of any of the transactions contemplated hereby, and no action,
proceeding or investigation by any Regulatory Authority with respect to the
Merger or the other transactions contemplated hereby shall be pending that
seeks to restrain, enjoin, prohibit or delay consummation of the Merger or such
other transaction or to impose any material restrictions or requirements
thereon or on Star Partners or Petro with respect thereto; provided, however,
that prior to invoking this condition, each party shall have complied fully
with its obligations under Section 6.1.
7.4. Representations, Warranties And Covenants Of Star Partners. In the case
of Petro's obligation to consummate the Merger (i) each of the representations
and warranties contained herein of Star Partners shall be true and correct as
of the date of this Agreement and upon the Closing Date
A-32
<PAGE>
with the same effect as though all such representations and warranties had been
made on the Closing Date, except for any such representations and warranties
made as of a specified date, which shall be true and correct as of such date,
in any case subject to the standard set forth in Section 5.2, (ii) each and all
of the agreements and covenants of Star Partners to be performed and complied
with pursuant to this Agreement on or prior to the Closing Date shall have been
duly performed and complied with in all material respects, and (iii) Petro
shall have received a certificate signed by the Chief Financial Officer of the
General Partner, dated the Closing Date, to the effect set forth in clauses (i)
and (ii) of this Section 7.4.
7.5. Representations, Warranties And Covenants Of Petro. In the case of Star
Partners's obligation to consummate the Merger (i) each of the representations
and warranties contained herein of Petro shall be true and correct as of the
date of this Agreement and upon the Closing Date with the same effect as though
all such representations and warranties had been made on the Closing Date,
except for any such representations and warranties made as of a specified date,
which shall be true and correct as of such date, in any case subject to the
standard set forth in Section 5.2, (ii) each and all of the agreements and
covenants of Petro to be performed and complied with pursuant to this Agreement
on or prior to the Closing Date shall have been duly performed and complied
with in all material respects, and (iii) Star Partners shall have received a
certificate signed by the Chief Financial Officer of Petro, dated the Closing
Date, to the effect set forth in clauses (i) and (ii) of this Section 7.5.
7.6. Effective Merger Registration Statement. The Merger Registration
Statement shall have become effective under the Securities Act and no stop
order suspending the effectiveness of the Merger Registration Statement shall
have been issued and no proceedings for that purpose shall have been initiated
or threatened by the SEC or any other Regulatory Authority.
7.7. Opinion of Andrews & Kurth LLP. Star Partners and Petro shall have
received an opinion from Andrews & Kurth LLP to the effect that:
(a) the Merger and the transactions contemplated by this Agreement will
not result in the loss of limited liability of any limited partner of Star
Partners or Star Propane,
(b) the Merger and the transactions contemplated by this Agreement will
not cause Star Partners or Star Propane to be treated as an association
taxable as a corporation or otherwise to be taxed as an entity for federal
income tax purposes,
(c) the Merger Registration Statement accurately sets forth the material
federal income tax consequences to the holders of Common Units of the
transactions contemplated hereby.
7.8. Opinion of Petro's Counsel. In the case of Star Partner's obligation to
consummate the Merger, Star Partners shall have received an opinion from
Phillips Nizer Benjamin Krim & Ballon LLP, counsel to Petro, to the effect
that:
(a) Petro is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Minnesota with all requisite
corporate power and authority to own its properties and assets and to carry
on its business as presently conducted;
A-33
<PAGE>
(b) Petro has all requisite corporate power and authority to effect the
Merger as contemplated by this Agreement; the Board of Directors and
shareholders of Petro have taken all action required by the MBCA and
Petro's Articles of Incorporation and Bylaws to authorize the Merger in
accordance with the terms of this Agreement; the execution and delivery of
this Agreement did not, and the consummation of the Merger will not,
violate any provision of Petro's Articles of Incorporation or Bylaws; and
upon the filing by the Surviving Corporation of the Articles of Merger with
the Secretary of State of the State of Minnesota, the Merger shall become
effective under the MBCA.
In rendering such opinions, such counsel may require and rely upon
representations and covenants including those contained in certificates of
officers of Star Partners, Petro and others and opinions of Minnesota counsel,
reasonably satisfactory in form and substance to such counsel.
7.9. NYSE Listing. The Senior Subordinated Units and Common Units issuable
pursuant to this Agreement and the Exchange Agreement shall have been approved
for listing on the NYSE, subject to official notice of issuance.
7.10. Affiliate Arrangements. Petro shall have taken reasonable action to
cause its Affiliates not to sell any securities received under the Merger
Agreement in violation of the registration requirements of the Securities Act,
including Rule 145 thereunder.
7.11. Fairness Opinion. In the case of Star Partner's obligation to
consummate the Merger, the Special Committee shall have received an opinion of
A.G. Edwards & Sons, Inc. to the effect that, as of the date of the Joint Proxy
Statement, the Merger and the transactions contemplated hereby are fair, from a
financial point of view, to the holders of Common Units (other than Petro and
its affiliates), and the opinion shall not have been withdrawn by A.G. Edwards
& Sons, Inc. In the case of Petro's obligation to consummate the Merger, Petro
shall have received an opinion of Dain Rauscher Wessels to the effect that, as
of the date of the Joint Proxy Statement, the Merger and the transactions
contemplated thereby are fair, from a financial point of view, to the non-
affiliated, public holders of Petro Common Stock, and the opinion shall not
have been withdrawn by Dain Rauscher Wessels.
7.12. Public Offerings. Star Partners shall have consummated the Equity
Offering and the Debt Offering, with the Cost of Capital not to exceed $27.5
million on an annual basis, and with the net proceeds therefrom applied to
reduce indebtedness of Petro outstanding prior to the Effective Time.
7.13. Refinancing Conditions. Immediately prior to the Restructuring
Transactions:
(a) The sum of (i) all indebtedness for borrowed money of Petro and its
Subsidiaries to be outstanding at the Effective Time except indebtedness
outstanding under Petro's working capital bank credit facility and (ii) the
repurchase or redemption price (including the value of the Junior Preferred
Stock, which shall be deemed to be $2.24 million) of all indebtedness for
borrowed money and Petro Preferred Stock to be repurchased or redeemed as
provided in the Refinancing Conditions less the amount, if any, by which
the Working Capital of Petro as of the most recent date for which internal
Petro financial statements are available (but in any event no more than 15
calendar days after the end of the preceding month) shall exceed the amount
of Working Capital of Petro required pursuant to Section 7.13(c), shall not
exceed $331,367,000;
A-34
<PAGE>
(b) Petro and its subsidiaries shall have cash balances of not less than
$500,000;
(c) At the Closing Date, the Working capital of Petro as of the most
recent date for which internal Petro financial statements are available
(which date or the availability of Petro financial statements shall in any
event not be more than 15 calendar days after the end of the preceding
month) shall exceed the following amounts:
<TABLE>
<CAPTION>
PETRO
WORKING
CAPITAL
CLOSING DATE REQUIREMENT
------------ -----------
<S> <C>
February 15, 1999 to the date of availability of Febru-
ary 1999 Petro financial statements.................... $18,000,000
Date of availability of February 1999 Petro financial
statements to date of availability of March 1999 Petro
financial statements................................... $35,000,000
Date of availability of March 1999 Petro financial
statements to date of availability of April 1999 Petro
financial statements................................... $46,000,000
</TABLE>
(d) Petro shall have cash balances in an amount equal to or not less than
(or shall have arranged for payment out of the proceeds of the Debt
Offering or the Equity Offering), and shall pay, all out-of-pocket costs
and expenses associated with the transactions contemplated by this
Agreement, including the underwriting discounts and commissions on the debt
and equity issued pursuant to the Debt Registration Statement and Equity
Registration Statement (excluding any over-allotment option), the financial
and advisory and fairness opinion fees incurred by Petro and Star Partners,
the legal, accounting and printing fees incurred by Petro and Star
Partners, all solicitation and exchange fees related to the retirement or
redemption of Petro debt or Petro Preferred Stock and all appraisals and
environmental reports;
(e) The Private Debt Conditions, 12 7/8% Preferred Stock Conditions, Public
Debt Conditions, 1989 Preferred Stock Conditions and Star Propane Debt
Conditions shall have been satisfied; and
(f) Star Partners shall have received a certificate signed by the Chief
Financial Officer of Petro, dated the Closing Date, to the effect set forth
in clauses (a) through (e) of this Section 7.11.
7.14. Dissenters' Rights. The shares of Petro Common Stock held by Dissenting
Common Holders shall not exceed 10% of the outstanding shares of Petro Common
Stock.
7.15. Covenant Not to Compete. Star Partners shall have received an agreement
from Irik Sevin substantially in the form of Exhibit H.
7.16. Working Capital Loan. Petro shall have entered into a working capital
credit facility of not less than $30 million reasonably satisfactory to the
Special Committee.
7.17. Debt Offering. The Special Committee shall not have reasonably objected
to the restrictive covenants governing the notes issued in the Debt Offering.
7.18. Restructuring Transactions. The Restructuring Transactions shall have
occurred on the terms provided in this Agreement.
A-35
<PAGE>
7.19. Special Committee. The Special Committee shall not have withdrawn its
approval of this Agreement, the Merger and the transactions contemplated hereby
and thereby as of the date of the Joint Proxy Statement.
7.20. Custody Agreement. All of the Petro Insiders have executed a Custody
Agreement substantially in the form attached to the Exchange Agreement on or
prior to December 31, 1998.
ARTICLE VIII.
TERMINATION
8.1. Termination.
(a) This Agreement may be terminated, and the Merger may be abandoned at any
time prior to the Effective Time, whether prior to or after approval by the
Common Unitholders of Star Partners or the stockholders of Petro:
(i) Mutual Consent. By the mutual consent of Star Partners and Petro in a
written instrument, if the Board of Directors of Petro and the Special
Committee each so determines by vote of a majority of its members;
(ii) Breach. By Star Partners (upon the vote of the Special Committee) or
by Petro (upon the vote of a majority of the members of the Board of
Directors) (provided that the terminating party is not then in material
breach of any representation, warranty, covenant or other agreement
contained herein), in the event of either: (i) a breach by the other party
of any representation or warranty contained herein (subject to the standard
set forth in Section 5.02), which breach cannot be or has not been cured
within 30 days after the giving of written notice to the breaching party of
such breach or (ii) a material breach by the other party of any of the
covenants or agreements contained herein, which breach cannot be or has not
been cured within 30 days after the giving of written notice to the
breaching party of such breach;
(iii) No Approval. By Star Partners (upon the vote of the Special
Committee) or by Petro (upon the vote of a majority of the members of the
Board of Directors), if its Board of Directors (or the Special Committee in
the case of Star Partners) so determines by a vote of a majority of the
members of its entire Board, in the event (i) the approval under the HSRA
required for consummation of the Merger and the other transactions
contemplated by the Merger shall have been denied by final nonappealable
action or any governmental entity of competent jurisdiction shall have
issued a final nonappealable order enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement; provided,
however, the party seeking termination shall have complied fully with its
obligations under Section 6.01(b) of this Agreement; or (ii) any
stockholder or unitholder approval required by Section 7.01 herein is not
obtained at the Petro Meeting or the Star Partners Meeting, and such
meetings (including adjournments and postponements) have been held; and
(iv) by either the Board of Directors of the General Partner or the Board
of Directors of Petro, if the Board of Directors of the other party shall
have withdrawn, modified or changed in a manner adverse to the terminating
party its approval or recommendation of this Agreement and the transactions
contemplated hereby.
A-36
<PAGE>
(b) This Agreement shall be terminated if the Merger shall not have been
consummated on or prior to April 1, 1999 unless Star Partners (upon the vote of
the Special Committee) and Petro (upon the vote of a majority of the members of
the Board of Directors) elect to extend such termination date.
8.2. Effect Of Termination And Abandonment. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article VIII,
no party to this Agreement shall have any liability or further obligation to
any other party hereunder except (i) as set forth in Section 9.1 and (ii) that
termination will not relieve a breaching party from liability for any willful
breach of this Agreement giving rise to such termination.
ARTICLE IX.
MISCELLANEOUS
9.1. Survival. All representations, warranties, agreements and covenants
contained in this Agreement shall not survive the Closing or termination of
this Agreement if this Agreement is terminated prior to the Closing; provided,
however, if the Closing occurs, the agreements of the parties in Sections 3.4,
3.7, 6.15, 9.1, 9.4 and 9.8 shall survive the Closing, and if this Agreement is
terminated prior to the Closing, the agreements of the parties in Sections
6.6(b), 8.2, 9.1, 9.4, 9.5, 9.6, 9.7 and 9.8 shall survive such termination.
9.2. Waiver; Amendment. Subject to compliance with applicable law, prior to
the Closing, any provision of this Agreement may be (i) waived by the party
benefitted by the provision or (ii) amended or modified at any time, by an
agreement in writing between the parties hereto approved by their respective
Boards of Directors (and in the case of Star Partners, by the Special
Committee) and executed in the same manner as this Agreement. Prior to
submission of this Agreement for approval by the stockholders of Petro, Star
Partners may make such amendments as are permitted by Section 2.1, and Petro's
Board of Directors shall approve the supplements and amendments specified in
this sentence.
9.3. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
9.4. Governing Law. This Agreement shall be governed by, and interpreted in
accordance with, the laws of the State of New York, without regard to the
conflict of law principles thereof (except to the extent that mandatory
provisions of federal law govern).
9.5. Expenses. Whether or not the Merger is consummated, all reasonable costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby will be paid by Petro.
9.6. Confidentiality. Each of the parties hereto and their respective agents,
attorneys and accountants will maintain the confidentiality of all information
provided in connection herewith in accordance, and subject to the limitations
of, the Confidentiality Agreement.
9.7. Notices. All notices, requests and other communications hereunder to a
party shall be in writing and shall be deemed given if personally delivered,
telecopied (with confirmation) or mailed
A-37
<PAGE>
by registered or certified mail (return receipt requested) to such party at its
address set forth below or such other address as such party may specify by
notice to the parties hereto.
If to Star Partners, to:
Star Gas Corporation
Clearwater House
2187 Atlantic Street
P.O. Box 120011
Stamford, CT 06912-0011
Fax: 203-328-739
With copies to:
Elizabeth K. Lanier
GE Power Systems
One River Road
Building 37, 6th Floor
Schenectady, NY 12345
Fax: 518-385-4725
William P. Nicoletti
Managing Director
McDonald & Company Securities, Inc.
One Evertrust Plaza
Jersey City, NJ 07032
Fax: 212-220-6149
Baker & Botts LLP
3000 One Shell Plaza 910 Louisiana
Houston, Tx 77002-4995
Attn: R. Joel Swanson, Esq.
Fax: 713-229-1522
If to Petro, to:
Petroleum Heat and Power Co., Inc.
2187 Atlantic Street--5th Fl.
P.O. Box 1457
Stamford, CT 06902
Fax: 203-328-7421
With copies to:
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103-0084
Attn: Alan Shapiro, Esq.
Fax: 212-262-5152
A-38
<PAGE>
9.8. Entire Understanding; No Third Party Beneficiaries. Except for the
Confidentiality Agreement, which shall remain in effect, this Agreement
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and supersedes any and all other oral or
written agreements heretofore made. Except for Sections 6.12 and 6.14, nothing
in this Agreement, expressed or implied, is intended to confer upon any person,
other than the parties hereto or their respective successors, any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
9.9. Headings. The headings contained in this Agreement are for reference
purposes only and are not part of this Agreement.
A-39
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
PETROLEUM HEAT AND POWER CO., INC.
By: _________________________________
Name: William G. Powers, Jr.
Title: President
STAR GAS PARTNERS, L.P.
By: Star Gas Corporation
By: _________________________________
Name: Joseph P. Cavanaugh
Title: President
STAR GAS PROPANE, LP
By: Star Gas Corporation
By: _________________________________
Name: Joseph P. Cavanaugh
Title: President
PETRO/MERGECO, INC.
By: _________________________________
Name: William G. Powers, Jr.
Title: President
A-40
<PAGE>
ANNEX B
EXCHANGE AGREEMENT
Agreement entered into as of this 17th day of October, 1998 ("Agreement") by
and among Star Gas Partners, L.P., a Delaware limited partnership ("Star
Partners"), and the shareholders of Petroleum Heat and Power Co., Inc., a
Minnesota corporation, ("Petro") who have executed this Agreement in such
capacity (individually a "Shareholder" and collectively the "Shareholders").
1. Recitals. This Agreement is entered into with reference to the following
facts:
1.1 Petro, Star Partners and certain direct and indirect subsidiaries of
Star Partners have this date entered into an Agreement and Plan of Merger
(the "Merger Agreement").
1.2 It is a condition to the Merger that immediately prior to the
Effective Time each of the Shareholders shall exchange (the "Exchange")
certain shares of Petro Class A Common Stock, par value $.10 per share, and
Petro Class C Common Stock, par value $.10 per share (collectively the
"Petro Common Stock") with Star Partners for certain units of Senior
Subordinated Limited Partnership Units ("Senior Subordinated Units") and
Junior Subordinated Partnership Units (the "Junior Subordinated Units" and
together with the Senior Subordinated Units, the "Subordinated Units"), all
as set forth on Exhibit 1.2 hereto, except that record and beneficial
ownership of certain shares of Class A Common Stock and Class C Common
Stock owned by Audrey Sevin, Irik Sevin, Wolfgang Traber, Hanseatic
Corporation and Hanseatic Americas LDS (collectively the "GP Group") as
contemplated under clause 6 of the definition of "Restructuring
Transactions" in the Merger Agreement will be transferred by the GP Group
to Star Gas LLC and by Star Gas LLC to Star Partners as part of the
Exchange.
1.3 As a condition to executing the Merger Agreement, Star Partners has
required that the Shareholders execute (i) this Agreement, pursuant to
which each of them agrees to exchange his Petro Common Stock with Star
Partners and Star Partners agrees to issue the Subordinated Units in
exchange for the Petro Common Stock, on the terms and conditions contained
herein and (ii) on or before December 31, 1998, a custody agreement of even
date between them and American Stock Transfer & Trust Company substantially
in the form of Exhibit 1.4 hereto (the "Custody Agreement").
1.4 All terms with initial capitals which are not defined herein shall
have the meaning assigned to them in the Merger Agreement.
2. Exchange of Petro Shares for Subordinated Units.
2.1 Subject to the terms and conditions of this Agreement, and
conditioned on the occurrence of the closing under the Merger Agreement, at
the closing under the Merger Agreement (the "Closing"), each of the
Shareholders agrees to transfer and convey to Star Partners the Petro
Common Stock indicated as owned by such Shareholder on Exhibit 1.2 and Star
Partners agrees to accept such transfers and conveyances and to issue to
each such Petro Shareholder the Subordinated Units issuable to such Petro
Shareholder at the Closing as set forth on Exhibit 1.2, except that the GP
Group agrees that on or before November 1, 1998 they will transfer to Star
Gas LLC those shares of Petro Common Stock specified on Exhibit 1.2 as
<PAGE>
transferable to Star Gas LLC and will cause Star Gas LLC to execute a
Custody Agreement and to transfer and convey such Petro Common Stock to
Star Partners at the Closing.
2.2 As security for the performance of its obligations pursuant to
Section 2.1 each of the Petro Shareholders has entered into the Custody
Agreement.
3. Representations and Warranties of each of the Shareholders.
Each of the Shareholders represents and warrants to Star Partners:
3.1 Each Shareholder is the lawful owner of the number of Petro Shares
listed opposite the name of such Shareholder on Exhibit 1.2 free and clear
of all liens, restrictions, encumbrances and claims of any kind to Star
Partners.
3.2 Upon consummation of the Exchange, Star Partners will acquire good
title to all of the Petro Common Stock owned by such Shareholder, free and
clear of any liens, restrictions, encumbrances and claims of any kind
whatsoever.
4. Representations and Warranties of Star Partners.
4.1 Star Partners hereby represents and warrants to the Petro
Shareholders as follows:
(a) The Subordinated Units to be delivered to the Petro Shareholders at
the Closing, and the additional Senior Subordinated Units which may be
issued to holders of the Senior Subordinated Units upon Petro's achieving
certain specified performance levels during the period of five years
following the Closing ("Contingent Senior Subordinated Units"), (i) have
been duly authorized and will be, when issued to the Petro Shareholders in
accordance with the terms hereof, or in the case of the Contingent Senior
Subordinated Units, when issued in accordance with the terms of the Amended
and Restated Agreement of Limited Partnership of Star Partners (the
"Partnership Agreement"), validly issued in accordance with the Partnership
Agreement, fully paid (to the extent required under the Partnership
Agreement) and nonassessable (except as such nonassessability may be
affected by matters described in the Registration Statement relating to the
Merger Agreement under the caption "Description of the Partnership
Agreement--Limited Liability"), and (ii) in the case of the Senior
Subordinated Units, on the Closing Date shall be approved for trading on
the NYSE subject to official notice of issuance.
(b) Neither the execution and delivery of this Agreement nor (upon the
adoption of the amendments to the Partnership Agreement provided for in the
Merger Agreement) the consummation of the transactions contemplated hereby
will violate any provisions of the Partnership Agreement or other
organizational documents of Star Partners or be in conflict with, or
constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination of,
or accelerate the performance required by, or cause the acceleration of the
maturity of any debt or obligation pursuant to, or result in the creation
or imposition of any security interest, lien or other encumbrance upon any
property or assets of Star Partners, under any agreement or commitment to
which Star Partners is a party or by which Star Partners is bound, or
violate any applicable statute or law or any judgment, decree, order,
regulation or rule of any court or governmental authority.
B-2
<PAGE>
(c) When delivered to the Shareholders pursuant to the Exchange, the
Senior Subordinated Units will be registered under the Securities Act of
1933, as amended (the "Securities Act") and will be transferable by the
Petro Shareholders free of any restrictions imposed by the Securities Act.
5. Representations and Acknowledgments of Shareholders Regarding the Junior
Subordinated Units
Each of the Shareholders hereby represents and acknowledges:
5.1 No Distribution.
The Junior Subordinated Units being acquired by such Shareholder as set
forth on Exhibit 1.2 are being acquired for his/its own account, for
investment and not with a view to or for resale in connection with any
"distribution" thereof as such term is used in connection with the
registration provisions of the Securities Act.
5.2 Legend.
The following legend shall be affixed to the certificates for Junior
Subordinated Units issued pursuant to this Agreement:
The securities represented by this Certificate have not been registered
under the Securities Act of 1933, as amended, nor the laws of any
state. Accordingly, these securities may not be offered, sold,
transferred, pledged or hypothecated in the absence of registration, or
the availability, in the opinion of counsel for the issuer, of an
exemption from registration under the Securities Act of 1933, as
amended, or the laws of any state. Therefore, the stock transfer agent
will effect transfer of this Certificate only in accordance with the
above instructions.
5.3 Review of Applicable Laws. Each Shareholder acknowledges that Star
Partners has informed him/it that the Junior Subordinated Units to be
received pursuant to the Exchange have not been registered under the
Securities Act and may not be sold until they have been registered or
unless an exemption from such registration is available.
5.4 Knowledge and Experience. Each Shareholder has the knowledge and
experience in the financial and business matters necessary for making an
informed decision on the merits and risk of his investment in the Junior
Subordinated Units.
6. Registration of Senior Subordinated Units. The Senior Subordinated
Units will be entitled to the registration rights provided in the
Partnership Agreement for the benefit of affiliates of the General Partner.
7. Termination. This Agreement may terminate under any of the following
circumstances:
7.1 If the Closing has not occurred on or before May 1, 1999, then any
party may terminate this Agreement by giving notice as provided in 7.9;
7.2 If Petro and Star Partners publicly announce that they have abandoned
the Merger, then this Agreement shall automatically terminate;
7.3 If the Merger Agreement is terminated, then this Agreement shall
automatically terminate;
B-3
<PAGE>
7.4 At any time, by the written consent of all parties.
7. Miscellaneous.
7.1 Complete Agreement. This Agreement constitutes the entire agreement
of the parties hereto pertaining to the subject matter hereof and
supersedes all prior or contemporaneous conversations, understandings,
negotiations and discussions, whether oral or written, on the subject
matter. It can be amended only in writing signed by all parties. The
representations and warranties set forth herein shall survive the Closing.
7.2 Governing Law. This Agreement is intended to be performed in the
State of New York and shall be construed and enforced in accordance with
the laws of the State of New York.
7.3 The parties hereto agree that they will, at the expense of the
requesting party, from time to time execute and deliver any and all
additional and supplemental instruments, and do such other reasonable acts
and things which may be necessary or desirable to effect the purpose of
this Agreement and the transactions contemplated hereby.
7.4 Waiver by any of the parties hereto of any breach of, or exercise of
any right under this Agreement, shall not be deemed a waiver of similar or
other breaches or rights.
7.5 Captions and section headings used herein are for convenience only,
and are not a part of this Agreement, and shall not be used in construing
it.
7.6 All of the terms and provisions of this Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their
respective transferees, successors and assigns. Neither party may assign
this Agreement or any interest therein.
7.7 Each Shareholder will indemnify and hold Star Partners harmless
against and in respect of any claims from brokerage or other commissions
relating to this Agreement or the transactions contemplated hereby
resulting from such Shareholder's own dealing with any person in connection
with the Exchange and Star Partners will indemnify and hold the
Shareholders harmless against and in respect of any claims from brokerage
or other commissions relating to this Agreement or the transactions
contemplated hereby resulting from its own dealing with any person in
connection with the Exchange.
7.8 This Agreement is intended to benefit only the parties hereto and
there shall be no third party beneficiaries of this Agreement.
7.9 Notices. All notices, requests and other communications hereunder to
a party shall be in writing and shall be deemed given if personally
delivered, telecopied (with confirmation) or mailed by registered or
certified mail (return receipt requested) to such party at its address set
forth below or such other address as such party may specify by notice to
the parties hereto.
B-4
<PAGE>
If to Star Partners, to:
Star Gas Corporation
Clearwater House
2187 Atlantic Street
P.O. Box 120011
Stamford, CT 06912-0011
Fax: 203-328-7393
Attn: Joseph P. Cavanaugh, President
With copies to:
Baker & Botts
One Shell Plaza
910 Louisiana
Houston, TX 77002-4995
Fax: 713-229-1522
Attn: R. Joel Swanson, Esq.
If to a Shareholder:
To his Address set forth on the
Signature Page
With copies to:
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103-0084
Attn: Alan Shapiro, Esq.
Fax: 212-262-5152
Star Gas Partners, L.P.
by Star Gas Corporation, its General
Partner
By __________________________________
Joseph P. Cavanaugh, President
Shareholders:
- ------------------------------------- -------------------------------------
Irik P. Sevin Wolfgang Traber
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
B-5
<PAGE>
- ------------------------------------- -------------------------------------
Audrey L. Sevin Paul Biddelman
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
Phillip Ean Cohen Hubertus Langen
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
Brentwood Corporation United Capital Corp.
By: _________________________________ By: _________________________________
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
Barcell Corporation
By: _________________________________ -------------------------------------
Thomas J. Edelman
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
B-6
<PAGE>
GABES SA TORTOSA GmbH
By: _________________________________ By: _________________________________
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
Minneford Corp. MM Warburg & Co.
By: _________________________________ By: _________________________________
- ------------------------------------- -------------------------------------
Address Address
- ------------------------------------- -------------------------------------
- -------------------------------------
Fernando Montero
- -------------------------------------
Address
- -------------------------------------
Hanseatic Americas LDC Hanseatic Corporation
By: _________________________________ By: _________________________________
- -------------------------------------
Richard O'Connell
- -------------------------------------
Address
- -------------------------------------
B-7
<PAGE>
EXHIBIT 1.2
<TABLE>
<CAPTION>
SHAREHOLDER CLASS A CLASS C TOTAL
- ----------- --------- --------- ----------
<S> <C> <C> <C>
P. Cohen........................................ 679,262 113,423 792,685
T. Edelman...................................... 653,312 129,019 782,331
R. O'Connell.................................... 1,128,745 302,461 1,431,206
A. Sevin........................................ 1,876,863 477,716 2,354,579
I. Sevin........................................ 740,438 201,641 942,079
W. Traber....................................... -- 9,038 9,038
Brentwood Corp.................................. 681,873 120,985 802,858
Gabes S.A....................................... 597,617 124,314 721,931
Minneford Corp.................................. 73,638 12,000 85,638
Fernando Montero................................ -- 35,287 35,287
M.M. Warburg & Co............................... -- 31,808 31,808
Hanseatic Corp.................................. -- 298,717 298,717
Hanseatic Americas LDC.......................... 1,777,279 -- 1,777,279
Barcel Corp..................................... 605,151 151,231 756,382
Hubertus Langen................................. 734,473 9,038 740,511
Tortosa GmbH.................................... -- 298,717 298,717
P. Biddelman.................................... 2,386 -- 2,386
United Capital Corp............................. 90,000 -- 90,000
--------- --------- ----------
9,638,037 2,315,395 11,953,432
========= ========= ==========
</TABLE>
All shareholders to receive senior subordinated units of Star Partners at the
ratio of .13064 per share, except A. Sevin, I. Sevin, W. Traber, Hanseatic
Corp. and Hanseatic Americas LDC which will receive junior subordinated units
and general partner units at the ratio of .15920 per share.
B-8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNEX C
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
STAR GAS PARTNERS, L.P.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[] [/] Symbols denote language that has been striken from this document.
<PAGE>
TABLE OF CONTENTS
ARTICLE I
ORGANIZATIONAL MATTERS
<TABLE>
<S> <C> <C> <C>
Section 1.1 Formation and Continuation................................[]21[/]
Section 1.2 Name......................................................[]12[/]
Section 1.3 Registered Office; Principal Office.......................[]12[/]
Section 1.4 Power of Attorney.........................................[] 2[/]
Section 1.5 Term......................................................[]34[/]
Section 1.6 Possible Restrictions on Transfer.........................[]34[/]
ARTICLE II
DEFINITIONS
ARTICLE III
PURPOSE
Section 3.1 Purpose and Business..................................[]2225[/]
Section 3.2 Powers................................................[]2226[/]
ARTICLE IV
CONTRIBUTIONS AND UNITS
Section 4.1 Organization Contributions and Return..........[]2226[/]
** 1 Section []4.3[/] 4.2 Contributions by Initial Limited Partners...[]2427[/]
Section []4.2[/] 4.3 General Partner and Subsidiary Contributions...[]2327[/]
* 1 moved from here; text not shown
Section 4.4 Issuances of Additional Partnership
Securities.....................................[]2428[/]
Section 4.5 Limitations on Issuance of Additional
Partnership Securities.........................[]2529[/]
Section 4.6 []Conversion of[/] Special Issuance of Senior
Subordinated Units and Conversion of Senior
Subordinated Units and Junior Subordinated
Units..........................................[]2630[/]
Section 4.7 Limited Preemptive Rights......................[]2731[/]
Section 4.8 Splits and Combinations........................[]2731[/]
Section 4.9 Capital Accounts...............................[]2832[/]
Section 4.10 Interest and Withdrawal........................[]3135[/]
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
Section 5.1 Allocations for Capital Account Purposes................ []3135[/]
Section 5.2 Allocations for Tax Purposes............................ []3943[/]
Section 5.3 Requirement and Characterization of Distributions....... []4245[/]
Section 5.4 Distributions of Operating Surplus...................... []4347[/]
Section 5.5 Distributions of Cash from Capital Surplus.............. []4449[/]
Section 5.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels..................................... []4549[/]
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
Section 5.7 Special Provisions Relating to the Senior Subordinated
Units and Junior Subordinated Units...................[]4549[/]
Section 5.8 Entity-Level Taxation.................................[]4550[/]
ARTICLE []VIMANAGEMENT AND OPERATION OF BUSINESS VI[/]
MANAGEMENT AND OPERATION OF BUSINESS
Section 6.1 Management............................................[]4650[/]
Section 6.2 Certificate of Limited Partnership....................[]4852[/]
Section 6.3 Restrictions on General Partner's Authority...........[]4953[/]
Section 6.4 Reimbursement of the General Partner..................[]4953[/]
Section 6.5 Outside Activities....................................[]5054[/]
Section 6.6 Loans from the General Partner; Contracts with
Affiliates; Certain Restrictions on the General
Partner...............................................[]5155[/]
Section 6.7 Indemnification.......................................[]5357[/]
Section 6.8 Liability of Indemnitees..............................[]5558[/]
Section 6.9 Resolution of Conflicts of Interest...................[]5559[/]
Section 6.10 Other Matters Concerning the General Partner..........[]5760[/]
Section 6.11 Title to Partnership Assets...........................[]5861[/]
Section 6.12 Purchase or Sale of Units.............................[]5861[/]
Section 6.13 Registration Rights................................... 62
Section 6.14 Reliance by Third Parties.............................[]6164[/]
ARTICLE VII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
Section 7.1 Limitation of Liability...............................[]6165[/]
Section 7.2 Management of Business................................[]6165[/]
Section 7.3 Outside Activities....................................[]6265[/]
Section 7.4 Return of Capital.....................................[]6265[/]
Section 7.5 Rights of Limited Partners to the Partnership.........[]6265[/]
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting................................[]6366[/]
Section 8.2 Fiscal Year...........................................[]6366[/]
Section 8.3 Reports...............................................[]6367[/]
ARTICLE IX
TAX MATTERS
Section 9.1 Tax Returns and Information............................[]6467[/]
Section 9.2 Tax Elections..........................................[]6467[/]
Section 9.3 Tax Controversies......................................[]6568[/]
Section 9.4 Withholding............................................[]6568[/]
</TABLE>
ii
<PAGE>
ARTICLE X
CERTIFICATES
<TABLE>
<C> <S> <C>
Section 10.1 Certificates..........................................[]6568[/]
Section 10.2 Registration, Registration of Transfer and Exchange...[]6568[/]
Section 10.3 Mutilated, Destroyed, Lost or Stolen Certificates.....[]6669[/]
Section 10.4 Record Holder.........................................[]6770[/]
ARTICLE XI
TRANSFER OF INTERESTS
Section 11.1 Transfer............................................. []6770[/]
Section 11.2 Transfer of a General Partner's Partnership Interest..[]6870[/]
Section 11.3 Transfer of Units.....................................[]6871[/]
Section 11.4 Restrictions on Transfers.............................[]6971[/]
Section 11.5 Citizenship Certificates; Non-citizen Assignees.......[]6972[/]
Section 11.6 Redemption of Interests...............................[]7072[/]
ARTICLE XII
ADMISSION OF PARTNERS
Section 12.1 Admission of Initial Limited Partners...................[]7174[/]
Section 12.2 Admission of Substituted Limited Partners...............[]7274[/]
Section 12.3 Admission of Successor General Partner..................[]7274[/]
Section 12.4 Admission of Additional Limited Partners................[]7275[/]
Section 12.5 Amendment of Agreement and Certificate of Limited
Partnership.............................................[]7375[/]
ARTICLE XIII
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 13.1 Withdrawal of the General Partner.......................[]7375[/]
Section 13.2 Removal of the General Partner..........................[]7577[/]
Section 13.3 Interest of Departing Partner and Successor General
Partner.................................................[]7577[/]
Section 13.4 Withdrawal of Limited Partners..........................[]7778[/]
ARTICLE XIV
DISSOLUTION AND LIQUIDATION
Section 14.1 Dissolution.............................................[]7779[/]
Section 14.2 Continuation of the Business of the Partnership After
Dissolution.............................................[]7879[/]
Section 14.3 Liquidator..............................................[]7880[/]
Section 14.4 Liquidation.............................................[]7980[/]
Section 14.5 Cancellation of Certificate of Limited Partnership......[]8081[/]
Section 14.6 Return of Contributions.................................[]8081[/]
Section 14.7 Waiver of Partition.....................................[]8081[/]
Section 14.8 Capital Account Restoration.............................[]8081[/]
</TABLE>
iii
<PAGE>
ARTICLE XV
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
<TABLE>
<C> <S> <C>
Section 15.1 Amendment to be Adopted Solely by General Partner....... []8082[/]
Section 15.2 Amendment Procedures.................................... []8283[/]
Section 15.3 Amendment Requirements.................................. []8283[/]
Section 15.4 Meetings................................................ []8384[/]
Section 15.5 Notice of a Meeting..................................... []8484[/]
Section 15.6 Record Date............................................. []8484[/]
Section 15.7 Adjournment............................................. []8485[/]
Section 15.8 Waiver of Notice; Approval of Meeting; Approval of
Minutes................................................. []8485[/]
Section 15.9 Quorum.................................................. []8585[/]
Section 15.10 Conduct of Meeting...................................... []8586[/]
Section 15.11 Action Without a Meeting................................ []8686[/]
Section 15.12 Voting and Other Rights................................. []8687[/]
</TABLE>
ARTICLE XVIMERGER XVI
MERGER
<TABLE>
<C> <S> <C>
Section 16.1 Authority................................................ []8787[/]
Section 16.2 Procedure for Merger or Consolidation.................... []8787[/]
Section 16.3 Approval by Limited Partners of Merger or Consolidation.. []8888[/]
Section 16.4 Certificate of Merger.................................... []8888[/]
Section 16.5 Effect of Merger......................................... []8989[/]
</TABLE>
ARTICLE XVII
RIGHT TO ACQUIRE UNITS
<TABLE>
<C> <S> <C>
Section 17.1 Right to Acquire Units................................... []8989[/]
</TABLE>
ARTICLE XVIII
GENERAL PROVISIONS
<TABLE>
<C> <S> <C>
Section 18.1 Addresses and Notices..................................... []9191[/]
Section 18.2 References................................................ []9292[/]
Section 18.3 Pronouns and Plurals...................................... []9292[/]
Section 18.4 Further Action............................................ []9292[/]
Section 18.5 Binding Effect............................................ []9292[/]
Section 18.6 Integration............................................... []9292[/]
Section 18.7 Creditors................................................. []9292[/]
Section 18.8 Waiver.................................................... []9292[/]
Section 18.9 Counterparts.............................................. []9392[/]
Section 18.10 Applicable Law............................................ []9392[/]
Section 18.11 Invalidity of Provisions.................................. []9393[/]
Section 18.12 Consent of Partners....................................... []9393[/]
EXHIBIT A................................................................. A-1
EXHIBIT B................................................................. B-1
</TABLE>
iv
<PAGE>
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
STAR GAS PARTNERS, L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF STAR GAS
PARTNERS, L.P., dated as of , []1995[/] 1999, is entered into by and
among []Star Gas Corporation;[/] STAR GAS LLC, a Delaware []corporation[/]
limited liability company, as the General Partner, and []William G. Powers, Jr.,
as the Organizational Limited Partner, together with any other Persons who[/]
those Persons who are or become Partners in the Partnership or parties hereto as
provided herein. In consideration of the covenants, conditions and agreements
contained herein, the parties hereto hereby agree as follows:
RECITALS:
WHEREAS, Star Gas Corporation, a Delaware corporation and the initial general
partner of the Partnership (the "Initial General Partner"), and certain other
parties organized the Partnership as a Delaware limited partnership pursuant to
an Agreement of Limited Partnership dated as of December 20, 1995 (the
"Original Agreement"); and
WHEREAS, the Partnership, the Operating Partnership, Petro and Mergeco have
entered into that Merger Agreement dated as of October , 1998 (the "Petro
Merger Agreement") providing for the merger (the "Merger") of Mergeco with and
into Petro; and
WHEREAS, in order to effect the transactions contemplated by the Merger
Agreement, it is necessary to amend this Agreement as provided herein; and
WHEREAS, the Merger Agreement and the transactions contemplated thereby
(including, without limitation, the form of this Agreement and the amendments
effected hereby and the withdrawal of Star Gas as the general partner of the
Partnership and the Operating Partnership and the election of Star Gas LLC as
the successor general partner of the Partnership and the Operating Partnership)
have been submitted to, and approved by the requisite vote of, the Limited
Partners; and
WHEREAS, the General Partner has the authority to adopt certain amendments to
this Agreement without the approval of any Limited Partner or Assignee to
reflect, among other things: (i) subject to the terms of Section 4.4, any
change that is necessary or desirable in connection with the authorization for
issuance of any class or series of Partnership Securities pursuant to Section
4.4 and (ii) a change that, in the sole discretion of the General Partner, does
not adversely affect the Limited Partners in any material respect.
NOW, THEREFORE, the Original Agreement is hereby amended and, as so amended,
is restated in its entirety as follows:
<PAGE>
ARTICLE I
ORGANIZATIONAL MATTERS
Section 1.1 Formation and Continuation.
The Initial General Partner and the Organizational Limited Partner []hereby
form[/] previously formed the Partnership as a limited partnership pursuant to
the provisions of the Delaware Act. The General Partner and the Limited Partners
hereby amend and restate this Agreement in its entirety to continue the
Partnership as a limited partnership pursuant to the provisions of the Delaware
Act and to set forth the rights and obligations of the Partners and certain
matters related thereto. This amendment and restatement shall become effective
on the date of this Agreement. Except as expressly provided to the contrary in
this Agreement, the rights and obligations of the Partners and the
administration, dissolution and termination of the Partnership shall be governed
by the Delaware Act. All Partnership Interests shall constitute personal
property of the owner thereof for all purposes.
Section 1.2 Name.
The name of the Partnership []shall be[/] is "Star Gas Partners, L.P." The
Partnership's business may be conducted under any other name or names deemed
necessary or appropriate by the General Partner, including the name of the
General Partner. The words "Limited Partnership," "L.P.," "Ltd." or similar
words or letters shall be included in the Partnership's name where necessary
for the purpose of complying with the laws of any jurisdiction that so
requires. The General Partner in its sole discretion may change the name of the
Partnership at any time and from time to time and shall notify the Limited
Partners of such change in the next regular communication to the Limited
Partners.
Section 1.3 Registered Office; Principal Office.
Unless and until changed by the General Partner, the registered office of the
Partnership in the State of Delaware shall be located at 32 Loockerman Square,
Suite L-100, Dover, Delaware 19904, and the registered agent for service of
process on the Partnership in the State of Delaware at such registered office
shall be The Prentice-Hall Corporation System, Inc. The principal office of the
Partnership shall be located at, and the address of the General Partner shall
be, 2187 Atlantic Street, Stamford, []CT[/] Connecticut 06902, or such other
place as the General Partner may from time to time designate by notice to the
Limited Partners. The Partnership may maintain offices at such other place or
places within or outside the State of Delaware as the General Partner deems
necessary or appropriate.
Section 1.4 Power of Attorney.
(a) Each Limited Partner and each Assignee hereby constitutes and appoints
each of the General Partner and, if a Liquidator shall have been selected
pursuant to Section 14.3, the Liquidator, severally (and any successor to
either thereof by merger, transfer, assignment, election or otherwise) and each
of their authorized officers and attorneys-in-fact, with full power of
substitution, as his true and lawful agent and attorney-in-fact, with full
power and authority in his name, place and stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the
C-2
<PAGE>
Certificate of Limited Partnership and all amendments or restatements
thereof) that the General Partner or the Liquidator deems necessary or
appropriate to form, qualify or continue the existence or qualification of
the Partnership as a limited partnership (or a partnership in which the
limited partners have limited liability) in the State of Delaware and in
all other jurisdictions in which the Partnership may conduct business or
own property; (B) all certificates, documents and other instruments that
the General Partner or the Liquidator deems necessary or appropriate to
reflect, in accordance with its terms, any amendment, change, modification
or restatement of this Agreement; (C) all certificates, documents and other
instruments (including conveyances and a certificate of cancellation) that
the General Partner or the Liquidator deems necessary or appropriate to
reflect the dissolution and liquidation of the Partnership pursuant to the
terms of this Agreement; (D) all certificates, documents and other
instruments relating to the admission, withdrawal, removal or substitution
of any Partner pursuant to, or other events described in, Article XI, XII,
XIII or XIV; (E) all certificates, documents and other instruments relating
to the determination of the rights, preferences and privileges of any class
or series of Partnership Securities issued pursuant to Section 4.4; and (F)
all certificates, documents and other instruments (including agreements and
a certificate of merger) relating to a merger or consolidation of the
Partnership pursuant to Article XVI; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the sole discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given by
the Partners hereunder or is consistent with the terms of this Agreement or
is necessary or appropriate, in the sole discretion of the General Partner
or the Liquidator, to effectuate the terms or intent of this Agreement;
provided, that when required by Section 15.3 or any other provision of this
Agreement that establishes a percentage of the Limited Partners or of the
Limited Partners of any class or series required to take any action, the
General Partner or the Liquidator may exercise the power of attorney made
in this Section 1.4(a)(ii) only after the necessary vote, consent or
approval of the Limited Partners or of the Limited Partners of such class
or series, as applicable.
Nothing contained in this Section 1.4(a) shall be construed as authorizing
the General Partner to amend this Agreement except in accordance with Article
XV or as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable and
a power coupled with an interest, and it shall survive and not be affected by
the subsequent death, incompetency, disability, incapacity, dissolution,
bankruptcy or termination of any Limited Partner or Assignee and the transfer
of all or any portion of such Limited Partner's or Assignee's Partnership
Interest and shall extend to such Limited Partner's or Assignee's heirs,
successors, assigns and personal representatives. Each such Limited Partner or
Assignee hereby agrees to be bound by any representation made by the General
Partner or the Liquidator acting in good faith pursuant to such power of
attorney; and each such Limited Partner or Assignee hereby waives any and all
defenses that may be available to contest, negate or disaffirm the action of
the General Partner or the Liquidator taken in good faith under such power of
attorney. Each Limited Partner or Assignee shall execute and deliver to the
General Partner or the Liquidator, within 15 days after receipt of the
C-3
<PAGE>
General Partner's or the Liquidator's request therefor, such further
designation, powers of attorney and other instruments as the General Partner or
the Liquidator deems necessary to effectuate this Agreement and the purposes of
the Partnership.
Section 1.5 Term.
The Partnership commenced upon the filing of the Certificate of Limited
Partnership in accordance with the Delaware Act and shall continue in existence
until the close of Partnership business on December 31, 2085, or until the
earlier dissolution of the Partnership in accordance with the provisions of
Article XIV.
Section 1.6 Possible Restrictions on Transfer.
The General Partner may impose restrictions on the transfer of Partnership
Interests if a subsequent Opinion of Counsel determines that such restrictions
are necessary to avoid a significant risk of the Partnership's or the Operating
Partnership's becoming taxable as a corporation or otherwise as an entity for
federal income tax purposes. The restrictions may be imposed by making such
amendments to this Agreement as the General Partner in its sole discretion may
determine to be necessary or appropriate to impose such restrictions; provided,
however, that any amendment that the General Partner believes, in the exercise
of its reasonable discretion, could result in the delisting or suspension of
trading of any class of Units on any National Securities Exchange on which such
class of Units is then traded must be approved by the holders of at least a
majority of the Outstanding Units of such class.
ARTICLE II
DEFINITIONS
The following definitions shall be for all purposes, unless otherwise clearly
indicated to the contrary, applied to the terms used in this Agreement.
"Acquisition" means any transaction in which any Group Member 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 from the operating capacity of the Partnership Group existing
immediately prior to such transaction.
"Additional Book Basis" means the portion of any remaining Carrying Value of
an Adjusted Property that is attributable to positive adjustments made to such
Carrying Value as a result of Book-Up Events. For purposes of determining the
extent to which Carrying Value constitutes Additional Book Basis:
(i) Any negative adjustment made to the Carrying Value of an Adjusted
Property as a result of either a Book-Down Event or a Book-Up Event shall
first be deemed to offset or decrease that portion of the Carrying Value of
such Adjusted Property that is attributable to any prior positive
adjustments made thereto pursuant to a Book-Up Event or Book-Down Event.
C-4
<PAGE>
(ii) If Carrying Value that constitutes Additional Book Basis is reduced
as a result of a Book-Down Event and the Carrying Value of other property
is increased as a result of such Book-Down Event, an allocable portion of
any such increase in Carrying Value shall be treated as Additional Book
Basis; provided that the amount treated as Additional Book Basis pursuant
hereto as a result of such Book-Down Event shall not exceed the amount by
which the Aggregate Remaining Net Positive Adjustments after such Book-Down
Event exceeds the remaining Additional Book Basis attributable to all of
the Partnership's Adjusted Property after such Book-Down Event (determined
without regard to the application of this clause (ii) to such Book-Down
Event).
"Additional Book Basis Derivative Items" means any Book Basis Derivative
Items that are computed with reference to Additional Book Basis. To the extent
that the Additional Book Basis attributable to all of the Partnership's
Adjusted Property as of the beginning of any taxable period exceeds the
Aggregate Remaining Net Positive Adjustments as of the beginning of such period
(the "Excess Additional Book Basis"), the Additional Book Basis Derivative
Items for such period shall be reduced by the amount that bears the same ratio
to the amount of Additional Book Basis Derivative Items determined without
regard to this sentence as the Excess Additional Book Basis bears to the
Additional Book Basis as of the beginning of such period.
[]"Additional Capital Contribution Obligation" has the meaning assigned to
such term in Section 4.2(b).[/]
"Additional Limited Partner" means a Person admitted to the Partnership as a
Limited Partner pursuant to Section 12.4 and who is shown as such on the books
and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set
by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and
(b) decreased by (i) the amount of all losses and deductions that, as of the
end of such fiscal year, are reasonably expected to be allocated to such
Partner in subsequent years under Sections 704(e)(2) and 706(d) of the Code and
Treasury Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all
distributions that, as of the end of such fiscal year, are reasonably expected
to be made to such Partner in subsequent years in accordance with the terms of
this Agreement or otherwise to the extent they exceed offsetting increases to
such Partner's Capital Account that are reasonably expected to occur during (or
prior to) the year in which such distributions are reasonably expected to be
made (other than increases as a result of a minimum gain chargeback pursuant to
Section 5.1(d)(i) or 5.1(d)(ii)). The foregoing definition of Adjusted Capital
Account is intended to comply with the provisions of Treasury Regulation
Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
The "Adjusted Capital Account" in respect of a Common Unit, a Senior
Subordinated Unit, a Junior Subordinated Unit, a General Partner Unit or any
other specified interest in the Partnership shall be the amount which such
Adjusted Capital Account would be if such Common Unit, a Senior Subordinated
Unit, a Junior Subordinated Unit, a General Partner Unit or other interest in
the Partnership were the only interest in the Partnership held by a Partner.
"Adjusted Distributable Cash" has the meaning assigned to such term in
Section 5.3(b).
C-5
<PAGE>
"Adjusted Operating Surplus" for any period means 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
(iii) any capital contribution pursuant to the Additional Capital Contribution
Obligation[/] not relating to an Operating Expenditure made 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. []Solely with respect to the
test of the Reduction Threshold, Operating Surplus will be increased by any net
increases in cash reserves for Operating Expenditures (other than any increase
already taken into account in (b)(ii) above) during such period.[/] Adjusted
Operating Surplus does not include that portion of Operating Surplus included
in clause (a)(i) of the definition of Operating Surplus.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Section 4.9(d)(i) or 4.9(d)(ii). Once an Adjusted Property
is deemed distributed by, and recontributed to, the Partnership for federal
income tax purposes upon a termination thereof pursuant to Section 708 of the
Code, such property shall thereafter constitute a Contributed Property until
the Carrying Value of such property is subsequently adjusted pursuant to
Section 4.9(d)(i) or 4.9(d)(ii).
"Affiliate" means, 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.
"Aggregate Remaining Net Positive Adjustments" means as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 5.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of valuation as it may
adopt; provided, however, that the Agreed Value of any property deemed
contributed to the Partnership for federal income tax purposes upon termination
and reconstitution thereof pursuant to Section 708 of the Code shall be
determined in accordance with Section 4.9(c)(i). Subject to Section 4.9(c)(i),
the General Partner shall, in its sole discretion, use such method as it deems
reasonable and appropriate to allocate the aggregate Agreed Value of
Contributed Properties contributed to the Partnership in a single or integrated
transaction among each separate property on a basis proportional to the fair
market value of each Contributed Property.
"Agreement" means this Amended and Restated Agreement of Limited Partnership
of Star Gas Partners, L.P., as it may be amended, supplemented or restated from
time to time.
C-6
<PAGE>
"Assignee" means a Non-citizen Assignee or a Person to whom one or more Units
representing a Limited Partner Interest have been transferred in a manner
permitted under this Agreement and who has executed and delivered a Transfer
Application as required by this Agreement, but who has not become a Substituted
Limited Partner.
"Associate" means, when used to indicate a relationship with any Person, (a)
any corporation or organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more of any class of
voting stock or other voting interest; (b) any trust or other estate in which
such Person has at least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and (c) any relative or
spouse of such Person, or any relative of such spouse, who has the same
residence as such Person.
"Audit Committee" means a committee of the Board of Directors of the General
Partner composed entirely of two or more directors who are neither members,
officers nor employees of the General Partner or members, stockholders (other
than holders of Common Units or Senior Subordinated Units), officers, directors
or employees of any Affiliate of the General Partner.
"Available Cash," as to any Quarter ending before the Liquidation Date, means
(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 Working Capital
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
distributions under Sections 5.4(a)(i), (ii) and (iii) or 5.4(b)(i) 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; provided,
however, that the General Partner may not establish cash reserves for
distributions pursuant to Section 5.4(a)(iii) unless the General Partner has
determined that in its judgment the establishment of reserves will not prevent
the Partnership from distributing the Minimum Quarterly Distribution on all
Common Units and any Common Unit Arrearages thereon with respect to the next
four Quarters; and, provided further, that disbursements made by a Group Member
or cash reserves established, increased or reduced after the end of such
Quarter but on or before the date of determination of Available Cash with
respect to such Quarter shall be deemed to have been made, established,
increased or reduced, for purposes of determining Available Cash, within such
Quarter if the General Partner so determines.
Notwithstanding the foregoing, "Available Cash" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
"Book Basis Derivative Items" means any item of income, deduction, gain, or
loss included in the determination of Net Income, Net Loss, Net Termination
Gain or Net Termination Loss that is computed with reference to the Carrying
Value of an Adjusted Property (e.g., depreciation, depletion, or gain or loss
with respect to an Adjusted Property).
C-7
<PAGE>
"Book-Down Event" means an event which triggers a negative adjustment to the
Capital Accounts of the Partners pursuant to Section 4.9(d).
* 2 moved from here; text not shown
"Book-Tax Disparity" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property
and the adjusted basis thereof for federal income tax purposes as of such date.
A Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to
Section 4.9 and the hypothetical balance of such Partner's Capital Account
computed as if it had been maintained strictly in accordance with federal
income tax accounting principles.
** 2 "Book-Up Event" means an event which triggers a positive adjustment to
the Capital Accounts of the Partners pursuant to Section 4.9(d).
"Business Day" means Monday through Friday of each week, except that a legal
holiday recognized as such by the government of the United States or the states
of New York or Connecticut shall not be regarded as a Business Day.
"Capital Account" means the capital account maintained for a Partner pursuant
to Section 4.9. The "Capital Account" in respect of a Common Unit, a
Subordinated Unit, a Junior Subordinated Unit, a General Partner 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, Junior
Subordinated Unit, General Partner Unit or other interest in the Partnership
were the only interest in the Partnership held by a []Limited Partner.[/]
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes or has contributed to
the Partnership pursuant to this Agreement and the Conveyance and Contribution
[]Agreement or Sections 4.1, 4.2, 4.3, 4.4, 4.9(c)(i), 13.3(c) or 14.8.[/]
Agreements.
"Capital Improvements" means (a) additions or improvements to the capital
assets owned by any Group Member or (b) 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" has the following meaning: 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 will be
deemed to be Capital Surplus.
"Carrying Value" means (a) with respect to a Contributed Property, the Agreed
Value of such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions
C-8
<PAGE>
charged to the Partners' and Assignees' Capital Accounts in respect of such
Contributed Property, and (b) with respect to any other Partnership property,
the adjusted basis of such property for federal income tax purposes, all as of
the time of determination. The Carrying Value of any property shall be adjusted
from time to time in accordance with Sections 4.9(d)(i) and 4.9(d)(ii) and to
reflect changes, additions or other adjustments to the Carrying Value for
dispositions and acquisitions of Partnership properties, as deemed appropriate
by the General Partner.
"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 general partner
of the Partnership.
"Certificate" means a certificate, substantially in the form of Exhibit A []to
this Agreement[/] hereto with respect to Common Units and Exhibit B hereto with
respect to Senior Subordinated Units or in such other form as may be adopted by
the General Partner in its sole discretion, issued by the Partnership
evidencing ownership of one or more Common Units or Senior Subordinated Units,
as the case may be, or a certificate, in such form as may be adopted by the
General Partner in its sole discretion, issued by the Partnership evidencing
ownership of one or more other Units.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership filed with the Secretary of State of the State of Delaware as
referenced in Section 6.2, as such Certificate of Limited Partnership may be
amended, supplemented or restated from time to time.
"Citizenship Certification" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other Person)
is an Eligible Citizen.
"Claim" has the meaning assigned to such term in Section 6.13(c).
[]"Closing Date" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.[/] "Class A Common Unit" means 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 Class A Common Units in
this Agreement; no Class A Common Units shall be outstanding until the
expiration of the Subordination Period, at which time all Common Units
Outstanding immediately prior to the expiration of the Subordination Period
shall be redesignated as Class A Common Units.
[]"Closing Price" has the meaning assigned to such term in Section 17.1(a).[/]
"Class B Common Unit" means 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 Class B Common Units in this
Agreement; no Class B Common Units shall be outstanding until the expiration of
the Subordination Period, at which time each Outstanding Senior Subordinated
Unit and Junior Subordinated Unit shall convert into one Class B Common Unit.
"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
C-9
<PAGE>
respect to securities listed or admitted to trading on the principal National
Securities Exchange (other than the Nasdaq Stock Market) 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 (other
than the Nasdaq Stock Market), 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.
"Code" means the Internal Revenue Code of 1986, as amended and in effect from
time to time. Any reference herein to a specific section or sections of the
Code shall be deemed to include a reference to any corresponding provision of
future law.
"Combined Interest" has the meaning assigned to such term in Section 13.3(a).
"Commission" means the Securities and Exchange Commission.
* 4 moved from here; text not shown
"Common Unit" means 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 this Agreement. All
references herein to Common Units after the expiration of the Subordination
Period shall be deemed to be references to both Class A Common Units and Class
B Common Units, unless otherwise indicated.
"Common Unit Arrearage" means, 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 then in effect 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 pursuant to Section
5.4(a)(i).
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership (or deemed contributed to the Partnership on termination and
reconstitution thereof pursuant to Section 708 of the Code). Once the Carrying
Value of a Contributed Property is adjusted pursuant to Section 4.9(d), such
property shall no longer constitute a Contributed Property, but shall be deemed
an Adjusted Property.
[]"Contribution" means any cash, cash equivalents or the Net Agreed Value of
any other property or asset that a Partner contributes to the Partnership
pursuant to the[/] "Conveyance and Contribution Agreements" means collectively,
(i) that certain Conveyance and Contribution Agreement, dated as of the
Effective Time, among the Partnership, the Operating Partnership, Petro and
Star Gas LLC and (ii) []Article IV or Section 13.3(c).[/]
C-10
<PAGE>
[]"Conveyance and Contribution Agreement" means[/] that certain Conveyance and
Contribution Agreement, []dated as of the Closing Date, between Star Gas,[/]
among the Partnership, the Operating Partnership []and certain other parties,[/]
Petro and Petro Holdings, together with the additional conveyance documents and
instruments contemplated or referenced thereunder.
"Cumulative Common Unit Arrearage" means, 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 Unit
issued in the Initial Offering 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 theretofore made pursuant to Section 5.4(a)(ii)
with respect to such Common Unit (including any distributions to be made in
respect of the last of such Quarters).
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 5.1(d)(xi).
"Current Market Price" []has the meaning assigned to such term in Section
17.1(a).[/] as of any date of any class of Units listed or admitted to trading
on any National Securities Exchange means the average of the daily Closing
Prices per Unit of such class for the 20 consecutive Trading Days immediately
prior to such date.
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act, 6
Del C. [](S)17-(S)17-101,[/] et seq., as amended, supplemented or restated from
time to time, and any successor to such statute.
"Departing Partner" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 13.1 or 13.2.
"Debt Offering" means the offering and sale by Petro Holdings of $
million Senior Subordinated Notes due .
"EBITDA" means operating income plus depreciation, amortization and non-cash
charges (excluding expenses related to the consummation of the Merger and the
transactions contemplated thereby).
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"Effective Time" means the effective time of the Merger, which shall be the
later to occur of (i) the filing in the office of the Secretary of State of the
State of Delaware of a properly executed certificate of merger and (ii) the
filing with the Department of State of Minnesota of properly executed articles
of merger, or such later date and time as may be set forth in such certificate
of merger and articles of merger.
"Eligible Citizen" means a Person qualified to own interests in real property
in jurisdictions in which any Group Member does business or proposes to do
business from time to time, and whose status as a Limited Partner or Assignee
does not or would not subject such Group Member to a significant risk of
cancellation or forfeiture of any of its properties or any interest therein.
"Equity Offering" means the offering and sale by the Partnership of Common
Units to the public, as described in the Equity Registration Statement.
C-11
<PAGE>
** 3 "Equity Registration Statement" means the Registration Statement on Form
S-3 (Registration No. []33-98490)-[/] ), as it has been or as it may be
amended or supplemented from time to time, filed by the Partnership with the
Commission under the Securities Act to register the offering and sale of the
Common Units in the []Initial[/] Equity Offering.
"Event of Withdrawal" has the meaning assigned to such term in Section
13.1(a).
"First Liquidation Target Amount" has the meaning assigned to such term in
Section 5.1(c)(i)(D).
"First Target Distribution" means $0.604 per Unit [](or, with respect to the
period commencing on the Closing Date and ending on March 31, 1996, the product
of $0.604 multiplied by a fraction of which the numerator is the number of days
in such period and of which the denominator is 91)[/], subject to adjustment in
accordance with Sections 5.6 and 5.8.
"General Partner" means Star Gas LLC, a Delaware limited liability company,
and its successor as general partner of the Partnership.
"General Partner Interest" means the ownership interest of the General
Partner in the Partnership (in its capacity as a general partner without
reference to any Limited Partner Interest held by it) which is evidenced by
General Partner Units and includes any and all benefits to which the General
Partner is entitled as provided in this Agreement, together with all
obligations of the General Partner to comply with the terms and provisions of
this Agreement.
"General Partner Unit" means a Unit representing a fractional part of the
General Partner Interest and having the rights and obligations specified with
respect to the General Partner Interest.
"Group" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation
made to 10 or more Persons) or disposing of any Partnership Securities with any
other Person that beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly, Partnership Interests.
"Group Member" means a member of the Partnership Group.
"Holder" has the meaning assigned to such term in Section 6.13(a).
[]"Incentive Distribution" means any amount of cash distributed to the General
Partner, in its capacity as general partner of the Partnership, pursuant to
Sections 5.4(a)(v), (vi) or (vii) and Sections 5.4(b)(iii), (iv) or (v) which
exceeds an amount equal to 1.0% of the aggregate amount of cash then being
distributed pursuant to such provisions.[/]
"includes" means includes, without limitation, and "including" means
including, without limitation.
"Indemnified Persons" has the meaning assigned to such term in Section
6.13(c).
C-12
<PAGE>
"Indemnitee" means (a) the General Partner, any Departing Partner, any Person
who is or was an Affiliate of the General Partner or any Departing Partner, (b)
any Person who is or was an officer, director, employee, partner, agent or
trustee of the General Partner or any Departing Partner or any such Affiliate,
or (c) any Person who is or was serving at the request of the General Partner
or any Departing Partner or any such Affiliate as a director, officer,
employee, partner, agent, fiduciary or trustee of another Person; provided,
that a Person shall not be an Indemnitee pursuant to this clause (c) by reason
of providing, on a fee-for-services basis, trustee, fiduciary or custodial
services.
"Initial Closing Date" means December 20, 1995.
"Initial Common Units" means the Common Units sold in the Initial Offering.
"Initial General Partner" means Star Gas Corporation, a Delaware corporation.
"Initial Limited Partners" means Star Gas, Silgas, Inc. and Silgas of
Illinois, Inc. [](with respect to the Subordinated Units received by them
pursuant to Section 4.2) and the[/] and the Initial Underwriters, in each case
[]upon being[/] admitted to the Partnership in accordance with Section 12.1.
"Initial Offering" means the initial offering and sale of Common Units to the
public on December 20, 1995, as described in the Initial Registration
Statement.
"Initial Overallotment Closing Date" means January 18, 1996.
"Initial Registration Statement" means the Registration Statement on Form S-l
(Registration No. 33-98490), as amended or supplemented from time to time,
filed by the Partnership with the Commission under the Securities Act to
register the offering and sale of the Initial Common Units in the Initial
Offering.
"Initial Underwriters" means each person named as an underwriter in the
Initial Offering.
"Initial Unit Price" means (a) []the initial public offering price per Common
Unit at which the Underwriters offered the Common Units to the public for sale
as set forth on the cover page of the prospectus first issued at or after the
time the Registration Statement first became effective[/] with respect to each
Common Unit, Senior Subordinated Unit, Junior Subordinated Unit and General
Partner Unit, $22.00 or (b) with respect to any other class or series of Units,
the price per Unit at which such class or series of Units is initially sold by
the Partnership, as determined by the General Partner, in each case adjusted as
the General Partner determines to be appropriate to give effect to any
distribution, subdivision or combination of Units.
"Interim Capital Transactions" means the following transactions if they occur
prior to the Liquidation Date: (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 Group Member; (b) sales of equity interests
(including Common Units sold to the Underwriters pursuant to the exercise of
the Overallotment Option, []but excluding the contributions made pursuant to the
Additional Capital Contribution Obligation)[/] by any Group Member; and (c)
sales or other voluntary or involuntary dispositions of any assets of any Group
Member other than (x) sales or other dispositions of inventory in the
C-13
<PAGE>
ordinary course of business, (y) sales or other dispositions of other current
assets, including receivables and accounts in the ordinary course of business,
and (z) sales or other dispositions of assets as part of normal retirements or
replacements.
** 4 []"Common[/] Junior Subordinated Unit" means 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[/] Junior Subordinated Units in this Agreement.
[]"Issue Price" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership.[/] "Limited Partner" means, unless the
context otherwise requires, (a) the Organizational Limited Partner, each Initial
Limited Partner, each Substituted Limited Partner, each Additional Limited
Partner and any Departing Partner upon the change of its status from General
Partner to Limited Partner pursuant to Section 13.3; and (b) solely for purposes
of Articles IV, V, VI and IX and Sections 14.3 and 14.4, each Assignee.
"Limited Partner Interest" means the ownership interest of a Limited Partner
in the Partnership which is evidenced by Common Units, Senior Subordinated
Units and Junior Subordinated Units or other Partnership Securities and
includes any and all benefits to which a Limited Partner is entitled as
provided in this Agreement, together with all obligations of a Limited Partner
to comply with the terms and provisions of this Agreement.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 14.2, the date on which the applicable time
period during which the holders of Outstanding Units have the right to elect to
reconstitute the Partnership and continue its business has expired without such
an election being made, and (b) in the case of any other event giving rise to
the dissolution of the Partnership, the date on which such event occurs.
"Liquidator" means the General Partner or other Person approved pursuant to
Section 14.3 who performs the functions described therein.
"Maintenance Capital Expenditures" means cash capital expenditures made to
maintain, up to the level thereof that existed at the time of such expenditure,
the operating capacity of the capital assets of the Partnership Group, as such
assets existed at the time of such expenditure and shall, therefore, not
include cash capital expenditures made in respect of Acquisitions and Capital
Improvements. Where cash capital expenditures are made in part to maintain the
operating capacity level referred to in the immediately preceding sentence and
in part for other purposes, the General Partner's good faith allocation thereof
between the portion used to maintain such operating capacity level and the
portion used for other purposes shall be conclusive.
"Mergeco" has the meaning assigned to such term in the introductory paragraph
to this Agreement.
"Merger" has the meaning assigned to such term in the introductory paragraph
to this Agreement.
C-14
<PAGE>
"Merger Agreement" has the meaning assigned to such term in Section 16.1.
"Minimum Quarterly Distribution" means []$0.55[/] $0.575 per Unit per Quarter
[](or with respect to[/] , subject to adjustment in accordance with Sections 5.6
and 5.8; provided, however, the Minimum Quarterly Distribution with respect to
the Senior Subordinated Units, Junior Subordinated Units and General Partner
Units for the period commencing on the []Closing Date[/] Effective Time and
ending on []March 31, 1996,[/] June 30, 1999, shall be equal to the product of
[]$0.55[/] $0.575 multiplied by a fraction of which the numerator is the number
of days in such period and of which the denominator is 91), []subject to
adjustment in accordance with Sections 5.6 and 5.8.[/]
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 4.9(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the
time of distribution, in either case, as determined under Section 752 of the
Code.
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other
than those items taken into account in the computation of Net Termination Gain
or Net Termination Loss) for such taxable year. The items included in the
calculation of Net Income shall be determined in accordance with Section 4.9(b)
and shall not include any items specially allocated under Section 5.1(d);
provided that the determination of the items that have been specially allocated
under Section 5.1(d) shall be made as if Section 5.1(d)(xii) were not in the
Agreement.
"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or
Net Termination Loss) for such taxable year. The items included in the
calculation of Net Loss shall be determined in accordance with Section 4.9(b)
and shall not include any items specially allocated under Section 5.1(d);
provided that the determination of the items that have been specially allocated
under Section 5.1(d) shall be made as if Section 5.1(d)(xii) were not in the
Agreement.
"Net Positive Adjustments" means, with respect to any Partner, the excess, if
any, of the total positive adjustments over the total negative adjustments made
to the Capital Account of such Partner pursuant to Book-Up and Book-Down
Events.
"Net Termination Gain" means, for any taxable year, the sum, if positive, of
all items of income, gain, loss or deduction recognized by the Partnership
(including, without limitation, such
C-15
<PAGE>
amounts recognized through the Operating Partnership) after the Liquidation
Date. The items included in the determination of Net Termination Gain shall be
determined in accordance with Section 4.9(b) and shall not include any items of
income, gain or loss specially allocated under Section 5.1(d).
"Net Termination Loss" means, for any taxable period, the sum, if negative,
of all items of income, gain, loss or deduction recognized by the Partnership
(including, without limitation, such amounts recognized through the Operating
Partnership) after the Liquidation Date. The items included in the
determination of Net Termination Loss shall be determined in accordance with
Section 4.9(b) and shall not include any items of income, gain or loss
specially allocated under Section 5.1(d).
"Non-citizen Assignee" means a Person whom the General Partner has determined
in its sole discretion does not constitute an Eligible Citizen and as to whose
Partnership Interest the General Partner has become the Substituted Limited
Partner, pursuant to Section 11.5.
"Non-competition Agreement" means that certain non-competition agreement
[]between Petroleum Heat and Power Co., Inc. ("Petro") and the Partnership
pursuant to which 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
Volume 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 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. Petro and the Partnership have further agreed
pursuant to the Non-competition Agreement that in the event that 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.[/] among Irik. P.
Sevin, the Partnership and the Operating Partnership.
"Nonrecourse Built-in Gain" means with respect to any Contributed Properties
or Adjusted Properties that are subject to a mortgage or pledge securing a
Nonrecourse Liability, the amount of any taxable gain that would be allocated
to the Partners pursuant to Sections 5.2(b)(i)(A), 5.2(b)(ii)(A) and
5.2(b)(iii) if such properties were disposed of in a taxable transaction in
full satisfaction of such liabilities and for no other consideration.
"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in
accordance with the principles of Treasury Regulation Section 1.704-2(b), are
attributable to a Nonrecourse Liability.
"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"Notice of Election to Purchase" has the meaning assigned to such term in
Section 17.1(b).
C-16
<PAGE>
"Old Subordinated Units" means the Subordinated Units issued to the Initial
General Partner on the Initial Closing Date.
"Operating Expenditures" means 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, (ii) payment of transaction
expenses relating to Interim Capital Transactions []or (iii)[/], (iii) payment
of transaction expenses related to the Merger and the transactions contemplated
thereby or (iv) 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" means Star Gas Propane, L.P., a Delaware limited
partnership, and any successors thereto.
"Operating Partnership Agreement" means the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership, as it may be amended,
supplemented or restated from time to time.
"Operating Surplus," as to any period ending before the Liquidation Date,
means
(a) the sum of (i) [16,056,000] million plus all cash of the Partnership
Group on hand as of the close of business on the Initial Closing Date []and[/],
(ii) all the cash receipts of the Partnership Group for the period beginning on
the Initial Closing Date and ending with the last day of such period, other than
cash receipts from Interim Capital Transactions (except to the extent specified
in Section 5.5) and (iii) all cash receipts of the Partnership Group after the
end of such period but on or before the date of determination of Operating
Surplus with respect to such period resulting from Working Capital Borrowings,
less
(b) the sum of (i) Operating Expenditures for the period beginning on the
Initial 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; provided, however, that disbursements made (including
contributions to a Group Member or disbursements on behalf of a Group Member)
or cash reserves established, increased or reduced after the end of such period
but on or before the date of determination of Available Cash with respect to
such period shall be deemed to have been made, established, increased or
reduced, for purposes of determining Operating Surplus, within such period if
the General Partner so determines.
C-17
<PAGE>
Notwithstanding the foregoing, "Operating Surplus" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter shall
equal zero.
"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to []Star Gas any Affiliate of Star Gas, the Partnership or the General
Partner)[/] the Partnership, the General Partner or any of its Affiliates)
acceptable to the General Partner in its reasonable discretion.
"Organizational Limited Partner" means William G. Powers, Jr., in his
capacity as the organizational limited partner of the Partnership pursuant to
this Agreement.
.
"Original Agreement" has the meaning assigned to such term in the Recitals to
this Agreement.
"Outstanding" means, with respect to Partnership Securities, all Partnership
Securities that are issued by the Partnership and reflected as outstanding on
the Partnership's books and records as of the date of determination.
"Overallotment Option" means the overallotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"Parity Units" means Common Units and all other Units having rights to
distributions or in liquidation ranking on a parity with the Common Units.
"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in Treasury
Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partner and the Limited Partners.
"Partnership" means Star Gas Partners, L.P., a Delaware limited partnership,
and any successors thereto.
"Partnership Group" means the Partnership, the Operating Partnership and any
Subsidiary of either such entity, treated as a single consolidated entity.
"Partnership Interest" means an interest in the Partnership, which shall
include []general partner interests, Common Units, Subordinated Units or other
Partnership Securities, or a combination thereof or interest therein, as the
case may be.[/] General Partner Interests and Limited Partner Interests.
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
C-18
<PAGE>
"Partnership Security" means any class or series of Unit, any option, right,
warrant or appreciation rights relating thereto, or any other type of equity
interest that the Partnership may lawfully issue, or any unsecured or secured
debt obligation of the Partnership that is convertible into any class or series
of equity interests of the Partnership.
"Percentage Interest" means as of the date of such determination [](a) as to
the General Partner, 1%, (b),[/] as to any []Limited[/] Partner or Assignee
holding Units, the product of (i) []99%[/] 100% less the percentage applicable
to paragraph (c) (b) multiplied by (ii) the quotient of the number of Units held
by such []Limited[/] Partner or Assignee divided by the total number of all
Outstanding Units, and (c)(b) as to the holders of additional Partnership
Securities issued by the Partnership in accordance with Section []4.3[/] 4.4,
the percentage established as a part of such issuance.
[]"Permitted Investments" means 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.[/]
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association or
other entity.
"Per Unit Capital Amount" means, as of any date of determination, the Capital
Account, stated on a per Unit basis, underlying any Unit held by a Person
[]other than the General Partner or any Affiliate.[/]
"Petro" means Petroleum Heat and Power Co., Inc., a Minnesota corporation, an
indirect subsidiary of the Operating Partnership.
"Petro Adjusted Operating Surplus" means, with respect to any four-Quarter
period, the Adjusted Operating Surplus generated by Petro (which for purposes
of this definition includes all subsidiaries of the Partnership primarily
engaged in the home heating oil business) during such four-Quarter period, as
determined in good faith by a majority of the members of the Board of Directors
of the General Partner []who holds Units.[/] (with the concurrence of the Audit
Committee). In calculating Petro Adjusted Operating Surplus, (i) debt service
(including the payment of principal, interest and premium) on all debt incurred
or assumed by Petro or any of its Affiliates, the proceeds of which are used by
or for the benefit of Petro (including the proceeds from the Debt Offering),
shall be included to the extent such debt service is included in the
calculation of Operating Surplus, and (ii) debt service (including the payment
of principal, interest and premium) on all debt incurred or assumed by Petro or
any of its Affiliates, the proceeds of which are not used by or for the benefit
of Petro, shall be excluded.
[]"Pro Rata"[/] "Petro Class A Common Stock" means the Class A Common Stock,
par value $.10 per share, of Petro.
C-19
<PAGE>
"Petro Class C Common Stock" means the Class C Common Stock, par value $.10
per share, of Petro.
"Petro Holdings" means Petro Holdings, Inc., a Minnesota corporation, a
wholly-owned indirect subsidiary of the Operating Partnership.
"Petro Merger Agreement" has the meaning set forth in the introductory
paragraph to this Agreement.
"Petro Units," with respect to any date, means the sum of (i) the excess of
the number of Units outstanding at the Effective Time over the number of Units
outstanding immediately prior to the Effective Time (assuming the simultaneous
closing of the Equity Offering), (ii) the number of Units issued by the
Partnership thereafter to the extent the net proceeds of which are contributed
to Petro (which for purposes hereof includes all subsidiaries of the
Partnership primarily engaged in the home heating oil business), (iii) the
number of Senior Subordinated Units or Class B Common Units issued pursuant to
Section 4.6, and (iv) the deemed number of Units outstanding based upon a
contribution of capital to Petro by the Partnership or any Affiliate thereof
after the Effective Time (which contribution is not covered by (ii) above or
traceable to debt proceeds), which number of deemed Units is obtained by
dividing (A) the amount of such contribution by (B) the Current Market Price of
a Common Unit (or of a Class A Common Unit after the termination of the
Subordination Period). If Petro pays down debt of Petro or debt allocated to
Petro from internally generated funds of Petro and if those internally
generated funds exist at Petro only because Petro has not paid dividends up to
the Partnership in an amount equal to the distributions that would have been
paid on the Petro Units had they been actual outstanding Units of the
Partnership, then the amount used to pay down such debt will be treated as if
it were contributed to Petro by the Partnership. The distribution per Senior
Subordinated Unit of the Partnership shall be the amount that the Partnership
would have been deemed to have distributed per Petro Unit had they been actual
outstanding Units of the Partnership. For purposes of the number of deemed
outstanding Units in (iv) above, such Units shall be deemed to be issued on the
date of such Capital Contribution. For this purpose, Common Unit means Class A
Common Units upon expiration of the Subordination Period.
"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units, []and[/] in accordance with their respective
Percentage Interests, and (b) when modifying Partners []means 1% of the General
Partner and 99% to the Unitholders Pro Rata,[/] and Assignees, apportioned among
all Partners and Assignees in accordance with their respective Percentage
Interests.
"Proxy Statement" means the Registration Statement on Form S-4 (Registration
No. ) as it has been or as it may be amended or supplemented from time to
time, filed jointly by the Partnership and Petro relating to the Merger and the
transactions contemplated thereby.
"Purchase Date" means the date determined by the General Partner as the date
for purchase of all Outstanding Units of a certain class (other than Units
owned by the General Partner and its Affiliates) pursuant to Article XVII.
"Quarter" means, unless the context requires otherwise, a three-month period
of time ending on March 31, June 30, September 30, or December 31.
C-20
<PAGE>
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Sections 734 or 743 of the Code)
upon the disposition of any property or asset of the Partnership, which gain is
characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"Record Date" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or to
vote at, any meeting of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or entitled to
exercise rights in respect of any lawful action of Limited Partners or (b) the
identity of Record Holders entitled to receive any report or distribution.
"Record Holder" means the Person in whose name a Common Unit or a Senior
Subordinated Unit is registered on the books of the Transfer Agent as of the
opening of business on a particular Business Day, or with respect to a holder of
a []general partner interest[/] Junior Subordinated Unit or General Partner Unit
or other Partnership Security, the Person in whose name such []general partner
interest[/] Junior Subordinated Unit or General Partner Unit or other
Partnership Security is registered on the books of the General Partner as of the
opening of business on such Business Day.
"Redeemable Units" means any []Units[/] Partnership Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 11.6.
[]"Reduction Threshold" has the meaning assigned to such term in Section
4.2(b).[/]
*3 moved from here; text not shown
"Remaining Net Positive Adjustments" means as of the end of any taxable
period, (i) with respect to the Limited Partners, as a class, the excess of (a)
the Net Positive Adjustments of the Limited Partners as of the end of such
period over (b) the sum of those Partners' Share of Additional Book Basis
Derivative Items for each prior taxable period, and (ii) with respect to the
General Partner, the excess of (a) the Net Positive Adjustments of the General
Partner as of the end of such period over (b) the sum of the General Partner's
Share of Additional Book Basis Derivative Items for each prior taxable period.
"Required Allocations" means any allocation (or limitation imposed on any
allocation) of an item of income, gain, deduction or loss pursuant to (a)
Section 5.1(b)(ii) or (b) Sections 5.1(d)(i), 5.1(d)(ii), 5.1(d)(iv),
5.1(d)(v), 5.1(d)(vi), 5.1(d)(vii) and 5.1(d)(ix), such allocations (or
limitations thereon) being directly or indirectly required by the Treasury
regulations promulgated under Section 704(b) of the Code.
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Sections 5.2(b)(i)(A) or 5.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"Second Liquidation Target Amount" has the meaning assigned to such term in
Section 5.1(c)(i)(E).
C-21
<PAGE>
"Second Target Distribution" means $0.711 per Unit [](or, with respect to the
period commencing on the Closing Date and ending on March 31, 1996, the product
of $0.711 multiplied by a fraction of which the numerator is equal to the
number of days in such period and of which the denominator is 91),[/] subject to
adjustment in accordance with Sections 5.6 and 5.8.
"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
** 5 "Senior Subordinated Unit" means 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 Senior Subordinated Units
in this Agreement.
"Share of Additional Book Basis Derivative Items" means in connection with
any allocation of Additional Book Basis Derivative Items for any taxable
period, (i) with respect to the Limited Partners, as a class, the amount that
bears the same ratio to such Additional Book Basis Derivative Items as the
Limited Partners' Remaining Net Positive Adjustments as of the end of such
period bears to the Aggregate Remaining Net Positive Adjustments as of that
time, and (ii) with respect to
the General Partner, the amount that bears the same ratio to such Additional
Book Basis Derivative Items as the General Partner's Remaining Net Positive
Adjustments as of the end of such period bears to the Aggregate Remaining Net
Positive Adjustments as of that time.
"Shelf Registration Statement" has the meaning assigned to such term in
Section 6.13(f).
"Special Approval" means approval by the Audit Committee.
"Star Gas" means Star Gas Corporation, a Delaware corporation []and a wholly
owned subsidiary of Petroleum Heat and Power Co., Inc., a Minnesota
corporation.[/]
* 5 moved from here; text not shown
"Subordination Period" means the period []commencing[/] that commenced on the
Initial Closing Date and ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning on or after []January[/] July 1,
[]2001[/] 2002 in respect of which (A) (i) distributions of Available Cash from
Operating Surplus on each of the Outstanding Common Units []and[/], Senior
Subordinated Units, Junior Subordinated Units and General Partner Units equaled
or exceeded the Minimum Quarterly Distribution for each of the three non-
overlapping four-Quarter periods immediately preceding such date and (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 Common Units []and[/], Senior
Subordinated Units, []plus the related distributions on the general partner
interest,[/] Junior Subordinated Units and General Partner Units that were
Outstanding during such periods on a fully diluted basis with respect to
employee options or other employee incentive compensation (i.e., taking into
account for purposes of such determination all Outstanding Common Units, Senior
Subordinated Units, Junior Subordinated Units and General Partner Units and all
Common Units issuable upon exercise of employee options that have, as of the
date of determination, already vested or are scheduled to vest prior to the end
of the Quarter immediately following the Quarter with respect to which
C-22
<PAGE>
determination is made, and all Units that have as of the date of determination
been earned by but not yet issued to management of the Partnership in respect
of incentive compensation) and (B) there are no Cumulative Common Unit
Arrearages; and
(b) the date on which the General Partner is removed as general partner of
the Partnership upon the requisite vote by Limited Partners under circumstances
where Cause does not exist; provided, however, that if the General Partner is
removed during the Subordination Period within 12 months after the end of a
six-Quarter period in which the Minimum Quarterly Distribution was not made on
the Common Units with respect to more than one of such Quarters (excluding for
this purpose the payment of any Common Unit Arrearages) and the first quarter
in such six-Quarter period that the Minimum Quarterly Distribution on Common
Units was not made occurs after March 31, 2001, then the Subordination Period
will not end. In the event that the General Partner is removed under the
circumstances set forth in the above proviso, the Junior Subordinated Units
shall convert into Senior Subordinated Units on a one-for-one basis and the
distribution rights on the General Partner Units will rank pari passu with the
Senior Subordinated Units.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, by such
Person, by one or more Subsidiaries of such Person or a combination thereof,
(b) a partnership (whether general or limited) in which such Person or a
Subsidiary of such Person is, at the date of determination, a general or
limited partner of such partnership, but only if more than 50% of the
partnership interests of such partnership (considering all of the partnership
interests of the partnership as a single class) is owned or controlled,
directly or indirectly, by such Person, by one or more Subsidiaries of such
Person, or a combination thereof, or (c) any other Person (other than a
corporation or a partnership) in which such Person, directly or indirectly, at
the date of determination, has (i) at least a majority ownership interest or
(ii) the power to elect or direct the election of a majority of the directors
or other governing body of such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 12.2 in place of and with all
the rights of a Limited Partner and who is shown as a Limited Partner on the
books and records of the Partnership.
"Surviving Business Entity" has the meaning assigned to such term in Section
16.2(b).
"Termination Capital Transaction" means a transaction in which Net
Termination Gain or Net Termination Loss is recognized.
"Third Target Distribution" means $0.926 per Unit [](or, with respect to the
period commencing on the Closing Date and ending on March 31, 1996, the product
of $0.926 multiplied by a fraction of which the numerator is equal to the
number of days in such period and of which the denominator is 91),[/] subject to
adjustment in accordance with Sections 5.6 and 5.8.
"Trading Day" means a day on which the principal National Securities Exchange
on which the Units of any class are listed or admitted to trading is open for
the transaction of business or, if 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.
C-23
<PAGE>
"Transfer" has the meaning assigned to such term in Section 11.1(a).
"Transfer Agent" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time
to time by the Partnership to act as registrar and transfer agent for the
[]Units.[/] Common Units and Senior Subordinated Units and as may be appointed
from time to time by the General Partner to act as registrar and transfer agent
for any other Partnership Securities; provided that if no Transfer Agent is
specifically designated for any such other Partnership Securities, the General
Partner shall act in such capacity.
"Transfer Application" means an application and agreement for transfer of
Units in the form set forth on the back of a Certificate or in a form
substantially to the same effect in a separate instrument.
"Underwriter" means each Person named as an underwriter in Schedule 1 to the
Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement []dated December 14,
1995,[/] relating to the Equity Offering, dated , among the
Underwriters, the Partnership and other parties providing for the purchase of
Common Units by such Underwriters.
"Unit" means a Partnership Interest of a []Limited[/] Partner or Assignee in
the Partnership representing a fractional part of the Partnership Interests of
all []Limited[/] Partners and Assignees and shall include, []without limitation,
Common Units and Subordinated[/] Common Units (Class A Common Units and Class B
Common Units after the expiration of the Subordination Period), Senior
Subordinated Units, Junior Subordinated Units and General Partner Units;
provided, that each []Common[/] Unit at any time Outstanding shall represent the
same fractional part of the Partnership Interests of all []Limited[/] Partners
and Assignees holding []Common Units as each other Common Unit and each
Subordinated Unit at any time Outstanding shall represent the same fractional
part of the Partnership Interests of all Limited Partners and Assignees holding
Subordinated[/] Units as each other Unit. A Unit shall not include a Petro Unit.
"Unit Majority" means, during the Subordination Period, at least (i) a
majority of the Outstanding Common Units []other than Common Units owned by the
General Partner or any Affiliate and, thereafter, at least[/] voting as a class
and (ii) a majority of the Outstanding Senior Subordinated Units and Junior
Subordinated Units voting as a single class, in each case excluding Units owned
by the General Partner or any Affiliate, and, after the Subordination Period,
at least a majority of the Outstanding Common Units.
"Unrealized Gain" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the fair market value
of such property as of such date (as determined under Section 4.9(d)) over (b)
the Carrying Value of such property as of such date (prior to any adjustment to
be made pursuant to Section 4.9(d) as of such date).
"Unrealized Loss" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the Carrying Value of
such property as of such date (prior to any adjustment to be made pursuant to
Section 4.9(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 4.9(d)).
C-24
<PAGE>
"Unrecovered Initial Unit Price" means, 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,[/] Common Units, Senior Subordinated Units, Junior Subordinated Units
or General Partner Units, the Initial Unit Price less the sum of all
distributions constituting Capital Surplus 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[/] an Initial Common Unit 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[/] an Initial Common Unit,
adjusted as the General Partner determines to be appropriate to give effect to
any distribution, subdivision or combination of Units.
[]"Unrecovered Subordinated Unit Capital" means, at any time, with respect to
a Subordinated Unit, prior to its conversion into a Common Unit pursuant to
Sections 5.7(b) and (c), the excess, if any, of (a) the Net Agreed Value (at the
time of conveyance) of the undivided interest in the Contributed Property
conveyed to the Partnership pursuant to Section 4.2 in exchange for such
Subordinated Unit, over (b) the sum of all distributions in respect of a
Subordinated Unit 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, adjusted as the General Partner
determines to be appropriate to give effect to any distribution, subdivision or
combination of Subordinated Units.[/]
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 13.1(b).
"Working Capital Borrowings" means borrowings pursuant to a facility or other
arrangement requiring all borrowings thereunder to be reduced to a relatively
small amount each year for an economically meaningful period of time. It being
the intent hereof, that borrowings which are not intended exclusively for
working capital purposes shall not be treated as Working Capital Borrowings.
ARTICLE III
PURPOSE
Section 3.1 Purpose and Business.
The purpose and nature of the business to be conducted by the Partnership
shall be to (a) serve as a limited partner in the Operating Partnership and, in
connection therewith, to exercise all the rights and powers conferred upon the
Partnership as a limited partner in the Operating Partnership pursuant to the
Operating Partnership Agreement or otherwise, (b) engage directly in, or to
enter into or form any corporation, partnership, joint venture, limited
liability company or other arrangement to engage indirectly in, any business
activity that the Operating Partnership is permitted to engage in by the
Operating Partnership Agreement and, in connection therewith, to exercise all
of the rights and powers conferred upon the Partnership pursuant to the
agreements relating to such business activity, (c) engage directly in, or to
enter into or form any corporation, partnership, joint venture, limited
C-25
<PAGE>
liability company or other arrangement to engage indirectly in, any business
activity that is approved by the General Partner and which lawfully may be
conducted by a limited partnership organized pursuant to the Delaware Act and,
in connection therewith, to exercise all of the rights and powers conferred
upon the Partnership pursuant to the agreements relating to such business
activity, and (d) do anything necessary or appropriate to the foregoing,
including the making of capital contributions or loans to the Operating
Partnership. The General Partner has no obligation or duty to the Partnership,
the Limited Partners, or the Assignees to propose or approve, and in its sole
discretion may decline to propose or approve, the conduct by the Partnership of
any business.
Section 3.2 Powers.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in
Section 3.1 and for the protection and benefit of the Partnership.
ARTICLE IV
CONTRIBUTIONS AND UNITS
Section 4.1 Organization Contributions and Return.
In connection with the formation of the Partnership under the Delaware Act,
the Initial General Partner made an initial Capital Contribution to the
Partnership []in the amount of $10 for an interest in the Partnership and has
been[/] and was admitted as the general partner of the Partnership, and the
Organizational Limited Partner made an initial Capital Contribution to the
Partnership []in the amount of $990 for an interest in the Partnership and has
been[/] and was admitted as a limited partner of the Partnership.
[]As of the Closing Date, after giving effect to the transactions contemplated
by Sections 4.2 and 4.3[/] Section 4.2 Contributions by Initial Limited
Partners.
On the Initial Closing Date, the Initial Underwriters contributed cash to the
Partnership in exchange for 2,600,000 Common Units. On the Initial Overallotment
Closing Date, the Initial Underwriters contributed cash to the Partnership in
exchange for 275,000 Common Units. On the Initial Closing Date, the Initial
General Partner, Silgas, Inc. and Silgas of Illinois, Inc. contributed their
interests in the Operating Partnership to the Partnership in exchange for
2,396,078 Old Subordinated Units. Immediately after these contributions, the
interest of the Organizational Limited Partner []shall be terminated; the
initial Capital Contributions of each partner shall be refunded;[/] was
terminated and the Organizational Limited Partner []shall cease[/] ceased to be
a Limited Partner []of the Partnership. Ninety-nine percent of any interest or
other profit that may have resulted from the investment or other use of such
initial Capital Contributions shall be allocated and distributed to the
Organizational Limited Partner, and the balance thereof shall be allocated and
distributed to the General Partner.[/].
C-26
<PAGE>
[]Section 4.2[/] Section 4.3 Contributions at the Effective Time; General
Partner Contributions.
(a) []On[/] At the []Closing Date[/] Effective Time and pursuant to the
Conveyance and Contribution Agreement Agreements, the General Partner
contributed shares of Petro Class A Common Stock and shares
of Petro Class C Common Stock to the Partnership in exchange for 278,985
General Partner Units representing a 1.99% General Partner Interest and
shares of Petro Class A Common Stock and shares of Petro Class C
Common Stock to the Operating Partnership in exchange for a 0.01% General
Partner Interest in the Operating Partnership. At the Effective Time, pursuant
to the Merger and related transactions, Senior Subordinated Units,
Junior Subordinated Units and Common Units will be issued
to former stockholders of Petro and the outstanding Old Subordinated Units were
cancelled.
(b) Upon the making of any Capital Contribution to the Partnership by any
Person, the General Partner, in its sole discretion, may []Silgas, Inc. and
Silgas of Illinois, Inc. shall contribute to the Partnership, as a Capital
Contribution, a limited partner interest in the Operating Partnership in
exchange for 2,220,444, 175,633 and one Subordinated Units, respectively. The
limited partner interest in the Operating Partnership contributed by the
General Partner, Silgas, Inc. and Silgas of Illinois, Inc. will represent a
98.9899% Percentage Interest (as defined in the Operating Partnership
Agreement) in the Operating Partnership.[/]
[](b) To enhance the Partnership's ability to pay the Minimum Quarterly
Distribution on the Common Units, the General Partner shall be obligated to
contribute up to $6.0 million in additional capital to the Partnership (the
"Additional Capital Contribution Obligation"), if, and to the extent that, the
amount of Available Cash constituting Operating Surplus (without giving effect
to any such additional contribution) with respect to any quarter is less than
the amount necessary to distribute the Minimum Quarterly Distribution on all
outstanding Common Units for such quarter. If (i) distributions of Available
Cash from Operating Surplus (without giving effect to any such additional
contribution) with respect to any quarter equaled or exceeded the Minimum
Quarterly Distributions on all of the then outstanding Common Units and (ii)
the Adjusted Operating Surplus generated during that quarter equaled or
exceeded 150% of the sum of the Minimum Quarterly Distribution on all of the
then outstanding Common Units (the "Reduction Threshold"), the Additional
Capital Contribution Obligation will be reduced by $1.5 million. To the extent
that the Adjusted Operating Surplus generated during a quarter exceeds (or is
less than) the Reduction Threshold applicable to such quarter, the amount of
such excess (or deficit) shall be carried forward on a cumulative basis and
included in determining the Adjusted Operating Surplus in succeeding quarters.
If the Partnership is liquidated or the General Partner either (i) is removed
as General Partner of the Partnership other than for Cause or (ii) withdraws as
General Partner of the Partnership not in violation of this Partnership
Agreement, the Additional Capital Contribution Obligation will terminate.[/]
[](c) Upon the making of any Capital Contribution to the Partnership by any
Person, the General Partner shall be required to[/] make an additional Capital
Contribution []in an amount equal to 1.01% of the Net Agreed Value of[/] only to
the extent necessary such that after taking into account the additional Capital
Contribution made by such Person ; []provided that the General Partner shall be
obligated to make a Capital Contribution pursuant to this Section 4.2(c) only to
the extent necessary such that after taking into account the additional Capital
Contribution made by such Person[/] and the
C-27
<PAGE>
General Partner pursuant to this Section []4.2(c) and any Capital Contribution
made by the General Partner pursuant to Section 4.2(b),[/] 4.2(b) the General
Partner will have a Capital Account equal to at least 1% 1.99% of the total of
all Capital Accounts.
[]Section 4.3 Contributions by Initial Limited Partners.[/]
[]On the Closing Date, subject to completion of the Capital Contributions
referred to in Section 4.2, each Underwriter shall contribute to the
Partnership cash in an amount equal to the Issue Price per Common Unit,
multiplied by the number of Common Units specified in the Underwriting
Agreement to be purchased by such Underwriter at the "First Closing Date," as
such term is defined in the Underwriting Agreement. In exchange for such
Capital Contributions by the Underwriters, the Partnership shall issue Common
Units to each Underwriter on whose behalf such Capital Contribution is made in
an amount equal to the quotient obtained by dividing (i) the cash contribution
to the Partnership by or on behalf of such Underwriter by (ii) the Issue Price
per Common Unit.[/]
Section 4.4 Issuances of Additional Partnership Securities.
(a) Subject to Section 4.5, the General Partner is authorized to cause the
Partnership to issue additional Partnership Securities for any Partnership
purpose at any time and from time to time to such Persons for such
consideration and on such terms and conditions as shall be established by the
General Partner in its sole discretion, all without the approval of any Limited
Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 4.4(a) may be issued in one or more classes, or
one or more series of any such classes, with such designations, preferences,
rights, powers and duties (which may be senior to existing classes and series
of Partnership Securities), as shall be fixed by the General Partner in the
exercise of its sole discretion, including (i) the right to share Partnership
profits and losses or items thereof; (ii) the right to share in Partnership
distributions; (iii) the rights upon dissolution and liquidation of the
Partnership; (iv) whether, and the terms and conditions upon which, the
Partnership may redeem the Partnership Security; (v) whether such Partnership
Security is issued with the privilege of conversion and, if so, the terms and
conditions of such conversion; (vi) the terms and conditions upon which each
Partnership Security will be issued, evidenced by certificates and assigned or
transferred; and (vii) the right, if any, of each such Partnership Security to
vote on Partnership matters, including matters relating to the relative rights,
preferences and privileges of such Partnership Security.
(c) The General Partner is hereby authorized and directed to take all actions
that it deems necessary or appropriate in connection with each issuance of
Partnership Securities pursuant to this Section 4.4 and to amend this Agreement
in any manner that it deems necessary or appropriate to provide for each such
issuance, to admit Additional Limited Partners in connection therewith and to
specify the relative rights, powers and duties of the holders of the Units or
other Partnership Securities being so issued. The General Partner shall do all
things necessary to comply with the Delaware Act and is authorized and directed
to do all things it deems to be necessary or advisable in connection with any
future issuance of Partnership Securities, including compliance with any
statute,
C-28
<PAGE>
rule, regulation or guideline of any federal, state or other governmental
agency or any National Securities Exchange on which the Units or other
Partnership Securities are listed for trading.
Section 4.5 Limitations on Issuance of Additional Partnership Securities.
The issuance of Partnership Securities pursuant to Section 4.4 shall be
subject to the following restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue an
aggregate of more than []1,300,000[/] 2,500,000 additional Parity Units without
the prior approval of holders of at least a majority of the Outstanding Common
Units (excluding Common Units held by the General Partner and its Affiliates),
except as provided in Sections 4.5(b) and 4.5(c). In applying this limitation,
there shall be excluded Common Units issued (i) in []connection with the
exercise of the Overallotment[/] Option the Equity Offering, (ii) in accordance
with Section 4.5(b) and 4.5(c) and (iii) in connection with the []conversion[/]
issuance of Senior Subordinated Units or Class B Common Units pursuant to
Section 4.6.
(b) 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 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, if acquired by the Partnership as of the date
that is one year prior to the first day of the Quarter in which such
Acquisition is to be consummated or such Capital Improvement is to be
completed, would have resulted, on a pro forma basis, in an increase in
(i) 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
(ii) the actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all Outstanding Units) (excluding
Adjusted Operating Surplus attributable to the Acquisition or Capital
Improvement) with respect to each of such four Quarters.
The amount in clause (i) shall be determined on a pro forma basis assuming
that (A) all of the Parity Units to be issued in connection with or within 365
days of such Acquisition or Capital Improvement had been issued and
outstanding, (B) all indebtedness for borrowed money to be incurred or assumed
in connection with such Acquisition or Capital Improvement (other than any such
indebtedness that is to be repaid with the proceeds of such offering) had been
incurred or assumed, in each case as of the commencement of such four-Quarter
period, (C) the personnel expenses that would have been incurred by the
Partnership in the operation of the acquired assets are the personnel expenses
for employees to be retained by the Partnership in the operation of the
acquired assets, and (D) the non-personnel costs and expenses are computed on
the same basis as those incurred by the Partnership in the operation of the
Partnership's business at similarly situated Partnership facilities.
(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.
C-29
<PAGE>
(d) During the Subordination Period, the Partnership shall not issue
additional Partnership Securities having rights to distributions or in
liquidation ranking prior or senior to the Common Units, without the prior
approval of []a Unit Majority.[/] at least a majority of the Outstanding Common
Units (excluding Common Units held by the General Partner and its Affiliates).
(e)(e)During the Subordination Period, the Partnership shall not issue
additional Partnership Securities that would reduce the percentage of
distributions allocable to all Units under Sections 5.4(a)(vi)(A),
5.4(a)(vii)(A) or 5.4(a)(viii)(A), and Sections 5.4(b)(iii)(A), 5.4(b)(iv)(A)
or 5.4(b)(v)(A), without the prior approval of holders of at least a majority
of the Outstanding Common Units (excluding Common Units held by the General
Partner and its Affiliates).
(f) No fractional Units shall be issued by the Partnership.
Section 4.6 []Conversion[/] of Special Issuance of Senior Subordinated Units
and Conversion of Senior Subordinated Units and Junior Subordinated
Units .
(a) For each full non-overlapping four-Quarter period ending on or after the
first anniversary of the Effective Time, but prior to the fifth anniversary of
the Effective Time, in which the dollar amount of Petro Adjusted Operating
Surplus per Petro Unit equals or exceeds $2.90, the Partnership will issue (i)
during the Subordination Period, 303,000 Senior Subordinated Units to the
holders of the Senior Subordinated Units, Junior Subordinated Units and the
General Partner Units on the Record Date in respect of the distribution for the
final Quarter of such non-overlapping four Quarter period, Pro Rata, and (ii)
after the Subordination Period, 303,000 Class B Common Units to the holders of
the Class B Common Units and the General Partner Units on the Record Date in
respect of the distribution for the final Quarter of such non-overlapping four-
Quarter period, Pro Rata; provided, that the Partnership may not issue more
than 909,000 Senior Subordinated Units and Class B Common Units in the
aggregate pursuant to this Section 4.6; and provided, further that the
Partnership may not issue more than 303,000 Senior Subordinated Units and Class
B []A total of 599,020 Subordinated Units will convert into Common Units on the
first day after the Record Date for distribution in respect of any Quarter
ending on or after March 31, 1999, and an additional 599,020 Subordinated Units
will convert into Common Units on the first day after the Record Date for
distributions in respect of any Quarter ending on or after March 31, 2000, in
respect of which[/]
[](i) distributions under Section 5.4 in respect of all Outstanding Common
Units and Subordinated Units equals or exceeds the sum of the Minimum
Quarterly Distribution (as prorated for the actual length of the period
from the Closing Date through March 31, 1996) 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 (as prorated for the
actual length of the period from the Closing Date through March 31, 1996)
on all of the Outstanding Common Units and Subordinated Units, plus related
distributions on the general partner interest, during such periods; and[/]
[](iii) the Cumulative Common Unit Arrearage on all of the Common Units is
zero.[/]
C-30
<PAGE>
[]In the event less than all of the Outstanding Subordinated Units shall
convert into[/] Common Units pursuant to this Section 4.6 [](a) at a time when
there shall be more than one holder of Subordinated Units, then, unless all of
the holders of Subordinated Units shall agree to a different allocation, the
Subordinated Units that are to be converted into Common Units shall be allocated
among the holders of Subordinated Units pro rata in respect of the number of
Subordinated Units held by each such holder[/]. within any 365-day period.
[](b) The remaining Subordinated Units shall convert into Common Units[/]
(b) The Partnership shall not issue any fractional Senior Subordinated Units or
Class B Common Units. Each holder who would otherwise be entitled to a
fractional Senior Subordinated Unit or Class B Common Unit shall receive an
amount in cash determined by multiplying such fraction by the Current Market
Price of a Senior Subordinated Unit or a Class B Common Unit, as the case may
be, as of the date three days prior to the date on which Senior Subordinated
Units or Class B Common Units, as the case may be, are issued pursuant to this
Section 4.6.
(c) Each Senior Subordinated Unit and Junior Subordinated Unit shall convert
into one Class B Common Unit on the first day following the Record Date for
distributions in respect of the final quarter Quarter of the Subordination
Period.
[](c) On the date a Subordination Unit is converted, it shall possess all the
rights and obligations of Common Units. Prior to such time, a Subordinated Unit
shall have all of the rights and obligations of a Common Unit, except with
respect to the right to vote on or approve matters requiring the vote or
approval of a percentage of the holders of Outstanding Common Units and the
right to participate in allocations of income, gain, loss and deductions and
distributions made with respect to Common Units.[/]
Section 4.7 Limited Preemptive Rights.
No Person shall have any preemptive, preferential or other similar right with
respect to the issuance of any Partnership Security, whether unissued, held in
the treasury or hereafter created, except that the General Partner shall have
the right, which it may from time to time assign in whole or in part to any of
its Affiliates, to purchase Partnership Securities from the Partnership
whenever, and on the same terms that, the Partnership issues Partnership
Securities to Persons other than the General Partner and its Affiliates, to the
extent necessary to maintain the Percentage Interests of the General Partner
and its Affiliates equal to that which existed immediately prior to the
issuance of such Partnership Securities.
Section 4.8 Splits and Combinations.
(a) Subject to Sections []4.8(d)[/] 4.9(d), 5.6 and 5.8 (dealing with
adjustments of distribution levels), the General Partner may make a pro rata
distribution of Partnership Securities to all Record Holders or may effect a
subdivision or combination of Partnership Securities so long as, after any such
event, each Partner shall have the same Percentage Interest in the Partnership
as before such event, and any amounts calculated on a per Unit basis (including
the number of Class B Common Units issuable upon conversion of the Senior
Subordinated Units and Junior Subordinated Units and the number of additional
Parity Units that may be issued pursuant to Section 4.5 without a Unitholder
vote) are proportionately adjusted retroactive to the beginning of the
Partnership.
C-31
<PAGE>
(b) Whenever such a distribution, subdivision or combination of Partnership
Securities is declared, the General Partner shall select a Record Date as of
which the distribution, subdivision or combination shall be effective and shall
send notice thereof at least 20 days prior to such Record Date to each Record
Holder as of the date not less than 10 days prior to the date of such notice.
The General Partner also may cause a firm of independent public accountants
selected by it to calculate the number of Units to be held by each Record
Holder after giving effect to such distribution, subdivision or combination.
The General Partner shall be entitled to rely on any certificate provided by
such firm as conclusive evidence of the accuracy of such calculation.
(c) Promptly following any such distribution, subdivision or combination, the
General Partner may cause Certificates to be issued to the Record Holders of
Units as of the applicable Record Date representing the new number of Units
held by such Record Holders, or the General Partner may adopt such other
procedures as it may deem appropriate to reflect such changes. If any such
combination results in a smaller total number of Units Outstanding, the General
Partner shall require, as a condition to the delivery to a Record Holder of
such new Certificate, the surrender of any Certificate held by such Record
Holder immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions this Section 4.8(d), each fractional Unit shall be rounded to
the nearest whole Unit (and a 0.5 Unit shall be rounded to the next higher
Unit).
Section 4.9 Capital Accounts.
(a) The Partnership shall maintain for each Partner (or a beneficial owner of
[]Units[/] Partnership Interests held by a nominee in any case in which the
nominee has furnished the identity of such owner to the Partnership in
accordance with Section 6031(c) of the Code or any other method acceptable to
the General Partner in its sole discretion) owning a Partnership Interest a
separate Capital Account with respect to such Partnership Interest in accordance
with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital
Account shall be increased by (i) the amount of all Capital Contributions made
to the Partnership with respect to such Partnership Interest pursuant to this
Agreement and (ii) all items of Partnership income and gain (including, without
limitation, income and gain exempt from tax) computed in accordance with Section
4.9(b) and allocated with respect to such Partnership Interest pursuant to
Section 5.1, and decreased by (x) the amount of cash or Net Agreed Value of all
actual and deemed distributions of cash or property made with respect to such
Partnership Interest pursuant to this Agreement and (y) all items of Partnership
deduction and loss computed in accordance with Section 4.9(b) and allocated with
respect to such Partnership Interest pursuant to Section 5.1.
(b) For purposes of computing the amount of any item of income, gain, loss or
deduction to be reflected in the Partners' Capital Accounts, the determination,
recognition and classification of any such item shall be the same as its
determination, recognition and classification for federal income tax purposes
(including, without limitation, any method of depreciation, cost recovery or
amortization used for that purpose), provided, that:
(i) Solely for purposes of this Section 4.9, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Operating Partnership
Agreement) of all property owned by the Operating Partnership.
C-32
<PAGE>
(ii) All fees and other expenses incurred by the Partnership to promote
the sale of (or to sell) a Partnership Interest that can neither be
deducted nor amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item of deduction
at the time such fees and other expenses are incurred and shall be
allocated among the Partners pursuant to Section 5.1.
(iii) Except as otherwise provided in Treasury Regulation Section 1.704-
1(b)(2)(iv)(m), the computation of all items of income, gain, loss and
deduction shall be made without regard to any election under Section 754 of
the Code which may be made by the Partnership and, as to those items
described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or
are neither currently deductible nor capitalized for federal income tax
purposes.
(iv) Any income, gain or loss attributable to the taxable disposition of
any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
4.9(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for
such depreciation, cost recovery or amortization attributable to such
property shall be determined (A) as if the adjusted basis of such property
were equal to the Carrying Value of such property immediately following
such adjustment and (B) using a rate of depreciation, cost recovery or
amortization derived from the same method and useful life (or, if
applicable, the remaining useful life) as is applied for federal income tax
purposes; provided, however, that, if the asset has a zero adjusted basis
for federal income tax purposes, depreciation, cost recovery or
amortization deductions shall be determined using any reasonable method
that the General Partner may adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
5.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
(c)(i) Except as otherwise provided in Section 4.9(c)(ii)-(v), a transferee
of a Partnership Interest shall succeed to a pro rata portion of the Capital
Account of the transferor relating to the Partnership Interest so transferred;
[]provided, however, that, if the transfer causes a termination of the
Partnership under Section 708(b)(1)(B) of the Code, the Partnership's
properties shall be deemed to have been distributed in liquidation of the
Partnership to the Partners (including any transferee of a Partnership Interest
that is a party to the transfer causing such termination).[/]
(ii) If and when a Senior Subordinated Unit is issued pursuant to Section
[]14.4 and recontributed by such Partners in reconstitution of the Partnership.
Any such deemed distribution shall be treated as[/]
C-33
<PAGE>
[]an actual distribution for purposes of this Section 4.9. In such event, the
Carrying Values of the Partnership properties shall be adjusted immediately
prior to such deemed distribution[/] 4.6 with respect to one or more Senior
Subordinated Units, the Capital Accounts associated with the existing Senior
Subordinated Units shall be reallocated as required to make the Capital Account
associated with each Senior Subordinated Unit be the same.
(iii) If and when a Class B Common Unit is issued pursuant to Section
4.9(d)(ii) and such []Carrying Values shall then constitute the Agreed Values of
such properties upon such deemed contribution to the reconstituted Partnership.
The Capital Accounts of such reconstituted Partnership shall be maintained in
accordance with the principles of this Section 4.9.[/] 4.6 with respect to one
or more Class B Common Units, the Capital Accounts associated with the existing
Class B Common Units shall be reallocated as required to make the Capital
Account associated with each Class B Common Unit be the same.
[](ii) Immediately prior to the conversion of a Subordinated Unit into a
Common Unit (iv) If and when a Senior Subordinated Unit or a Class B Common Unit
is issued pursuant to Section 4.6 or the sale, exchange or other disposition of
a Subordinated Unit by a holder thereof, the Capital Account maintained for such
Person with respect to its Subordinated Units will (A) first, be allocated to
the Subordinated Units to be converted or transferred, as the case may be, in an
amount equal to the product of (x) the number of such Subordinated Units to be
converted or transferred, as the case may be, and (y)[/] with respect to one or
more Junior Subordinated Units or General Partner Units, the Capital Accounts
associated with the existing Units shall be reallocated to the new Unit until
the Capital Account of the new Unit is the same as all other Units of the same
class or until the Capital Account associated with the existing Units is reduced
to zero.
(v) If at the time of conversion of a Junior Subordinated Unit, the Per Unit
Capital Amount []for a Common Unit, and (B) second, any remaining balance in
such Capital Account will be retained by the transferor, regardless of whether
it has retained any Subordinated Units. Following any such allocation, the
transferor's Capital Account, if any, maintained with respect to the retained[/]
attributable to a Junior Subordinated Unit exceeds the existing Per Unit Capital
Amount of Senior Subordinated Units, []if any, will have a balance equal to the
amount allocated under clause (B) hereinabove, and the transferee's Capital
Account established with respect to the transferred Subordinated Units will have
a balance equal to the amount allocated under clause (A) hereinabove.[/] the
amount of excess shall be reallocated to the Capital Accounts attributable to
the General Partner Units through contribution of such excess to the General
Partner.
(d) (i) Consistent with the provisions of Treasury Regulation Section 1.704-
1(b)(2)(iv)(f), on an issuance of additional Units for cash or Contributed
Property or the conversion of the General Partner's []Partnership[/] Combined
Interest to Common Units pursuant to Section 13.3(b), the Capital Account of
all Partners and the Carrying Value of each Partnership property immediately
prior to such issuance shall be adjusted upward or downward to reflect any
Unrealized Gain or Unrealized Loss attributable to such Partnership property,
as if such Unrealized Gain or Unrealized Loss had been recognized on an actual
sale of each such property immediately prior to such issuance and had been
allocated to the Partners at such time pursuant to Section 5.1(c). In
determining such Unrealized Gain or Unrealized Loss, the aggregate cash amount
and fair market value of all Partnership assets (including, without limitation,
cash or cash equivalents) immediately prior to the issuance of
C-34
<PAGE>
additional Units shall be determined by the General Partner using such
reasonable method of valuation as it may adopt; provided, however, the General
Partner, in arriving at such valuation, must take fully into account the fair
market value of the Partnership Interests of all Partners at such time. The
General Partner shall allocate such aggregate value among the assets of the
Partnership (in such manner as it determines in its sole discretion to be
reasonable) to arrive at a fair market value for individual properties.
(ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
immediately prior to any actual or deemed distribution to a Partner of any
Partnership property (other than a distribution of cash that is not in
redemption or retirement of a Partnership Interest), the Capital Accounts of
all Partners and the Carrying Value of all Partnership property shall be
adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, as if such Unrealized Gain or
Unrealized Loss had been recognized in a sale of such property immediately
prior to such distribution for an amount equal to its fair market value, and
had been allocated to the Partners, at such time, pursuant to Section 5.1(c).
Any Unrealized Gain or Unrealized Loss attributable to such property shall be
allocated in the same manner as Net Termination Gain or Net Termination Loss
pursuant to Section 5.1(c); provided, however, that, in making any such
allocation, Net Termination Gain or Net Termination Loss actually realized
shall be allocated first. In determining such Unrealized Gain or Unrealized
Loss the aggregate cash amount and fair market value of all Partnership assets
(including, without limitation, cash or cash equivalents) immediately prior to
a distribution shall (A) in the case of an actual distribution which is not
made pursuant to Section 13.3 or 13.4 or []in the case of a deemed distribution
occurring as a result of a termination of the Partnership pursuant to Section
708 of the Code, be determined and allocated in the same manner as that provided
in Section 4.9(d)(i) or[/] (B) in the case of a liquidating distribution
pursuant to Section 14.4, be determined and allocated by the Liquidator using
such reasonable method of valuation as it may adopt.
Section 4.10 Interest and Withdrawal.
No interest shall be paid by the Partnership on Capital Contributions, and no
Partner or Assignee shall be entitled to withdraw any part of its Capital
Contributions or otherwise to receive any distribution from the Partnership,
except as provided in Section 4.1 and Articles V, VII, XIII and XIV.
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
Section 5.1 Allocations for Capital Account Purposes.
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 4.9(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided hereinbelow.
C-35
<PAGE>
(a) Net Income. After giving effect to the special allocations set forth in
Section 5.1(d), Net Income for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Income for such
taxable period shall be allocated as follows:
(i) First, 100% to the General Partner until the aggregate Net Income
allocated to the General Partner pursuant to this Section 5.1(a)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
5.1(b)(iii) for all previous taxable years;
(ii) Second, 100% to the General Partner and the Limited Partners, in
accordance with their respective Percentage Interests, until the aggregate
Net Income allocated to such Partners pursuant to this Section 5.1(a)(ii)
for the current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to such Partners pursuant to Section
5.1(b)(ii) for all previous taxable years; and
(iii) Third, the balance, if any, 100% to the General Partner and the
Limited Partners in accordance with their respective Percentage Interests.
(b) Net Losses. After giving effect to the special allocations set forth in
Section 5.1(d), Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Losses for such
taxable period shall be allocated as follows:
(i) First, 100% to the General Partner and the Limited Partners, in
accordance with their respective Percentage Interests, until the aggregate
Net Losses allocated pursuant to this Section 5.1(b)(i) for the current
taxable year and all previous taxable years is equal to the aggregate Net
Income allocated to such Partners pursuant to Section 5.1(a)(iii) for all
previous taxable years;
(ii) Second, 100% to the General Partner and the Limited Partners in
accordance with their respective Percentage Interests; provided, that Net
Losses shall not be allocated pursuant to this Section 5.1(b)(ii) to the
extent that such allocation would cause any Limited Partner to have a
deficit balance in its Adjusted Capital Account at the end of such taxable
year (or increase any existing deficit balance in its Adjusted Capital
Account); and
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 5.1(d), all items of income gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same manner
as such Net Termination Gain or Net Termination Loss is allocated hereunder.
All allocations under this Section 5.1(c) shall be made after Capital Account
balances have been adjusted by all other allocations provided under this
Section 5.1 and after all distributions of Available Cash provided under
Section 5.4 have been made with respect to the taxable period ending on the
date of the Partnership's liquidation pursuant to Section 14.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 4.9(d)) from Termination Capital Transactions, such Net
Termination Gain shall be allocated among the General Partner and the
Limited Partners in the following manner (and the Capital Accounts of the
Partners shall be increased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
C-36
<PAGE>
[](A)[/] (1) First, to each Partner having a deficit balance in its
Capital Account, in the proportion that such deficit balance bears to the
total deficit balances in the Capital Accounts of all Partners, until each
such Partner has been allocated Net Termination Gain equal to any such
deficit balance in its Capital Account;
[](B)[/] (2) Second, 99% 100% to all []Limited[/] Partners holding
Common Units, in accordance with their relative Percentage Interests, []and
1% to the General Partner[/] until the Capital Account in respect of each
Common Unit then Outstanding is equal to the sum of (1) its Unrecovered
Initial Unit Price plus (2) the Minimum Quarterly Distribution for the
Quarter during which such Net Termination Gain is recognized, reduced by any
distribution pursuant to Sections 5.4(a)(i) or (b)(i) []with respect to such
Common Unit for such Quarter (the amount determined pursuant to this clause
(2) is hereinafter defined as the "Unpaid MQD") plus (3) any then existing
Cumulative Common Unit Arrearage with respect to a Common Unit sold by the
Underwriters on the Closing Date;[/];
[](C)[/] (3) Third, if such Termination Capital Transaction occurs (or
is deemed to occur) prior to the expiration of the Subordination Period,
[]99% to the Limited Partners holding Subordinated Units, in the proportion
that the total number of Subordinated Units held by each such Limited
Partner bears to the total number of Subordinated Units then Outstanding,
and 1% to the General Partner, in the amount which will increase[/] 100% to
all Partners holding Senior Subordinated Units, in accordance with their
relative Percentage Interests, until the Capital Account []of each such
Limited Partner maintained with respect to such Subordinated Units to that
amount which equals[/] in respect of each Senior Subordinated Unit then
Outstanding is equal to the sum of (1) the Unrecovered []Subordinated Unit
Capital attributable to such Subordinated Units, determined for the taxable
year (or portion thereof) to which this allocation of gain relates[/]
Initial Unit Price plus (2) the Minimum Quarterly Distribution for the
Quarter during which such Net Termination Gain is recognized, reduced by any
distribution pursuant to Section 5.4(a)(iii) with respect to such Senior
Subordinated Unit for such Quarter;
(4) Fourth, if such Termination Capital Transaction occurs (or is
deemed to occur) prior to the expiration of the Subordination Period,
100 % to all Partners holding Junior Subordinated Units and General
Partner Units, Pro Rata, in accordance with their relative Percentage
Interests, until the Capital Account in respect of each Junior
Subordinated Unit then Outstanding is equal to the sum of (1) the
Unrecovered Initial Unit Price plus (2) the Minimum Quarterly
Distribution for the Quarter during which such Net Termination Gain is
recognized, reduced by any distribution pursuant to Section 5.4(a)(iv)
with respect to such Junior Subordinated Unit for such Quarter;
[](D) Fourth, 99%[/] (5) Fifth, 100% to all []Limited[/] Partners, in
accordance with their relative Percentage Interests, []and 1% to the General
Partner[/] until the Capital Account in respect of each Common Unit then
Outstanding (if such Termination Capital Transaction occurs, or is deemed to
occur, prior to the expiration of the Subordination Period) or Class A
Common Unit then Outstanding (if such Termination Capital Transaction
occurs, or is deemed to occur, after the expiration of the Subordination
Period) is equal to the sum of (1) its Unrecovered Initial Unit Price, plus
(2) the Unpaid MQD, if any, for such Common Unit with respect to the Quarter
during which such Net Termination Gain is recognized,
C-37
<PAGE>
plus (3) any then existing Cumulative Common Unit Arrearage []with
respect to a Common Unit sold by the Underwriters on the Closing Date,[/]
plus (4) the excess of (aa) the First Target Distribution less the
Minimum Quarterly Distribution for each Quarter of the Partnership's
existence over (bb) the amount of any distributions of Operating
Surplus that was distributed pursuant to Sections 5.4(a)(v) or 5.4
(b)(i) (the sum of (1) plus (2) plus (3) plus (4) is hereinafter
defined as the "First Liquidation Target Amount");
[](E) Fifth, 85.8673%[/] (6) Sixth, 86.7% to all []Limited[/] Partners,
in accordance with their relative Percentage Interests, and []14.1327% to
the General Partner[/] 13.3% to the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units, Pro Rata (if such Termination
Capital Transaction occurs, or is deemed to occur, prior to the expiration
of the Subordination Period), or 13.3% to the Class B Common Units and
General Partner Units, Pro Rata (if such Termination Capital Transaction
occurs, or is deemed to occur, after the expiration of the Subordination
Period), until the Capital Account in respect of each Common Unit then
Outstanding (if such Termination Capital Transaction occurs, or is deemed to
occur, prior to the expiration of the Subordination Period) or Class A
Common Unit then Outstanding (if such Termination Capital Transaction
occurs, or is deemed to occur, after the expiration of the Subordination
Period) is equal to the sum of (1) the First Liquidation Target Amount, plus
(2) the excess of (aa) the Second Target Distribution less the First Target
Distribution for each Quarter of the Partnership's existence over (bb) the
amount of any distributions of Operating Surplus that was distributed
pursuant to Section [] 5.4(a)(v) or 5.4(b)(iv)[/] 5.4(a)(vi) or 5.4(b)(iii)
(the sum of (1) plus (2) is hereinafter defined as the "Second Liquidation
Target Amount");
[](F)Sixth, 75.7653%[/] (7) Seventh, 76.5% to all []Limited[/] Partners,
in accordance with their relative Percentage Interests, and []24.2347% to
the General Partner[/] 23.5% to the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units, Pro Rata (if such Termination
Capital Transaction occurs, or is deemed to occur, prior to the expiration
of the Subordination Period), or 23.5% to the Class B Common Units and
General Partner Units, Pro Rata (if such Termination Capital Transaction
occurs, or is deemed to occur, after the expiration of the Subordination
Period), until the Capital Account in respect of each Common Unit then
Outstanding (if such Termination Capital Transaction occurs, or is deemed to
occur, prior to the expiration of the Subordination Period) or Class A
Common Unit then Outstanding (if such Termination Capital Transaction
occurs, or is deemed to occur, after the expiration of the Subordination
Period) is equal to the sum of (1) the Second Liquidation Target Amount,
plus (2) the excess of (aa) the Third Target Distribution less the Second
Target Distribution for each Quarter of the Partnership's existence over
(bb) the amount of any distributions of Operating Surplus that was
distributed pursuant to Section 5.4(a)(vii) or []5.4(b)(v);[/] 5.4(b)(iv);
and
[](G)[/] (8) Finally, any remaining amount []50.5102%[/] 51% to all
[]Limited[/] Partners, in accordance with their relative Percentage
Interests, and []49.4898% to the[/] 49% to the Senior Subordinated Units,
Junior Subordinated Units and General Partner Units, Pro Rata (if such
Termination Capital Transaction occurs, or is deemed to occur, prior to the
expiration of the Subordination Period), or 49% to the Class B Common Units
and General Partner Units, Pro Rata (if such Termination Capital Transaction
occurs, or is deemed to occur, after the expiration of the Subordination
Period).
C-38
<PAGE>
(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 4.9(d)) from Termination Capital Transactions, such Net
Termination Loss shall be allocated to the Partners in the following
manner:
[](A) First, 100% to the General Partner to the extent the General
Partner has contributed additional capital to the Partnership pursuant
to its Additional Capital Contribution Obligation reduced by the amount
such Additional Capital Contribution Obligation has reduced the General
Partner's obligation pursuant to Section 4.2(c);[/]
[](B) Second[/],(1) First, if such Termination Capital Transaction
occurs (or is deemed to occur) prior to the conversion of the last
outstanding Junior Subordinated Unit, []99%[/] 100% to the Partners holding
Subordinated Units, in proportion that the total number of []Subordinated
Units held by each such Limited Partner bears to the total number of
Subordinated Units then Outstanding, and 1% to the General Partner[/],
Junior Subordinated Units and General Partner Units, Pro Rata, until the
Capital Account in respect of each Junior Subordinated Unit []then
Outstanding[/] has been reduced to zero;
(2) Second, if such Termination Capital Transaction occurs (or is
deemed to occur) prior to the conversion of the last outstanding Senior
Subordinated Unit, 100% to the Partners holding Senior Subordinated
Units, in accordance with their relative Percentage Interests, until
the Capital Account in respect of each Senior Subordinated Unit then
Outstanding has been reduced to zero;
(3) Third, 100% to all Partners holding Common Units, the Capital
Account balances attributable to which are in excess of the Capital
Account balances attributable to the remainder of the Common Units then
Outstanding, in accordance with their relative Percentage Interests,
until the Capital Accounts in respect of each Common Unit then
Outstanding are equal;
(4) Fourth, 100% to all [](C) Third, 99% to all Limited[/]Partners
holding Common Units, in accordance with their relative Percentage
Interests, []and 1% to the General Partner[/], until the Capital Account in
respect of each Common Unit then Outstanding has been reduced to zero;
and
[](D)[/] (5) Fifth, the balance, if any, 100% to the General Partner.
(d) Special Allocations. Notwithstanding any other provision of this Section
5.1, the following special allocations shall be made for such taxable period:
(i) Partnership Minimum Gain Chargeback. Notwithstanding any other
provision of this Section 5.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and 1.704-
2(j)(2)(i), or any successor provision. For purposes of this Section
5.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 5.1(d) with respect to such taxable period (other than an
allocation pursuant to Sections 5.1(d)(vi) and 5.1(d)(vii)). This Section
5.1(d)(i) is intended to comply with the Partnership Minimum Gain
chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall
be interpreted consistently therewith.
C-39
<PAGE>
(ii) Chargeback of Partner Nonrecourse Debt Minimum Gain. Notwithstanding
the other provisions of this Section 5.1 (other than Section 5.1(d)(i)),
except as provided in Treasury Regulation Section 1.704-2(i)(4), if there
is a net decrease in Partner Nonrecourse Debt Minimum Gain during any
Partnership taxable period, any Partner with a share of Partner Nonrecourse
Debt Minimum Gain at the beginning of such taxable period shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any
successor provisions. For purposes of this Section 5.1(d), each Partner's
Adjusted Capital Account balance shall be determined, and the allocation of
income or gain required hereunder shall be effected, prior to the
application of any other allocations pursuant to this Section 5.1(d), other
than Section 5.1(d)(i) and other than an allocation pursuant to Sections
5.1(d)(vi) and 5.1(d)(vii), with respect to such taxable period. This
Section 5.1(d)(ii) is intended to comply with the chargeback of items of
income and gain requirement in Treasury Regulation Section 1.704-2(i)(4)
and shall be interpreted consistently therewith.
(iii) Priority Allocations. If the amount of cash or the Net Agreed Value
of any property distributed (except cash or property distributed pursuant
to Section 14.4) to any Limited Partner with respect to a taxable year is
greater (on a per Unit basis) than the amount of cash or the Net Agreed
Value of property distributed to the other Limited Partners (on a per Unit
basis), then (1) each Limited Partner receiving such greater cash or
property distribution shall be allocated gross income in an amount equal to
the product of (aa) the amount by which the distribution (on a per Unit
basis) to such Limited Partner exceeds the distribution (on a per Unit
basis) to the Limited Partners receiving the smallest distribution and (bb)
the number of Units owned by the Limited Partner receiving the greater
distribution; and (2) the General Partner shall be allocated gross income
in an aggregate amount equal to 1/99 of the sum of the amounts allocated in
clause (1) above. All or any portion of the remaining items of Partnership
gross income or gain for the taxable period, if any, shall be allocated
100% to the General Partner until the aggregate amount of such items
allocated to the General Partner pursuant to this paragraph (iii) for the
current taxable period and all previous taxable periods is equal to the
cumulative amount of all Incentive Distributions made to the General
Partner from the Closing Date through the end of such taxable period.
(iv) Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-
1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership income
and gain shall be specifically allocated to such Partner in an amount and
manner sufficient to eliminate, to the extent required by the Treasury
Regulations promulgated under Section 704(b) of the Code, the deficit
balance, if any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible unless
such deficit balance is otherwise eliminated pursuant to Section 5.1(d)(i)
or (ii).
(v) Gross Income Allocations. In the event any Partner has a deficit
balance in its Capital Account at the end of any Partnership taxable period
in excess of the sum of (A) the amount such Partner is required to restore
pursuant to the provisions of this Agreement and (B) the amount such
Partner is deemed obligated to restore pursuant to Treasury Regulation
Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially
allocated items of Partnership gross income and gain in the amount of such
excess as quickly as possible; provided, that an
C-40
<PAGE>
allocation pursuant to this Section 5.1(d)(v) shall be made only if and to
the extent that such Partner would have a deficit balance in its Capital
Account as adjusted after all other allocations provided for in this
Section 5.1 have been tentatively made as if this Section 5.1(d)(v) were
not in this Agreement.
(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its
good faith discretion that the Partnership's Nonrecourse Deductions must be
allocated in a different ratio to satisfy the safe harbor requirements of
the Treasury Regulations promulgated under Section 704(b) of the Code, the
General Partner is authorized, upon notice to the Limited Partners, to
revise the prescribed ratio to the numerically closest ratio that does
satisfy such requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for
any taxable period shall be allocated 100% to the Partner that bears the
Economic Risk of Loss with respect to the Partner Nonrecourse Debt to which
such Partner Nonrecourse Deductions are attributable in accordance with
Treasury Regulation Section 1.704-2(i). If more than one Partner bears the
Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such
Partner Nonrecourse Deductions attributable thereto shall be allocated
between or among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the sum of (A) the amount of Partnership
Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be
allocated among the Partners in accordance with their respective Percentage
Interests.
(ix) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or
743(b) of the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis), and such item of
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required to
be adjusted pursuant to such Section of the Treasury regulations.
(x) Economic Uniformity. []At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, if any, shall be
allocated 100% to each Partner holding Subordinated Units in the proportion
of the number of Subordinated Units held by such Partner to the total
number of Subordinated Units then Outstanding, until each such Partner has
been allocated an amount of gross income or gain which increases the
Capital Account maintained with respect to such Subordinated Units to an
amount equal to the product of (A) the number of Subordinated Units held by
such Partner and (B) the Per Unit Capital Amount for a Common Unit. The
purpose of this allocation is to establish uniformity between the Capital
Accounts underlying Subordinated Units and the Capital Accounts underlying
Common Units held by Persons other than the General Partner and its
Affiliates immediately prior to the conversion of such Subordinated Units
into Common[/]
C-41
<PAGE>
[]Units. This allocation method for establishing such economic uniformity
will only be available to the General Partner if the method for allocating[/]
Upon the issuance of any Unit pursuant to Section 4.6 or upon the
conversion of any Unit into another class after application of Section
4.9(c)(iii), gross income shall be allocated to the holder of such Unit
until the Capital Account of such Unit is the same as the Capital Account
[]maintained with respect to the Subordinated Units between the transferred
and retained Subordinated Units pursuant to Section 4.9(c)(ii) does not
otherwise provide such economic uniformity to the Subordinated Units[/]. per
Unit of all other Units of the same class.
(xi) Curative Allocation.
[](A)[/] (1) Notwithstanding any other provision of this Section 5.1,
other than the Required Allocations, the Required Allocations shall be taken
into account in making the Agreed Allocations so that, to the extent
possible, the net amount of items of income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations and the
Agreed Allocations, together, shall be equal to the net amount of such items
that would have been allocated to each such Partner under the Agreed
Allocations had the Required Allocations and the related Curative Allocation
not otherwise been provided in this Section 5.1. Notwithstanding the
preceding sentence, Required Allocations relating to (1) Nonrecourse
Deductions shall not be taken into account except to the extent that there
has been a decrease in Partnership Minimum Gain and (2) Partner Nonrecourse
Deductions shall not be taken into account except to the extent that there
has been a decrease in Partner Nonrecourse Debt Minimum Gain. Allocations
pursuant to this Section 5.1(d)(xi)(A) shall only be made with respect to
Required Allocations to the extent the General Partner reasonably determines
that such allocations will otherwise be inconsistent with the economic
agreement among the Partners. Further, allocations pursuant to this Section
5.1(d)(xi)(A) shall be deferred with respect to allocations pursuant to
clauses (1) and (2) hereof to the extent the General Partner reasonably
determines that such allocations are likely to be offset by subsequent
Required Allocations.
[](B)[/] (2) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of Section
5.1(d)(xi)(A) in whatever order is most likely to minimize the economic
distortions that might otherwise result from the Required Allocations,
and (2) divide all allocations pursuant to Section 5.1(d)(xi)(A) among
the Partners in a manner that is likely to minimize such economic
distortions.
(xii) Corrective Allocations. In the event of any allocation of
Additional Book Basis Derivative Items or any Book-Down Event, the
following rules shall apply:
[](A)[/] (1) In the case of any allocation of Additional Book Basis
Derivative Items (other than an allocation of Unrealized Gain or
Unrealized Loss under Section 4.9(d) hereof), the General Partner shall
allocate additional items of gross income and gain to the Limited
Partners or additional items of deduction and loss to the General
Partner to the extent that the Additional Book Basis Derivative Items
allocated to the Limited Partners exceeds their Share of those
Additional Book Basis Derivative Items. For this purpose, the Limited
Partners shall be treated as being allocated Additional Book Basis
Derivative Items to the extent that such Additional Book Basis
Derivative Items have reduced the amount of income that would otherwise
have been allocated to the Limited Partners under the
C-42
<PAGE>
Partnership Agreement (e.g., Additional Book Basis Derivative Items
taken into account in computing cost of goods sold would reduce the
amount of book income otherwise available for allocation among the
Partners). Any allocation made pursuant to this Section 5.1(d)(xii)(A)
shall be made after all of the other Agreed Allocations have been made
as if this Section 5.1(d)(xii) were not in the Partnership Agreement
and, to the extent necessary, shall require the reallocation of items
that have been allocated pursuant to such other Agreed Allocations.
[](B)[/] (2) In the case of any negative adjustments to the Capital
Accounts of the Partners resulting from a Book-Down Event, such
negative adjustment (1) shall first be allocated between the General
Partner and the Limited Partners in proportion to and to the extent of
their Remaining Net Positive Adjustments and (2) any remaining negative
adjustment shall be allocated pursuant to Section 5.1(c) hereof. The
aggregate amount so allocated to the Limited Partners in respect of
each class or series of Units shall be allocated among them ratably on
a per Unit basis.
[](C)[/] (3) In making the allocations required under this Section
5.1(d)(xii), the General Partner, in its sole discretion, may apply
whatever conventions or other methodology it deems reasonable to
satisfy the purpose of this Section 5.1(d)(xii).
(xiii) []First Year Allocation. Net Income or Net Loss[/] Depreciation.
Depreciation deductions of the Partnership for []the period beginning on the
Closing Date and ending on the last day of the taxable year of the
Partnership that includes the Closing Date shall be allocated 100% to the
General Partner. For the immediately succeeding taxable year of the
Partnership, items of income or gain (if the allocation in the prior year
was an allocation of Net Income) or items of loss and deduction (if the
allocation in the prior year was an allocation of Net Loss) shall be
allocated 100% to the Limited Partners,[/] each period shall be allocated
among the Partners in accordance with []their Percentage Interests, in an
amount equal to 99% of the Net Income or Net Loss allocated to the General
Partner in the prior taxable year.[/] relative Capital Account balances as
they existed immediately after the most recent book adjustments pursuant to
Section 4.9(d) of this Agreement that occurred prior to such period and
without regard to allocations made after such adjustment.
Section 5.2 Allocations for Tax Purposes.
(a) Except as otherwise provided herein, for federal income tax purposes,
each item of income, gain, loss and deduction shall be allocated among the
Partners in the same manner as its correlative item of "book" income, gain,
loss or deduction is allocated pursuant to Section 5.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) [](A)[/] (1) In the case of a Contributed Property, such items
attributable thereto shall be allocated among the Partners in the manner
provided under Section 704(c) of the Code that takes into account the
variation between the Agreed Value of such property and its adjusted basis at
the time of contribution; and (B)(2) any item of Residual Gain or Residual
Loss attributable to a Contributed Property shall be allocated among the
Partners in the same manner as its correlative item of "book" gain or loss is
allocated pursuant to Section 5.1.
C-43
<PAGE>
(ii) [](A)[/] (1) In the case of an Adjusted Property, such items shall (1)
first, be allocated among the Partners in a manner consistent with the
principles of Section 704(c) of the Code to take into account the
Unrealized Gain or Unrealized Loss attributable to such property and the
allocations thereof pursuant to Section 4.9(d)(i) or (ii), and (2) second,
in the event such property was originally a Contributed Property, be
allocated among the Partners in a manner consistent with Section
5.2(b)(i)(A); and [](B)[/] (2) any item of Residual Gain or Residual Loss
attributable to an Adjusted Property shall be allocated among the Partners
in the same manner as its correlative item of "book" gain or loss is
allocated pursuant to Section 5.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the preservation
of uniformity of the Units (or any class or classes thereof), the General
Partner shall have sole discretion to (i) adopt such conventions as it deems
appropriate in determining the amount of depreciation, amortization and cost
recovery deductions; (ii) make special allocations for federal income tax
purposes of income (including, without limitation, gross income) or deductions;
and (iii) amend the provisions of this Agreement as appropriate (x) to reflect
the proposal or promulgation of Treasury regulations under Section 704(b) or
Section 704(c) of the Code or (y) otherwise to preserve or achieve uniformity
of the Units (or any class or classes thereof). The General Partner may adopt
such conventions, make such allocations and make such amendments to this
Agreement as provided in this Section 5.2(c) only if such conventions,
allocations or amendments would not have a material adverse effect on the
Partners, the holders of any class or classes of Units issued and Outstanding
or the Partnership, and if such allocations are consistent with the principles
of Section 704 of the Code.
(d) The General Partner in its sole discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the extent
of the unamortized Book-Tax Disparity) using a predetermined rate derived from
the depreciation or amortization method and useful life applied to the
Partnership's common basis of such property, despite the inconsistency of such
approach with Treasury Regulation Section 1.167(c)-1(a)(6) and proposed
Treasury Regulation Section 1.197-2(g)(3). If the General Partner determines
that such reporting position cannot reasonably be taken, the General Partner
may adopt depreciation and amortization conventions under which all purchasers
acquiring Units in the same month would receive depreciation and amortization
deductions, based upon the same applicable rate as if they had purchased a
direct interest in the Partnership's property. If the General Partner chooses
not to utilize such aggregate method, the General Partner may use any other
reasonable depreciation and amortization conventions to preserve the uniformity
of the intrinsic tax characteristics of any Units that would not have a
material adverse effect on the Limited Partners or the Record Holders of any
class or classes of Units.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after
taking into account other required allocations of gain pursuant to this Section
5.2, be characterized as Recapture Income in the same proportions and to the
same extent as such Partners (or their predecessors in interest) have been
allocated any deductions directly or indirectly giving rise to the treatment of
such gains as Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof
C-44
<PAGE>
shall be determined without regard to any election under Section 754 of the
Code which may be made by the Partnership; provided, however, that such
allocations, once made, shall be adjusted as necessary or appropriate to take
into account those adjustments permitted or required by Sections 734 and 743 of
the Code.
(g) Each item of Partnership income, gain, loss and deduction attributable to
a transferred Partnership Interest []of the General Partner or to transferred
Units[/] shall, for federal income tax purposes, be determined on an annual
basis and prorated on a monthly basis and shall be allocated to the Partners as
of the opening of the New York Stock Exchange on the first Business Day of each
month; provided, however, that (i) if the []Underwriter's[/] Overallotment
Option is not exercised, such items for the period beginning on the Closing Date
and ending on the last day of the month in which the []Closing Date[/] Effective
Time occurs shall be allocated to Partners as of the opening of the New York
Stock Exchange on the first Business Day of the next succeeding month or (ii) if
the []Underwriters'[/] Overallotment Option is exercised, such items for the
period beginning on the Closing Date and ending on the last day of the month in
which the []Second Delivery Date (as defined in the Underwriting Agreement)[/]
closing of the Overallotment Option occurs shall be allocated to the Partners as
of the opening of the New York Stock Exchange on the first Business Day of the
next succeeding month; and provided, further, that gain or loss on a sale or
other disposition of any assets of the Partnership other than in the ordinary
course of business shall be allocated to the Partners as of the opening of the
New York Stock Exchange on the first Business Day of the month in which such
gain or loss is recognized for federal income tax purposes. The General Partner
may revise, alter or otherwise modify such methods of allocation as it
determines necessary, to the extent permitted or required by Section 706 of the
Code and the regulations or rulings promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article V shall instead be made to the beneficial owner of
Units held by a nominee in any case in which the nominee has furnished the
identity of such owner to the Partnership in accordance with Section 6031(c) of
the Code or any other method acceptable to the General Partner in its sole
discretion.
Section 5.3 Requirement and Characterization of Distributions.
(a) []Within[/] Subject to (b), (c) and (d) below, within 45 days following
the end of (i) the period beginning on the Initial Closing Date and ending on
March 31, 1996 and (ii) each Quarter commencing with the Quarter beginning on
April 1, 1996, an amount equal to 100% of Available Cash with respect to such
period or Quarter shall be distributed in accordance with this Article V by the
Partnership to the Partners, as of the Record Date selected by the General
Partner in its reasonable discretion; provided, however, that the distribution
of Available Cash to the holders of Senior Subordinated Units, Junior
Subordinated Units and General Partner Units shall commence with respect to the
Quarter beginning on April 1, 1999. All amounts of Available Cash distributed by
the Partnership on any date from any source shall be deemed to be Operating
Surplus until the sum of all amounts of Available Cash theretofore distributed
by the Partnership to Partners pursuant to Section 5.4 equals the Operating
Surplus from the Initial Closing Date through the close of the immediately
preceding Quarter. Any remaining amounts of Available Cash distributed by the
Partnership on such date shall, except as otherwise provided in Section 5.5, be
deemed to be from Capital Surplus.
C-45
<PAGE>
(b) A distribution of Available Cash may be made on the Senior Subordinated
Units, Junior Subordinated Units and General Partner Units with respect to the
time period beginning on the Effective Time and ending on June 30, 1999 in an
amount up to the Minimum Quarterly Distribution for such period to the extent
the sum of EBITDA, less interest, less taxes, and less Maintenance Capital
Expenditures consolidated (combined actual from October 1, 1998 until the
Effective Time) for Petro and the Partnership ("Adjusted Distributable Cash")
for the period beginning October 1, 1998 and ending on June 30, 1999 exceeds
the sum of
(i) $57,172,000, plus or minus
(ii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending December 31, 1998 exceeds
or is less than 10,544,000, plus or minus
(iii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending March 31, 1999 exceeds or
is less than 10,544,000, plus or minus
(iv) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending June 30, 1999 exceeds or
is less than 10,544,000.
(c) A distribution of Available Cash may be made on the Senior Subordinated
Units, Junior Subordinated Units and General Partner Units, with respect to the
time period beginning on July 1, 1999 and ending on September 30, 1999 in an
amount up to the Minimum Quarterly Distribution for such period to the extent
the Adjusted Distributable Cash for the period beginning on October 1, 1998 and
ending on September 30, 1999 exceeds the sum of
(i) $25,307,000, plus or minus
(ii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending December 31, 1998 exceeds
or is less than 10,544,000, plus or minus
(iii) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending March 31, 1999 exceeds or
is less than 10,544,000, plus or minus
(iv) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending June 30, 1999 exceeds or
is less than 10,544,000, plus or minus
(v) the product of (A) $0.60 and (B) the amount by which the number of
Common Units Outstanding on the Record Date for the distribution of
Available Cash with respect to the Quarter ending September 30, 1999
exceeds or is less than 10,544,000.
(d) Beginning with the distribution for the Quarter ending on December 31,
1999, no distributions will be made on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units, except for distributions from
Capital Surplus, unless the aggregate amount of distributions on all Units with
respect to all Quarters, beginning with the Quarter ending on December 31, 1999
shall be equal to or less than the total Operating Surplus generated by the
Partnership since October 1, 1999 (which does not include that portion of
Operating Surplus included in clause (a)(i) of the definition of Operating
Surplus).
C-46
<PAGE>
(e) Notwithstanding the definitions of Available Cash and Operating Surplus
contained herein, [](i) cash receipts of the Partnership from the capital
contributions pursuant to the Additional Capital Contribution Obligation shall
be deemed to be received, for purposes of determining Available Cash from
Operating Surplus, during the quarter in respect of which such capital
contributions are made, even if such capital contributions are received by the
Partnership after the last day of such quarter; and (ii)[/] disbursements
(including, without limitation, contributions to the Operating Partnership or
disbursements on behalf of the Operating Partnership) made or cash reserves
established, increased or reduced (including, without limitation, cash reserves
established, increased or reduced by the Operating Partnership) after the end
of any Quarter but on or before the date on which the Partnership makes its
distribution of Available Cash in respect of such Quarter pursuant to Section
5.3(a) shall be deemed to have been made, established, increased or reduced for
purposes of determining Available Cash and Operating Surplus, within such
Quarter if the General Partner so determines. Notwithstanding the foregoing, in
the event of the dissolution and liquidation of the Partnership, all proceeds
of such liquidation shall be applied and distributed in accordance with, and
subject to the terms and conditions of, Section 14.4.
(f) Nothing in this Section 5.3 prohibits the holders of the Senior
Subordinated Units, Junior Subordinated Units or General Partner Units from
receiving distributions from Capital Surplus in a partial liquidation during
the Subordination Period.
Section 5.4 Distributions of Operating Surplus.
(a) During Subordination Period. Available Cash with respect to any Quarter
within the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 5.3 or 5.5 shall, subject to Section 5.3 and
subject to Section 17-607 of the Delaware Act, be distributed as follows,
except as otherwise required by Section 4.4(b) in respect of additional
Partnership Securities issued pursuant thereto:
(i) First, []99% to the Limited Partners holding Common Units, in
accordance with their relative Percentage Interests, and 1% to the General
Partner[/] 100% to the Common Units, Pro Rata, until there has been
distributed in respect of each Common Unit then Outstanding an amount equal
to the Minimum Quarterly Distribution;
(ii) Second, []99% to the Limited Partners holding Common Units, in
accordance with their relative Percentage Interests, and 1% to the General
Partner[/] 100% to the Common Units, Pro Rata, until there has been
distributed in respect of each Common Unit then Outstanding an amount equal
to the Cumulative Common Unit Arrearage, if any, existing with respect to
such any prior Quarter;
(iii) Third, []99%[/] 100% to the []Limited Partners holding[/] Senior
Subordinated Units, []in accordance with their relative Percentage Interests,
and 1% to the General Partner[/] Pro Rata, until there has been distributed in
respect of each Senior Subordinated Unit then Outstanding an amount equal to
the Minimum Quarterly Distribution;
(iv) Fourth, []99% to all Limited Partners, in accordance with their
relative Percentage Interests, and 1% to the General Partner[/] 100% to the
Junior Subordinated Units and General Partner Units, Pro Rata, until there
has been distributed in respect of each Junior Subordinated Unit and
General Partner Unit then Outstanding an amount equal to the []excess of the
First Target Distribution over the[/] Minimum Quarterly Distribution;
C-47
<PAGE>
(v) Fifth, []85.8673% to all Limited Partners, in accordance with their
relative Percentage Interests, and 14.1327% to the General Partner[/] 100% to
all Units, Pro Rata, until there has been distributed in respect of each
Unit then Outstanding an amount equal to the excess of the []Second[/] First
Target Distribution over the []First Target[/] Minimum Quarterly Distribution;
(vi) Sixth, []75.7653% to all Limited Partners, in accordance with their
relative Percentage Interests, and 24.2347% to the General Partner[/] (A)
86.7% to all Units, Pro Rata, and (B) 13.3% to all Senior Subordinated
Units, Junior Subordinated Units and General Partner Units, Pro Rata, until
there has been distributed in respect of each Common Unit then Outstanding
an amount equal to the excess of the Second Target Distribution over the
First Target Distribution;
[](vii) Seventh, (A) 76.5% to all Units, Pro Rata, and (B) 23.5% to all
Senior Subordinated Units, Junior Subordinated Units and General Partner[/]
Units, Pro Rata, until there has been distributed in respect of each Common
Unit then Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution; and
(vii) Thereafter, 50.5102% to all Limited Partners, in accordance with
their relative Percentage Interests, and 49.4898% to the General Partner;
(viii) Thereafter, (A) 51% to all Units, Pro Rata, and (B) 49% to all
Senior Subordinated, Junior Subordinated and General Partner Units, Pro
Rata;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 5.6(a),
the distributions of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made in accordance with Section 5.4(a)(vii)
5.4(a)(viii).
(b) After Subordination Period. Available Cash with respect to any Quarter
after the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 5.3 or 5.5 shall, subject to Section 17-607 of the
Delaware Act, be distributed as follows, except as otherwise required by
Section 4.4(b) in respect of additional Partnership Securities issued pursuant
thereto:
(i) First, []99% to all Limited Partners, in accordance with their relative
Percentage Interests, and 1% to the General Partner[/] 100% to all Units, Pro
Rata, until there has been distributed in respect of each Unit then
Outstanding an amount equal to the Minimum Quarterly Distribution;
(ii) Second, []99% to all Limited Partners, in accordance with their
relative Percentage Interests, and 1% to the General Partner[/] 100% to all
Units, Pro Rata, until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the First Target
Distribution over the Minimum Quarterly Distribution;
(iii) Third, []85.8673% to all Limited Partners, in accordance with their
relative Percentage Interests, and 14.1327% to the General Partner[/] (A)
86.7% to all Units, Pro Rata, and (B) 13.3% to all Class B Common Units and
General Partner Units, Pro Rata, until there has been distributed in
respect of each Class A Common Unit then Outstanding an amount equal to the
excess of the Second Target Distribution over the First Target
Distribution;
(iv) Fourth, []75.7653% to all Limited Partners, in accordance with their
relative Percentage Interests, and 24.2347% to the General Partner[/] (A)
76.5% to all Units, Pro Rata, and (B) 23.5%
C-48
<PAGE>
to all Class B Common Units and General Partner Units, Pro Rata, until
there has been distributed in respect of each Class A Common Unit then
Outstanding an amount equal to the excess of the Third Target Distribution
over the Second Target Distribution; and
(v) Thereafter, []50.5102% to all Limited Partners, in accordance with
their relative Percentage Interests, and 49.4898% to the General Partner;[/]
(A) 51% to all Units, Pro Rata, and (B) 49% to all Class B Common Units and
General Partner Units, Pro Rata;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 5.6(a),
the distributions of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made in accordance with Section 5.4(b)(v).
Section 5.5 Distributions of Cash from Capital Surplus.
Available Cash that constitutes Capital Surplus shall, subject to Section 17-
607 of the Delaware Act, be distributed, unless the provisions of Section 5.3
require otherwise, []99% to all Limited Partners, in accordance with their
relative Percentage Interests, and 1% to the General Partner[/] 100% to all
Units, Pro Rata, until a hypothetical holder of a Common Unit acquired on the
Initial Closing Date has received with respect to such Common Unit, during the
period since the Initial Closing Date through such date, distributions of
Available Cash that are deemed to be Capital Surplus in an aggregate amount
equal to the Initial Unit Price. Thereafter, all Available Cash shall be
distributed as if it were Operating Surplus and shall be distributed in
accordance with Section 5.4.
Section 5.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels.
(a) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution shall be proportionately
adjusted in the event of any distribution, combination or subdivision (whether
effected by a distribution payable in Units or otherwise) of Units or other
Partnership Securities in accordance with Section 4.8. In the event of a
distribution of Available Cash that is deemed to be from Capital Surplus, the
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution shall be adjusted proportionately
downward to equal the product obtained by multiplying the otherwise applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, as the case may be, by a fraction
of which the numerator is the Unrecovered Initial Unit Price of the Common
Units immediately after giving effect to such distribution and of which the
denominator is the Unrecovered Initial Unit Price of the Common Units
immediately prior to giving effect to such distribution.
(b) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution shall also be subject to
adjustment pursuant to Section 5.8.
Section 5.7 Special Provisions Relating to the Senior Subordinated Units and
Junior Subordinated Units.
Except with respect to the right to vote on or approve matters requiring the
vote or approval of a percentage of the holders of Outstanding Common Units and
the right to participate in allocations of income, gain, loss and deduction and
distributions of cash made with respect to Common Units
C-49
<PAGE>
pursuant to this Article V, []the holder of a[/] and except as provided in
Section 6.12 and Section 17.1, the holder of a Senior Subordinated Unit or a
Junior Subordinated Unit shall have all of the rights and obligations of a
Limited Partner holding Common Units hereunder; provided, however, that
immediately upon the end of the Subordination Period []or upon the conversion of
Subordinated Units as provided in Section 4.6,[/] the holder of a Senior
Subordinated Unit or Junior Subordinated Unit shall possess all of the rights
and obligations of a Limited Partner holding Class B Common Units hereunder,
including, without limitation, the right to vote as a Common Unitholder and the
right to participate in allocations of income, gain, loss and deduction and
distributions of cash made with respect to Common Units pursuant to this Article
V (but such Senior Subordinated Units and Junior Subordinated Units shall remain
subject to the provisions of Sections 4.9(c)(ii) and 5.1(d)(x)).
Section 5.8 Entity-Level Taxation.
If legislation is enacted or the interpretation of existing language is
modified by the relevant governmental authority which causes the Partnership or
the Operating Partnership to be treated as an association taxable as a
corporation or otherwise subjects the Partnership or the Operating Partnership
to entity-level taxation for federal income tax purposes, the Minimum Quarterly
Distribution, First Target Distribution, Second Target Distribution or Third
Target Distribution, as the case may be, shall be equal to the product obtained
by multiplying (a) the amount thereof by (b) one minus the sum of (i) the
highest marginal federal corporate (or other entity, as applicable) income tax
rate of the Partnership for the taxable year of the Partnership in which such
Quarter occurs (expressed as a percentage) plus (ii) the effective overall
state and local income tax rate (expressed as a percentage) applicable to the
Partnership for the calendar year next preceding the calendar year in which
such Quarter occurs (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), but only to the extent of the increase in such rates
resulting from such legislation or interpretation. Such effective overall state
and local income tax rate shall be determined for the taxable year next
preceding the first taxable year during which the Partnership or the Operating
Partnership is taxable for federal income tax purposes as an association
taxable as a corporation or is otherwise subject to entity-level taxation by
determining such rate as if the Partnership or the Operating Partnership had
been subject to such state and local taxes during such preceding taxable year.
ARTICLE VI
[]MANAGEMENT AND OPERATION OF BUSINESS[/] MANAGEMENT AND
OPERATION OF BUSINESS
Section 6.1 Management.
(a) The General Partner shall conduct, direct and manage all activities of
the Partnership. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the Partnership shall be
exclusively vested in the General Partner, and no Limited Partner or Assignee
shall have any management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted a general
partner of a limited partnership under applicable law or which are granted to
the General Partner under any other provision of this Agreement, the General
Partner, subject to Section 6.3, shall have full power and authority to do all
C-50
<PAGE>
things and on such terms as it, in its sole discretion, may deem necessary or
appropriate to conduct the business of the Partnership, to exercise all powers
set forth in Section 3.2 and to effectuate the purposes set forth in Section
3.1, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section 6.3);
(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership or the
Operating Partnership, the lending of funds to other Persons (including []the
Operating Partnership, the General Partner and its Affiliates)[/] Group
Members), the repayment of obligations of the Partnership and the Operating
Partnership and the making of capital contributions to the Operating
Partnership;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the contract
to have no recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the terms of the
transaction being less favorable to the Partnership than would otherwise be
the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including employees
having titles such as "president," "vice president," "secretary" and
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms of
employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited or
general partnerships, joint ventures, corporations, limited liability
companies or other relationships (including the acquisition of interests
in, and the contributions of property to, the Operating Partnership from
time to time);
(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
C-51
<PAGE>
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Units from, or
requesting that trading be suspended on, any such exchange (subject to any
prior approval that may be required under Section 1.6);
(xiii) the purchase, sale or other acquisition or disposition of Units;
and
(xiv) the undertaking of any action in connection with the Partnership's
participation in the Operating Partnership as the limited partner.
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and Assignees and each other Person who may
acquire an interest in Units hereby (i) approves, ratifies and confirms the
execution, delivery and performance by the parties thereto of the Operating
Partnership Agreement, the Underwriting Agreement, the Conveyance and
Contribution Agreement, the agreements and other documents filed as exhibits to
the Proxy Statement and the Equity Offering Registration Statement, and the
other agreements described in or filed as a part of the Proxy Statement and the
Equity Registration Statement; (ii) agrees that the General Partner (on its own
or through any officer of the Partnership) is authorized to execute, deliver
and perform the agreements referred to in clause (i) of this sentence and the
other agreements, acts, transactions and matters described in or contemplated
by the Proxy Statement and the Equity Registration Statement on behalf of the
Partnership without any further act, approval or vote of the Partners or the
Assignees or the other Persons who may acquire an interest in Units; and (iii)
agrees that the execution, delivery or performance by the General Partner, any
Group Member or any Affiliate of any of them, of this Agreement or any
agreement authorized or permitted under this Agreement (including the exercise
by the General Partner or any Affiliate of the General Partner of the rights
accorded pursuant to Article XVII), shall not constitute a breach by the
General Partner of any duty that the General Partner may owe the Partnership or
the Limited Partners or the Assignees or any other Persons under this Agreement
(or any other agreements) or of any duty stated or implied by law or equity.
Section 6.2 Certificate of Limited Partnership.
The General Partner has caused the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act and shall use all reasonable efforts to cause to be filed such
other certificates or documents as may be determined by the General Partner in
its sole discretion to be reasonable and necessary or appropriate for the
formation, continuation, qualification and operation of a limited partnership
(or a partnership in which the limited partners have limited liability) in the
State of Delaware or any other state in which the Partnership may elect to do
business or own property. To the extent that such action is determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate of Limited Partnership and do all things to maintain the
Partnership as a limited partnership (or a partnership in which the limited
partners have limited liability) under the laws of the State of Delaware or of
any other state in which the Partnership may elect to do business or own
property. Subject to the terms of Section 7.5(a), the General Partner shall not
be required, before or after filing,
C-52
<PAGE>
to deliver or mail a copy of the Certificate of Limited Partnership, any
qualification document or any amendment thereto to any Limited Partner or
Assignee.
Section 6.3 Restrictions on General Partner's Authority.
(a) The General Partner may not, without written approval of the specific act
by all of the Outstanding Units or by other written instrument executed and
delivered by all of the Outstanding Units subsequent to the date of this
Agreement, take any action in contravention of this Agreement, including,
except as otherwise provided in this Agreement, (i) committing any act that
would make it impossible to carry on the ordinary business of the Partnership;
(ii) possessing Partnership property, or assigning any rights in specific
Partnership property, for other than a Partnership purpose; (iii) admitting a
Person as a Partner; (iv) amending this Agreement in any manner; or (v)
transferring its interest as general partner of the Partnership.
(b) Except as provided in Articles XIV and XVI, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related
transactions or approve on behalf of the Partnership the sale, exchange or
other disposition of all or substantially all of the assets of the Operating
Partnership, without the approval of holders of at least a Unit Majority;
provided however that this provision shall not preclude or limit the General
Partner's ability to mortgage, pledge, hypothecate or grant a security interest
in all or substantially all of the assets of the Partnership or Operating
Partnership and shall not apply to any forced sale of any or all of the assets
of the Partnership or Operating Partnership pursuant to the foreclosure of, or
other realization upon, any such encumbrance. Without the approval of holders
of at least a Unit Majority, the General Partner shall not, on behalf of the
Partnership, (i) consent to any amendment to the Operating Partnership
Agreement or, except as expressly permitted by Section 6.9(d), take any action
permitted to be taken by a partner of the Operating Partnership, in either
case, that would have a material adverse effect on the Partnership as a partner
of the Operating Partnership or (ii) except as permitted under Sections 11.2,
13.1 and 13.2, elect or cause the Partnership to elect a successor general
partner of the Operating Partnership.
[](c) At all times while serving as the general partner of the Partnership,
the General Partner shall not make any dividend or distribution on, or
repurchase any shares of, its stock or take any other action within its control
if the effect of such action would cause its net worth, independent of its
interest in the Partnership Group, to be less than $6.0 million.[/]
Section 6.4 Reimbursement of the General Partner.
(a) Except as provided in this Section 6.4 and elsewhere in this Agreement or
in the Operating Partnership Agreement, the General Partner shall not be
compensated for its services as general partner of any Group Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such other
basis as the General Partner may determine in its sole discretion, for (i) all
direct and indirect expenses it incurs or payments it makes on behalf of the
Partnership (including salary, bonus, incentive compensation and other amounts
paid to any Person to perform services for the Partnership or for the General
Partner in the discharge of its duties to the Partnership), and (ii) all other
necessary or appropriate
C-53
<PAGE>
expenses allocable to the Partnership or otherwise reasonably incurred by the
General Partner in connection with operating the Partnership's business
(including expenses allocated to the General Partner by its Affiliates). 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. Reimbursements pursuant to this Section 6.4 shall be in
addition to any reimbursement to the General Partner as a result of
indemnification pursuant to Section 6.7.
(c) Subject to Section 4.5, the General Partner, in its sole discretion and
without the approval of the Limited Partners (who shall have no right to vote
in respect thereof), may propose, adopt and amend on behalf of the Partnership
employee benefit plans, employee programs and employee practices (including
plans, programs and practices involving the issuance of Units), or issue
Partnership Securities pursuant to any employee benefit plan, employee program
or employee practice maintained or sponsored by the General Partner or any of
its Affiliates, in each case for the benefit of employees of the General
Partner, any Group Member or any Affiliate, or any of them, in respect of
services performed, directly or indirectly, for the benefit of the Partnership
Group. The Partnership agrees to issue and sell to the General Partner or any
of its Affiliates any Units or other Partnership Securities that the General
Partner or such Affiliate is obligated to provide to any employees pursuant to
any such employee benefit plans, employee programs or employee practices.
Expenses incurred by the General Partner in connection with any such plans,
programs and practices (including the net cost to the General Partner or such
Affiliate of Units or other Partnership Securities purchased by the General
Partner or such Affiliate from the Partnership to fulfill options or awards
under such plans, programs and practices) shall be reimbursed in accordance
with Section 6.4(b). Any and all obligations of the General Partner under any
employee benefit plans, employee programs or employee practices adopted by the
General Partner as permitted by this Section 6.4(c) shall constitute
obligations of the General Partner hereunder and shall be assumed by any
successor General Partner approved pursuant to Section 13.1 or 13.2 or the
transferee of or successor to all of the General Partner's Partnership Interest
(which is represented by the General Partner Units) as a general partner in the
Partnership pursuant to Section 11.2.
Section 6.5 Outside Activities.
(a) After the []Closing Date[/] Effective Time, the General Partner, for so
long as it is the general partner of the Partnership, shall 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 one or more Group
Members or as described in or contemplated by the []Registration[/] Proxy
Statement or (ii) the acquiring, owning or disposing of debt or equity
securities in any Group Member.
[](b) Petroleum Heat and Power Co., Inc. ("Petro") or an Affiliate may engage
in the propane business provided it complies with the Non-competition
Agreement[/] Certain Affiliates of the General Partner have entered into the
Non-competition Agreement with the Partnership and the Operating Partnership,
which agreement sets forth certain restrictions on the ability of such
Affiliates to compete with the Partnership and the Operating Partnership. Any
amendments or waivers to the Non-competition Agreement must be approved by the
Audit Committee.
(c) Except as restricted by Sections 6.5(a) or (b) and the Non-competition
Agreement, each Indemnitee (other than the General Partner) shall have the
right to engage in businesses of every type
C-54
<PAGE>
and description and other activities for profit and to engage in and possess an
interest in other business ventures of any and every type or description,
whether in businesses engaged in or anticipated to be engaged in by any Group
Member, independently or with others, including business interests and
activities in direct competition with the business and activities of any Group
Member, and none of the same shall constitute a breach of this Agreement or any
duty to any Group Member or any Partner or Assignee. Neither any Group Member,
any Limited Partner nor any other Person shall have any rights by virtue of
this Agreement, the Operating Partnership Agreement or the partnership
relationship established hereby or thereby in any business ventures of any
Indemnitee.
(d) []Notwithstanding[/] Subject to Sections 6.5(a), (b) and (c) and the terms
of the Non-competition Agreement, but otherwise notwithstanding anything to the
contrary in this Agreement, (i) the engaging in competitive activities by any
Indemnitees (other than the General Partner) in accordance with the provisions
of this Section 6.5 is hereby approved by the Partnership and all Partners and
(ii) it shall be deemed not to be a breach of the General Partner's fiduciary
duty or any other obligation of any type whatsoever of the General Partner for
the Indemnitees (other than the General Partner) to engage in such business
interests and activities in preference to or to the exclusion of the Partnership
(including, without limitation, the General Partner and the Indemnitees shall
have no obligation to present business opportunities to the Partnership).
(e) The General Partner and any of its Affiliates may acquire Units or other
Partnership Securities in addition to those acquired []on[/] at the []Closing
Date[/] Effective Time and, except as otherwise provided in this Agreement,
shall be entitled to exercise all rights of an Assignee or Limited Partner, as
applicable, relating to such Units or Partnership Securities.
(f) The term "Affiliates" when used in Section 6.5(b) with respect to the
General Partner shall not include any Group Member or any Subsidiary of the
Group Member.
Section 6.6 Loans from the General Partner; Contracts with Affiliates; Certain
Restrictions on the General Partner.
(a) The General Partner or any Affiliate thereof may lend to any Group
Member, and any Group Member may borrow, funds needed or desired by the Group
Member for such periods of time and in such amounts as the General Partner may
determine; provided, however, that in any such case the lending party may not
charge the borrowing party interest at a rate greater than the rate that would
be charged the borrowing party or impose terms less favorable to the borrowing
party than would be charged or imposed on the borrowing party by unrelated
lenders on comparable loans made on an arms'-length basis (without reference to
the lending party's financial abilities or guarantees). The borrowing party
shall reimburse the lending party for any costs (other than any additional
interest costs) incurred by the lending party in connection with the borrowing
of such funds. For purposes of this Section 6.6(a) and Section 6.6(b), the term
"Group Member" shall include any Affiliate of the Group Member that is
controlled by the Group Member. []The Partnership and the Operating Partnership
may not[/] No Group Member may lend funds to the General Partner or any of its
Affiliates.
(b) The Partnership may lend or contribute to any Group Member, and any Group
Member may borrow, funds on terms and conditions established in the sole
discretion of the General Partner; provided, however, that the Partnership may
not charge the Group Member interest at a rate greater than the rate that would
be charged to the Group Member (without reference to the General Partner's
C-55
<PAGE>
financial abilities or guarantees), by unrelated lenders on comparable loans.
The foregoing authority shall be exercised by the General Partner in its sole
discretion and shall not create any right or benefit in favor of any Group
Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement with any
of its Affiliates to, render services to the Partnership or to the General
Partner in the discharge of its duties as general partner of the Partnership.
Any services rendered to the Partnership by the General Partner or any of its
Affiliates shall be on terms that are fair and reasonable to the Partnership;
provided, however, that the requirements of this Section 6.6(c) shall be deemed
satisfied as to (i) any transaction approved by Special Approval, (ii) any
transaction, the terms of which are no less favorable to the Partnership than
those generally being provided to or available from unrelated third parties or
(iii) any transaction that, 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), is equitable
to the Partnership. The provisions of Section 6.4 shall apply to the rendering
of services described in this Section 6.6(c).
(d) The Partnership may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and applicable
law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the
requirements of this Section 6.6(e) shall be deemed to be satisfied as to (i)
the transactions effected pursuant to Sections 4.1, 4.2 and 4.3, the Conveyance
and Contribution Agreement and any other transactions described in or
contemplated by the []Registration[/] Proxy Statement, (ii) any transaction
approved by Special Approval, (iii) any transaction, the terms of which are no
less favorable to the Partnership than those generally being provided to or
available from unrelated third parties, or (iv) any transaction that, 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), is equitable to the Partnership. With respect to any
contribution of assets to the Partnership in exchange for Units, the Audit
Committee, in determining whether the appropriate number of Units are being
issued, should take into account, among other things, the fair market value of
the assets, the liquidated and contingent liabilities assumed, the tax basis in
the assets, the extent to which tax-only allocations to the transferor will
protect the existing partners of the Partnership against a low tax basis, and
such other factors as the Audit Committee deems relevant under the
circumstances.
(f) The General Partner and its Affiliates will have no obligation to permit
any Group Member to use any facilities or assets of the General Partner and its
Affiliates, except as may be provided in contracts entered into from time to
time specifically dealing with such use, nor shall there be any obligation on
the part of the General Partner or its Affiliates to enter into such contracts.
(g) []Notwithstanding any provision of this Agreement to the contrary, prior
to the termination of the Additional Capital Contribution Obligation, the
General Partner may not, (i) make any dividends or distributions of any cash or
other assets to its stockholders, other than (v) the proceeds of the First
Mortgage Notes (other than the $6.0 million used to fund the Additional Capital
Contribution[/]
C-56
<PAGE>
[]Obligation), (w) the Subordinated Units, (x) distributions from the
Partnership or the Operating Partnership, (y) interest and profits earned on
Permitted Investments and (z) interest on any loan to Petro, (ii) incur any
indebtedness for borrowed money (other than its obligations with respect to
indebtedness of the Partnership, Operating Partnership or any other subsidiary
entity of the Partnership) or (iii) merge with or into any other Person or
permit any Person to merge with or into the General Partner or to sell all or
substantially all of its assets in one or a series of transactions. In addition,
prior to the termination of the Additional Capital Contribution Obligation the
General Partner shall maintain $6.0 million in Permitted Investments; provided,
that such $6.0 million shall be reduced from time to time to the extent and in
the amount the Additional Capital Contribution Obligation is reduced in
accordance with Section 4.2(b).[/]
[](h)[/] Without limitation of Sections 6.6(a) through 6.6(f), and
notwithstanding anything to the contrary in this Agreement, the existence of the
conflicts of interest described in the []Registration[/] Proxy Statement are
hereby approved by all Partners.
Section 6.7 Indemnification.
(a) To the fullest extent permitted by law but subject to the limitations
expressly provided in this Agreement, all Indemnitees shall be indemnified and
held harmless by the Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including 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 an Indemnitee[],[/]; 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; provided, further, no
indemnification pursuant to this Section 6.7 shall be available to the General
Partner or Petro with respect to their respective obligations incurred pursuant
to the Underwriting Agreement or the Conveyance and Contribution []Agreement[/]
Agreements (other than obligations incurred by the General Partner on behalf of
the Partnership or the Operating Partnership). The termination of any action,
suit or proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere, or its equivalent, shall not create a presumption that the
Indemnitee acted in a manner contrary to that specified above. Any
indemnification pursuant to this Section 6.7 shall be made only out of the
assets of the Partnership, it being agreed that the General Partner shall not be
personally liable for such indemnification and shall have no obligation to
contribute or loan any monies or property to the Partnership to enable it to
effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
6.7(a) in defending any claim, demand, action, suit or proceeding shall, from
time to time, be advanced by the Partnership prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Partnership
of an undertaking by or on behalf of the Indemnitee to repay such amount if it
shall be determined that the Indemnitee is not entitled to be indemnified as
authorized in this Section 6.7.
(c) The indemnification provided by this Section 6.7 shall be in addition to
any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of
C-57
<PAGE>
Outstanding Units, as a matter of law or otherwise, both as to actions in the
Indemnitee's capacity as an Indemnitee and as to actions in any other capacity
(including any capacity under the Underwriting Agreement), and shall continue
as to an Indemnitee who has ceased to serve in such capacity and shall inure to
the benefit of the heirs, successors, assigns and administrators of the
Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the General
Partner and such other Persons as the General Partner shall determine, against
any liability that may be asserted against or expense that may be incurred by
such Person in connection with the Partnership's activities, regardless of
whether the Partnership would have the power to indemnify such Person against
such liability under the provisions of this Agreement.
(e) For purposes of this Section 6.7, the Partnership shall be deemed to have
requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants or
beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect
to an employee benefit plan pursuant to applicable law shall constitute "fines"
within the meaning of Section 6.7(a); and action taken or omitted by it with
respect to any employee benefit plan in the performance of its duties for a
purpose reasonably believed by it to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is in, or
not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 6.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 6.7 or any provision
hereof shall in any manner terminate, reduce or impair the right of any past,
present or future Indemnitee to be indemnified by the Partnership, nor the
obligations of the Partnership to indemnify any such Indemnitee under and in
accordance with the provisions of this Section 6.7 as in effect immediately
prior to such amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
Section 6.8 Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in this Agreement, no
Indemnitee shall be liable for monetary damages to the Partnership, the Limited
Partners, the Assignees or any other Persons who have acquired interests in the
Units, for losses sustained or liabilities incurred as a result of any act or
omission if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 6.1(a), the General Partner may exercise any of the powers granted to
it by this Agreement and perform any of
C-58
<PAGE>
the duties imposed upon it hereunder either directly or by or through its
agents, and the General Partner shall not be responsible for any misconduct or
negligence on the part of any such agent appointed by the General Partner in
good faith.
(c) Any amendment, modification or repeal of this Section 6.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership and the Limited Partners of the
General Partner, its directors, officers and employees and any other
Indemnitees under this Section 6.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be
asserted.
Section 6.9 Resolution of Conflicts of Interest.
(a) Unless otherwise expressly provided in this Agreement or the Operating
Partnership Agreement, whenever a potential conflict of interest exists or
arises between the General Partner or any of its Affiliates, on the one hand,
and the Partnership, the Operating Partnership, any Partner or any Assignee, on
the other hand, any resolution or course of action in respect of such conflict
of interest shall be permitted and deemed approved by all Partners, and shall
not constitute a breach of this Agreement, of the Operating Partnership
Agreement, of any agreement contemplated herein or therein, or of any duty
stated or implied by law or equity, if the resolution or course of action is,
or by operation of this Agreement is deemed to be, fair and reasonable to the
Partnership. The General Partner shall be authorized but not required in
connection with its resolution of such conflict of interest to seek Special
Approval of a resolution of such conflict or course of action. Any conflict of
interest and any resolution of such conflict of interest shall be conclusively
deemed fair and reasonable to the Partnership if such conflict of interest or
resolution is (i) approved by Special 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). The General Partner may also adopt a resolution or course of
action that has not received Special Approval. The General Partner (including
the Audit Committee in connection with Special Approval) shall be authorized in
connection with its determination of what is "fair and reasonable" to the
Partnership and in connection with its resolution of any conflict of interest
to consider (A) the relative interests of any party to such conflict,
agreement, transaction or situation and the benefits and burdens relating to
such interest; (B) any customary or accepted industry practices and any
customary or historical dealings with a particular Person; (C) any applicable
generally accepted accounting practices or principles; and (D) such additional
factors as the General Partner (including the Audit Committee) determines in
its sole discretion to be relevant, reasonable or appropriate under the
circumstances. Nothing contained in this Agreement, however, is intended to nor
shall it be construed to require the General Partner (including the Audit
Committee) to consider the interests of any Person other than the Partnership.
In the absence of bad faith by the General Partner, the resolution, action or
terms so made, taken or provided by the General Partner with respect to such
matter shall not constitute a breach of this Agreement or any other agreement
contemplated herein or a breach of any standard of care or duty imposed herein
or therein or, to the extent permitted by law, under the Delaware Act or any
other law, rule or regulation.
C-59
<PAGE>
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion," that
it deems "necessary or appropriate" or "necessary or advisable" or under a
grant of similar authority or latitude, except as otherwise provided herein,
the General Partner or such Affiliate shall be entitled to consider only such
interests and factors as it desires and shall have no duty or obligation to
give any consideration to any interest of, or factors affecting, the
Partnership, the Operating Partnership, any Limited Partner or any Assignee,
(ii) it may make such decision in its sole discretion (regardless of whether
there is a reference to "sole discretion" or "discretion") unless another
express standard is provided for, or (iii) in "good faith" or under another
express standard, the General Partner or such Affiliate shall act under such
express standard and shall not be subject to any other or different standards
imposed by this Agreement, the Operating Partnership Agreement, any other
agreement contemplated hereby or under the Delaware Act or any other law, rule
or regulation. In addition, any actions taken by the General Partner or such
Affiliate consistent with the standards of "reasonable discretion" set forth in
the definitions of Available Cash or Operating Surplus shall not constitute a
breach of any duty of the General Partner to the Partnership or the Limited
Partners. The General Partner shall have no duty, express or implied, to sell
or otherwise dispose of any asset of the Partnership Group. No borrowing by any
Group Member or the approval thereof by the General Partner shall be deemed to
constitute a breach of any duty of the General Partner to the Partnership or
the Limited Partners by reason of the fact that the purpose or effect of such
borrowing is directly or indirectly to (A) enable distributions in []respect of
the general partner interest to exceed 1%[/] on the General Partner Units to
exceed the General Partner's Percentage Interest of the total amount
distributed, or (B) hasten the expiration of the Subordination Period or the
conversion of any Senior Subordinated Units or Junior Subordinated Units into
[]Common Units or (C) enable the General Partner to avoid or reduce its
Additional Capital Contribution Obligation.[/] Class B Common Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
(d) The Limited Partners hereby authorize the General Partner, on behalf of
the Partnership as a partner of a Group Member, to approve of actions by the
general partner of such Group Member similar to those actions permitted to be
taken by the General Partner pursuant to this Section 6.9.
Section 6.10 Other Matters Concerning the General Partner.
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture or other
paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants
and advisers selected by it, and any act taken or omitted to be taken in
reliance upon the opinion (including an Opinion of Counsel) of such Persons as
to matters that the General Partner reasonably believes to be within such
Person's
C-60
<PAGE>
professional or expert competence shall be conclusively presumed to have been
done or omitted in good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of any of its powers
or obligations hereunder, to act through any of its duly authorized officers, a
duly appointed attorney or attorneys-in-fact or the duly authorized officers of
the Partnership.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified,
waived or limited, to the extent permitted by law, as required to permit the
General Partner to act under this Agreement or any other agreement contemplated
by this Agreement and to make any decision pursuant to the authority prescribed
in this 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.
Section 6.11 Title to Partnership Assets.
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have
any ownership interest in such Partnership assets or any portion thereof. Title
to any or all of the Partnership assets may be held in the name of the
Partnership, the General Partner, one or more of its Affiliates or one or more
nominees, as the General Partner may determine. The General Partner hereby
declares and warrants that any Partnership assets for which record title is
held in the name of the General Partner or one or more of its Affiliates or one
or more nominees shall be held by the General Partner or such Affiliate or
nominee for the use and benefit of the Partnership in accordance with the
provisions of this Agreement; provided, however, that the General Partner shall
use its reasonable efforts to cause record title to such assets (other than
those assets in respect of which the General Partner determines that the
expense and difficulty of conveyancing makes transfer of record title to the
Partnership impracticable) to be vested in the Partnership as soon as
reasonably practicable; provided that, prior to the withdrawal or removal of
the General Partner or as soon thereafter as practicable, the General Partner
shall use reasonable efforts to effect the transfer of record title to the
Partnership and, prior to any such transfer, will provide for the use of such
assets in a manner satisfactory to the Partnership. All Partnership assets
shall be recorded as the property of the Partnership in its books and records,
irrespective of the name in which record title to such Partnership assets is
held. The General Partner covenants and agrees that at the Closing Date, the
Partnership Group shall have all licenses, permits, certificates, franchises,
or other governmental authorizations or permits necessary for the ownership of
their properties or for the conduct of their businesses, except for such
licenses, permits, certificates, franchises, or other governmental
authorizations or permits, failure to have obtained which will not,
individually or in the aggregate, have a material adverse effect on the
Partnership Group.
Section 6.12 Purchase or Sale of Units.
The General Partner may cause the Partnership to purchase or otherwise
acquire Units; provided that, except as permitted pursuant to Section 11.6 and
Section 17.1(a), the General Partner may not cause the Partnership to purchase
[]Subordinated[/] Units other than Common Units during the Subordination Period.
As long as Units are held by any Group Member, such Units shall not be
C-61
<PAGE>
[]considered Outstanding for any purpose, except as otherwise provided herein.
The General Partner or any Affiliate of the General Partner (other than a Group
Member) may also purchase or otherwise acquire and sell or otherwise dispose of
Units for its own account, subject to the provisions of Articles XI and XII.[/]
Section 6.13 Registration Rights.
[]6.13 Registration Rights of Star Gas and its Affiliates.[/] (a) If (i) Star
Gas or any Affiliate of Star Gas (including for purposes of this Section 6.13,
any Person that is an Affiliate of Star Gas at the date hereof notwithstanding
that it may later cease to be an Affiliate of Star Gas) holds Units or other
Partnership Securities that it desires to sell and (ii) Rule 144 of the
Securities Act (or any successor rule or regulation to Rule 144) or another
exemption from registration is not available to enable such holder of Units (the
"Holder") to dispose of the number of Units or other securities it desires to
sell at the time it desires to do so without registration under the Securities
Act, then upon the request of Star Gas or any of its Affiliates, the Partnership
shall file with the Commission as promptly as practicable after receiving such
request, and use all reasonable efforts to cause to become effective and remain
effective for a period of not less than six months following its effective date
or such shorter period as shall terminate when all Units or other Partnership
Securities covered by such registration statement have been sold, a registration
statement under the Securities Act registering the offering and sale of the
number of Units or other securities specified by the Holder; provided, however,
that the Partnership shall not be required to effect more than three
registrations pursuant to this Section 6.13(a); and provided further, however,
that if the Audit Committee determines in its good faith judgment that a
postponement of the requested registration for up to six months would be in the
best interests of the Partnership and its Partners due to a pending transaction,
investigation or other event, the filing of such registration statement or the
effectiveness thereof may be deferred for up to six months, but not thereafter.
In connection with any registration pursuant to the immediately preceding
sentence, the Partnership shall promptly prepare and file (x) such documents as
may be necessary to register or qualify the securities subject to such
registration under the securities laws of such states as the Holder shall
reasonably request; provided, however, that no such qualification shall be
required in any jurisdiction where, as a result thereof, the Partnership would
become subject to general service of process or to taxation or qualification to
do business as a foreign corporation or partnership doing business in such
jurisdiction, and (y) such documents as may be necessary to apply for listing or
to list the securities subject to such registration on such National Securities
Exchange as the Holder shall reasonably request, and do any and all other acts
and things that may reasonably be necessary or advisable to enable the Holder to
consummate a public sale of such Units in such states. Except as set forth in
Section 6.13(c), all costs and expenses of any such registration and offering
(other than the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include such
number or amount of securities held by the Holder in such registration
statement as the Holder shall request. If the proposed offering pursuant to
this Section 6.13(b) shall be an underwritten offering, then, in the event that
the managing underwriter of such offering advises the Partnership
C-62
<PAGE>
and the Holder in writing that in its opinion the inclusion of all or some of
the Holder's securities would adversely and materially affect the success of
the offering, the Partnership shall include in such offering only that number
or amount, if any, of securities held by the Holder which, in the opinion of
the managing underwriter, will not so adversely and materially affect the
offering. Except as set forth in Section 6.13(c), all costs and expenses of any
such registration and offering (other than the underwriting discounts and
commissions) shall be paid by the Partnership, without reimbursement by the
Holder.
(c) If underwriters are engaged in connection with any registration referred
to in this Section 6.13(a) or (f), the Partnership shall provide
indemnification, representations, covenants, opinions and other assurance to
the underwriters in form and substance reasonably satisfactory to such
underwriters. Further, in addition to and not in limitation of the
Partnership's obligation under Section 6.7, the Partnership shall, to the
fullest extent permitted by law, indemnify and hold harmless the Holder, its
officers, directors and each Person who controls the Holder (within the meaning
of the Securities Act) and any agent thereof (collectively, "Indemnified
Persons") against any losses, claims, demands, actions, causes of action,
assessments, damages, liabilities (joint or several), costs and expenses
(including interest, penalties and reasonable attorneys' fees and
disbursements), resulting to, imposed upon, or incurred by the Indemnified
Persons, directly or indirectly, under the Securities Act or otherwise
(hereinafter referred to in this Section 6.13(c) as a "claim" and in the plural
as "claims") based upon, arising out of or resulting from any untrue statement
or alleged untrue statement of any material fact contained in any registration
statement under which any Units were registered under the Securities Act or any
state securities or Blue Sky laws, in any preliminary prospectus (if used prior
to the effective date of such registration statement), or in any summary or
final prospectus or in any amendment or supplement thereto (if used during the
period the Partnership is required to keep the registration statement current),
or arising out of, based upon or resulting from the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements made therein not misleading; provided,
however, that the Partnership shall not be liable to any Indemnified Person to
the extent that any such claim arises out of, is based upon or results from an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, such preliminary, summary or final
prospectus or such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Partnership by or on behalf of such
Indemnified Person specifically for use in the preparation thereof. For
purposes of this Section 6.13(c), the term "Holder" shall also include
Affiliates or former Affiliates of Petro holding Common Units and Senior
Subordinated Units.
(d) The provisions of Section 6.13(a) and 6.13(b) shall continue to be
applicable with respect to Star Gas (and any of Star Gas' Affiliates) after it
ceases to be a Partner of the Partnership, during a period of two years
subsequent to the effective date of such cessation and for so long thereafter
as is required for the Holder to sell all of the Units or other securities of
the Partnership with respect to which it has requested during such two-year
period that a registration statement be filed; provided, however, that the
Partnership shall not be required to file successive registration statements
covering the same securities for which registration was demanded during such
two-year period. The provisions of Section 6.13(c) shall continue in effect
thereafter.
(e) Any request to register Partnership Securities pursuant to this Section
6.13 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii)
C-63
<PAGE>
express such Person's present intent to offer such shares for distribution,
(iii) describe the nature or method of the proposed offer and sale of
Partnership Securities, and (iv) contain the undertaking of such Person to
provide all such information and materials and take all action as may be
required in order to permit the Partnership to comply with all applicable
requirements in connection with the registration of such Partnership
Securities.
(f) Prior to the Effective Time, the Partnership shall have filed with the
Commission a registration statement (the "Shelf Registration Statement") on an
appropriate form under the Securities Act relating to the resale of Common
Units and Senior Subordinated Units issued to Affiliates of Petro. The
Partnership shall use all reasonable efforts to cause the Shelf Registration
Statement to become effective and remain effective for a period of not less
than one year from the Effective Time or such shorter period as shall terminate
when all Common Units and Senior Subordinated Units covered by the Shelf
Registration Statement have been sold pursuant to such registration statement;
provided, however, that if the Audit Committee determines in its good faith
judgment that the sale or distribution of Common Units or Senior Subordinated
Units pursuant to the Shelf Registration Statement would not be in the best
interests of the Partnership and its Partners due to a pending transaction,
investigation or other event, the Audit Committee may elect that the Shelf
Registration Statement may not be used for a reasonable period of time, not to
exceed 120 days in any 365-day period.
Section 6.14 Reliance by Third Parties.
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of the Partnership authorized by the General Partner to
act on behalf of and in the name of the Partnership has full power and
authority to encumber, sell or otherwise use in any manner any and all assets
of the Partnership and to enter into any contracts on behalf of the
Partnership, and such Person shall be entitled to deal with the General Partner
or any such officer as if it were the Partnership's sole party in interest,
both legally and beneficially. Each Limited Partner hereby waives any and all
defenses or other remedies that may be available against such Person to
contest, negate or disaffirm any action of the General Partner or any such
officer in connection with any such dealing. In no event shall any Person
dealing with the General Partner or any such officer or its representatives be
obligated to ascertain that the terms of the Agreement have been complied with
or to inquire into the necessity or expedience of any act or action of the
General Partner or any such officer or its representatives. Each and every
certificate, document or other instrument executed on behalf of the Partnership
by the General Partner or any such officer or its representatives shall be
conclusive evidence in favor of any and every Person relying thereon or
claiming thereunder that (a) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in full force and
effect, (b) the Person executing and delivering such certificate, document or
instrument was duly authorized and empowered to do so for and on behalf of the
Partnership and (c) such certificate, document or instrument was duly executed
and delivered in accordance with the terms and provisions of this Agreement and
is binding upon the Partnership.
C-64
<PAGE>
ARTICLE VII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
Section 7.1 Limitation of Liability.
The Limited Partners, the Organizational Limited Partner and the Assignees
shall have no liability under this Agreement except as expressly provided in
this Agreement or the Delaware Act.
Section 7.2 Management of Business.
No Limited Partner or Assignee (other than the General Partner, any of its
Affiliates or any officer, director, employee, partner, agent or trustee of the
General Partner or any of its Affiliates, in its capacity as such, if such
Person shall also be a Limited Partner or Assignee) shall participate in the
operation, management or control (within the meaning of the Delaware Act) of
the Partnership's business, transact any business in the Partnership's name or
have the power to sign documents for or otherwise bind the Partnership. The
transaction of any such business by the General Partner, any of its Affiliates
or any member, officer, director, employee, partner, agent or trustee of the
General Partner or any of its Affiliates, in its capacity as such, shall not
affect, impair or eliminate the limitations on the liability of the Limited
Partners or Assignees under this Agreement.
Section 7.3 Outside Activities.
Subject to the provisions of Section 6.5 and the Non-competition Agreement,
which shall continue to be applicable to the Persons referred to therein,
regardless of whether such Persons shall also be Limited Partners or Assignees,
any Limited Partner or Assignee shall be entitled to and may have business
interests and engage in business activities in addition to those relating to
the Partnership, including business interests and activities in direct
competition with the Partnership Group. Neither the Partnership nor any of the
other Partners or Assignees shall have any rights by virtue of this Agreement
in any business ventures of any Limited Partner or Assignee.
Section 7.4 Return of Capital.
No Limited Partner or Assignee shall be entitled to the withdrawal or return
of its Capital Contribution, except to the extent, if any, that distributions
made pursuant to this Agreement or upon termination of the Partnership may be
considered as such by law and then only to the extent provided for in this
Agreement. Except to the extent provided by Article V or as otherwise expressly
provided in this Agreement, no Limited Partner or Assignee shall have priority
over any other Limited Partner or Assignee either as to the return of Capital
Contributions or as to profits, losses or distributions. Any such return shall
be a compromise to which all Partners and Assignees agree within the meaning of
(S) Section 17-502(b) of the Delaware Act.
Section 7.5 Rights of Limited Partners to the Partnership.
(a) In addition to other rights provided by this Agreement or by applicable
law, and except as limited by Section 7.5(b), each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon reasonable demand and at such
Limited Partner's own expense:
C-65
<PAGE>
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local tax returns for each year;
(iii) to have furnished to him, upon notification to the General Partner,
a current list of the name and last known business, residence or mailing
address of each Partner;
(iv) to have furnished to him, upon notification to the General Partner,
a copy of this Agreement and the Certificate of Limited Partnership and all
amendments thereto, together with a copy of the executed copies of all
powers of attorney pursuant to which this Agreement, the Certificate of
Limited Partnership and all amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash and
a description and statement of the Net Agreed Value of any other Capital
Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners and
Assignees, for such period of time as the General Partner deems reasonable, (i)
any information that the General Partner reasonably believes to be in the
nature of trade secrets or (ii) other information the disclosure of which the
General Partner in good faith believes (A) is not in the best interests of the
Partnership Group, (B) could damage the Partnership Group or (C) that any Group
Member is required by law or by agreements with third parties to keep
confidential (other than agreements with Affiliates the primary purpose of
which is to circumvent the obligations set forth in this Section 7.5).
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting.
The General Partner shall keep or cause to be kept at the principal office of
the Partnership appropriate books and records with respect to the Partnership's
business, including all books and records necessary to provide to the Limited
Partners any information required to be provided pursuant to Section 7.5(a).
Any books and records maintained by or on behalf of the Partnership in the
regular course of its business, including the record of the Record Holders and
Assignees of Units or other Partnership Securities, books of account and
records of Partnership proceedings, may be kept on, or be in the form of,
computer disks, hard drives, punch cards, magnetic tape, photographs,
micrographics or any other information storage device,; provided, that the
books and records so maintained are convertible into clearly legible written
form within a reasonable period of time. The books of the Partnership shall be
maintained, for financial reporting purposes, on an accrual basis in accordance
with generally accepted accounting principles.
Section 8.2 Fiscal Year.
The fiscal year of the Partnership shall be October 1 to September 30.
C-66
<PAGE>
Section 8.3 Reports.
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the General Partner shall cause
to be mailed to each Record Holder of a Unit as of a date selected by the
General Partner in its sole discretion, an annual report containing financial
statements of the Partnership for such fiscal year of the Partnership,
presented in accordance with generally accepted accounting principles,
including a balance sheet and statements of operations, Partners' equity and
cash flows, such statements to be audited by a firm of independent public
accountants selected by the General Partner.
(b) 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 shall cause to be mailed to each Record Holder of a Unit, as of a date
selected by the General Partner in its sole discretion, a report containing
unaudited financial statements of the Partnership and such other information as
may be required by applicable law, regulation or rule of any National
Securities Exchange on which the Units are listed for trading, or as the
General Partner determines to be necessary or appropriate.
ARTICLE IX
TAX MATTERS
Section 9.1 Tax Returns and Information.
The General Partner shall timely file all returns of the Partnership that are
required for federal, state and local income tax purposes on the basis of the
accrual method and a taxable year ending on December 31. The tax information
reasonably required by Record Holders for federal and state income tax
reporting purposes with respect to a taxable year shall be furnished to them
within 90 days of the close of the calendar year in which the Partnership's
taxable year ends. The classification, realization and recognition of income,
gain, losses and deductions and other items shall be on the accrual method of
accounting for federal income tax purposes.
Section 9.2 Tax Elections.
(a) The Partnership shall make the election under Section 754 of the Code in
accordance with applicable regulations thereunder, subject to the reservation
of the right to seek to revoke any such election upon the General Partner's
determination that such revocation is in the best interests of the Limited
Partners. For the purposes of computing the adjustments under Section 743(b) of
the Code, the General Partner shall be authorized (but not required) to adopt a
convention whereby the price paid by a transferee of Units will be deemed to be
the lowest quoted closing price of the Units on any National Securities
Exchange on which such Units are traded during the calendar month in which such
transfer is deemed to occur pursuant to Section 5.2(g) without regard to the
actual price paid by such transferee.
(b) The Partnership shall elect to deduct expenses incurred in organizing the
Partnership ratably over a sixty-month period as provided in Section 709 of the
Code.
(c) Except as otherwise provided herein, the General Partner shall determine
whether the Partnership should make any other elections permitted by the Code.
C-67
<PAGE>
Section 9.3 Tax Controversies.
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in Section 6231 of the Code) and is authorized
and required to represent the Partnership (at the Partnership's expense) in
connection with all examinations of the Partnership's affairs by tax
authorities, including resulting administrative and judicial proceedings, and
to expend Partnership funds for professional services and costs associated
therewith. Each Partner agrees to cooperate with the General Partner and to do
or refrain from doing any or all things reasonably required by the General
Partner to conduct such proceedings.
Section 9.4 Withholding.
Notwithstanding any other provision of this Agreement, the General Partner is
authorized to take any action that it determines in its sole discretion to be
necessary or appropriate to cause the Partnership and the Operating Partnership
to comply with any withholding requirements established under the Code or any
other federal, state or local law including, without limitation, pursuant to
Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the
Partnership is required to withhold and pay over to any taxing authority any
amount resulting from the allocation or distribution of income to any Partner
or Assignee (including, without limitation, by reason of Section 1446 of the
Code), the amount withheld shall be treated as a distribution of cash pursuant
to Section 5.3 in the amount of such withholding from such Partner.
ARTICLE X
CERTIFICATES
Section 10.1 Certificates.
Upon the Partnership's issuance of Common Units or, Senior Subordinated
Units, Junior Subordinated Units or General Partner Units to any Person, the
Partnership shall issue one or more Certificates in the name of such Person
evidencing the number of such Units being so issued. Certificates shall be
executed on behalf of the Partnership by the General Partner. No Common Unit
Certificate shall be valid for any purpose until it has been countersigned by
the Transfer Agent. The Partners holding Certificates evidencing Senior
Subordinated Units or Junior Subordinated Units may exchange such Certificates
for Certificates evidencing Class B Common Units on or after the []date on which
such Subordinated Units are converted into Common Units pursuant to the terms
of Section 4.6.[/] expiration of the Subordination Period.
Section 10.2 Registration, Registration of Transfer and Exchange.
(a) The General Partner shall cause to be kept on behalf of the Partnership a
register in which, subject to such reasonable regulations as it may prescribe
and subject to the provisions of Section 10.2(b), the General Partner will
provide for the registration and transfer of Units. The Transfer Agent is
hereby appointed registrar and transfer agent for the purpose of registering
Units and transfers of such Units as herein provided. The Partnership shall not
recognize transfers of Certificates representing Units unless such transfers
are effected in the manner described in this
C-68
<PAGE>
Section 10.2. Upon surrender for registration of transfer of any Units
evidenced by a Certificate, and subject to the provisions of Section 10.2(b),
the General Partner on behalf of the Partnership shall execute, and the
Transfer Agent shall countersign and deliver, in the name of the holder or the
designated transferee or transferees, as required pursuant to the holder's
instructions, one or more new Certificates evidencing the same aggregate number
of Units as was evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 11.5, the Partnership shall not
recognize any transfer of Units until the Certificates evidencing such Units
are surrendered for registration of transfer and such Certificates are
accompanied by a Transfer Application duly executed by the transferee (or the
transferee's attorney-in-fact duly authorized in writing). No charge shall be
imposed by the Partnership for such transfer; provided, that as a condition to
the issuance of any new Certificate under this Section 10.2, the General
Partner may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed with respect thereto.
Section 10.3 Mutilated, Destroyed, Lost or Stolen Certificates.
(a) If any mutilated Certificate is surrendered to the Transfer Agent, the
General Partner on behalf of the Partnership shall execute, and upon its
request the Transfer Agent shall countersign and deliver in exchange therefor,
a new Certificate evidencing the same number of Units as the Certificate so
surrendered.
(b) The General Partner on behalf of the Partnership shall execute, and upon
its request the Transfer Agent shall countersign and deliver a new Certificate
in place of any Certificate previously issued if the Record Holder of the
Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to the
General Partner, that a previously issued Certificate has been lost,
destroyed or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the General Partner, delivers to the Partnership a
bond, in form and substance satisfactory to the General Partner, with
surety or sureties and with fixed or open penalty as the General Partner
may reasonably direct, in its sole discretion, to indemnify the
Partnership, the General Partner and the Transfer Agent against any claim
that may be made on account of the alleged loss, destruction or theft of
the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the General
Partner.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Units represented by the Certificate is
registered before the Partnership, the General Partner or the Transfer Agent
receives such notification, the Limited Partner or Assignee shall be precluded
from making any claim against the Partnership, the General Partner or the
Transfer Agent for such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate under this Section
10.3, the General Partner may require the payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed in relation thereto
and any other expenses (including the fees and expenses of the Transfer Agent)
reasonably connected therewith.
C-69
<PAGE>
Section 10.4 Record Holder.
In accordance with Section 10.2(b), the Partnership shall be entitled to
recognize the Record Holder as the Limited Partner or Assignee with respect to
any Units and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such Units on the part of any other Person,
regardless of whether the Partnership shall have actual or other notice
thereof, except as otherwise provided by law or any applicable rule,
regulation, guideline or requirement of any National Securities Exchange on
which the Units are listed for trading. Without limiting the foregoing, when a
Person (such as a broker, dealer, bank, trust company or clearing corporation
or an agent of any of the foregoing) is acting as nominee, agent or in some
other representative capacity for another Person in acquiring and/or holding
Units, as between the Partnership on the one hand, and such other Persons, on
the other, such representative Person (a) shall be the Limited Partner or
Assignee (as the case may be) of record and beneficially, (b) must execute and
deliver a Transfer Application and (c) shall be bound by this Agreement and
shall have the rights and obligations of a Limited Partner or Assignee (as the
case may be) hereunder and as provided for herein.
ARTICLE XI
TRANSFER OF INTERESTS
Section 11.1 Transfer.
(a) The term "transfer," when used in this Article XI with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner assigns its []Partnership[/] General Partner Interest []as a
general partner in the Partnership[/] to another Person or by which the holder
of a Unit Limited Partner Interest assigns such []Unit[/] Limited Partner
Interest to another Person who is or becomes an Assignee, and includes a sale,
assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any
other disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part, except
in accordance with the terms and conditions set forth in this Article XI. Any
transfer or purported transfer of a Partnership Interest not made in accordance
with this Article XI shall be null and void.
(c) Nothing contained in this Article XI shall be construed to prevent a
disposition by the []parent entity[/] members of the General Partner of any or
all of the issued and outstanding []capital stock of[/] member interests in the
General Partner.
(d) Nothing contained in this Article XI, or elsewhere in this Partnership
Agreement, shall preclude the settlement of any transactions involving
[]Common[/] Units entered into through the facilities of any National Securities
Exchange on which the Units listed for trading.
Section 11.2 Transfer of a General Partner's Partnership Interest.
Except for a transfer by the General Partner of all, but not less than all, of
its []Partnership[/] General Partner Interest []as a general partner in the
Partnership[/] to (a) an Affiliate of the General Partner or (b) another Person
in connection with the merger or consolidation of the General Partner
C-70
<PAGE>
with or into another Person, which in either case, shall only be limited by the
provisions of this Section 11.2, the transfer by the General Partner of all or
any part of its []Partnership[/] General Partner Interest []as a general partner
in the Partnership[/] to a Person prior to December 31, 2005 shall be subject to
the prior approval of holders of at least a Unit Majority. Notwithstanding
anything herein to the contrary, no transfer by the General Partner of all or
any part of its []Partnership[/] General Partner Interest []as a general partner
in the Partnership[/] to another Person shall be permitted unless (i) the
transferee agrees to assume the rights and duties of the General Partner under
this Agreement and the Operating Partnership Agreement and to be bound by the
provisions of this Agreement and the Operating Partnership Agreement, (ii) the
Partnership receives an Opinion of Counsel that such transfer would not result
in the loss of limited liability of any Limited Partner or of any limited
partner of any Group Member or cause any Group Member to be treated as an
association taxable as a corporation or otherwise to be taxed as an entity for
federal income tax purposes and (iii) such transferee also agrees to purchase
all (or the appropriate portion thereof, if applicable) of the partnership
interest of the General Partner as the general partner of each Group Member. In
the case of a transfer pursuant to and in compliance with this Section 11.2, the
transferee or successor (as the case may be) shall, subject to compliance with
the terms of Section 12.3, be admitted to the []Partnership[/] as a General
Partner immediately prior to the transfer of the Partnership General Partner
Interest, and the business of the Partnership shall continue without
dissolution.
Section 11.3 Transfer of Units.
(a) Units may be transferred only in the manner described in []Section 10[/]
Article X. The transfer of any Units and the admission of any new Partner shall
not constitute an amendment to this Agreement.
(b) Until admitted as a Substituted Limited Partner pursuant to Article XII,
the Record Holder of a Unit shall be an Assignee in respect of such Unit.
Limited Partners may include custodians, nominees, or any other individual or
entity in its own or any representative capacity.
(c) Each distribution in respect of Units shall be paid by the Partnership,
directly or through the Transfer Agent or through any other Person or agent,
only to the Record Holders thereof as of the Record Date set for the
distribution. Such payment shall constitute full payment and satisfaction of
the Partnership's liability in respect of such payment, regardless of any claim
of any Person who may have an interest in such payment by reason of an
assignment or otherwise.
(d) A transferee who has completed and delivered a Transfer Application shall
be deemed to have (i) requested admission as a Substituted Limited Partner,
(ii) agreed to comply with and be bound by and to have executed this Agreement,
(iii) represented and warranted that such transferee has the right, power and
authority and, if an individual, the capacity to enter into this Agreement,
(iv) granted the powers of attorney set forth in this Agreement and (v) given
the consents and approvals and made the waivers contained in this Agreement.
Section 11.4 Restrictions on Transfers.
Notwithstanding the other provisions of this Article XI, no transfer of any
Unit or interest therein of any Limited Partner or Assignee shall be made if
such transfer would (a) violate the then applicable federal or state securities
laws or rules and regulations of the Commission, any state
C-71
<PAGE>
securities commission or any other governmental authorities with jurisdiction
over such transfer, (b) affect any Group Member's existence or qualification as
a limited partnership under the laws of the jurisdiction of its formation, or
(c) result in entity-level taxation for federal income tax purposes of the
Partnership or the Operating Partnership.
Section 11.5 Citizenship Certificates; Non-citizen Assignees.
(a) If any Group Member is or becomes subject to any federal, state or local
law or regulation that, in the reasonable determination of the General Partner,
creates a substantial risk of cancellation or forfeiture of any property in
which the Group Member has an interest based on the nationality, citizenship or
other related status of a Limited Partner or Assignee, the General Partner may
request any Limited Partner or Assignee to furnish to the General Partner,
within 30 days after receipt of such request, an executed Citizenship
Certification or such other information concerning his nationality, citizenship
or other related status (or, if the Limited Partner or Assignee is a nominee
holding for the account of another Person, the nationality, citizenship or
other related status of such Person) as the General Partner may request. If a
Limited Partner or Assignee fails to furnish to the General Partner within the
aforementioned 30-day period such Citizenship Certification or other requested
information or if upon receipt of such Citizenship Certification or other
requested information the General Partner determines, with the advice of
counsel, that a Limited Partner or Assignee is not an Eligible Citizen, the
Units owned by such Limited Partner or Assignee shall be subject to redemption
in accordance with the provisions of Section 11.6. In addition, the General
Partner may require that the status of any such Limited Partner or Assignee be
changed to that of a Non-citizen Assignee and, thereupon, the General Partner
shall be substituted for such Non-citizen Assignee as the Limited Partner in
respect of his Units.
(b) The General Partner shall, in exercising voting rights in respect of
Units held by it on behalf of Non-citizen Assignees, distribute the votes in
the same ratios as the votes of Limited Partners in respect of Units other than
those of Non-citizen Assignees are cast, either for, against or abstaining as
to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have no
right to receive a distribution in kind pursuant to Section 14.4 but shall be
entitled to the cash equivalent thereof, and the General Partner shall provide
cash in exchange for an assignment of the Non-citizen Assignee's share of the
distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the General Partner from the Non-citizen
Assignee of his Partnership Interest (representing his right to receive his
share of such distribution in kind).
(d) At any time after he can and does certify that he has become an Eligible
Citizen, a Non-citizen Assignee may, upon application to the General Partner,
request admission as a Substituted Limited Partner with respect to any Units of
such Non-citizen Assignee not redeemed pursuant to Section 11.6, and upon his
admission pursuant to Section 12.2, the General Partner shall cease to be
deemed to be the Limited Partner in respect of the Non-citizen Assignee's
Units.
Section 11.6 Redemption of Interests.
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 11.5(a), or if upon receipt
C-72
<PAGE>
of such Citizenship Certification or other information the General Partner
determines, with the advice of counsel, that a Limited Partner or Assignee is
not an Eligible Citizen, the Partnership may, unless the Limited Partner or
Assignee establishes to the satisfaction of the General Partner that such
Limited Partner or Assignee is an Eligible Citizen or has transferred his Units
to a Person who furnishes a Citizenship Certification to the General Partner
prior to the date fixed for redemption as provided below, redeem the
Partnership Interest of such Limited Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited Partner
or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Units, the date fixed for redemption,
the place of payment, that payment of the redemption price will be made
upon surrender of the Certificate evidencing the Redeemable Units and that
on and after the date fixed for redemption no further allocations or
distributions to which the Limited Partner or Assignee would otherwise be
entitled in respect of the Redeemable Units will accrue or be made.
(ii) The aggregate redemption price for Redeemable Units shall be an
amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Units of the class to be
so redeemed multiplied by the number of Units of each such class included
among the Redeemable Units. The redemption price shall be paid, in the sole
discretion of the General Partner, in cash or by delivery of a promissory
note of the Partnership in the principal amount of the redemption price,
bearing interest at the rate of 10% annually and payable in three equal
annual installments of principal together with accrued interest, commencing
one year after the redemption date.
(iii) Upon surrender by or on behalf of the Limited Partner or Assignee,
at the place specified in the notice of redemption, of the Certificate
evidencing the Redeemable Units, duly endorsed in blank or accompanied by
an assignment duly executed in blank, the Limited Partner or Assignee or
his duly authorized representative shall be entitled to receive the payment
therefor.
(iv) After the redemption date, Redeemable Units shall no longer
constitute issued and Outstanding Units.
(b) The provisions of this Section 11.6 shall also be applicable to Units
held by a Limited Partner or Assignee as nominee of a Person determined to
be other than an Eligible Citizen.
(c) Nothing in this Section 11.6 shall prevent the recipient of a notice
of redemption from transferring his Units before the redemption date if
such transfer is otherwise permitted under this Agreement. Upon receipt of
notice of such a transfer, the General Partner shall withdraw the notice of
redemption, provided the transferee of such Units certifies in the Transfer
Application that he is an Eligible Citizen. If the transferee fails to make
such certification, such redemption shall be effected from the transferee
on the original redemption date.
C-73
<PAGE>
ARTICLE XII
ADMISSION OF PARTNERS
Section 12.1 Admission of Initial Limited Partners.
Upon the issuance by the Partnership of the Old Subordinated Units to the
Initial General Partner []as described in Section 4.2, the[/] in connection with
the Initial Offering, the Initial General Partner []shall be deemed to have
been[/] was admitted to the Partnership as a Limited Partner []in respect of the
Subordinated Units issued to it.[/] Upon the issuance by the Partnership of
Common Units to the Initial Underwriters []as described in Section 4.3[/] in
connection with the Initial Offering and the execution by []each Underwriter[/]
the Initial Underwriters of a Transfer Application, the []General Partner shall
admit the[/] Initial Underwriters were admitted to the Partnership as Initial
Limited Partners []in respect of the Common Units purchased by them.[/]
Section 12.2 Admission of Substituted Limited Partners.
By transfer of a Unit representing a Limited Partner Interest in accordance
with Article XI, the transferor shall be deemed to have given the transferee
the right to seek admission as a Substituted Limited Partner subject to the
conditions of, and in the manner permitted under, this Agreement. A transferor
of a Certificate representing a Limited Partner Interest shall, however, only
have the authority to convey to a purchaser or other transferee who does not
execute and deliver a Transfer Application (a) the right to negotiate such
Certificate to a purchaser or other transferee and (b) the right to transfer
the right to request admission as a Substituted Limited Partner to such
purchaser or other transferee in respect of the transferred Units. Each
transferee of a Unit representing a Limited Partner Interest (including any
nominee holder or an agent acquiring such Unit for the account of another
Person) who executes and delivers a Transfer Application shall, by virtue of
such execution and delivery, be an Assignee and be deemed to have applied to
become a Substituted Limited Partner with respect to the Units so transferred
to such Person. Such Assignee shall become a Substituted Limited Partner (x) at
such time as the General Partner consents thereto, which consent may be given
or withheld in the General Partner's sole discretion, and (y) when any such
admission is shown on the books and records of the Partnership. If such consent
is withheld, such transferee shall be an Assignee. An Assignee shall have an
interest in the Partnership equivalent to that of a Limited Partner with
respect to allocations and distributions, including liquidating distributions,
of the Partnership. With respect to voting rights attributable to Units that
are held by Assignees, 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 Units on any matter, vote such Units at the written direction
of the Assignee who is the Record Holder of such Units. If no such written
direction is received, such Units will not be voted. An Assignee shall have no
other rights of a Limited Partner.
Section 12.3 Admission of Successor General Partner.
A successor General Partner approved pursuant to Section 13.1 or 13.2 or the
transferee of or successor to all []of the General Partner's Partnership
Interest as a general partner in the Partnership[/] the General Partner Interest
pursuant to Section 11.2 who is proposed to be admitted as a successor General
Partner shall be admitted to the Partnership as the General Partner, effective
immediately prior to the withdrawal or removal of the General Partner pursuant
to Section 13.1 or 13.2 or the transfer of the General []Partner's Partnership
Interest as a general partner in the Partnership[/] Partner
C-74
<PAGE>
Interest pursuant to Section 11.2; provided, however, that no such successor
shall be admitted to the Partnership until compliance with the terms of Section
11.2 has occurred and such successor has executed and delivered such other
documents or instruments as may be required to effect such admission. Any such
successor shall, subject to the terms hereof, carry on the business of the
Partnership and Operating Partnership without dissolution.
Section 12.4 Admission of Additional Limited Partners.
(a) A Person (other than the General Partner, an Initial Limited Partner or a
Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement [](other than by virtue of a
capital contribution pursuant to the Additional Capital Contribution
Obligation)[/] shall be admitted to the Partnership as an Additional Limited
Partner only upon furnishing to the General Partner (i) evidence of acceptance
in form satisfactory to the General Partner of all of the terms and conditions
of this Agreement, including the power of attorney granted in Section 1.4, and
(ii) such other documents or instruments as may be required in the discretion
of the General Partner to effect such Person's admission as an Additional
Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 12.4, no Person
shall be admitted as an Additional Limited Partner without the consent of the
General Partner, which consent may be given or withheld in the General
Partner's sole discretion. The admission of any Person as an Additional Limited
Partner shall become effective on the date upon which the name of such Person
is recorded as such in the books and records of the Partnership, following the
consent of the General Partner to such admission.
Section 12.5 Amendment of Agreement and Certificate of Limited Partnership.
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act
to amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practical an amendment of this Agreement and,
if required by law, to prepare and file an amendment to the Certificate of
Limited Partnership, and the General Partner may for this purpose, among
others, exercise the power of attorney granted pursuant to Section 1.4.
ARTICLE XIII
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 13.1 Withdrawal of the General Partner.
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each such
event herein referred to as an "Event of Withdrawal");
(i) the General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners (and it shall be deemed that
the General Partner has withdrawn pursuant to this Section 13.1(a)(i) if
the General Partner voluntarily withdraws as general partner of the
Operating Partnership);
(ii) the General Partner transfers all of its rights as General Partner
pursuant to Section 11.2;
C-75
<PAGE>
(iii) the General Partner is removed pursuant to Section 13.2;
(iv) the General Partner (A) makes a general assignment for the benefit
of creditors; (B) files a voluntary bankruptcy petition for relief under
Chapter 7 of the United States Bankruptcy Code; (C) files a petition or
answer seeking for itself a liquidation, dissolution or similar relief (but
not a reorganization) under any law; (D) files an answer or other pleading
admitting or failing to contest the material allegations of a petition
filed against the General Partner in a proceeding of the type described in
clauses (A)-(C) of this Section 13.1(a)(iv); or (E) seeks, consents to or
acquiesces in the appointment of a trustee (but not a debtor in
possession), receiver or liquidator of the General Partner or of all or any
substantial part of its properties;
(v) a final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or against
the General Partner; or
(vi) a certificate of dissolution or its equivalent is filed for the
General Partner, or 90 days expire after the date of notice to the General
Partner of revocation of its charter without a reinstatement of its
charter, under the laws of its state of incorporation or formation.
If an Event of Withdrawal specified in Section 13.1(a)(iv), (v) or (vi) occurs,
the withdrawing General Partner shall give notice to the Limited Partners
within 30 days after such occurrence. The Partners hereby agree that only the
Events of Withdrawal described in this Section 13.1 shall result in the
withdrawal of the General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Closing Date and ending at 12:00 midnight, Eastern Standard
Time, on December 31, 2005, the General Partner voluntarily withdraws by giving
at least 90 days' advance notice of its intention to withdraw to the Limited
Partners, provided that prior to the effective date of such withdrawal, the
withdrawal is approved by Limited Partners holding at least a Unit Majority and
the General Partner delivers to the Partnership an Opinion of Counsel
("Withdrawal Opinion of Counsel") that such withdrawal (following the selection
of the successor General Partner) would not result in the loss of the limited
liability of any Limited Partner or of the limited partner of any Group Member
or cause any Group Member to be treated as an association taxable as a
corporation or otherwise to be taxed as an entity for federal income tax
purposes; (ii) at any time after 12:00 midnight, Eastern Standard Time, on
December 31, 2005, the General Partner voluntarily withdraws by giving at least
90 days' advance notice to the Limited Partners, such withdrawal to take effect
on the date specified in such notice; (iii) at any time that the General
Partner ceases to be a General Partner pursuant to Section 13.1(a)(ii) or is
removed pursuant to Section 13.2; or (iv) notwithstanding clause (i) of this
sentence, at any time that the General Partner voluntarily withdraws by giving
at least 90 days' advance notice of its intention to withdraw to the Limited
Partners, such withdrawal to take effect on the date specified in the notice,
if at the time such notice is given one Person and its Affiliates (other than
the General Partner and its Affiliates) own beneficially or of record or
control at least 50% of the Outstanding Units. The withdrawal of the General
Partner from the Partnership upon the occurrence of an Event of Withdrawal
shall also constitute the withdrawal of the General Partner as general partner
of the other Group Members. If the General Partner gives a notice of withdrawal
pursuant to Section 13.1(a)(i), holders of at least a Unit Majority may, prior
to the effective date of such withdrawal, elect a successor General Partner.
C-76
<PAGE>
The Person so elected as successor General Partner shall automatically become
the successor general partner of the other Group Members. If, prior to the
effective date of the General Partner's withdrawal, a successor is not selected
by the Limited Partners as provided herein or the Partnership does not receive
a Withdrawal Opinion of Counsel, the Partnership shall be dissolved in
accordance with Section 14.1. Any successor General Partner elected in
accordance with the terms of this Section 13.1 shall be subject to the
provisions of Section 12.3.
Section 13.2 Removal of the General Partner.
The General Partner may be removed if such removal is approved by Limited
Partners holding at least two-thirds of the Outstanding Units, voting together
as a single class (excluding those Units held by the General Partner and its
Affiliates). Any such action by such Limited Partners for removal of the
General Partner must also provide for the election of a successor General
Partner by Limited Partners holding at least a majority of the Outstanding
Units (excluding for purposes of such determination Units owned by the General
Partner and its Affiliates). Such removal shall be effective immediately
following the admission of a successor General Partner pursuant to Article XII.
The removal of the General Partner shall also automatically constitute the
removal of the General Partner as general partner of the other Group Members.
If a person is elected as a successor General Partner in accordance with the
terms of this Section 13.2, such person shall, upon admission pursuant to
Article XII, automatically become the successor general partner of the other
Group Members. The right of the Limited Partners holding Outstanding Units to
remove the General Partner shall not exist or be exercised unless the
Partnership has received an opinion opining as to the matters covered by a
Withdrawal Opinion of Counsel. Any successor General Partner elected in
accordance with the terms of this Section 13.2 shall be subject to the
provisions of Section 12.3.
Section 13.3 Interest of Departing Partner and Successor General Partner.
(a) In the event of (i) withdrawal of the General Partner under circumstances
where such withdrawal does not violate this Agreement or (ii) removal of the
General Partner by the Limited Partners under circumstances where Cause does
not exist, if a successor General Partner is elected in accordance with the
terms of Section 13.1 or 13.2, the Departing Partner shall have the option
exercisable prior to the effective date of the departure of such Departing
Partner to require its successor to purchase its Partnership Interest as a
general partner in the Partnership (which is represented by the General Partner
Units) and its partnership interest as the general partner in the other Group
Members (collectively, the "Combined Interest") in exchange for an amount in
cash equal to the fair market value of such Combined Interest, such amount to
be determined and payable as of the effective date of its departure. If the
General Partner is removed by the Limited Partners under circumstances where
Cause exists or if the General Partner withdraws under circumstances where such
withdrawal violates this agreement, and if a successor General Partner is
elected in accordance with the terms of Section 13.1 or 13.2, such successor
shall have the option, exercisable prior to the effective date of the departure
of such Departing Partner, to purchase the Combined Interest of the Departing
Partner for such fair market value of such Combined Interest. In either event,
the Departing Partner shall be entitled to receive all reimbursements due such
Departing Partner pursuant to Section 6.4, including any employee-related
liabilities (including severance liabilities), incurred in connection with the
termination of any employees employed by the General Partner for the benefit of
the Partnership or the other Group Members.
C-77
<PAGE>
For purposes of this Section 13.3(a), the fair market value of the Departing
Partner's Combined Interest shall be determined by agreement between the
Departing Partner and its successor or, failing agreement within 30 days after
the effective date of such Departing Partner's departure, by an independent
investment banking firm or other independent expert selected by the Departing
Partner and its successor, which, in turn, may rely on other experts, and the
determination of which shall be conclusive as to such matter. If such parties
cannot agree upon one independent investment banking firm or other independent
expert within 45 days after the effective date of such departure, then the
Departing Partner shall designate an independent investment banking firm or
other independent expert, the Departing Partner's successor shall designate an
independent investment banking firm or other independent expert, and such firms
or experts shall mutually select a third independent investment banking firm or
independent expert, which shall determine the fair market value of the Combined
Interest. In making its determination, such independent investment banking firm
or other independent expert shall consider the then current trading price of
Units on any National Securities Exchange on which Units are then listed, the
value of the Partnership's assets, the rights and obligations of the General
Partner and other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 13.3(a), the Departing Partner shall become a Limited Partner and the
Combined Interest shall be converted into Common Units pursuant to a valuation
made by an investment banking firm or other independent expert selected
pursuant to Section 13.3(a), without reduction in such Partnership Interest
(but subject to proportionate dilution by reason of the admission of its
successor). Any successor General Partner shall indemnify the Departing Partner
as to all debts and liabilities of the Partnership arising on or after the date
on which the Departing Partner becomes a Limited Partner. For purposes of this
Agreement, conversion of the General Partner's Combined Interest to Common
Units will be characterized as if the General Partner contributed its Combined
Interest to the Partnership in exchange for the newly issued Common Units. For
purposes of this Section 13.3(b), in the event that the Subordination Period
has expired, the Combined Interest shall be converted into Class A Common
Units.
(c) If a successor General Partner is elected in accordance with the terms of
Section 13.1 or 13.2 and the option described in Section 13.3(a) is not
exercised by the party entitled to do so, the successor General Partner shall,
at the effective date of its admission to the Partnership, contribute to the
Partnership cash in an amount equal to []1.01% of the Net Agreed Value of the
Partnership's assets[/] the fair market value of the General Partner Units on
such date. In such event, such successor General Partner shall, subject to the
following sentence, be entitled to such Percentage Interest of all Partnership
allocations and distributions and any other allocations and distributions to
which the Departing Partner was entitled. []In addition, such successor General
Partner shall cause this Agreement to be amended to reflect that, from and after
the date of such successor General Partner's admission, the successor General
Partner's interest in all Partnership distributions and allocations shall be 1%,
and that of the holders of Outstanding Unit shall be 99%.[/]
Section 13.4 Withdrawal of Limited Partners.
No Limited Partner shall have any right to withdraw from the Partnership;
provided, however, that when a transferee of a Limited Partner's Units becomes
a Record Holder, such transferring Limited Partner shall cease to be a Limited
Partner with respect to the Units so transferred.
C-78
<PAGE>
ARTICLE XIV
DISSOLUTION AND LIQUIDATION
Section 14.1 Dissolution.
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, if a successor General
Partner is elected pursuant to Section 13.1 or 13.2, the Partnership shall not
be dissolved and such successor General Partner shall continue the business of
the Partnership. The Partnership shall dissolve, and (subject to Section 14.2)
its affairs shall be wound up, upon:
(a) the expiration of its term as provided in Section 1.5;
(b) an Event of Withdrawal of the General Partner as provided in Section
13.1(a) (other than Section 13.1(a)(ii)), unless a successor is elected and
an Opinion of Counsel is received as provided in Section 13.1(b) or 13.2
and such successor is admitted to the Partnership pursuant to Section 12.3;
(c) an election to dissolve the Partnership by the General Partner that
is approved by holders of at least a Unit Majority;
(d) entry of a decree of judicial dissolution of the Partnership pursuant
to the provisions of the Delaware Act; or
(e) the sale of all or substantially all of the assets and properties of
the Partnership Group.
Section 14.2 Continuation of the Business of the Partnership After Dissolution.
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 13.1(a)(i) or (iii) and the failure of the Partners to select a
successor to such Departing Partner pursuant to Section 13.1 or 13.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 13.1(a)(iv), (v) or
(vi), then within 180 days thereafter, holders of at least a majority of the
Outstanding Units (excluding for purposes of such determination any Units held
by the General Partner or its Affiliates) may elect to reconstitute the
Partnership and continue its business on the same terms and conditions set
forth in this Agreement by forming a new limited partnership on terms identical
to those set forth in this Agreement and having as the successor general
partner a Person approved by holders of at least a majority of the Outstanding
Units (excluding for purposes of such determination any Units held by the
General Partner or its Affiliates). Unless such an election is made within the
applicable time period as set forth above, the Partnership shall conduct only
activities necessary to wind up its affairs. If such an election is so made,
then:
(i) the reconstituted Partnership shall continue until the end of the
term set forth in Section 1.5 unless earlier dissolved in accordance with
this Article XIV;
(ii) if the successor General Partner is not the former General Partner,
then the interest of the former General Partner shall be dealt with in the
manner provided in Section 13.3(b); and
(iii) all necessary steps shall be taken to cancel this Agreement and the
Certificate of Limited Partnership and to enter into and, as necessary, to
file a new partnership agreement and
C-79
<PAGE>
certificate of limited partnership, and the successor general partner may
for this purpose exercise the powers of attorney granted the General
Partner pursuant to Section 1.4; provided, that the right of holders of at
least a majority of Outstanding Units to approve a successor General
Partner and to reconstitute and to continue the business of the Partnership
shall not exist and may not be exercised unless the Partnership has
received an Opinion of Counsel that (x) the exercise of the right would not
result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership nor any
other Group Member would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of such right to continue.
Section 14.3 Liquidator.
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 14.2, the General Partner, or in the event the dissolution is the
result of an Event of Withdrawal, a liquidator or liquidating committee
approved by holders of at least a majority of the Outstanding Units
representing Limited Partner Interests, shall be the Liquidator. The Liquidator
(if other than the General Partner) shall be entitled to receive such
compensation for its services as may be approved by holders of at least a
majority of the Outstanding Units representing Limited Partner Interests. The
Liquidator shall agree not to resign at any time without 15 days' prior notice
and (if other than the General Partner) may be removed at any time, with or
without cause, by notice of removal approved by holders of at least a majority
of the Outstanding Units representing Limited Partner Interests. Upon
dissolution, removal or resignation of the Liquidator, a successor and
substitute Liquidator (who shall have and succeed to all rights, powers and
duties of the original Liquidator) shall within 30 days thereafter be approved
by holders of at least a majority of the Outstanding Units representing Limited
Partner Interests. The right to approve a successor or substitute Liquidator in
the manner provided herein shall be deemed to refer also to any such successor
or substitute Liquidator approved in the manner herein provided. Except as
expressly provided in this Article XIV, the Liquidator approved in the manner
provided herein shall have and may exercise, without further authorization or
consent of any of the parties hereto, all of the powers conferred upon the
General Partner under the terms of this Agreement (but subject to all of the
applicable limitations, contractual and otherwise, upon the exercise of such
powers, other than the limitation on sale set forth in Section 6.3(b)) to the
extent necessary or desirable in the good faith judgment of the Liquidator to
carry out the duties and functions of the Liquidator hereunder for and during
such period of time as shall be reasonably required in the good faith judgment
of the Liquidator to complete the winding up and liquidation of the Partnership
as provided for herein.
Section 14.4 Liquidation.
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner and
over such period as the Liquidator determines to be in the best interest of the
Partners, subject to the following:
(a) Disposition of Assets. The assets may be disposed of by public or
private sale or by distribution in kind to one or more Partners on such
terms as the Liquidator and such Partner or Partners may agree. If any
property is distributed in kind, the Partner receiving the property
C-80
<PAGE>
shall be deemed for purposes of Section 14.4(c) to have received cash equal
to its fair market value; and contemporaneously therewith, appropriate cash
distributions must be made to the other Partners. For purposes of computing
Net []Liquidation[/] Termination Gain, gain or loss on distributed property
shall be recognized as if such property had been sold for its fair market
value.
(b) Discharge of Liabilities. Liabilities of the Partnership include
amounts owed to Partners otherwise in respect of their distribution rights
under Article V. With respect to any liability that is contingent or is
otherwise not yet due and payable, the Liquidator shall either settle such
claim for such amount as it thinks appropriate or establish a reserve of
cash or other assets to provide for its payment. When paid, any unused
portion of the reserve shall be distributed as additional liquidation
proceeds.
(c) Liquidation Distributions. All property and all cash in excess of
that required to discharge liabilities as provided in Section 14.4(b) shall
be distributed to the Partners in accordance with, and to the extent of,
the positive balances in their respective Capital Accounts, as determined
after taking into account all Capital Account adjustments (other than those
made by reason of this clause) for the taxable year of the Partnership
during which the liquidation of the Partnership occurs (with such date of
occurrence being determined pursuant to Treasury Regulation, Section 1.704-
1(b)(2)(ii)(g)), and such distribution shall be made by the end of such
taxable year (or, if later, within 90 days after said date of such
occurrence).
Section 14.5 Cancellation of Certificate of Limited Partnership.
Upon the completion of the distribution of Partnership cash and property as
provided in Sections 14.3 and 14.4 in connection with the liquidation of the
Partnership, the Partnership shall be terminated and the Certificate of Limited
Partnership and all qualifications of the Partnership as a foreign limited
partnership in jurisdictions other than the State of Delaware shall be canceled
and such other actions as may be necessary to terminate the Partnership shall
be taken.
Section 14.6 Return of Contributions.
The General Partner shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions of the Limited
Partners, or any portion thereof, it being expressly understood that any such
return shall be made solely from Partnership assets.
Section 14.7 Waiver of Partition.
[]Each[/] To the maximum extent permitted by law, each Partner hereby waives
any right to partition of the Partnership property.
Section 14.8 Capital Account Restoration.
No Limited Partner shall have any obligation to restore any negative balance
in its Capital Account upon liquidation of the Partnership. The General Partner
shall be obligated to restore any negative balance in its Capital Account upon
liquidation of its interest in the Partnership by the end of the taxable year
of the Partnership during which such liquidation occurs, or, if later, within
90 days after the date of such liquidation.
C-81
<PAGE>
ARTICLE XV
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 15.1 Amendment to be Adopted Solely by General Partner.
Each Limited Partner agrees that the General Partner (pursuant to its powers
of attorney from the Limited Partners and Assignees), without the approval of
any Limited Partner or Assignee, may amend any provision of this Agreement and
execute, swear to, acknowledge, deliver, file and record whatever documents may
be required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) 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 limited partnership or a partnership in which the limited
partners have limited liability under the laws of any state or 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;
(d) a change that, in the sole discretion of the General Partner, (i)
does not adversely affect the Limited Partners in any material respect,
(ii) is necessary or advisable to (A) satisfy any requirements, conditions
or guidelines contained in any opinion, directive, order, ruling or
regulation of any federal or state agency or judicial authority or
contained in any federal or state statute (including the Delaware Act) or
(B) facilitate the trading of the Units (including the division of
Outstanding Units into different classes to facilitate uniformity of tax
consequences within such classes of Units) or comply with any rule,
regulation, guideline or requirement of any National Securities Exchange on
which the Units are or will be listed for trading, compliance with any of
which the General Partner determines in its sole discretion to be in the
best interests of the Partnership and the Limited Partners, (iii) is
necessary or advisable in connection with action taken by the General
Partner pursuant to Section 4.8, or (iv) is required to effect the intent
of the provisions of this Agreement or is otherwise contemplated by this
Agreement;
(e) a change in the fiscal year []and[/] or taxable year of the Partnership
and any changes that, in the sole discretion of the General Partner, are
necessary or advisable as a result of a change in the fiscal year []and[/] or
taxable year of the Partnership including, if the General Partner shall so
determine, a change in the definition of "Quarter" and the dates on which
distributions are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to prevent
the Partnership or the General Partner or its directors or officers from in
any manner being subjected to the provisions of the Investment Company Act
of 1940, as amended, the Investment Advisers Act of 1940, as amended, or
"plan asset" regulations adopted under the Employee Retirement Income
Security Act of 1974, as amended, regardless of whether such are
substantially similar to plan asset regulations currently applied or
proposed by the United States Department of Labor;
C-82
<PAGE>
(g) subject to the terms of Section 4.4, an amendment that, in the sole
discretion of the General Partner, is necessary or advisable in connection
with the authorization of issuance of any class or series of Partnership
Securities pursuant to Section 4.4;
(h) any amendment expressly permitted in this Agreement to be made by the
General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 16.3;
(j) an amendment that, in the sole discretion of the General Partner, is
necessary or advisable to reflect, account for and deal with appropriately
the formation by the Partnership of, or investment by the Partnership in,
any corporation, partnership, joint venture, limited liability company or
other entity other than the Operating Partnership, in connection with the
conduct by the Partnership of activities permitted by the terms of Section
3.1; or
(k) any other amendments substantially similar to the foregoing.
Section 15.2 Amendment Procedures.
Except as provided in Sections 15.1 and 15.3, all amendments to this
Agreement shall be made in accordance with the following requirements.
Amendments to this Agreement may be proposed only by or with the consent of the
General Partner. A proposed amendment shall be effective upon its approval by
the holders of at least a Unit Majority, unless a greater or different
percentage is required under this Agreement or by Delaware law. Each proposed
amendment that requires the approval of the holders of a specified percentage
of Outstanding Units shall be set forth in a writing that contains the text of
the proposed amendment. If such an amendment is proposed, the General Partner
shall seek the written approval of the requisite percentage of Outstanding
Units or call a meeting of the Limited Partners to consider and vote on such
proposed amendment. The General Partner shall notify all Record Holders upon
final adoption of any such proposed amendments.
Section 15.3 Amendment Requirements.
(a) Notwithstanding the provisions of Sections 15.1 and 15.2, no provision of
this Agreement that establishes a percentage of Outstanding Units required to
take any action shall be amended, altered, changed, repealed or rescinded in
any respect that would have either (i) the effect of reducing such voting
percentage or (ii) more than an immaterial effect on a Unitholder unless such
amendment is approved by the written consent or the affirmative vote of holders
of Outstanding Units whose aggregate Outstanding Units constitute not less than
the voting requirement sought to be reduced.
(b) Notwithstanding the provisions of Sections 15.1 and 15.2, no amendment to
this Agreement may (i) enlarge the obligations of any Limited Partner without
its consent, unless such shall be deemed to have occurred as a result of an
amendment approved pursuant to Section 15.3(c), (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 Section 14.1(a) or (c), or (iv) change the term of the
Partnership or, except as set forth in Section 14.1(c), give any Person the
right to dissolve the Partnership.
C-83
<PAGE>
(c) Except as otherwise provided, and without limitation of the General
Partner's authority to adopt amendments to this Agreement as contemplated in
Section 15.1, any amendment that would have a material adverse effect on the
rights or preferences of any class of Outstanding Units in relation to other
classes of Units must be approved by the holders of not less than a majority of
the Outstanding Units of the class affected (excluding, during the
Subordination Period, Common Units owned by the General Partner and its
Affiliates).
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 6.3 or 15.1 and except as otherwise provided by
Section 16.3(b), no amendments shall become effective without the approval of
the holders of at least 90% of the Outstanding 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 or any limited partner of the
other Group Members under applicable law.
(e) This Section 15.3 shall only be amended with the approval of the holders
of at least 90% of the Outstanding Units.
Section 15.4 Meetings.
All acts of Limited Partners to be taken pursuant to this Agreement shall be
taken in the manner provided in this Article XV. Meetings of the Limited
Partners may be called by the General Partner or by Limited Partners owning 20%
or more of the Outstanding Units of the class or classes for which a meeting is
proposed. Limited Partners shall call a meeting by delivering to the General
Partner one or more requests in writing stating that the signing Limited
Partners wish to call a meeting and indicating the general or specific purposes
for which the meeting is to be called. Within 60 days after receipt of such a
call from Limited Partners or within such greater time as may be reasonably
necessary for the Partnership to comply with any statutes, rules, regulations,
listing agreements or similar requirements governing the holding of a meeting
or the solicitation of proxies for use at such a meeting, the General Partner
shall send a notice of the meeting to the Limited Partners either directly or
indirectly through the Transfer Agent. A meeting shall be held at a time and
place determined by the General Partner on a date not less than 10 days nor
more than 60 days after the mailing of notice of the meeting. []Limited Partners
shall not vote on matters that would cause the Limited Partners to be deemed to
be taking part in the management and control of the business and affairs of the
Partnership so as to jeopardize the Limited Partners' limited liability under
the Delaware Act or the law of any other state in which the Partnership is
qualified to do business.[/]
Section 15.5 Notice of a Meeting.
Notice of a meeting called pursuant to Section 15.4 shall be given to the
Record Holders in writing by mail or other means of written communication in
accordance with Section 18.1. The notice shall be deemed to have been given at
the time when deposited in the mail or sent by other means of written
communication.
Section 15.6 Record Date.
For purposes of determining the Limited Partners entitled to notice of or to
vote at a meeting of the Limited Partners or to give approvals without a
meeting as provided in Section 15.11, the General Partner may set a Record
Date, which shall not be less than 10 nor more than 60 days before
C-84
<PAGE>
(a) the date of the meeting (unless such requirement conflicts with any rule,
regulation, guideline or requirement of any National Securities Exchange on
which the Units are listed for trading, in which case the rule, regulation,
guideline or requirement of such exchange shall govern) or (b) in the event
that approvals are sought without a meeting, the date by which Limited Partners
are requested in writing by the General Partner to give such approvals.
Section 15.7 Adjournment.
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting and a new Record Date need not be fixed, if the
time and place thereof are announced at the meeting at which the adjournment is
taken, unless such adjournment shall be for more than 45 days. At the adjourned
meeting, the Partnership may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than 45 days
or if a new Record Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this Article XV.
Section 15.8 Waiver of Notice; Approval of Meeting; Approval of Minutes.
The transactions of any meeting of Limited Partners, however called and
noticed, and whenever held, shall be as valid as if occurred at a meeting duly
held after regular call and notice, if a quorum is present either in person or
by proxy, and if, either before or after the meeting, Limited Partners
representing such quorum who were present in person or by proxy and entitled to
vote, sign a written waiver of notice or an approval of the holding of the
meeting or an approval of the minutes thereof. All waivers and approvals shall
be filed with the Partnership records or made a part of the minutes of the
meeting. Attendance of a Limited Partner at a meeting shall constitute a waiver
of notice of the meeting, except when the Limited Partner does not approve, at
the beginning of the meeting, of the transaction of any business because the
meeting is not lawfully called or convened; and except that attendance at a
meeting is not a waiver of any right to disapprove the consideration of matters
required to be included in the notice of the meeting, but not so included, if
the disapproval is expressly made at the meeting.
Section 15.9 Quorum.
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).
At any meeting of the Limited Partners duly called and held in accordance with
this Agreement at which a quorum is present, the act of Limited Partners
holding Outstanding Units that in the aggregate represent a majority of the
Outstanding Units entitled to vote and be present in person or by proxy at such
meeting shall be deemed to constitute the act of all Limited Partners, unless a
greater or different percentage is required with respect to such action under
the provisions of this Agreement, in which case the act of the Limited Partners
holding Outstanding Units that in the aggregate represent at least such greater
or different percentage shall be required. The Limited Partners present at a
duly called or held meeting at which a quorum is present
C-85
<PAGE>
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Limited Partners to leave less than a quorum, if any
action taken (other than adjournment) is approved by the required percentage of
Outstanding Units specified in this Agreement. In the absence of a quorum any
meeting of Limited Partners may be adjourned from time to time by the
affirmative vote of holders of at least a majority of the Outstanding Units
represented either in person or by proxy, but no other business may be
transacted, except as provided in Section 15.7.
Section 15.10 Conduct of Meeting.
The General Partner shall have full power and authority concerning the manner
of conducting any meeting of the Limited Partners or solicitation of approvals
in writing, including the determination of Persons entitled to vote, the
existence of a quorum, the satisfaction of the requirements of Section 15.4,
the conduct of voting, the validity and effect of any proxies and the
determination of any controversies, votes or challenges arising in connection
with or during the meeting or voting. The General Partner shall designate a
Person to serve as chairman of any meeting and shall further designate a Person
to take the minutes of any meeting. All minutes shall be kept with the records
of the Partnership maintained by the General Partner. The General Partner may
make such other regulations consistent with the applicable law and this
Agreement as it may deem advisable concerning the conduct of any meeting of the
Limited Partners or solicitation of approvals in writing, including regulations
in regard to the appointment of proxies, the appointment and duties of
inspectors of votes and approvals, the submission and examination of proxies
and other evidence of the right to vote, and the revocation of approvals in
writing.
Section 15.11 Action Without a Meeting.
Any action that may be taken at a meeting of the Limited Partners may be
taken without a meeting if an approval in writing setting forth the action so
taken is signed by Limited Partners owning not less than the minimum percentage
of the Outstanding Units that would be necessary to authorize or take such
action at a meeting at which all the Limited Partners were present and voted.
Prompt notice of the taking of action without a meeting shall be given to the
Limited Partners who have not approved in writing. The General Partner may
specify that any written ballot submitted to Limited Partners for the purpose
of taking any action without a meeting shall be returned to the Partnership
within the time period, which shall be not less than 20 days, specified by the
General Partner. If a ballot returned to the Partnership does not vote all of
the Units held by the Limited Partner, the Partnership shall be deemed to have
failed to receive a ballot for the Units that were not voted. If approval of
the taking of any action by the Limited Partners is solicited by any Person
other than by or on behalf of the General Partner, the written approvals shall
have no force and effect unless and until (a) they are deposited with the
Partnership in care of the General Partner, (b) approvals sufficient to take
the action proposed are dated as of a date not more than 90 days prior to the
date sufficient approvals are deposited with the Partnership and (c) an Opinion
of Counsel is delivered to the General Partner to the effect that the exercise
of such right and the action proposed to be taken with respect to any
particular matter (i) will not cause the Limited Partners to be deemed to be
taking part in the management and control of the business and affairs of the
Partnership so as to jeopardize the Limited Partners' limited liability, and
(ii) is otherwise permissible under the state statutes then governing the
rights, duties and liabilities of the Partnership and the Partners.
C-86
<PAGE>
Section 15.12 Voting and Other Rights.
(a) Only those Record Holders of the Units on the Record Date set pursuant to
Section 15.6 (and also subject to the limitations contained in the definition
of "Outstanding") shall be entitled to notice of, and to vote at, a meeting of
Limited Partners or to act with respect to matters as to which the holders of
the Outstanding Units have the right to vote or to act. All references in this
Agreement to votes of, or other acts that may be taken by, the Outstanding
Units shall be deemed to be references to the votes or acts of the Record
Holders of such Outstanding Units.
(b) With respect to Units that are held for a Person's account by another
Person (such as a broker, dealer, bank, trust company or clearing corporation,
or an agent of any of the foregoing), in whose name such Units are registered,
such other Person shall, in exercising the voting rights in respect of such
Units on any matter, and unless the arrangement between such Persons provides
otherwise, vote such Units in favor of, and at the direction of, the Person who
is the beneficial owner, and the Partnership shall be entitled to assume it is
so acting without further inquiry. The provisions of this Section 15.12(b) (as
well as all other provisions of this Agreement) are subject to the provisions
of Section 10.4.
ARTICLE XVI
[]MERGER[/] MERGER
Section 16.1 Authority.
The Partnership may merge or consolidate with one or more corporations,
business trusts or associations, real estate investment trusts, common law
trusts or unincorporated businesses, including a general partnership or,
limited partnership or limited liability company, formed under the laws of the
State of Delaware or any other state of the United States of America, pursuant
to a written agreement of merger or consolidation ("Merger Agreement") in
accordance with this Article XVI.
Section 16.2 Procedure for Merger or Consolidation.
Merger or consolidation of the Partnership pursuant to this Article XVI
requires the prior approval of the General Partner. If the General Partner
shall determine, in the exercise of its sole discretion, to consent to the
merger or consolidation, the General Partner shall approve the Merger
Agreement, which shall set forth:
(a) The names and jurisdictions of formation or organization of each of
the business entities proposing to merge or consolidate;
(b) The name and jurisdictions of formation or organization of the
business entity that is to survive the proposed merger or consolidation
(the "Surviving Business Entity");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property
or general or limited partner interests, rights, securities or obligations
of the Surviving Business Entity; and (i) if any general or limited partner
interests, securities or rights of any constituent business entity are not
to be exchanged
C-87
<PAGE>
or converted solely for, or into, cash, property or general or limited
partner interests, rights, securities or obligations of the Surviving
Business Entity, the cash, property or general or limited partner
interests, rights, securities or obligations of any limited partnership,
corporation, trust or other entity (other than the Surviving Business
Entity) which the holders of such general or limited partner interests,
securities or rights are to receive in exchange for, or upon conversion of
their general or limited partner interests, securities or rights, and (ii)
in the case of securities represented by certificates, upon the surrender
of such certificates, which cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited partnership, corporation, trust or other
entity (other than the Surviving Business Entity), or evidences thereof,
are to be delivered;
(e) A statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership, certificate of limited liability company
or other similar charter or governing document) of the Surviving Business
Entity to be effected by such merger or consolidation;
(f) The effective time of the merger, which may be the date of the filing
of the certificate of merger pursuant to Section 16.4 or a later date
specified in or determinable in accordance with the Merger Agreement
(provided, that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, the effective time shall
be fixed no later than the time of the filing of the certificate of merger
and stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General
Partner.
Section 16.3 Approval by Limited Partners of Merger or Consolidation.
(a) The General Partner, upon its approval of the Merger Agreement, shall
direct that the Merger Agreement be submitted to a vote of Limited Partners,
whether at a meeting or by written consent, in either case in accordance with
the requirements of Article XV. A copy or a summary of the Merger Agreement
shall be included in or enclosed with the notice of a meeting or the written
consent.
(b) The Merger Agreement shall be approved upon receiving the affirmative
vote or consent of the holders of at least a Unit Majority unless the Merger
Agreement contains any provision that, if contained in an amendment to this
Agreement, the provisions of this Agreement or the Delaware Act would require
the vote or consent of a greater percentage of the Outstanding Units or of any
class of Limited Partners, in which case such greater percentage vote or
consent shall be required for approval of the Merger Agreement.
(c) After such approval by vote or consent of the Limited Partners, and at
any time prior to the filing of the certificate of merger pursuant to Section
16.4, the merger or consolidation may be abandoned pursuant to provisions
therefor, if any, set forth in the Merger Agreement.
Section 16.4 Certificate of Merger.
Upon the required approval by the General Partner and the Limited Partners of
a Merger Agreement, a certificate of merger shall be executed and filed with
the Secretary of State of the State of Delaware in conformity with the
requirements of the Delaware Act.
C-88
<PAGE>
Section 16.5 Effect of Merger.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all
other things and causes of action belonging to each of those business
entities shall be vested in the Surviving Business Entity and after the
merger or consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business entity;
(ii) the title to any real property vested by deed or otherwise in any of
those constituent business entities shall not revert and is not in any way
impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests in
property of any of those constituent business entities shall be preserved
unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity, and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not be
deemed to result in a transfer or assignment of assets or liabilities from one
entity to another having occurred.
ARTICLE XVII
RIGHT TO ACQUIRE UNITS
Section 17.1 Right to Acquire Units.
(a) Notwithstanding any other provision of this Agreement, if at any time not
more than 20% of the total Units of any class then Outstanding are held by
Persons other than the General Partner and its Affiliates, the General Partner
shall then have the right, which right it may assign and transfer to the
Partnership or any Affiliate of the General Partner, exercisable in its sole
discretion, to purchase all, but not less than all, of the Units of such class
then Outstanding held by Persons other than the General Partner and its
Affiliates, at the greater of (x) the Current Market Price as of the date three
days prior to the date that the notice described in Section []17.1(b)[/] 17.1(c)
is mailed, and (y) the highest cash price paid by the General Partner or any of
its Affiliates for any such Unit purchased during the 90-day period preceding
the date that the notice described in Section []17.1(b) is mailed. As used in
this Agreement, (i) "Current Market Price" as of any date of any class of Units
listed or admitted to trading on any National Securities Exchange means the
average of the daily Closing Prices (as hereinafter defined) per Unit of such
class for the 20 consecutive Trading Days (as hereinafter defined) immediately
prior to such date; (ii) "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 (other than the Nasdaq Stock Market) 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[/]
C-89
<PAGE>
[]to trading on any National Securities Exchange (other than the Nasdaq Stock
Market), 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; and (iii) "Trading Day" means
a day on which the principal National Securities Exchange on which the Units of
any class are listed or admitted to trading is open for the transaction of
business or, if 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. [/]17.1(c) is mailed.
[](b)[/] (b) Notwithstanding any other provision of this Agreement, if at any
time after the expiration of the Subordination Period, the Partnership acquires,
through purchase or exchange, in a twelve-month period, 66 2/3% or more of the
total Class B Common Units, the Partnership shall then have the right, which it
may not assign or transfer, exercisable in its sole discretion, to purchase all,
but not less than all, of the remaining Class B Common Units then Outstanding
during the following twelve-month period, at the greater of (x) the Current
Market Price as of the date three days prior to the date that the notice
described in Section 17(c) is mailed, and (y) the highest cash price paid by the
Partnership for any such Unit purchased during the 90-day period preceding the
date that the notice described in Section 17(c) is mailed.
(c) If the General Partner, any Affiliate of the General Partner or the
Partnership elects to exercise the right to purchase Units granted pursuant to
Section 17.1(a) or the Partnership elects to exercise the right granted
pursuant to Section 17(b) to purchase Class B Common Units, the General Partner
or the Partnership, as the case may be, shall deliver to the Transfer Agent
notice of such election to purchase (the "Notice of Election to Purchase") and
shall cause the Transfer Agent to mail a copy of such Notice of Election to
Purchase to the Record Holders of such Units (as of a Record Date selected by
the General Partner) at least 10, but not more than 60, days prior to the
Purchase Date. Such Notice of Election to Purchase shall also be published for
a period of at least three consecutive days in at least two daily newspapers of
general circulation printed in the English language and published in the
Borough of Manhattan, New York. The Notice of Election to Purchase shall
specify the Purchase Date and the price (determined in accordance with Section
17. l(a)) at which Units will be purchased and state that the General Partner,
its Affiliate or the Partnership, as the case may be, elects to purchase such
Units, upon surrender of Certificates representing such Units in exchange for
payment, at such office or offices of the Transfer Agent as the Transfer Agent
may specify, or as may be required by any National Securities Exchange on which
the Units are listed or admitted to trading. Any such Notice of Election to
Purchase mailed to a Record Holder of Units at his address as reflected in the
records of the Transfer Agent shall be conclusively presumed to have been given
regardless of whether the owner receives such notice. On or prior to the
Purchase Date, the General Partner, its Affiliate or the Partnership, as the
case may be, shall deposit with the Transfer Agent cash in an amount sufficient
to pay the aggregate purchase price of all of the Units to be purchased in
accordance with this Section 17.1. If the Notice of Election to Purchase shall
have been duly given as aforesaid at least 10 days prior to the Purchase Date,
and if on or prior to the
C-90
<PAGE>
Purchase Date the deposit described in the preceding sentence has been made for
the benefit of the holders of Units subject to purchase as provided herein,
then from and after the Purchase Date, notwithstanding that any Certificate
shall not have been surrendered for purchase, all rights of the holders of such
Units (including any rights pursuant to Articles IV, V and XIV) shall thereupon
cease, except the right to receive the purchase price (determined in accordance
with Section 17.1(a)) for Units therefor, without interest, upon surrender to
the Transfer Agent of the Certificates representing such Units, and such Units
shall thereupon be deemed to be transferred to the General Partner, its
Affiliate or the Partnership, as the case may be, on the record books of the
Transfer Agent and the Partnership, and the General Partner or any Affiliate of
the General Partner, or the Partnership, as the case may be, shall be deemed to
be the owner of all such Units from and after the Purchase Date and shall have
all rights as the owner of such Units (including all rights as owner of such
Units pursuant to Articles IV, V and XIV).
(c)(d) At any time from and after the Purchase Date, a holder of an
Outstanding Unit subject to purchase as provided in this Section 17.1 may
surrender his Certificate evidencing such Unit to the Transfer Agent in
exchange for payment of the amount described in Section 17.1(a), therefor,
without interest thereon.
ARTICLE XVIII
GENERAL PROVISIONS
Section 18.1 Addresses and Notices.
Any notice, demand, request, report or proxy materials required or permitted
to be given or made to a Partner or Assignee under this Agreement shall be in
writing and shall be deemed given or made when delivered in person or when sent
by first class United States mail or by other means of written communication to
the Partner or Assignee at the address described below. Any notice, payment or
report to be given or made to a Partner or Assignee hereunder shall be deemed
conclusively to have been given or made, and the obligation to give such notice
or report or to make such payment shall be deemed conclusively to have been
fully satisfied, upon sending of such notice, payment or report to the Record
Holder of such Unit at his address as shown on the records of the Transfer
Agent or as otherwise shown on the records of the Partnership, regardless of
any claim of any Person who may have an interest in such Unit or the
Partnership Interest of a General Partner by reason of any assignment or
otherwise. An affidavit or certificate of making of any notice, payment or
report in accordance with the provisions of this Section 18.1 executed by the
General Partner, the Transfer Agent or the mailing organization shall be prima
facie evidence of the giving or making of such notice, payment or report. If
any notice, payment or report addressed to a Record Holder at the address of
such Record Holder appearing on the books and records of the Transfer Agent or
the Partnership is returned by the United States []Post Office[/] Postal Service
marked to indicate that the United States Postal Service is unable to deliver
it, such notice, payment or report and any subsequent notices, payments and
reports shall be deemed to have been duly given or made without further mailing
(until such time as such Record Holder or another Person notifies the Transfer
Agent or the Partnership of a change in his address) if they are available for
the Partner or Assignee at the principal office of the Partnership for a period
of one year from the date of the giving or making of
C-91
<PAGE>
such notice, payment or report to the other Partners and Assignees. Any notice
to the Partnership shall be deemed given if received by the General Partner at
the principal office of the Partnership designated pursuant to Section 1.3. The
General Partner may rely and shall be protected in relying on any notice or
other document from a Partner, Assignee or other Person if believed by it to be
genuine.
Section 18.2 References.
Except as specifically provided otherwise, references to "Articles" and
"Sections" are to Articles and Sections of this Agreement.
Section 18.3 Pronouns and Plurals.
Whenever the context may require, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns, pronouns and verbs shall include the plural and vice versa.
Section 18.4 Further Action.
The parties shall execute and deliver all documents, provide all information
and take or refrain from taking action as may be necessary or appropriate to
achieve the purposes of this Agreement.
Section 18.5 Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 18.6 Integration.
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto.
Section 18.7 Creditors.
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
Section 18.8 Waiver.
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach of any other covenant, duty, agreement or condition.
Section 18.9 Counterparts.
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto or, in the case of a Person acquiring a Unit, upon accepting
the certificate evidencing such Unit or executing and delivering a Transfer
Application as herein described, independently of the signature of any other
party.
Section 18.10 Applicable Law.
This Agreement shall be construed in accordance with and governed by the laws
of the State of Delaware, without regard to the principles of conflicts of law.
C-92
<PAGE>
Section 18.11 Invalidity of Provisions.
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
Section 18.12 Consent of Partners.
Each Partner hereby expressly consents and agrees that, whenever in this
Agreement it is specified that an action may be taken upon the affirmative vote
or consent of less than all of the Partners, such action may be so taken upon
the concurrence of less than all of the Partners and each Partner shall be
bound by the results of such action.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
General Partner:
[]Star Gas Corporation[/]
[]By:
William G. Powers, Jr., President[/]
[]ORGANIZATIONAL LIMITED PARTNER:[/]
[]By:
William G. Powers, Jr.[/]
[]APPENDIX B Star Gas LLC[/]
By:
Name:
Title:
Limited Partners:
All Limited Partners now and
hereafter admitted as limited
partners of the Partnership,
pursuant to the Powers of Attorney
now and hereafter executed in favor
of, and granted and delivered to,
the General Partner.
By: Star Gas LLC
General Partner, as attorney-in-fact
for all Limited Partners pursuant to
the Powers of Attorney granted
pursuant to Section 1.4
By:
Name:
Title:
C-93
<PAGE>
EXHIBIT A
TO THE AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
STAR GAS PARTNERS, L.P.
CERTIFICATE EVIDENCING COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
STAR GAS PARTNERS, L.P.
No. Common Units
STAR GAS, LLC., a Delaware limited liability company, as the General Partner
of STAR GAS PARTNERS, L.P., a Delaware limited partnership (the "Partnership"),
hereby certifies that (the "Holder") is the registered owner of
Common Units representing limited partner interests in the Partnership (the
"Common Units") transferable on the books of the Partnership, in person or by
duly authorized attorney, upon surrender of this Certificate properly endorsed
and accompanied by a properly executed application for transfer of the Common
Units represented by this Certificate. The rights, preferences and limitations
of the Common Units are set forth in, and this Certificate and the Common Units
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Amended and Restated Agreement of Limited Partnership of
STAR GAS PARTNERS, L.P., as amended, supplemented or restated from time to time
(the "Partnership Agreement"). Copies of the Partnership Agreement are on file
at, and will be furnished without charge on delivery of written request to the
Partnership at, the principal office of the Partnership located at 2187
Atlantic Street, Stamford, Connecticut 06912-0011. Capitalized terms used
herein but not defined shall have the meaning given them in the Partnership
Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement,
(ii) represented and warranted that the Holder has all right, power and
authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (iii) granted the powers of attorney provided for in the
Partnership Agreement and (iv) made the waivers and given the consents and
approvals contained in the Partnership Agreement.
This Certificate shall not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
Dated: Star Gas, LLC.,
as General Partner
Countersigned and Registered by: By: _________________________________
President
By: _________________________________
as Transfer Agent and Registrar Secretary
By: _________________________________
Authorized Signature
A-1
<PAGE>
[REVERSE OF CERTIFICATE]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as follows according to applicable laws or
regulations:
TEN COM- as tenants in common UNIF GIFT MIN ACT-
TEN ENT- as tenants by the entireties Custodian
JT TEN- as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants in under Uniform Gifts to Minors
common Act
State
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
IN
STAR GAS PARTNERS, L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF STAR GAS PARTNERS, L.P.
You have acquired an interest in Star Gas Partners, L.P., 2187 Atlantic
Street, Stamford, Connecticut 06912-0011, whose taxpayer identification number
is 06-1437793. The Internal Revenue Service has issued Star Gas Partners, L.P.
the following tax shelter registration number:
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY
INCOME BY REASON OF YOUR INVESTMENT IN Star Gas PARTNERS, L.P.
You must report the registration number as well as the name and taxpayer
identification number of Star Gas Partners, L.P. on Form 8271. FORM 8271 MUST
BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT, OR
OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN STAR GAS
PARTNERS, L.P.
If you transfer your interest in Star Gas Partners, L.P. to another person,
you are required by the Internal Revenue Service to keep a list containing (a)
that person's name, address and taxpayer identification number, (b) the date on
which you transferred the interest and (c) the name, address and tax shelter
registration number of Star Gas Partners, L.P. If you do not want to keep such
a list, you must (1) send the information specified above to the Partnership,
which will keep the list for this tax shelter, and (2) give a copy of this
notice to the person to whom you transfer your interest. Your failure to comply
with any of the above-described responsibilities could result in the imposition
of a penalty under Section 6707(b) or 6708(a) of the Internal Revenue Code of
1986, as amended, unless such failure is shown to be due to reasonable cause.
A-2
<PAGE>
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED, OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
FOR VALUE RECEIVED, hereby assigns, conveys, sells and
transfers unto
- ------------------------------------- -------------------------------------
(Please print or typewrite name (Please insert Social Security or
and address of Assignee) other identifying number of
Assignee)
Common Units representing limited partner interests evidenced by this
Certificate, subject to the Partnership Agreement, and does hereby irrevocably
constitute and appoint as its attorney-in-fact with full power of substitution
to transfer the same on the books of Star Gas Partners, L.P.
Date: NOTE: The signature to any
endorsement hereon must correspond
with the name as written upon the
face of this Certificate in every
particular, without alteration,
enlargement or change.
SIGNATURE(S) MUST BE GUARANTEED BY A
MEMBER FIRM OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS,
INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY
-------------------------------------
(Signature)
-------------------------------------
(Signature)
SIGNATURE(S) GUARANTEED
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.
A-3
<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 and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated 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
A-4
<PAGE>
- -------------------------------------
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[]-Foreign Corporation--
Non-[/]resident Alien
[_] Foreign Corporation
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[/] 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.
A-5
<PAGE>
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-6
<PAGE>
EXHIBIT B
TO THE AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
STAR GAS PARTNERS, L.P.
CERTIFICATE EVIDENCING SENIOR SUBORDINATED UNITS
REPRESENTING LIMITED PARTNER INTERESTS
STAR GAS PARTNERS, L.P.
No. Senior Subordinated Units
STAR GAS, LLC., a Delaware limited liability company, as the General Partner
of STAR GAS PARTNERS, L.P., a Delaware limited partnership (the "Partnership"),
hereby certifies that (the "Holder") is the
registered owner of Senior Subordinated Units representing limited
partner interests in the Partnership (the "Senior Subordinated Units")
transferable on the books of the Partnership, in person or by duly authorized
attorney, upon surrender of this Certificate properly endorsed and accompanied
by a properly executed application for transfer of the Senior Subordinated
Units represented by this Certificate. The rights, preferences and limitations
of the Senior Subordinated Units are set forth in, and this Certificate and the
Senior Subordinated Units represented hereby are issued and shall in all
respects be subject to the terms and provisions of, the Amended and Restated
Agreement of Limited Partnership of STAR GAS PARTNERS, L.P., as amended,
supplemented or restated from time to time (the "Partnership Agreement").
Copies of the Partnership Agreement are on file at, and will be furnished
without charge on delivery of written request to the Partnership at, the
principal office of the Partnership located at 2187 Atlantic Street, Stamford,
Connecticut 06912-0011. Capitalized terms used herein but not defined shall
have the meaning given them in the Partnership Agreement.
The Holder, by accepting this Certificate, is deemed to have (i) requested
admission as, and agreed to become, a Limited Partner and to have agreed to
comply with and be bound by and to have executed the Partnership Agreement,
(ii) represented and warranted that the Holder has all right, power and
authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (iii) granted the powers of attorney provided for in the
Partnership Agreement and (iv) made the waivers and given the consents and
approvals contained in the Partnership Agreement.
This Certificate shall not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
Dated: Star Gas, LLC.,
as General Partner
Countersigned and Registered by:
By: _________________________________
President
_____________________________________ By: _________________________________
as Transfer Agent and Registrar Secretary
By: _________________________________
Authorized Signature
B-1
<PAGE>
[REVERSE OF CERTIFICATE]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as follows according to applicable laws or
regulations:
TEN COM- as tenants in common UNIF GIFT MIN ACT-
TEN ENT- as tenants by the entireties Custodian
JT TEN- as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants in under Uniform Gifts to Minors
common Act
State
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF SENIOR SUBORDINATED UNITS
IN
STAR GAS PARTNERS, L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF STAR GAS PARTNERS, L.P.
You have acquired an interest in Star Gas Partners, L.P. 2187 Atlantic
Street, Stamford, Connecticut 06912-0011, whose taxpayer identification number
is 06-1437793. The Internal Revenue Service has issued Star Gas Partners, L.P.
the following tax shelter registration number:
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY
INCOME BY REASON OF YOUR INVESTMENT IN Star Gas PARTNERS, L.P.
You must report the registration number as well as the name and taxpayer
identification number of Star Gas Partners, L.P. on Form 8271. FORM 8271 MUST
BE ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT, OR
OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN STAR GAS
PARTNERS, L.P.
If you transfer your interest in Star Gas Partners, L.P. to another person,
you are required by the Internal Revenue Service to keep a list containing (a)
that person's name, address and taxpayer identification number, (b) the date on
which you transferred the interest and (c) the name, address and tax shelter
registration number of Star Gas Partners, L.P. If you do not want to keep such
a list you must (1) send the information specified above to the Partnership,
which will keep the list for this tax shelter, and (2) give a copy of this
notice to the person to whom you transfer your interest. Your failure to comply
with any of the above-described responsibilities could result in the imposition
of a penalty under Section 6707(b) or 6708(a) of the Internal Revenue Code of
1986, as amended unless such failure is shown to be due to reasonable cause.
B-2
<PAGE>
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
FOR VALUE RECEIVED, hereby assigns, conveys, sells and
transfers unto
_____________________________________ _____________________________________
(Please print or typewrite nameand (Please insert Social Security or
address of Assignee) other identifying number of
Assignee)
Senior Subordinated Units representing limited partner interests
evidenced by this Certificate, subject to the Partnership Agreement, and does
hereby irrevocably constitute and appoint as its attorney-in-fact
with full power of substitution to transfer the same on the books of Star Gas
Partners, L.P.
Date: _______________________________ NOTE: The signature to any
endorsement hereon must correspond
with the name as written upon the
face of this Certificate in every
particular, without alteration,
enlargement or change.
SIGNATURE(S) MUST BE GUARANTEED BY A
MEMBER FIRM OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS,
INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY.
SIGNATURE(S) GUARANTEED _____________________________________
(Signature)
_____________________________________
(Signature)
No transfer of the Senior Subordinated Units evidenced hereby will be
registered on the books of the Partnership, unless the Certificate evidencing
the Senior Subordinated Units to be transferred is surrendered for registration
or transfer and an Application for Transfer of Senior Subordinated 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 Senior Subordinated 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 Senior
Subordinate Units.
B-3
<PAGE>
APPENDIX A
No transfer of the Senior Subordinated Units evidenced hereby will be
registered on the Books of the Partnership, unless the Certificate evidencing
the Senior Subordinated Units to be transferred is surrendered for registration
or transfer and an Application for Transfer of Senior Subordinated 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 Senior Subordinated 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 Senior
Subordinated Units.
APPLICATION FOR TRANSFER OF SENIOR SUBORDINATED UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Senior Subordinated Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Star Gas Partners, L.P., 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 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
B-4
<PAGE>
_____________________________________
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
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 corporation, foreign
partnership, foreign
(Name of Interestholder)
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.
B-5
<PAGE>
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.
B-6
<PAGE>
ANNEX D
October 16, 1998
The Special Committee of the Board of Directors
Star Gas Corporation
2187 Atlantic Street
Stamford, CT 06912-0011
Members of the Special Committee of the Board of Directors:
You (the "Special Committee") have requested the opinion of A.G. Edwards &
Sons, Inc. ("A.G. Edwards"), the financial advisor to the Special Committee, as
to the fairness, from a financial point of view, of the Transaction (as
hereinafter defined) to the public common unitholders (the "Public Common
Unitholders"), of Star Gas Partners, L.P., (the "Partnership").
As more fully described in the Partnership's Registration Statement on Form
S-4, the "Transaction" consists of the following four interrelated principal
parts:
(1) the acquisition of Petroleum Heat and Power Co., Inc. ("Petro") by
the Partnership;
(2) the public offerings of debt and equity by the Partnership or its
subsidiary (in accordance with the terms set forth in the Agreement and
Plan of Merger) and the redemption of certain debt and preferred stock of
Petro;
(3) the withdrawal of Star Gas Corporation, the current general partner
of the Partnership (the "General Partner") from the Partnership (as well as
from the operating partnership), and the admission of Star Gas L.L.C. as
the new general partner; and
(4) the adoption of certain amendments to the Agreement of Limited
Partnership (and the operating partnership's agreement of limited
partnership) in order to consummate the Transaction.
For purposes of our opinion with respect to the Transaction, we have assumed
that the Partnership will be able to complete the requisite financings in (2)
and understand that the Transaction will not be consummated if the Partnership
is unable to complete the requisite financings in accordance with the specified
terms and conditions. We have also assumed that the General Partner's
withdrawal and the related admission of a successor general partner in (3) will
have no financial impact on the Public Common Unitholders.
A.G. Edwards, as part of its investment banking business, is regularly
engaged in, among other things, the valuation of businesses and their
securities in connection with mergers and acquisitions, initial public
offerings, secondary distribution of listed and unlisted securities, private
placements, and valuations for estate, corporate and other purposes. We are
familiar with the Partnership through acting as exclusive financial advisor and
placement agent in the Partnership's private placement of 7.17% First Mortgage
Notes due 2010 and through our securities research coverage of the
<PAGE>
Partnership. In connection with this engagement, we will receive fees (a
portion of which is contingent upon the consummation of the Transaction) as
well as our standard indemnification. We are not aware of any relationship
between A.G. Edwards and the Partnership, the General Partner or Petro, which
in our opinion would affect our ability to render a fair and independent
opinion in this matter.
In connection with the opinion, A.G. Edwards' activities included, among
other things:
(i) A review of the most recently available drafts of the Partnership's
Registration Statement on Form S-4 and exhibits thereto, including the
Agreement and Plan of Merger, the Exchange Agreement, the Amended and
Restated Agreement of Limited Partnership and the Conveyance and
Contribution Agreements.
(ii) A review of certain publicly-available Partnership and Petro
historical audited financial statements and certain unaudited interim
financial statements;
(iii) A review of certain financial analyses and forecasts of the
Partnership prepared by and reviewed with management of the General Partner
and the views of management of the General Partner regarding the
Partnership's past and current business operations, results thereof,
financial condition and future prospects, including the impact of the
Transaction, as well as information relating to the retail propane
distribution industry and the potential strategic, financial and
operational benefits and challenges anticipated from the Transaction;
(iv) A review of certain financial analyses and forecasts of Petro
prepared by and reviewed with management of Petro and the views of
management of Petro regarding Petro's past and current business operations,
results thereof, financial condition and future prospects, including the
impact of the Transaction, as well as information relating to the retail
home heating oil distribution industry and the potential strategic,
financial and operational benefits and challenges anticipated from the
Transaction;
(v) A review of the pro forma impact of the Transaction on the
Partnership and Petro;
(vi) A review of the publicly reported historical price and trading
activity for the Partnership's Common Units and Petro's Class A Common
Stock, including a comparison of certain financial and stock market
information for the Partnership with similar publicly available information
for certain other companies, the securities of which are publicly traded;
(vii) A review of the current market environment generally, and the
retail propane distribution environment and the retail home heating oil
distribution environment in particular;
(viii) A review of information relating to the financial terms of certain
transactions, including selected mergers and acquisition transactions; and
(ix) A review of such other information, financial studies, analyses and
investigations, and financial, economic and market criteria that A.G.
Edwards considered relevant.
In rendering our opinion, A.G. Edwards has relied upon and assumed, without
independent verification, the accuracy and completeness of all financial and
other information, publicly available, furnished to, or otherwise discussed
with A.G. Edwards for the purposes of the opinion. With respect to financial
projections and other information provided to or otherwise discussed with A.G.
Edwards,
D-2
<PAGE>
A.G. Edwards assumed and was advised by the management of the General Partner
and Petro,
respectively, that such projections and other information were reasonably
prepared on a basis that reflects the best currently available estimates and
judgments of the management of the General Partner and Petro, respectively.
A.G. Edwards did, however, review numerous sets of projections for Petro and
analyzed what it believed were certain of the major assumptions embedded within
Petro's projections. A.G. Edwards used two sets of projections for Petro to
perform A.G. Edwards' analyses. A.G. Edwards used a set of projections based on
30-year weather and a set of projections based on 15-year weather. The Special
Committee did not, however, engage A.G. Edwards to, and therefore A.G. Edwards
did not, verify the accuracy or completeness of any information. A.G. Edwards
has relied upon the assurances of the management of the General Partner and
Petro that the respective managements are not aware of any facts that would
make such information inaccurate or misleading. A.G. Edwards did not conduct a
physical inspection of the properties or facilities of the Partnership or Petro
nor did it make or obtain any independent evaluation or appraisals of any such
properties or facilities or assets and liabilities. A.G. Edwards also assumed
that the final form of the Partnership's Registration Statement on Form S-4,
the Agreement and Plan of Merger, the Exchange Agreement, the Amended and
Restated Agreement of Limited Partnership and the Conveyance and Contribution
Agreements would be substantially similar to the last draft reviewed by A.G.
Edwards.
A.G. Edwards did not express an opinion as to what the value of the
Partnership's Senior Subordinated Units, Junior Subordinated Units or General
Partner Units will be when issued to the holders of Petro's Common Stock
pursuant to the Transaction, or the price at which the Partnership's Common
Units or Senior Subordinated Units will trade subsequent to the Transaction.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
Our opinion as expressed herein is limited to the fairness, from a financial
point of view, to the Public Common Unitholders, of the Transaction and does
not constitute tax advice, or a recommendation to any Public Common Unitholder
as to how such unitholder should vote with respect to the Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Transaction is fair, from a financial point of view, to the
Public Common Unitholders.
Very truly yours,
A.G. Edwards & Sons, Inc.
D-3
<PAGE>
ANNEX E
October 6, 1998
The Board of Directors
Petroleum Heat & Power Co., Inc.
Clearwater House
2187 Atlantic Street
Stamford, CT 06904-1457
Lady and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the non-affiliate, public holders ("Public Common Stockholders") of
Class A common stock and Class C common stock (collectively, "Petro Common
Stock"), of Petroleum Heat & Power Co., Inc., a Minnesota corporation
("Petro"), of the terms of the proposed merger as set forth in the Agreement
and Plan of Merger, anticipated to be executed in October 1998 (the "Merger
Agreement"), by and among Petro; Star Gas Propane, L.P. (the "Operating
Partnership"), a Delaware limited partnership and wholly-owned subsidiary of
Star Gas Partners, L.P., a Delaware limited partnership (the "Partnership");
and a wholly-owned indirect subsidiary of the Operating Partnership
("Mergeco"). Pursuant to the Merger Agreement, Mergeco will be merged with and
into Petro (the "Merger"), with Petro surviving the Merger as a wholly-owned
indirect subsidiary of the Operating Partnership, and each share of Petro
Common Stock held by the Public Common Stockholders shall be converted into the
right to receive 0.13064 of a Senior Subordinated Unit ("Senior Subordinated
Unit") of the Partnership. Cash will be paid in lieu of fractional Senior
Subordinated Units based upon the market price of the Senior Subordinated Units
following the Merger. The Merger will be treated as a taxable transaction for
the Public Common Stockholders, and will be accounted for as a purchase
transaction under generally accepted accounting principles. The terms and
conditions of the Merger and the rights and preferences of the Senior
Subordinated Units are set forth more fully in the Merger Agreement and the
Amended and Restated Partnership Agreement ("Partnership Agreement").
In arriving at our opinion, we have reviewed the most recently available
drafts of the Merger Agreement, the Partnership Agreement, the Joint Proxy
Statement / Prospectus of Petro and the Partnership (the "Proxy Statement")
anticipated to be filed as a part of the Registration Statement on Form S-4
(the "Registration Statement") of the Partnership, and certain publicly
available financial information concerning Petro and the Partnership. In
addition, we have reviewed certain internal analyses, forecasts and other
internal information concerning the businesses and operations of Petro and the
Partnership prepared by the respective senior managements of Petro and the
Partnership. We have also met with the senior managements of Petro and the
Partnership to discuss the businesses, operations and prospects of Petro and
the Partnership. In addition, we have considered certain long-term strategic
benefits of the Merger, both operational and financial, that were described to
us by the senior managements of Petro and the Partnership.
We have reviewed the terms of the Merger in relation to, among other things,
current and historical market prices and trading volume for the Petro Class A
Common Stock and the Partnership
<PAGE>
Common Units ("Common Units"); the respective companies' cash flow, net income
and book value per share/unit; the capitalization and financial condition of
Petro and the Partnership; the pro forma financial impact of the Merger on
Petro and the Partnership, including the potential relative ownership of
various classes of units of the Partnership after the Merger by the current
holders of Petro Common Stock and the current unitholders of the Partnership;
and, to the extent publicly available, the terms of recent merger and
acquisition transactions involving comparable companies. In addition, we have
reviewed the merger premiums paid in recent stock-for-stock acquisitions of
public companies generally, and energy industry companies in particular. We
have also analyzed certain financial, stock market and other publicly available
information relating to the business of other companies and partnerships whose
operations we consider comparable to the respective operations of Petro and the
Partnership. In addition to the foregoing, we have considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria as we deemed relevant in arriving at our opinion.
In connection with our review, we have not independently verified any of the
foregoing information, and we have relied upon such information being complete
and accurate in all material respects. We have assumed, with your consent, that
the financial forecasts provided to us and discussed with us have been
reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the senior managements of Petro and the Partnership
as to the respective expected future performance of Petro and the Partnership,
and of the combined companies subsequent to the proposed Merger. In addition,
we have not conducted a physical inspection or made an independent evaluation
or appraisal of the assets of Petro or the Partnership, nor have we been
furnished with any such evaluation or appraisal. In rendering our opinion, we
have assumed that in the course of obtaining the necessary regulatory and
governmental approvals for the proposed Merger, no restriction will be imposed
that will have a material adverse effect on the contemplated benefits of the
proposed Merger. Our opinion is based on circumstances as they exist and can be
evaluated on, and the information made available to us at, the date hereof.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain
Rauscher Wessels"), as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. We will receive a fee for our
services in connection with rendering our opinion. In the ordinary course of
our business, we may actively trade the securities of Petro and the Partnership
for our own account and for the accounts of customers and, accordingly, may at
any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Petro in connection with its consideration of the Merger and is
not to be quoted or referred to, in whole or in part, in any registration
statement, prospectus or proxy statement, or in any other document used in
connection with the offering or sale of securities, nor shall this letter be
used for any other purposes, without Dain Rauscher Wessels' prior written
consent. We understand that this letter will be reprinted in its entirety in
the Proxy Statement sent to the holders of Petro Common Stock and unitholders
of the Partnership in connection with the Merger and that we will have the
opportunity to review and comment on all descriptions thereof in the Proxy
Statement prior to the filing of the
E-2
<PAGE>
Proxy Statement, the Registration Statement and any supplements and amendments
thereto, with the Securities and Exchange Commission and prior to its
dissemination to holders of Petro Common Stock and the unitholders of the
Partnership.
Our opinion does not address the merits of the underlying decision by Petro
to engage in the Merger, and does not constitute a recommendation to any holder
of Petro Common Stock as to how such holder should vote on the approval and
adoption of the Merger Agreement or any matter related thereto. We are not
expressing any opinion herein as to the prices at which Common Units or Senior
Subordinated Units of the Partnership will trade following the consummation of
the Merger.
Based upon our experience as investment bankers and subject to the foregoing,
including the various assumptions and limitations set forth herein, it is our
opinion that as of the date hereof the consideration to be received by the
Public Common Stockholders in the proposed Merger is fair, from a financial
point of view, to the Public Common Stockholders.
Very truly yours,
Dain Rauscher Wessels
a division of Dain Rauscher
Incorporated
E-3
<PAGE>
ANNEX F
302A.471 RIGHTS OF DISSENTING SHAREHOLDERS.
SUBD. 1. Actions creating rights. A shareholder of a corporation may dissent
from, and obtain payment for the fair value of the shareholder's shares in the
event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption of
the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares to
acquire shares, securities other than shares, or rights to purchase shares
or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter, or
to cumulate votes, except as the right may be excluded or limited through
the authorization or issuance of securities of an existing or new class or
series with similar or different voting rights; except that an amendment to
the articles of an issuing public corporation that provides that section
302A.671 does not apply to a control share acquisition does not give rise
to the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 3024A.66,
subdivision 1, or a disposition in dissolution described in section 302A.725,
subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the
net proceeds of disposition be distributed to the shareholders in accordance
with their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B, to
which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their
shares.
SUBD. 2. Beneficial owners. (a) A shareholder shall not assert dissenters'
rights as to less than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of
the shareholder and discloses the name and address of each beneficial owner on
whose behalf the
1
<PAGE>
shareholder dissents. In that event, the rights of the dissenter shall be
determined as if the shares as to which the shareholder has dissented and the
other shares were registered in the names of different shareholders.
(b) A beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the
corporation at the time of or before the assertion of the rights a written
consent of the shareholder.
SUBD. 3. Rights not to apply. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
SUBD. 4. Other rights. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at
law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
302A.473 PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS.
SUBD. 1. Definitions. (a) For purposes of this section, the terms defined in
this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a corporation
immediately before the effective date of the corporate action referred to in
section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1 up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. Notice of action. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. Notice of dissent. If a proposed action must be approved by the
shareholders, a shareholder who wishes to exercise dissenters' rights must file
with the corporation before the vote on the proposed action a written notice of
intent to demand the fair value of the shares owned by the shareholder and must
not vote the shares in favor of the proposed action.
SUBD. 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all
2
<PAGE>
shareholders who have complied with subdivision 3 and to all shareholders
entitled to dissent if no shareholder vote was required, a notice that
contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice was given, but the dissenter retains all other rights of a shareholder
until the proposed action takes effect.
SUBD. 5. Payment; return of shares. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) the corporation's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) an estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this section, and a brief description
of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person
who was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and
3
<PAGE>
cancel all transfer restrictions. However, the corporation may again give
notice under subdivision 4 and require deposit or restrict transfer at a later
time.
SUBD. 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to
the amount remitted by the corporation.
SUBD. 7. Petition; determination. If the corporation receives a demand under
subdivision 6, it shall, within 60 days after receiving the demand, either pay
to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding
on all shareholders, wherever located. A dissenter is entitled to judgment in
cash for the amount by which the fair value of the shares as determined by the
court, plus interest, exceeds the amount, if any, remitted under subdivision 5,
but shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
SUBD. 8. Costs; fees; expenses. (a) The court shall determine the costs and
expenses of a proceeding under subdivision 7, including the reasonable expenses
and compensation of any appraisers appointed by the court, and shall assess
those costs and expenses against the corporation, except that the court may
assess part or all of those costs and expenses against a dissenter whose action
in demanding payment under subdivision 6 is found to be arbitrary, vexatious,
or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable.
4
<PAGE>
These fees and expenses may also be assessed against a person who has acted
arbitrarily, vexatiously, or not in good faith in bringing the proceeding, and
may be awarded to a party injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an attorney
for the dissenters out of the amount awarded to the dissenters, if any.
5
<PAGE>
ANNEX G
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS
The following table shows the calculation of pro forma Available Cash from
Operating Surplus and should be read only in conjunction with "Cash Available
for Distribution," the Partnership's unaudited pro forma condensed
consolidated financial information.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED
1997 JUNE 30, 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Pro forma net income................................ $ (320) $ 31,946
Add (deduct):
Loss (gain) on sale of assets(a).................. (11,180) (11,283)
Depreciation and amortization..................... 37,012 27,771
Provision for supplemental benefits............... 565 320
Pension curtailment expense(b).................... 654 --
Corporate identity expenses(b).................... 4,136 1,100
Restructuring charges(b).......................... 2,850 2,085
Maintenance capital expenditures.................. (5,420) (3,232)
-------- --------
$ 28,297 $ 48,707
======== ========
</TABLE>
- --------
(a) Reflects the gain recorded by Petro associated with the disposal of
certain underperforming assets in November 1997.
(b) Represents non-recurring charges associated with Petro's branding,
corporate identity and restructuring programs.
G-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) The Registrant
The Section of the Registrant's Joint Proxy Statement/Prospectus which forms
a part of this Registration Statement, entitled "The Amended and Restated
Partnership Agreement--Indemnification" is incorporated herein by this
reference.
Subject to any terms, conditions or restrictions set forth in the
Partnership Agreements, Section 17-108 of the Delaware Revised Limited
Partnership Act empowers a Delaware limited partnership to indemnify and hold
harmless any partner or other person from and against any and all claims and
demands whatsoever.
(b) Petro
Section 302A.521 of the Minnesota Business Corporation Act (the "MBCA")
provides mandatory and exclusive standards for indemnification, although the
Articles of Incorporation or by-laws of a corporation can specifically limit
the statutory indemnification. Minnesota law generally provides that a
corporation shall indemnify a person made or threatened to be made a party to
a proceeding by reason of such person's official capacity as an officer,
director or employee of the corporation, against judgments, penalties, fines,
including, without limitation, excise taxes assessed against such person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorney's fees and disbursements, incurred by that person in
connection with the proceeding, if such person (a) has not been indemnified by
another entity for the same proceedings and in connection with the same acts
or omission; (b) acted in good faith; (c) received no improper personal
benefit; (d) in the case of a criminal proceeding, had no reason to believe
such person's conduct was unlawful; and (e) in connection with the acts or
omissions in question, the person reasonably believed that such person's
conduct was in the best interests of the corporation (or, in the case of a
question of improper personal benefit, believed that the conduct was not
opposed to the best interests of the corporation; or in the case of an
employee benefit plan, believed that the conduct was in the best interests of
the participants or beneficiaries of the employee benefit plan).
Section 302A.521 of the MBCA further provides that if an officer, director
or employee is made or threatened to be made a party to a proceeding in such
person's official capacity, such person is entitled, upon written request to
the corporation, to payment or reimbursement by the corporation of reasonable
expenses incurred by such person in advance of the final disposition of the
proceeding (a) upon receipt by the corporation of a written confirmation by
such person of such person's good faith belief that the criteria for
indemnification set forth under Minnesota law have been satisfied, an
undertaking by such person to repay all amounts paid or reimbursed by the
corporation if it is ultimately determined that the criteria for
indemnification have not been satisfied, and (b) after a determination that
the facts then known to those making the determination would not preclude
indemnification under Minnesota law.
Finally, Section 302A.521 of the MBCA provides that a corporation's articles
of incorporation or by-laws may prohibit indemnification or advances or may
impose conditions on such indemnification or advance, as long as those
conditions apply equally to all persons or to all persons within a given
class.
Petro's restated articles of incorporation, as amended, contain the
limitation of liability provision set forth below:
"ARTICLE VIII--A director of the corporation shall not be personally
liable to the corporation or its shareholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under
II-1
<PAGE>
Section 302A.559 of the Minnesota Business Corporation Act or Section
80A.23 of the Minnesota Securities Law, or (iv) for any transaction from
which the director derived an improper personal benefit. If the Minnesota
Business Corporation Act is hereafter amended to authorize any further
limitation of the liability of a director, then the liability of a director
of the corporation shall be eliminated or limited to the fullest extent
permitted by the Minnesota Business Corporation Act, as amended. No
amendment or repeal of this Article VIII shall apply to or have any effect
on the liability or alleged liability of any director of the corporation
for or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal."
Petro's by-laws, as amended, contain the indemnification provision set forth
below:
"Section 8.01. The corporation shall indemnify all officers and directors
of the corporation, for such expenses and liabilities, in such manner,
under such circumstances, and to such extent as permitted by Minnesota
Statutes Section 302A.521, as now enacted or hereafter amended. Unless
otherwise approved by the Board of Directors, the corporation shall not
indemnify or advance expenses to any employee of the corporation who is not
otherwise entitled to indemnification pursuant to the prior sentence of
this Section 8.01."
Indemnification Agreements with Directors
In March 1996 Petro entered into Indemnification Agreements with each of its
directors. The Agreements generally provide that Petro will indemnify the
directors against certain liabilities arising out of legal actions brought or
threatened against them for their conduct on behalf of Petro to the fullest
extent permitted by applicable law. The agreements contain provisions
implementing the director's rights thereunder with respect to, among other
things: (i) indemnification of expenses to a party who is wholly or partly
successful; (ii) indemnification of expenses of a witness; (iii) advancement
of expenses; (iv) procedure for determination of entitlement to
indemnification; (v) certain presumptions; (vi) remedies of an indemnitee;
(vii) subrogation; (viii) establishment of a trust and the funding thereof by
Petro, upon the indemnitee's request, in the event of change in Control or
potential Change in Control (as defined therein); and (ix) contribution in the
event indemnification may be unavailable.
ITEM 21. EXHIBITS
<TABLE>
<C> <S>
2.1 Merger Agreement dated as of September 25, 1998 by and among Petroleum
Heat and Power Co., Inc., the Registrant and Star Gas Propane, L.P.
(included as Annex A to the Joint Proxy Statement/ Prospectus which
forms a part of this Registration Statement).
3.1 Form of Agreement of Limited Partnership of the Registrant(1)
3.2 Form of Agreement of Limited Partnership of Star Gas Propane, L.P.(1)
3.3 Form of Amended and Restated Limited Partnership Agreement of the
Registrant (included as Annex C to the Joint Proxy Statement/Prospectus
which forms a part of this Registration Statement).
3.4 Form of Amended and Restated Limited Partnership Agreement of Star Gas
Propane, L.P.*
3.5 Restated and Amended Articles of Incorporation of Petro, as amended, and
Articles of Amendment thereto.(2)
3.6 Restated By-Laws of Petro.(2)
5.1 Opinion of Phillips Nizer Benjamin Krim & Ballon LLP as to the legality
of the securities being registered+
8.1 Opinion of Andrews & Kurth L.L.P. relating to tax matters
10.1 Form of Credit Agreement among Star Gas Propane, L.P. and certain
banks(3)
10.2 Form of Conveyance and Contribution Agreement among Star Gas Corporation,
the Partnership and the Operating Partnership.(3)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.3 Form of First Mortgage Note Agreement among certain insurance companies,
Star Gas Corporation and Star Gas Propane L.P.(3)
10.4 Intercompany Debt(3)
10.5 Form of Non-competition Agreement between Petro and the Partnership(3)
10.6 Form of Star Gas Corporation 1995 Unit Option Plan(3)
10.7 Amoco Supply Contract(3)
10.8 Stock Purchase Agreement dated October 20, 1997 with respect to the
Pearl Gas Acquisition(4)
10.9 Conveyance and Contribution Agreement with respect to the Pearl Gas
Acquisition(4)
10.10 Second Amendment dated as of October 21, 1997 to the Credit Agreement
dated as of December 13, 1995 among the Operating Partnership, Bank
Boston, N.A. and NationsBank, N.A.(4)
10.11 Note Agreement, dated as of January 22, 1998, by and between Star Gas
and The Northwestern Mutual Life Insurance Company(5)
10.12 Exchange Agreement (included as Annex B to the Joint Proxy
Statement/Prospectus which forms a part of this Registration Statement)
10.13 Projections*
10.14 Form of Proxy Card for the Registrant*
10.15 Form of Proxy Card for Petro*
21 Subsidiaries of the Registrant(5)
23.1 Consent of KPMG Peat Marwick LLP*
23.2 Consent of Phillips Nizer Benjamin Krim & Ballon LLP (included in
Exhibit 5.1)+
23.3 Consent of Andrews & Kurth L.L.P. (included in Exhibit 8.1)+
23.4 Consent of A.G. Edwards & Sons, Inc.*
23.5 Consent of Dain Rauscher Wessels*
24.1 Powers of Attorney (included on signature page)*
</TABLE>
- --------
* Filed herewith.
+ To be filed by amendment.
(1) Incorporated by reference to Appendix A to the Prospectus filed as part of
Registrant's Registration Statement on Form S-l, File No. 33-90496.
(2) Filed as exhibits to Petro's Registration Statement on Form S-1, File No.
33-48051, and incorporated herein by reference.
(3) Incorporated by reference to the same Exhibit to Registrant's Registration
Statement on Form S-1, File No. 33-98496, filed with the Commission on
December 13,1995.
(4) Incorporated by reference to the same Exhibit to Registrant's Periodic
Report on Form 8-K, as amended, as filed with the Commission on October 23
and 29, 1997.
(5) Incorporated by reference to the same Exhibit to Registrant's Registration
Statement on Form S-3, File No. 333-47295, as filed with the Commission on
March 4, 1998.
ITEM 17. UNDERTAKINGS
(1) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-3
<PAGE>
(2) The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(b) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
Provided, however, that paragraphs (a)(i) and (a)(ii) do not apply if
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or section 15(d) of the Exchange Act
that are incorporated by reference in the Registration Statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To respond to requests for information that is incorporated by reference
into this Prospectus within one business day of receipt of such request, and
to send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the Registration Statement through the date of
responding to the request.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
Registration Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Stamford, Connecticut, on October
22, 1998.
STAR GAS PARTNERS, L.P.
By: STAR GAS CORPORATION,
as General Partner
/s/ Joseph P. Cavanaugh
By: _________________________________
Joseph P. Cavanaugh
President
POWER OF ATTORNEY
Each person whose signature appears below appoints Irik Sevin, Richard F.
Ambury and Joseph P. Cavanaugh and each of them, any of whom may act without
the joinder of the other, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and any
Registration Statement (including any amendment thereto) for this offering
that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange
Commission, granted unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or
would do in person, hereby ratifying and confirming all that said attorney-in-
fact and agents or any of them or their or his substitute and substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Joseph P. Cavanaugh President (Principal October 22,
____________________________________ Executive Officer) 1998
Joseph P. Cavanaugh
/s/ Richard F. Ambury Vice President--Finance October 22,
____________________________________ (Principal Financial and 1998
Richard F. Ambury Accounting Officer)
/s/ Irik P. Sevin Director October 22,
____________________________________ 1998
Irik P. Sevin
/s/ Audrey L. Sevin Director October 22,
____________________________________ 1998
Audrey L. Sevin
/s/ William Nicoletti Director October 22,
____________________________________ 1998
William Nicoletti
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Elizabeth K. Lanier Director October 22,
____________________________________ 1998
Elizabeth K. Lanier
/s/ Paul Biddelman Director October 22,
____________________________________ 1998
Paul Biddelman
/s/ Thomas J. Edelman Director October 22,
____________________________________ 1998
Thomas J. Edelman
/s/ Wolfgang Traber Director October 22,
____________________________________ 1998
Wolfgang Traber
/s/ William G. Powers, Jr. Director October 22,
____________________________________ 1998
William G. Powers, Jr.
</TABLE>
II-6
<PAGE>
EXHIBIT 3.4
Draft 10/21/98
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
STAR GAS PROPANE, L.P.
<PAGE>
TABLE OF CONTENTS
ARTICLE I
ORGANIZATIONAL MATTERS
<TABLE>
<S> <C>
Section 1.1 Formation and Continuation.................................. 2
Section 1.2 Name........................................................ 2
Section 1.3 Registered Office; Principal Office......................... 2
Section 1.4 Power of Attorney........................................... 2
Section 1.5 Term........................................................ 4
Section 1.6 Possible Restrictions on Transfer........................... 4
ARTICLE II
DEFINITIONS
ARTICLE III
PURPOSE
SECTION 3.1 Purpose and Business........................................ 14
SECTION 3.2 Powers...................................................... 14
ARTICLE IV
CONTRIBUTIONS
Section 4.1 Initial Contributions....................................... 14
Section 4.2 Contributions at the Initial Closing Date; Contributions
at the Effective Time....................................... 15
Section 4.3 Additional Contributions.................................... 15
Section 4.4 No Preemptive Rights........................................ 15
Section 4.5 Capital Accounts............................................ 16
Section 4.6 Interest and Withdrawal..................................... 18
</TABLE>
i
<PAGE>
ARTICLE V
DISTRIBUTIONS
<TABLE>
<S> <C>
Section 5.1 Allocations for Capital Account Purposes................... 18
Section 5.2 Allocations for Tax Purpose................................ 23
Section 5.3 Requirement of Distributions............................... 25
ARTICLE VI
MANAGEMENT AND OPERATION OF BUSINESS
SECTION 6.1 Management................................................. 25
SECTION 6.2 Certificate of Limited Partnership......................... 27
SECTION 6.3 Restrictions on General Partner's Authority................ 27
SECTION 6.4 Reimbursement of the General Partner....................... 28
SECTION 6.5 Outside Activities......................................... 29
SECTION 6.6 Loans from the General Partner; Contracts with Affiliates;
Certain Restrictions on the General Partner................ 29
SECTION 6.7 Indemnification............................................ 31
SECTION 6.8 Liability of Indemnitees................................... 33
SECTION 6.9 Resolution of Conflicts of Interest........................ 33
SECTION 6.10 Other Matters Concerning the General Partner............... 35
SECTION 6.11 Title to Partnership Assets................................ 35
SECTION 6.12 Reliance by Third Parties.................................. 36
ARTICLE VII
RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNER
Section 7.1 Limitation of Liability.................................... 37
Section 7.2 Management of Business..................................... 37
Section 7.3 Return of Capital.......................................... 37
Section 7.4 Right of the Limited Partner Relating to the Partnership... 37
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting..................................... 38
Section 8.2 Fiscal Year................................................ 39
</TABLE>
ii
<PAGE>
ARTICLE IX
TAX MATTERS
<TABLE>
<S> <C>
Section 9.1 Preparation of Tax Returns................................ 39
Section 9.2 Tax Elections............................................. 39
Section 9.3 Tax Controversies......................................... 39
Section 9.4 Withholding............................................... 40
ARTICLE X
TRANSFER OF INTERESTS
SECTION 10.2 Transfer of the General Partner's Partnership Interest.... 40
SECTION 10.3 Transfer of the Limited Partner's Partnership Interest.... 41
ARTICLE XI
ADMISSION OF PARTNERS
Section 11.1 Admission of Star Gas as a Limited Partner................ 41
Section 11.2 Admission of Substituted Limited Partners................. 41
Section 11.3 Admission of Successor General Partner.................... 41
Section 11.4 Amendment of Agreement and Certificate of Limited
Partnership............................................... 42
Section 11.5 Admission of Additional Limited Partners.................. 42
ARTICLE XII
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 12.1 Withdrawal of the General Partner......................... 42
Section 12.2 Removal of the General Partner............................ 44
Section 12.3 Interest of Departing Partner and Successor General
Partner................................................... 44
Section 12.4 Reimbursement of Departing Partner........................ 44
Section 12.5 Withdrawal of the Limited Partner......................... 44
ARTICLE XIII
DISSOLUTION AND LIQUIDATION
Section 13.1 Dissolution............................................... 45
Section 13.2 Continuation of the Business of the Partnership
After Dissolution......................................... 45
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Section 13.3 Liquidator................................................ 46
Section 13.4 Liquidation............................................... 47
Section 13.5 Cancellation of Certificate of Limited Partnership........ 47
Section 13.6 Return of Contributions................................... 48
Section 13.7 Waiver of Partition....................................... 48
Section 13.8 Capital Account Restoration............................... 48
ARTICLE XIV
AMENDMENT OF PARTNERSHIP AGREEMENT
Section 14.1 Amendment to be Adopted Solely by General Partner......... 48
Section 14.2 Amendment Procedures...................................... 49
ARTICLE XV
MERGER
Section 15.1 Authority................................................. 50
Section 15.2 Procedure for Merger or Consolidation..................... 50
Section 15.3 Approval by Limited Partner of Merger or Consolidation.... 51
Section 15.4 Certificate of Merger..................................... 51
Section 15.5 Effect of Merger.......................................... 51
ARTICLE XVI
GENERAL PROVISIONS
Section 16.1 Addresses and Notices..................................... 52
Section 16.2 References................................................ 52
Section 16.3 Pronouns and Plurals...................................... 52
Section 16.4 Further Action............................................ 53
Section 16.5 Binding Effect............................................ 53
Section 16.6 Integration............................................... 53
Section 16.7 Creditors................................................. 53
Section 16.8 Waiver.................................................... 53
Section 16.9 Counterparts.............................................. 53
Section 16.10 Applicable Law............................................ 53
Section 16.11 Invalidity of Provisions.................................. 54
</TABLE>
iv
<PAGE>
AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF STAR GAS PROPANE, L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF STAR GAS
PROPANE, L. P., dated as of ____________, 1999, is entered into by and among
Star Gas LLC, a Delaware limited liability company, as the General Partner, and
Star Gas Partners, L.P., a Delaware limited partnership, as the Limited Partner,
together with any other Persons who become Partners in the Partnership as
provided herein. In consideration of the covenants, conditions and agreements
contained herein, the parties hereto hereby agree as follows:
R E C I T A L S:
- - - - - - - -
WHEREAS, Star Gas Corporation, a Delaware corporation and the initial
general partner of the Partnership (the "Initial General Partner"), and certain
other parties organized the Partnership as a Delaware limited partnership
pursuant to an Agreement of Limited Partnership dated as of December 20, 1995
(the "Original Agreement"); and
WHEREAS, the Partnership, the MLP, Petro and Mergeco have entered into that
Merger Agreement dated as of October ___, 1998 (the "Petro Merger Agreement")
providing for the merger (the "Merger") of Mergeco with and into Petro; and
WHEREAS, in order to effect the transactions contemplated by the Merger
Agreement, it is necessary to amend this Agreement as provided herein; and
WHEREAS, the Merger Agreement and the transactions contemplated thereby
(including, without limitation, the form of this Agreement and the amendments
effected hereby and the withdrawal of Star Gas as the general partner of the
Partnership and the MLP and the election of Star Gas LLC as the successor
general partner of the Partnership and the MLP) have been submitted to, and
approved by the requisite vote of, the Limited Partners; and
WHEREAS, the General Partner has the authority to adopt certain amendments
to this Agreement without the approval of any Limited Partner or limited partner
of the MLP to reflect, among other things: (i) subject to the terms of Section
4.4, any change that is necessary or desirable in connection with the
authorization for issuance of any class or series of Partnership Securities
pursuant to Section 4.4 of the MLP Agreement and (ii) a change that, in the sole
discretion of the General Partner, does not adversely affect the limited partner
of the MLP in any material respect.
NOW, THEREFORE, the Original Agreement is hereby amended and, as so
amended, is restated in its entirety as follows:
1
<PAGE>
ARTICLE I
ORGANIZATIONAL MATTERS
Section 1.1 Formation and Continuation.
The General Partner and the MLP previously formed the Partnership as a
limited partnership pursuant to the provisions of the Delaware Act. The General
Partner and the Limited Partners hereby amend and restate this Agreement in its
entirety to continue the Partnership as a limited partnership pursuant to the
provisions of the Delaware Act and to set forth the rights and obligations of
the Partners and certain matters related thereto. This amendment and
restatement shall become effective on the date of this Agreement. Except as
expressly provided to the contrary in this Agreement, the rights and obligations
of the Partners and the administration, dissolution and termination of the
Partnership shall be governed by the Delaware Act. All Partnership Interests
shall constitute personal property of the owner thereof for all purposes.
Section 1.2 Name.
The name of the Partnership is "Star Gas Propane, L.P." The Partnership's
business may be conducted under any other name or names deemed necessary or
appropriate by the General Partner, including the name of the General Partner.
The words "Limited Partnership," "L.P.," "Ltd." or similar words or letters
shall be included in the Partnership's name where necessary for the purpose of
complying with the laws of any jurisdiction that so requires. The General
Partner in its sole discretion may change the name of the Partnership at any
time and from time to time and shall notify the Limited Partner of such change
in the next regular communication to the Limited Partner.
Section 1.3 Registered Office; Principal Office.
Unless and until changed by the General Partner, the registered office of
the Partnership in the State of Delaware shall be located at 32 Loockerman
Square, Suite L-100, Dover, Delaware 19904, and the registered agent for service
of process on the Partnership in the State of Delaware at such registered office
shall be The Prentice-Hall Corporation System, Inc. The principal office of the
Partnership shall be located at, and the address of the General Partner shall
be, 2187 Atlantic Street, Stamford, Connecticut 06902, or such other place as
the General Partner may from time to time designate by notice to the Limited
Partner. The Partnership may maintain offices at such other place or places
within or outside the State of Delaware as the General Partner deems necessary
or appropriate.
Section 1.4 Power of Attorney.
(a) The Limited Partner hereby constitutes and appoints each of
the General Partner and, if a Liquidator shall have been selected pursuant to
Section 13.3, the Liquidator, severally (and any successor to either thereof by
merger, transfer, assignment, election or otherwise)
2
<PAGE>
and each of their authorized officers and attorneys-in-fact, with full power of
substitution, as its true and lawful agent and attorney-in-fact, with full power
and authority in its name, place and stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in
the appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements thereof) that the General
Partner or the Liquidator deems necessary or appropriate to form, qualify
or continue the existence or qualification of the Partnership as a limited
partnership (or a partnership in which the limited partners have limited
liability) in the State of Delaware and in all other jurisdictions in which
the Partnership may conduct business or own property; (B) all certificates,
documents and other instruments that the General Partner or the Liquidator
deems necessary or appropriate to reflect, in accordance with its terms,
any amendment, change, modification or restatement of this Agreement; (C)
all certificates, documents and other instruments (including conveyances
and a certificate of cancellation) that the General Partner or the
Liquidator deems necessary or appropriate to reflect the dissolution and
liquidation of the Partnership pursuant to the terms of this Agreement; (D)
all certificates, documents and other instruments relating to the
admission, withdrawal, removal or substitution of any Partner pursuant to,
or other events described in, Article X, XI, XII or XIII; (E) all
certificates, documents and other instruments relating to the determination
of the rights, preferences and privileges of any class or series of
Partnership Interests; and (F) all certificates, documents and other
instruments (including agreements and a certificate of merger) relating to
a merger or consolidation of the Partnership pursuant to Article XV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the sole discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given by
the Partners hereunder or is consistent with the terms of this Agreement or
is necessary or appropriate, in the sole discretion of the General Partner
or the Liquidator, to effectuate the terms or intent of this Agreement;
provided, that when the approval of the Limited Partner is required by any
provision of this Agreement, the General Partner or the Liquidator may
exercise the power of attorney made in this Section 1.4(a)(ii) only after
the necessary consent or approval of the Limited Partner is obtained.
Nothing contained in this Section 1.4(a) shall be construed as authorizing the
General Partner to amend this Agreement except in accordance with Article XIV or
as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be
irrevocable and a power coupled with an interest, and it shall survive and not
be affected by the subsequent death, incompetency, disability, incapacity,
dissolution, bankruptcy or termination of the Limited Partner
3
<PAGE>
and the transfer of all or any portion of the Limited Partner's Partnership
Interest and shall extend to the Limited Partner's heirs, successors, assigns
and personal representatives. The Limited Partner hereby agrees to be bound by
any representation made by the General Partner or the Liquidator acting in good
faith pursuant to such power of attorney; and the Limited Partner hereby waives
any and all defenses that may be available to contest, negate or disaffirm the
action of the General Partner or the Liquidator taken in good faith under such
power of attorney. The Limited Partner shall execute and deliver to the General
Partner or the Liquidator, within 15 days after receipt of the General Partner's
or the Liquidator's request therefor, such further designation, powers of
attorney and other instruments as the General Partner or the Liquidator deems
necessary to effectuate this Agreement and the purposes of the Partnership.
Section 1.5 Term.
The Partnership commenced upon the filing of the Certificate of Limited
Partnership in accordance with the Delaware Act and shall continue in existence
until the close of Partnership business on December 31, 2085 or until the
earlier dissolution of the Partnership in accordance with the provisions of
Article XIII.
Section 1.6 Possible Restrictions on Transfer.
The General Partner may impose restrictions on the transfer of Partnership
Interests if a subsequent Opinion of Counsel determines that such restrictions
are necessary to avoid a significant risk of the Partnership's becoming taxable
as a corporation or otherwise as an entity for federal income tax purposes. The
restrictions may be imposed by making such amendments to this Agreement as the
General Partner in its sole discretion may determine to be necessary or
appropriate to impose such restrictions.
ARTICLE II
DEFINITIONS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Additional Limited Partner" means a Person admitted to the Partnership as
a Limited Partner pursuant to Section 11.5 and who is shown as such on the books
and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set by
Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)), and
(b) decreased by (i) the amount of all losses and deductions that, as of the end
of such fiscal year, are
4
<PAGE>
reasonably expected to be allocated to such Partner in subsequent years under
Sections 704(e)(2) and 706(d) of the Code and Treasury Regulation Section 1.751-
1(b)(2)(ii), and (ii) the amount of all distributions that, as of the end of
such fiscal year, are reasonably expected to be made to such Partner in
subsequent years in accordance with the terms of this Agreement or otherwise to
the extent they exceed offsetting increases to such Partner's Capital Account
that are reasonably expected to occur during (or prior to) the year in which
such distributions are reasonably expected to be made (other than increases as a
result of a minimum gain chargeback pursuant to Section 5.1(d)(i) or
5.1(d)(ii)). The foregoing definition of Adjusted Capital Account is intended to
comply with the provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Section 4.5(d)(i) or 4.5(d)(ii).
"Affiliate" means, 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.
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 5.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of valuation as it may
adopt. Subject to Section 4.5(c)(i), the General Partner shall, in its sole
discretion, use such method as it deems reasonable and appropriate to allocate
the aggregate Agreed Value of Contributed Properties contributed to the
Partnership in a single or integrated transaction among each separate property
on a basis proportional to the fair market value of each Contributed Property.
"Agreement" means this Amended and Restated Agreement of Limited
Partnership of Star Gas Propane, L.P.,as it may be amended, supplemented or
restated from time to time.
"Audit Committee" means a committee of the Board of Directors of the
General Partner composed entirely of two or more directors who are neither
members, officers nor employees of the General Partner or members, stockholders
(other than holders of Common Units or Senior Subordinated Units) officers,
directors or employees of any Affiliates of the General Partner.
"Available Cash" as to any Quarter ending before the Liquidation Date,
means
5
<PAGE>
(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 in hand on the date of determination of
Available Cash with respect to such Quarter resulting from Working Capital
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
distributions under Sections 5.4(a)(i), (ii), and (iii) or 5.4(b)(i) of the MLP
Agreement 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; provided, however, that the General Partner may not establish cash
reserves for distributions pursuant to Section 5.4(a)(iii) of the MLP Agreement
unless the General Partner has determined that in its judgment the establishment
of reserves will not prevent the MLP from distributing the Minimum Quarterly
Distribution on all Common Units and any Common Unit Arrearages thereon with
respect to the next four Quarters; and, provided further, that disbursements
made by a Group Member or cash reserves established, increased or reduced after
the end of such Quarter but on or before the date of determination of Available
Cash with respect to such Quarter shall be deemed to have been made,
established, increased or reduced, for purposes of determining Available Cash,
within such Quarter if the General Partner so determines.
Notwithstanding the foregoing, "Available Cash" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero. Notwithstanding the foregoing (x) disbursements (including, without
limitation, contributions to an OLP Subsidiary or disbursements on behalf of an
OLP Subsidiary) made or reserves established, increased or reduced after the end
of any Quarter but on or before the date on which the Partnership makes its
distribution of Available Cash in respect of such Quarter pursuant to Section
5.3(a) shall be deemed to have been made, established, increased or reduced, for
purposes of determining Available Cash, with respect to such Quarter if the
General Partner so determines and (y) "Available Cash" with respect to any
period shall not include any cash receipts or reductions in reserves or take
into account any disbursements made or reserves established after the
Liquidation Date.
"Book-Tax Disparity" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or Adjusted Property and
the adjusted basis thereof for federal income tax purposes as of such date. A
Partner's share of the Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be reflected by the difference
between such Partner's Capital Account balance as maintained pursuant to Section
4.5 and the hypothetical balance of such Partner's Capital Account computed as
if it had been maintained strictly in accordance with federal income tax
accounting principles.
6
<PAGE>
"Business Day" means Monday through Friday of each week, except that a
legal holiday recognized as such by the government of the United States or the
states of New York or Connecticut shall not be regarded as a Business Day.
"Capital Account" means the capital account maintained for a Partner
pursuant to Section 4.5.
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes or has contributed to
the Partnership pursuant to this Agreement and the Conveyance and Contribution
Agreements.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership filed with the Secretary of State of the State of Delaware as
referenced in Section 6.2, as such Certificate of Limited Partnership may be
amended, supplemented or restated from time to time.
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of
the Code shall be deemed to include a reference to any corresponding provision
of future law.
"Common Unit" means 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 MLP
Agreement. [All references herein to Common Units after the expiration of the
Subordination Period shall be deemed to be references to both Class A Common
Units and Class B Common Units, unless otherwise indicated.]
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership. Once the Carrying Value of a Contributed Property is adjusted
pursuant to Section 4.5(d), such property shall no longer constitute a
Contributed Property, but shall be deemed an Adjusted Property.
"Conveyance and Contribution Agreements" means collectively, (i) that
certain Conveyance and Contribution Agreement, dated as of the Effective Time,
among the Partnership, the MLP, Petro and Star Gas LLC and (ii) that certain
Conveyance and Contribution Agreement among the Partnership, the MLP, Petro and
Petro Holdings, together with the additional conveyance documents and
instruments contemplated or referenced thereunder.
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 5.1(d)(x).
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act,
6 Del C. (S) 17-101, et seq., as amended, supplemented or restated from time to
time, and any successor to such statute.
7
<PAGE>
"Departing Partner" means a former General Partner, from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 12.1 or Section 12.2.
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"Effective Time" means the effective time of the Merger, which shall be the
later to occur of (i) the filing in the office of the Secretary of State of the
State of Delaware of a properly executed certificate of merger and (ii) the
filing with the Department of State of Minnesota of properly executed articles
of merger, or such later date and time as may be set forth in such certificate
of merger and articles of merger.
"Equity Registration Statement" means the Registration Statement on Form S-
3 (Registration No. - ______), as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the Commission
under the Securities Act to register the offering and sale of the Common Units
in the Equity Offering.
"Event of Withdrawal" has the meaning assigned to such term in Section 12.
l(a).
"General Partner" means Star Gas LLC, a Delaware limited liability company,
and its successor as general partner of the Partnership.
"Group Member" means a member of the Partnership Group.
"Includes" means includes, without limitation, and "including" means
including, without limitation.
"Indemnitee" means (a) the General Partner, any Departing Partner, any
Person who is or was an Affiliate of the General Partner or any Departing
Partner, (b) any Person who is or was an officer, director, employee, partner,
agent or trustee of the General Partner or any Departing Partner or any such
Affiliate, or (c) any Person who is or was serving at the request of the General
Partner or any Departing Partner or any such Affiliate as a director, officer,
employee, partner, agent, fiduciary or trustee of another Person; provided, that
a Person shall not be an Indemnitee pursuant to this clause (c) by reason of
providing, on a fee-for-services basis, trustee, fiduciary or custodial
services.
"Initial Closing Date" means December 20,1995.
"Initial General Partner" means Star Gas Corporation, a Delaware
corporation.
"Initial Offering" means the initial offering and sale of Common Units to
the public on December 20, 1995.
8
<PAGE>
"Initial Registration Statement" means the Registration Statement on Form
S-l (Registration No. 33-98490), as amended or supplemented from time to time,
filed by the MLP with the Commission under the Securities Act to register the
offering and sale of the Initial Common Units in the Initial Offering.
"Limited Partner" means the MLP and Star Gas LLC pursuant to Section 4.2,
each Substituted Limited Partner, if any, each Additional Limited Partner and
any Departing Partner upon the change of its status from General Partner to
Limited Partner pursuant to Section 12.3, but excluding any such Person from and
after the time it withdraws from the Partnership.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 13.2, the date on which the applicable time period
during which the Partners have the right to elect to reconstitute the
Partnership and continue its business has expired without such an election being
made, and (b) in the case of any other event giving rise to the dissolution of
the Partnership, the date on which such event occurs.
"Liquidator" means the General Partner or other Person approved pursuant to
Section 13.3 who performs the functions described therein.
"Mergeco" has the meaning assigned to such term in the Recitals to this
Agreement.
"Merger" has the meaning assigned to such term in the Recitals to this
Agreement.
"Merger Agreement" has the meaning assigned to such term in Section 15.1.
"MLP" means Star Gas Partners, L.P.,a Delaware limited partnership.
"MLP Agreement" means the Amended and Restated Agreement of Limited
Partnership of Star Gas Partners, L.P., as it may be amended, supplemented or
restated from time to time.
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner by the
Partnership, the Partnership's Carrying Value of such property (as adjusted
pursuant to Section 4.5(d)(ii)) at the time such property is distributed,
reduced by any indebtedness either assumed by such Partner upon such
distribution or to which such property is subject at the time of distribution,
in either case, as determined under Section 752 of the Code.
9
<PAGE>
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of loss and deduction (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Income shall be determined in accordance with Section 4.5(b) and shall
not include any items specially allocated under Section 5.1(d).
"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership's items of income and gain (other than
those items taken into account in the computation of Net Termination Gain or Net
Termination Loss) for such taxable year. The items included in the calculation
of Net Loss shall be determined in accordance with Section 4.5(b) and shall not
include any items specially allocated under Section 5.1(d).
"Net Termination Gain" means, for any taxable year, the sum, if positive,
of all items of income, gain, loss or deduction recognized by the Partnership
(including, without limitation, such amounts recognized through an OLP
Subsidiary, if applicable) after the Liquidation Date. The items included in the
determination of Net Termination Gain shall be determined in accordance with
Section 4.5(b) and shall not include any items of income, gain or loss specially
allocated under Section 5.1(d).
"Net Termination Loss" means, for any taxable year, the sum, if negative,
of all items of income, gain, loss or deduction recognized by the Partnership
(including, without limitation, such amounts recognized through an OLP
Subsidiary, if applicable) after the Liquidation Date. The items included in the
determination of Net Termination Loss shall be determined in accordance with
Section 4.5(b) and shall not include any items of income, gain or loss specially
allocated under Section 5.1(d).
"Nonrecourse Built-in Gain" means with respect to any Contributed
Properties or Adjusted Properties that are subject to a mortgage or pledge
securing a Nonrecourse Liability, the amount of any taxable gain that would be
allocated to the Partners pursuant to Sections 5.2(b)(i)(A) and 5.2(b)(ii)(A) if
such properties were disposed of in a taxable transaction in full satisfaction
of such liabilities and for no other consideration.
"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in accordance
with the principles of Treasury Regulation Section 1.704-(2)(b), are
attributable to a Nonrecourse Liability.
"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
10
<PAGE>
"OLP Subsidiary" means a Subsidiary of the Partnership.
"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to the Partnership, the General Partner or any of its Affiliates)
acceptable to the General Partner in its reasonable discretion.
"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partner and the Limited Partner.
"Partnership" means Star Gas Propane, L.P., a Delaware limited partnership,
and any successor thereto.
"Partnership Group" means the Partnership and its partnership Subsidiaries,
treated as a single consolidated partnership.
"Partnership Interest" means the interest of a Partner in the Partnership.
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"Percentage Interest" means (a) as to the General Partner, in its capacity
as such, 0.01% and (b) as to the Limited Partner, 99.99%.
"Person" means an individual or a corporation, partnership, trust,
unincorporated organization, association or other entity.
"Petro" means Petroleum Heat and Power Co., Inc., a Minnesota corporation,
an indirect subsidiary of the Partnership.
"Petro Class A Common Stock" means the Class A Common Stock, par value $.10
per share, of Petro.
11
<PAGE>
"Petro Class C Common Stock" means the Class C Common Stock, par value $.10
per share, of Petro.
"Proxy Statement" means the Registration Statement on Form S-4
(Registration No. ___) as it has been or as it may be amended or supplemented
from time to time, filed jointly by the Partnership and Petro relating to the
Merger and the transactions contemplated thereby.
"Quarter" means, unless the context requires otherwise, a three-month
period of time ending on March 31, June 30, September 30, or December 31.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Sections 734 or 743 of the Code)
upon the disposition of any property or asset of the Partnership, which gain is
characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"Required Allocations" means any allocation (or limitation imposed on any
allocation) of an item of income, gain, deduction or loss pursuant to (a)
Section 5.1(b)(i) or (b) Sections 5.1(d)(i), (ii), (iv)-(vii) (ix), such
allocations (or limitations thereon) being directly or indirectly required by
the Treasury regulations promulgated under Section 704(b) of the Code.
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Sections 5.2(b)(i)(A) or 5.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"Special Approval" means approval by the Audit Committee.
"Star Gas" means Star Gas Corporation, a Delaware corporation.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, by such
Person, by one or more Subsidiaries of such Person or a combination thereof, (b)
a partnership (whether general or limited) in which such Person or a Subsidiary
of such Person is, at the date of determination, a general or limited partner of
such partnership, but only if more than 50% of the partnership interests of such
partnership (considering all of the partnership interests of the partnership as
a single class) is owned or controlled, directly or indirectly, by such Person,
by one or more Subsidiaries of such Person, or a combination thereof, or (c) any
other Person (other than a corporation or a partnership) in which such Person,
directly or indirectly, at the date of
12
<PAGE>
determination, has (i) at least a majority ownership interest or (ii) the power
to elect or direct the election of a majority of the directors or other
governing body of such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 11.3 in place of and with all the
rights of a Limited Partner and who is shown as a Limited Partner on the books
and records of the Partnership.
"Surviving Business Entity" has the meaning assigned to such term in
Section 15.2(b).
"Underwriter" means each Person named as an underwriter in Schedule 1 to
the Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement, relating to the
Equity Offering, dated ________________, among the Underwriters, the MLP and
other parties providing for the purchase of Common Units by such Underwriters.
"Unit" has the meaning assigned to such term in the MLP Agreement.
"Unrealized Gain" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the fair market
value of such property as of such date (as determined under Section 4.5(d)) over
(b) the Carrying Value of such property as of such date (prior to any adjustment
to be made pursuant to Section 4.5(d) as of such date).
"Unrealized Loss" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (a) the Carrying Value
of such property as of such date (prior to any adjustment to be made pursuant to
Section 4.5(d) as of such date) over (b) the fair market value of such property
as of such date (as determined under Section 4.5(d)).
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 12.1(b).
"Working Capital Borrowings" means borrowings pursuant to a facility or
other arrangement requiring all borrowings thereunder to be reduced to a
relatively small amount each year for an economically meaningful period of time.
It being the intent hereof, that borrowings which are not intended exclusively
for working capital purposes shall not be treated as Working Capital Borrowings.
13
<PAGE>
ARTICLE III
PURPOSE
Section 3.1 Purpose and Business.
The purpose and nature of the business to be conducted by the Partnership
shall be to (a) acquire, manage and operate the assets of the Partnership and
any similar assets or properties, and to engage directly in, or to enter into or
form any corporation, partnership, joint venture, limited liability company or
other arrangement to engage indirectly in, any type of business or activity
engaged in by Star Gas or its Affiliates immediately prior to the Initial
Closing Date and, in connection therewith, to exercise all of the rights and
powers conferred upon the Partnership pursuant to the agreements relating to
such business activity, (b) engage directly in, or enter into or form any
corporation, partnership, joint venture, limited liability company or other
arrangement to engage indirectly in, any business activity that is approved by
the General Partner and which may lawfully be conducted by a limited partnership
organized pursuant to the Delaware Act and, in connection therewith, to exercise
all of the rights and powers conferred upon the Partnership pursuant to the
agreements relating to such business activity, and (c) do anything necessary or
appropriate to the foregoing, including the making of capital contributions or
loans to the MLP or any Subsidiary of the Partnership or the MLP. The General
Partner has no obligation or duty to the Partnership or the Limited Partner to
propose or approve, and in its sole discretion may decline to propose or
approve, the conduct by the Partnership of any business.
Section 3.2 Powers.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in Section
3.1 and for the protection and benefit of the Partnership.
ARTICLE IV
CONTRIBUTIONS
Section 4.1 Initial Contributions.
In connection with the formation of the Partnership under the Delaware Act,
the Initial General Partner made an initial Capital Contribution to the
Partnership and was admitted as the general partner of the Partnership, and the
MLP made an initial Capital Contribution to the Partnership and was admitted as
a limited partner of the Partnership.
14
<PAGE>
Section 4.2 Contributions at the Initial Closing Date; Contributions at the
Effective Time.
(a) On the Initial Closing Date, Star Gas, Silgas, Inc. and
Silgas of Illinois, Inc. conveyed substantially all of their assets (other than
$83.9 million in cash and certain non-operating assets) into the Partnership and
received consideration consisting of (i) the continuation of Star Gas' general
partner interest in the Partnership consisting of a Partnership Interest
representing a 1.0101% Percentage Interest, (ii) a limited partner interest in
the Partnership, which was contributed by Star Gas, Silgas, Inc. and Silgas of
Illinois, Inc. to the MLP, and (iii) the Partnership's assumption of, or taking
of assets subject to, certain indebtedness and other liabilities, including the
Partnership's assumption of the payment obligations of certain indebtedness of
Star Gas. The Partnership Interest contributed by Star Gas, Silgas, Inc. and
Silgas of Illinois, Inc. pursuant to the provisions of Sections 4.2(a) to the
MLP, represented a 98.9899% Percentage Interest in the Partnership.
(b) On the Initial Closing Date, the MLP contributed to the
Partnership in respect of its Partnership Interest the net proceeds to the MLP
from the issuance of the Common Units pursuant to the Initial Offering.
(c) At the Effective Time and pursuant to the Conveyance and
Contribution Agreements, the General Partner contributed _________ shares of
Petro Class A Common Stock and _________ shares of Petro Class C Common Stock to
the MLP in exchange for 278,985 General Partner Units representing a 1.99%
general partner interest and _________ shares of Petro Class A Common Stock and
_________ shares of Petro Class C Common Stock to the Partnership in exchange
for a 0.01% general partner interest in the Partnership.
Section 4.3 Additional Contributions.
(a) With the consent of the General Partner, the Limited Partner
may, but shall not be obligated to, make additional Capital Contributions to the
Partnership. Contemporaneously with the making of any such additional Capital
Contributions by the Limited Partner, the General Partner may but shall not be
obligated to make an additional Capital Contribution to the Partnership in an
amount equal to 0.01% of the Net Agreed Value of the additional Capital
Contribution then made by the Limited Partner. Except as set forth in the
immediately preceding sentence and Article XIII, the General Partner shall not
be obligated to make any additional Capital Contributions to the Partnership.
(b) The Partnership may not issue additional limited partner
interests.
Section 4.4 No Preemptive Rights.
No Person shall have any preemptive, preferential or other similar right
with respect to issuance or sale of any class or series of Partnership
Interests, any option, right, warrant or appreciation rights relating thereto,
or any other type of equity interest that the Partnership may
15
<PAGE>
lawfully issue, or any unsecured or secured debt obligation of the Partnership
that is convertible into any class or series of equity interests of the
Partnership.
Section 4.5 Capital Accounts.
(a) The Partnership shall maintain for each Partner owning a
Partnership Interest a separate Capital Account with respect to such Partnership
Interest in accordance with the rules of Treasury Regulation Section 1.704-
1(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all
Capital Contributions made to the Partnership with respect to such Partnership
Interest pursuant to this Agreement and (ii) all items of Partnership income and
gain (including, without limitation, income and gain exempt from tax) computed
in accordance with Section 4.5(b) and allocated with respect to such Partnership
Interest pursuant to Section 5.1, and decreased by (x) the amount of cash or the
Net Agreed Value of all actual and deemed distributions of cash or property made
with respect to such Partnership Interest pursuant to this Agreement and (y) all
items of Partnership deduction and loss computed in accordance with Section
4.5(b) and allocated with respect to such Partnership Interest pursuant to
Section 5.1.
(b) For purposes of computing the amount of any item of income,
gain, loss or deduction to be reflected in the Partners' Capital Accounts, the
determination, recognition and classification of any such item shall be the same
as its determination, recognition and classification for federal income tax
purposes (including, without limitation, any method of depreciation, cost
recovery or amortization used for that purpose), provided, that:
(i) Solely for purposes of this Section 4.5, the
Partnership shall be treated as owning directly its proportionate share (as
determined by the General Partner) of all property owned by any OLP
Subsidiary that is classified as a partnership for federal income tax
purposes.
(ii) All fees and other expenses incurred by the
Partnership to promote the sale of (or to sell) a Partnership Interest that
can neither be deducted nor amortized under Section 709 of the Code, if
any, shall, for purposes of Capital Account maintenance, be treated as an
item of deduction at the time such fees and other expenses are incurred and
shall be allocated among the Partners pursuant to Section 5.1.
(iii) Except as otherwise provided in Treasury Regulation
Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain,
loss and deduction shall be made without regard to any election under
Section 754 of the Code which may be made by the Partnership and, as to
those items described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code,
without regard to the fact that such items are not includable in gross
income or are neither currently deductible nor capitalized for federal
income tax purposes.
(iv) Any income, gain or loss attributable to the taxable
disposition of any Partnership property shall be determined as if the
adjusted basis of such property as of such
16
<PAGE>
date of disposition were equal in amount to the Partnership's Carrying
Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b)
of the Code, any deductions for depreciation, cost recovery or amortization
attributable to any Contributed Property shall be determined as if the
adjusted basis of such property on the date it was acquired by the
Partnership were equal to the Agreed Value of such property. Upon an
adjustment pursuant to Section 4.5(d) to the Carrying Value of any
Partnership property subject to depreciation, cost recovery or
amortization, any further deductions for such depreciation, cost recovery
or amortization attributable to such property shall be determined (A) as if
the adjusted basis of such property were equal to the Carrying Value of
such property immediately following such adjustment and (B) using a rate of
depreciation, cost recovery or amortization derived from the same method
and useful life (or, if applicable, the remaining useful life) as is
applied for federal income tax purposes; provided, however that, if the
asset has a zero adjusted basis for federal income tax purposes,
depreciation, cost recovery or amortization deductions shall be determined
using any reasonable method that the General Partner may adopt.
(vi) If the Partnership's adjusted basis in a depreciable or
cost recovery property is reduced for federal income tax purposes pursuant
to Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
5.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
(c) A transferee of a Partnership Interest shall succeed to a pro
rata portion of the Capital Account of the transferor relating to the
Partnership in respect of its Partnership Interest so transferred.
(d) (i) Consistent with the provisions of Treasury Regulation
Section 1.704-1(b)(2)(iv)(f), on an issuance of additional Partnership
Interests for cash or Contributed Property, the Capital Account of all
Partners and the Carrying Value of each Partnership property immediately
prior to such issuance shall be adjusted upward or downward to reflect any
Unrealized Gain or Unrealized Loss attributable to such Partnership
property, as if such Unrealized Gain or Unrealized Loss had been recognized
on an actual sale of each such property immediately prior to such issuance
and had been allocated to the Partners at such time pursuant to Section
5.1(c). In determining such Unrealized Gain or Unrealized Loss, the
aggregate cash amount and fair market value of all Partnership assets
(including, without limitation, cash or cash equivalents) immediately prior
to the issuance of additional Partnership Interests shall be determined by
the General Partner using such reasonable method of valuation as it may
adopt; provided, however, that the General Partner, in arriving at such
valuation, must take fully into account the fair market value of the
17
<PAGE>
Partnership Interests of all Partners at such time. The General Partner
shall allocate such aggregate value among the assets of the Partnership (in
such manner as it determines in its sole discretion to be reasonable) to
arrive at a fair market value for individual properties.
(ii) In accordance with Treasury Regulation Section 1.704-
1(b)(2)(iv)(f), immediately prior to any actual or deemed distribution to a
Partner of any Partnership property (other than a distribution of cash that
is not in redemption or retirement of a Partnership Interest), the Capital
Accounts of all Partners and the Carrying Value of all Partnership property
shall be adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property, as if such
Unrealized Gain or Unrealized Loss had been recognized in a sale of such
property immediately prior to such distribution for an amount equal to its
fair market value, and had been allocated to the Partners, at such time,
pursuant to Section 5.1(c). Any Unrealized Gain or Unrealized Loss
attributable to such property shall be allocated in the same manner as Net
Termination Gain or Net Termination Loss pursuant to Section 5.1(c);
provided, however that, in making any such allocation, Net Termination Gain
or Net Termination Loss actually realized shall be allocated first. In
determining such Unrealized Gain or Unrealized Loss the aggregate cash
amount and fair market value of all Partnership assets (including, without
limitation, cash or cash equivalents) immediately prior to a distribution
shall (A) in the case of an actual distribution which is not made pursuant
to Section 13.4, be determined and allocated in the same manner as that
provided in Section 4.5(d)(i) or (B) in the case of a liquidating
distribution pursuant to Section 14.3 or 14.4, be determined and allocated
by the Liquidator using such reasonable method of valuation as it may
adopt.
Section 4.6 Interest and Withdrawal.
No interest shall be paid by the Partnership on Contributions, and no
Partner shall be entitled to withdraw any part of its Contributions or to
receive any distribution from the Partnership, except as provided in Articles V,
VII, XII and XIII.
ARTICLE V
DISTRIBUTIONS
Section 5.1 Allocations for Capital Account Purposes.
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Section 4.5(b)) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided hereinbelow.
18
<PAGE>
(a) Net Income. After giving effect to the special allocations set
forth in Section 5.1(d), Net Income for each taxable period and all items of
income, gain, loss and deduction taken into account in computing Net Income for
such taxable period shall be allocated as follows:
(i) First, 100% to the General Partner until the aggregate Net
Income allocated to the General Partner pursuant to this Section 5.1(a)(i)
for the current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
5.1(b)(ii) for all previous taxable years; and
(ii) Second, the balance, if any, 100% to the General Partner and
the Limited Partner in accordance with their respective Percentage
Interest s.
(b) Net Losses. After giving effect to the special allocations set
forth in Section 5.1(d), Net Losses for each taxable period and all items of
income, gain, loss and deduction taken into account in computing Net Losses for
such taxable period shall be allocated as follows:
(i) First, 100% to the General Partner and the Limited Partner
in accordance with their respective Percentage Interests; provided, that
Net Losses shall not be allocated pursuant to this Section 5.1(b)(i) to the
extent that such allocation would cause any Limited Partner to have a
deficit balance in its Adjusted Capital Account at the end of such taxable
year (or increase any existing deficit balance in its Adjusted Capital
Account); and
(ii) Second, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the
special allocations set forth in Section 5.1(d), all items of income, gain, loss
and deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same manner
as such Net Termination Gain or Net Termination Loss is allocated hereunder. All
allocations under this Section 5.1(c) shall be made after Capital Account
balances have been adjusted by all other allocations provided under this Section
5.1 and after all distributions of Available Cash provided under Section 5.3
have been made with respect to the taxable period ending on the date of the
Partnership's liquidation pursuant to Sections 13.3 and 13.4.
(i) If a Net Termination Gain is recognized (or deemed
recognized pursuant to Section 4.5(d)), such Net Termination Gain shall be
allocated between the General Partner and the Limited Partner in the
following manner (and the Capital Accounts of the Partners shall be
increased by the amount so allocated in each of the following subclauses,
in the order listed, before an allocation is made pursuant to the next
succeeding subclause):
(A) First, to each Partner having a deficit balance in its
Capital Account, in the proportion that such deficit balance bears to
the total deficit balances
19
<PAGE>
in the Capital Accounts of all Partners, until each such Partner has
been allocated Net Termination Gain equal to any such deficit balance
in its Capital Account; and
(B) Second, 100% to the General Partner and the Limited
Partner in accordance with their respective Percentage Interests.
(ii) If a Net Termination Loss is recognized (or deemed
recognized pursuant to Section 4.5(d)), such Net Termination Loss
shall be allocated to the Partners in the following manner:
(A) First, 100% to the General Partner and the Limited
Partner in proportion to, and to the extent of, the positive balances
in their respective Capital Accounts; and
(B) Second, the balance, if any, 100% to the General
Partner.
(d) Special Allocations. Notwithstanding any other provision of this
Section 5.1, the following special allocations shall be made for such taxable
period:
(i) Partnership Minimum Gain Chargeback. Notwithstanding any
other provision of this Section 5.1, if there is a net decrease in
Partnership Minimum Gain during any Partnership taxable period, each
Partner shall be allocated items of Partnership income and gain for such
period (and, if necessary, subsequent periods) in the manner and amounts
provided in Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and
1.704-(j)(2)(i), or any successor provision. For purposes of this Section
5.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 5.1(d) with respect to such taxable period (other than an
allocation pursuant to Sections 5.1 (d)(v) and (vi)). This Section
5.1(d)(i) is intended to comply with the Partnership Minimum Gain
chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall
be interpreted consistently therewith.
(ii) Chargeback of Partner Nonrecourse Debt Minimum Gain.
Notwithstanding the other provisions of this Section 5.1 (other than
Section 5.1(d)(i)), except as provided in Treasury Regulation Section
1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt
Minimum Gain during any Partnership taxable period, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain at the beginning of such
taxable period shall be allocated items of Partnership income and gain for
such period (and, if necessary, subsequent periods) in the manner and
amounts provided in Treasury Regulation Sections 1.704-2(i)(4) and
1.704(a)(2)(ii), or any successor provisions. For purposes of this Section
5.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 5.1(d), other than Section 5.1(d)(i) and other
20
<PAGE>
than an allocation pursuant to Sections 5.1(d)(v) and (vi), with respect to
such taxable period. This Section 5.1(d)(ii) is intended to comply with the
chargeback of items of income and gain requirement in Treasury Regulation
Section 1.704-2(i)(4) and shall be interpreted consistently therewith.
(iii) Allocation of Deductions. This section is intentionally
deleted.
(iv) Qualified Income Offset. In the event any Partner
unexpectedly receives any adjustments, allocations or distributions
described in Treasury Regulation Sections 1.7041(b)(2)(ii)(d)(4), 1.704-
1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership income
and gain shall be specifically allocated to such Partner in an amount and
manner sufficient to eliminate, to the extent required by the Treasury
Regulations promulgated under Section 704(b) of the Code, the deficit
balance, if any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible unless
such deficit balance is otherwise eliminated pursuant to Section 5.1(d)(i)
or (ii).
(v) Gross Income Allocations. In the event any Partner has a
deficit balance in its Capital Account at the end of any Partnership
taxable period in excess of the sum of (A) the amount such Partner is
required to restore pursuant to the provisions of this Agreement and (B)
the amount such Partner is deemed obligated to restore pursuant to Treasury
Regulation Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be
specially allocated items of Partnership gross income and gain in the
amount of such excess as quickly as possible; provided, that an allocation
pursuant to this Section 5.1(d)(v) shall be made only if and to the extent
that such Partner would have a deficit balance in its Capital Account as
adjusted after all other allocations provided in this Section 5.1 have been
tentatively made as if this Section 5.1(d)(v) were not in this Agreement.
(vi) Nonrecourse Deductions. Nonrecourse Deductions for any
taxable period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its
good faith discretion that the Partnership's Nonrecourse Deductions must be
allocated in a different ratio to satisfy the safe harbor requirements of
the Treasury Regulations promulgated under Section 704(b) of the Code, the
General Partner is authorized, upon notice to the Limited Partner, to
revise the prescribed ratio to the numerically closest ratio that does
satisfy such requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse
Deductions for any taxable period shall be allocated 100% to the Partner
that bears the Economic Risk of Loss with respect to the Partner
Nonrecourse Debt to which such Partner Nonrecourse Deductions are
attributable in accordance with Treasury Regulation Section 1.704-2(i). If
more than one Partner bears the Economic Risk of Loss with respect to a
Partner Nonrecourse Debt, such Partner Nonrecourse Deductions attributable
thereto shall be
21
<PAGE>
allocated between or among such Partners in accordance with the ratios in
which they share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of Treasury
Regulation Section 1.752-3(a)(3), the Partners agree that Nonrecourse
Liabilities of the Partnership in excess of the sum of (A) the amount of
Partnership Minimum Gain and (B) the total amount of Nonrecourse Built-in
Gain shall be allocated among the Partners in accordance with their
respective Percentage Interests.
(ix) Code Section 754 Adjustments. To the extent an adjustment to
the adjusted tax basis of any Partnership asset pursuant to Section 734(b)
or 743(b) of the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis), and such item of
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required to
be adjusted pursuant to such Section of the Treasury Regulations.
(x) Curative Allocation.
(A) Notwithstanding any other provision of this Section
5.1, other than the Required Allocations, the Required Allocations
shall be taken into account in making the Agreed Allocations so that,
to the extent possible, the net amount of items of income, gain, loss
and deduction allocated to each Partner pursuant to the Required
Allocations and the Agreed Allocations, together, shall be equal to
the net amount of such items that would have been allocated to each
such Partner under the Agreed Allocations had the Required Allocations
and the related Curative Allocation not otherwise been provided in
this Section 5.1. Notwithstanding the preceding sentence, Required
Allocations relating to (1) Nonrecourse Deductions shall not be taken
into account except to the extent that there has been a decrease in
Partnership Minimum Gain and (2) Partner Nonrecourse Deductions shall
not be taken into account except to the extent that there has been a
decrease in Partner Nonrecourse Debt Minimum Gain. Allocations
pursuant to this Section 5.1(d)(x)(A) shall only be made with respect
to Required Allocations to the extent the General Partner reasonably
determines that such allocations will otherwise be inconsistent with
the economic agreement among the Partners. Further, allocations
pursuant to this Section 5.1(d)(x)(A) shall be deferred with respect
to allocations pursuant to clauses (1) and (2) hereof to the extent
the General Partner reasonably determines that such allocations are
likely to be offset by subsequent Required Allocations.
(B) The General Partner shall have reasonable discretion,
with respect to each taxable period, to (1) apply the provisions of
Section 5.1(d)(x)(A) in
22
<PAGE>
whatever order is most likely to minimize the economic distortions
that might otherwise result from the Required Allocations, and (2)
divide all allocations pursuant to Section 5.1(d)(x)(A) among the
Partners in a manner that is likely to minimize such economic
distortions.
Section 5.2 Allocations for Tax Purposes.
(a) Except as otherwise provided herein, for federal income tax
purposes, each item of income, gain, loss and deduction shall be allocated among
the Partners in the same manner as its correlative item of "book" income, gain,
loss or deduction is allocated pursuant to Section 5.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable
to a Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items
attributable thereto shall be allocated among the Partners in the manner
provided under Section 704(c) of the Code that takes into account the
variation between the Agreed Value of such property and its adjusted basis
at the time of contribution; and (B) any item of Residual Gain or Residual
Loss attributable to a Contributed Property shall be allocated among the
Partners in the same manner as its correlative item of "book" gain or loss
is allocated pursuant to Section 5.1.
(ii) (A) In the case of an Adjusted Property, such items
shall (1) first, be allocated among the Partners in a manner consistent
with the principles of Section 704(c) of the Code to take into account the
Unrealized Gain or Unrealized Loss attributable to such property and the
allocations thereof pursuant to Section 4.5(d)(i) or (ii), and (2) second,
in the event such property was originally a Contributed Property, be
allocated among the Partners in a manner consistent with Section
5.2(b)(i)(A); and (B) any item of Residual Gain or Residual Loss
attributable to an Adjusted Property shall be allocated among the Partners
in the same manner as its correlative item of "book" gain or loss is
allocated pursuant to Section 5.1.
(iii) The General Partner shall apply the principles of
Treasury Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of Units of the MLP (or any class or classes
thereof), the General Partner shall have sole discretion to (i) adopt such
conventions as it deems appropriate in determining the amount of depreciation,
amortization and cost recovery deductions; (ii) make special allocations for
federal income tax purposes of income (including, without limitation, gross
income) or deductions; and (iii) amend the provisions of this Agreement as
appropriate (x) to reflect the proposal or promulgation
23
<PAGE>
of Treasury Regulations under Section 704(b) or Section 704(c) of the Code or
(y) otherwise to preserve or achieve uniformity of Units of the MLP (or any
class or classes thereof). The General Partner may adopt such conventions, make
such allocations and make such amendments to this Agreement as provided in this
Section 5.2(c) only if such conventions, allocations or amendments would not
have a material adverse effect on the Partners, the holders of any class or
classes of Units of the MLP issued and outstanding or the Partnership, and if
such allocations are consistent with the principles of Section 704 of the Code.
(d) The General Partner in its sole discretion may determine to
depreciate or amortize the portion of an adjustment under Section 743(b) of the
Code attributable to unrealized appreciation in any Adjusted Property (to the
extent of the unamortized Book-Tax Disparity) using a predetermined rate derived
from the depreciation or amortization method and useful life applied to the
Partnership's common basis of such property, despite the inconsistency of such
approach with Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed Treasury
Regulation Section 1.197-2(g)(3). If the General Partner determines that such
reporting position cannot reasonably be taken, the General Partner may adopt
depreciation and amortization conventions under which all purchasers acquiring
Units of the MLP in the same month would receive depreciation and amortization
deductions, based upon the same applicable rate as if they had purchased a
direct interest in the Partnership's property. If the General Partner chooses
not to utilize such aggregate method, the General Partner may use any other
reasonable depreciation and amortization conventions to preserve the uniformity
of the intrinsic tax characteristics of any class or classes of Units of the MLP
that would not have a material adverse effect on the Limited Partner or the
holders of any class or classes of Units of the MLP.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after taking
into account other required allocations of gain pursuant to this Section 5.2, be
characterized as Recapture Income in the same proportions and to the same extent
as such Partners (or their predecessors in interest) have been allocated any
deductions directly or indirectly giving rise to the treatment of such gains as
Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized
by the Partnership for federal income tax purposes and allocated to the Partners
in accordance with the provisions hereof shall be determined without regard to
any election under Section 754 of the Code which may be made by the Partnership;
provided, however, that such allocations, once made, shall be adjusted as
necessary or appropriate to take into account those adjustments permitted or
required by Sections 734 and 743 of the Code.
(g) The General Partner may adopt such methods of allocation of
income, gain, loss or deduction between a transferor and a transferee of a
Partnership Interest as it determines necessary, to the extent permitted or
required by Section 706 of the Code and the regulations or rulings promulgated
thereunder.
24
<PAGE>
Section 5.3 Requirement of Distributions.
(a) Within 45 days following the end of (i) the period beginning
on the Initial Closing Date and ending on March 31, 1996 and (ii) each Quarter
commencing with the Quarter beginning on April 1, 1996, an amount equal to 100%
of Available Cash with respect to such period or Quarter shall be distributed in
accordance with this Article V by the Partnership to the Partners in accordance
with their respective Percentage Interests. The immediately preceding sentence
shall not require any distribution of cash if and to the extent such
distribution would be prohibited by applicable law or by any loan agreement,
security agreement, mortgage, debt instrument or other agreement or obligation
to which the Partnership is a party or by which it is bound or its assets are
subject.
(b) Notwithstanding the foregoing, in the event of the
dissolution and liquidation of the Partnership, all proceeds of such liquidation
shall be applied and distributed in accordance with, and subject to the terms
and conditions of, Section 13.4.
ARTICLE VI
MANAGEMENT AND OPERATION OF BUSINESS
Section 6.1 Management.
(a) The General Partner shall conduct, direct and manage all
activities of the Partnership. Except as otherwise expressly provided in this
Agreement, all management powers over the business and affairs of the
Partnership shall be exclusively vested in the General Partner, and the Limited
Partner shall have no right of control or management power over the business and
affairs of the Partnership. In addition to the powers now or hereafter granted a
general partner of a limited partnership under applicable law or which are
granted to the General Partner under any other provision of this Agreement, the
General Partner, subject to Section 6.3, shall have full power and authority to
do all things and on such terms as it, in its sole discretion, may deem
necessary or appropriate to conduct the business of the Partnership, to exercise
all powers set forth in Section 3.2 and to effectuate the purposes set forth in
Section 3.1, including the following:
(i) the making of any expenditures, the lending or
borrowing of money, the assumption or guarantee of, or other contracting
for, indebtedness and other liabilities, the issuance of evidences of
indebtedness and the incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or
rendering of periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
25
<PAGE>
(iii) the acquisition, disposition, mortgage, pledge,
encumbrance, hypothecation or exchange of any or all of the assets of the
Partnership or the merger or other combination of the Partnership with or into
another Person;
(iv) the use of the assets of the Partnership (including
cash on hand) for any purpose consistent with the terms of this Agreement,
including the financing of the conduct of the operations of the Partnership, the
lending of funds to other Persons (including the MLP, the General Partner and
its Affiliates), the repayment of obligations of the Partnership and the making
of capital contributions to a Subsidiary;
(v) the negotiation, execution and performance of any
contracts, conveyances or other instruments (including instruments that
limit the liability of the Partnership under contractual arrangements to
all or particular assets of the Partnership, with the other party to the
contract to have no recourse against the General Partner or its assets
other than its interest in the Partnership, even if same results in the
terms of the transaction being less favorable to the Partnership than would
otherwise be the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including
employees having titles such as "president," "vice president," "secretary"
and "treasurer") and agents, outside attorneys, accountants, consultants
and contractors and the determination of their compensation and other terms
of employment or hiring;
(viii) the maintenance of such insurance for the benefit of
the Partnership Group and the Partners (including the assets of the
Partnership) as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in,
and the contribution of property and the making of loans to, any further
limited or general partnerships, joint ventures, corporations, limited
liability companies or other relationships;
(x) the indemnification of any Person against liabilities
and contingencies to the extent permitted by law; and
(xi) the control of any matters affecting the rights and
obligations of the Partnership, including the bringing and defending of
actions at law or in equity and otherwise engaging in the conduct of
litigation and the incurring of legal expense and the settlement of claims
and litigation.
(b) Notwithstanding any other provision of this Agreement, the
MLP Agreement, the Delaware Act or any applicable law, rule or regulation, each
of the Partners hereby (i) approves, ratifies and confirms the execution,
delivery and performance by the parties thereto of the MLP
26
<PAGE>
Agreement, the Underwriting Agreement, the Equity Registration Statement, the
Conveyance and Contribution Agreements, the agreements and other documents filed
as exhibits to the Proxy Statement, and the other agreements described in or
filed as a part of the Proxy Statement; (ii) agrees that the General Partner (on
its own or through any officer of the Partnership) is authorized to execute,
deliver and perform the agreements referred to in clause (i) of this sentence
and the other agreements, acts, transactions and matters described in or
contemplated thereby on behalf of the Partnership without any further act,
approval or vote of the Partners; and (iii) agrees that the execution, delivery
or performance by the General Partner, the MLP, any Group Member or any
Affiliate of any of them, of this Agreement or any agreement authorized or
permitted under this Agreement, shall not constitute a breach by the General
Partner of any duty that the General Partner may owe the Partnership or the
Limited Partner or any other Persons under this Agreement (or any other
agreements) or of any duty stated or implied by law or equity.
Section 6.2 Certificate of Limited Partnership.
The General Partner has caused the Certificate of Limited Partnership to be
filed with the Secretary of State of the State of Delaware as required by the
Delaware Act and shall use all reasonable efforts to cause to be filed such
other certificates or documents as may be determined by the General Partner in
its sole discretion to be reasonable and necessary or appropriate for the
formation, continuation, qualification and operation of a limited partnership
(or a partnership in which the Limited Partner has limited liability) in the
State of Delaware or any other state in which the Partnership may elect to do
business or own property. To the extent that such action is determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate of Limited Partnership and do all things to maintain the
Partnership as a limited partnership (or a partnership in which the Limited
Partner has limited liability) under the laws of the State of Delaware or of any
other state in which the Partnership may elect to do business or own property.
Subject to the terms of Section 7. 4(a), the General Partner shall not be
required, before or after filing, to deliver or mail a copy of the Certificate
of Limited Partnership, any qualification document or any amendment thereto to
the Limited Partner.
Section 6.3 Restrictions on General Partner's Authority.
(a) The General Partner may not, without written approval of the
specific act by the Limited Partner or by other written instrument executed and
delivered by the Limited Partner subsequent to the date of this Agreement, take
any action in contravention of this Agreement, including, except as otherwise
provided in this Agreement, (i) committing any act that would make it impossible
to carry on the ordinary business of the Partnership; (ii) possessing
Partnership property, or assigning any rights in specific Partnership property,
for other than a Partnership purpose; (iii) admitting a Person as a Partner;
(iv) amending this Agreement in any manner; or (v) transferring its interest as
general partner of the Partnership.
27
<PAGE>
(b) Except as provided in Articles XIII and XV, the General
Partner may not sell, exchange or otherwise dispose of all or substantially all
of the Partnership's assets in a single transaction or a series of related
transactions without the approval of the Limited Partner; provided however that
this provision shall not preclude or limit the General Partner' s ability to
mortgage, pledge, hypothecate or grant a security interest in all or
substantially all of the Partnership's assets and shall not apply to any forced
sale of any or all of the Partnership's assets pursuant to the foreclosure of,
or other realization upon, any such encumbrance.
Section 6.4 Reimbursement of the General Partner.
(a) Except as provided in this Section 6.4 and elsewhere in this
Agreement or in the MLP Agreement, the General Partner shall not be compensated
for its services as general partner of any Group Member.
(b) The General Partner shall be reimbursed on a monthly basis,
or such other basis as the General Partner may determine in its sole discretion,
for (i) all direct and indirect expenses it incurs or payments it makes on
behalf of the Partnership (including salary, bonus, incentive compensation and
other amounts paid to any Person to perform services for the Partnership or for
the General Partner in the discharge of its duties to the Partnership) and (ii)
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 (including expenses allocated to the
General Partner by its Affiliates). 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. Reimbursements
pursuant to this Section 6.4 shall be in addition to any reimbursement to the
General Partner as a result of indemnification pursuant to Section 6.7.
(c) The General Partner, in its sole discretion and without the
approval of the Limited Partner (who shall have no right to vote in respect
thereof), may propose and adopt on behalf of the Partnership employee benefit
plans, employee programs and employee practices for the benefit of employees of
the General Partner, any Group Member, or any Affiliate, or any of them, in
respect of services performed, directly or indirectly, for the benefit of the
Partnership Group. Expenses incurred by the General Partner in connection with
any such plans, programs and practices shall be reimbursed in accordance with
Section 6.4(b). Any and all obligations of the General Partner under any
employee benefit plans, employee programs or employee practices adopted by the
General Partner as permitted by this Section 6.4(c) shall constitute obligations
of the General Partner hereunder and shall be assumed by any successor General
Partner approved pursuant to Section 12.1 or 12.2 or the transferee of or
successor to all of the General Partner's Partnership Interest as a general
partner in the Partnership pursuant to Section 11.3.
28
<PAGE>
Section 6.5 Outside Activities.
(a) After the Initial Closing Date, the General Partner, for so
long as it is the general partner of the Partnership, shall 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 one or more Group
Members or as described in or contemplated by the Initial Registration Statement
or (ii) the acquiring, owning or disposing of debt or equity securities in any
Group Member.
(b) Certain Affiliates of the General Partner have entered into
a non-competition agreement with the Partnership and the MLP, which agreement
sets forth certain restrictions on the ability of such Affiliates to compete
with the Partnership and the Operating Partnership. Any amendments or waivers to
the non-competition agreement must be approved by the Audit Committee.
(c) Except as restricted by Sections 6.5(a) and 6.5(b), each
Indemnitee shall have the right to engage in businesses of every type and
description and other activities for profit and to engage in and possess an
interest in other business ventures of any and every type or description,
whether in businesses engaged in or anticipated to be engaged in by any Group
Member, independently or with others, including business interests and
activities in direct competition with the business and activities of any Group
Member, and none of the same shall constitute a breach of this Agreement or any
duty to any Group Member or any Partner or Assignee. Neither any Group Member,
any Limited Partner nor any other Person shall have any rights by virtue of this
Agreement, the Operating Partnership Agreement or the partnership relationship
established hereby or thereby in any business ventures of any Indemnitee.
(d) Notwithstanding anything to the contrary in this Agreement,
(i) the engaging in competitive activities by any Indemnitees in accordance with
the provisions of this Section 6.5 is hereby approved by the Partnership and all
Partners and (ii) it shall be deemed not to be a breach of the General Partner's
fiduciary duty or any other obligation of any type whatsoever of the General
Partner for the Indemnitees to engage in such business interests and activities
in preference to or to the exclusion of the Partnership (including, without
limitation, the General Partner and the Indemnitees shall have no obligation to
present business opportunities to the Partnership).
(e) The term "Affiliates" when used in this Section 6.5 with
respect to the General Partner shall not include any Group Member, the MLP or
any Subsidiary of any Group Member or the MLP.
Section 6.6 Loans from the General Partner; Contracts with Affiliates;
Certain Restrictions on the General Partner.
(a) The General Partner or any Affiliate thereof may lend to any
Group Member, and any Group Member may borrow, funds needed or desired by the
Group Member for such periods of time and in such amounts as the General Partner
may determine; provided, however, that in any
29
<PAGE>
such case the lending party may not charge the borrowing party interest at a
rate greater than the rate that would be charged the borrowing party or impose
terms less favorable to the borrowing party than would be charged or imposed on
the borrowing party by unrelated lenders on comparable loans made on an arms'-
length basis (without reference to the lending party's financial abilities or
guarantees). The borrowing party shall reimburse the lending party for any costs
(other than any additional interest costs) incurred by the lending party in
connection with the borrowing of such funds. For purposes of this Section 6.6(a)
and Section 6.6(b), the term "Group Member" shall include any Affiliate of the
Group Member that is controlled by the Group Member. The Partnership may not
lend funds to the General Partner or any of its Affiliates.
(b) The Partnership may lend or contribute to any Group Member,
and any Group Member may borrow, funds on terms and conditions established in
the sole discretion of the General Partner; provided, however, that the
Partnership may not charge the Group Member interest at a rate greater than the
rate that would be charged to the Group Member (without reference to the General
Partner's financial abilities or guarantees), by unrelated lenders on comparable
loans. The foregoing authority shall be exercised by the General Partner in its
sole discretion and shall not create any right or benefit in favor of any Group
Member or any other Person.
(c) The General Partner may itself, or may enter into an
agreement with any of its Affiliates to, render services to the Partnership or
to the General Partner in the discharge of its duties as general partner of the
Partnership. Any services rendered to the Partnership by the General Partner or
any of its Affiliates shall be on terms that are fair and reasonable to the
Partnership; provided, however, that the requirements of this Section 6.6(c)
shall be deemed satisfied as to (i) any transaction approved by Special
Approval, (ii) any transaction, the terms of which are no less favorable to the
Partnership than those generally being provided to or available from unrelated
third parties or (iii) any transaction that, 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), is
equitable to the Partnership. The provisions of Section 6.4 shall apply to the
rendering of services described in this Section 6.6(c).
(d) The Partnership may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and applicable
law.
(e) Neither the General Partner nor any of its Affiliates shall
sell, transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the requirements
of this Section 6.6(e) shall be deemed to be satisfied as to (i) the
transactions effected pursuant to the Conveyance and Contribution Agreements and
any other transactions described in or contemplated by the Proxy Statement, (ii)
any transaction approved by Special Approval, (iii) any transaction, the terms
of which are no less favorable to the Partnership than those generally being
provided to or available from unrelated third parties, or (iv) any transaction
that, taking into account
30
<PAGE>
the totality of the relationships between the parties involved (including other
transactions that may be particularly favorable or advantageous to the
Partnership), is equitable to the Partnership.
(f) The General Partner and its Affiliates will have no
obligation to permit any Group Member or the MLP to use any facilities or assets
of the General Partner and its Affiliates, except as may be provided in
contracts entered into from time to time specifically dealing with such use nor
shall there be any obligation on the part of the General Partner or its
Affiliates to enter into such contracts.
(g) Without limitation of Sections 6.6(a) through 6.6(f), and
notwithstanding anything to the contrary in this Agreement, the existence of the
conflicts of interest described in the Proxy Statement is hereby approved by all
Partners.
Section 6.7 Indemnification.
(a) To the fullest extent permitted by law but subject to the
limitations expressly provided in this Agreement, all Indemnitees shall be
indemnified and held harmless by the Partnership from and against any and all
losses, claims, damages, liabilities, joint or several, expenses (including
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 an Indemnitee, 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; provided, further, no indemnification
pursuant to this Section 6.7 shall be available to the General Partner or Petro
with respect to their respective obligations incurred pursuant to the
Underwriting Agreement or the Conveyance and Contribution Agreement (other than
obligations incurred by the General Partner on behalf of the Partnership or the
MLP). The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere, or its equivalent,
shall not create a presumption that the Indemnitee acted in a manner contrary to
that specified above. Any indemnification pursuant to this Section 6.7 shall be
made only out of the assets of the Partnership, it being agreed that the General
Partner shall not be personally liable for such indemnification and shall have
no obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including
legal fees and expenses) incurred by an Indemnitee who is indemnified pursuant
to Section 6.7(a) in defending any claim, demand, action, suit or proceeding
shall, from time to time, be advanced by the Partnership prior to the final
disposition of such claim, demand, action, suit or proceeding upon receipt by
the Partnership of an undertaking by or on behalf of the Indemnitee to repay
such amount if it shall be determined that the Indemnitee is not entitled to be
indemnified as authorized in this Section 6.7.
31
<PAGE>
(c) The indemnification provided by this Section 6.7 shall be in
addition to any other rights to which an Indemnitee may be entitled under any
agreement, pursuant to any vote of the Partners, as a matter of law or
otherwise, both as to actions in the Indemnitee's capacity as an Indemnitee and
as to actions in any other capacity (including any capacity under the
Underwriting Agreement) and shall continue as to an Indemnitee who has ceased to
serve in such capacity and shall inure to the benefit of the heirs, successors,
assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the
General Partner or its Affiliates for the cost of) insurance, on behalf of the
General Partner and such other Persons as the General Partner shall determine,
against any liability that may be asserted against or expense that may be
incurred by such Person in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to indemnify such
Person against such liability under the provisions of this Agreement.
(e) For purposes of this Section 6.7, the Partnership shall be
deemed to have requested an Indemnitee to serve as fiduciary of an employee
benefit plan whenever the performance by it of its duties to the Partnership
also imposes duties on, or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable law
shall constitute "fines" within the meaning of Section 6.7(a); and action taken
or omitted by it with respect to any employee benefit plan in the performance of
its duties for a purpose reasonably believed by it to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a purpose
which is in, or not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partner to
personal liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole
or in part under this Section 6.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the transaction
was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.7 are for the benefit of
the Indemnitees, their heirs, successors, assigns and administrators and shall
not be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 6.7 or
any provision hereof shall in any manner terminate, reduce or impair the right
of any past, present or future Indemnitee to be indemnified by the Partnership,
nor the obligations of the Partnership to indemnify any such Indemnitee under
and in accordance with the provisions of this Section 6.7 as in effect
immediately prior to such amendment, modification or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part, prior
to such amendment, modification or repeal, regardless of when such claims may
arise or be asserted.
32
<PAGE>
Section 6.8 Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in this
Agreement, no Indemnitee shall be liable for monetary damages to the
Partnership, the Limited Partner, or any other Persons who have acquired
interests in the Partnership, for losses sustained or liabilities incurred as a
result of any act or omission if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set
forth in Section 6. 1 (a), the General Partner may exercise any of the powers
granted to it by this Agreement and perform any of the duties imposed upon it
hereunder either directly or by or through its agents, and the General Partner
shall not be responsible for any misconduct or negligence on the part of any
such agent appointed by the General Partner in good faith.
(c) Any amendment, modification or repeal of this Section 6. 8
or any provision hereof shall be prospective only and shall not in any way
affect the limitations on the liability to the Partnership and the Limited
Partner of the General Partner, its directors, officers and employees and any
other Indemnitees under this Section 6.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be asserted.
Section 6.9 Resolution of Conflicts of Interest.
(a) Unless otherwise expressly provided in this Agreement or the
MLP Agreement, whenever a potential conflict of interest exists or arises
between the General Partner or any of its Affiliates, on the one hand, and the
Partnership, the MLP or the Limited Partner, on the other hand, any resolution
or course of action in respect of such conflict of interest shall be permitted
and deemed approved by the Limited Partner, and shall not constitute a breach of
this Agreement, of the MLP Agreement or of any agreement contemplated herein or
therein, or of any duty stated or implied by law or equity, if the resolution or
course of action is, or by operation of this Agreement is deemed to be, fair and
reasonable to the Partnership. The General Partner shall be authorized but not
required in connection with its resolution of such conflict of interest to seek
Special Approval of a resolution of such conflict or course of action. Any
conflict of interest and any resolution of such conflict of interest shall be
conclusively deemed fair and reasonable to the Partnership if such conflict of
interest or resolution is (i) approved by Special 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). The General Partner may also adopt a resolution or course
of action that has not received Special Approval. The General Partner (including
the Audit Committee in connection with Special Approval) shall be authorized in
connection with its determination of what is "fair and reasonable" to the
Partnership and in connection with its resolution of any conflict of interest to
consider (A) the relative interests of any party to such conflict, agreement,
transaction or situation
33
<PAGE>
and the benefits and burdens relating to such interest; (B) any customary or
accepted industry practices and any customary or historical dealings with a
particular Person; (C) any applicable generally accepted accounting or
engineering principles or practices; and (D) such additional factors as the
General Partner (including the Audit Committee) determines in its sole
discretion to be relevant, reasonable or appropriate under the circumstances.
Nothing contained in this Agreement, however, is intended to nor shall it be
construed to require the General Partner (including the Audit Committee) to
consider the interests of any Person other than the Partnership. In the absence
of bad faith by the General Partner, the resolution, action or terms so made,
taken or provided by the General Partner with respect to such matter shall not
constitute a breach of this Agreement, the MLP Agreement or any other agreement
contemplated herein or therein or a breach of any standard of care or duty
imposed herein or therein or, to the extent permitted by law, under the Delaware
Act or any other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated
hereby provides that the General Partner or any of its Affiliates is permitted
or required to make a decision (i) in its "sole discretion" or "discretion,"
that it deems "necessary or appropriate" or "necessary or advisable" or under a
grant of similar authority or latitude, the General Partner or such Affiliate
shall be entitled to consider only such interests and factors as it desires and
shall have no duty or obligation to give any consideration to any interest of,
or factors affecting, the Partnership, the Limited Partner or any limited
partner of the Limited Partner, (ii) it may make such decision in its sole
discretion (regardless of whether there is a reference to "sole discretion" or
"discretion") unless another express standard is provided for, or (iii) in "good
faith" or under another express standard, the General Partner or such Affiliate
shall act under such express standard and shall not be subject to any other or
different standards imposed by this Agreement, the MLP Agreement, any other
agreement contemplated hereby or under the Delaware Act or any other law, rule
or regulation. In addition, any actions taken by the General Partner or such
Affiliate consistent with the standards of "reasonable discretion" set forth in
the definition of Available Cash shall not constitute a breach of any duty of
the General Partner to the Partnership, the Limited Partner or any limited
partner of the Limited Partner. The General Partner shall have no duty, express
or implied, to sell or otherwise dispose of any asset of the Partnership Group.
No borrowing by any Group Member or the approval thereof by the General Partner
shall be deemed to constitute a breach of any duty of the General Partner to the
Partnership, the Limited Partner or any limited partner of the Limited Partner
by reason of the fact that the purpose or effect of such borrowing is directly
or indirectly to (A) enable distributions in respect of the general partner
interest under the MLP Agreement to exceed 1% of the total amount distributed by
the MLP or (B) hasten the expiration of the "Subordination Period" under the MLP
Agreement or the conversion of any "Subordinated Units" in the MLP into Common
Units.
(c) Whenever a particular transaction, arrangement or resolution
of a conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
34
<PAGE>
(d) The Limited Partner hereby authorizes the General Partner,
on behalf of the Partnership as a partner of a Group Member, to approve of
actions by the general partner of such Group Member similar to those actions
permitted to be taken by the General Partner pursuant to this Section 6.9.
Section 6.10 Other Matters Concerning the General Partner.
(a) The General Partner may rely and shall be protected in
acting or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, bond, debenture,
or other paper or document believed by it to be genuine and to have been signed
or presented by the proper party or parties.
(b) The General Partner may consult with legal counsel,
accountants, appraisers, management consultants, investment bankers and other
consultants and advisers selected by it, and any act taken or omitted to be
taken in reliance upon the opinion (including an Opinion of Counsel) of such
Persons as to matters that the General Partner reasonably believes to be within
such Person's professional or expert competence shall be conclusively presumed
to have been done or omitted in good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of any
of its powers or obligations hereunder, to act through any of its duly
authorized officers, a duly appointed attorney or attorneys-in-fact or the duly
authorized officers of the Partnership.
(d) Any standard of care and duty imposed by this Agreement or
under the Delaware Act or any applicable law, rule or regulation shall be
modified, waived or limited to the extent permitted by law as required to permit
the General Partner to act under this Agreement or any other agreement
contemplated by this Agreement and to make any decision pursuant to the
authority prescribed in this 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.
Section 6.11 Title to Partnership Assets.
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner, individually or collectively, shall have any ownership
interest in such Partnership assets or any portion thereof. Title to any or all
of the Partnership assets may be held in the name of the Partnership, the
General Partner, one or more of its Affiliates or one or more nominees, as the
General Partner may determine. The General Partner hereby declares and warrants
that any Partnership assets for which record title is held in the name of the
General Partner or one or more of its Affiliates or one or more nominees shall
be held by the General Partner or such Affiliate or nominee for the use and
benefit of the Partnership in accordance with the provisions of this Agreement;
provided, however, that the General Partner shall use its reasonable efforts to
cause record title to such assets (other than those assets in respect of which
the General Partner determines that the expense and difficulty of
35
<PAGE>
conveyancing makes transfer of record title to the Partnership impracticable) to
be vested in the Partnership as soon as reasonably practicable; provided that,
prior to the withdrawal or removal of the General Partner or as soon thereafter
as practicable, the General Partner shall use reasonable efforts to effect the
transfer of record title to the Partnership and, prior to any such transfer,
will provide for the use of such assets in a manner satisfactory to the
Partnership. All Partnership assets shall be recorded as the property of the
Partnership in its books and records, irrespective of the name in which record
title to such Partnership assets is held. The General Partner covenants and
agrees that at the Initial Closing Date, the Partnership Group shall have all
licenses, permits, certificates, franchises, or other governmental
authorizations or permits necessary for the ownership of their properties or for
the conduct of their businesses, except for such licenses, permits,
certificates, franchises, or other governmental authorizations or permits,
failure to have obtained which will not, individually or in the aggregate, have
a material adverse effect on the Partnership Group.
Section 6.12 Reliance by Third Parties.
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of the Partnership authorized by the General Partner to
act on behalf of and in the name of the Partnership has full power and authority
to encumber, sell or otherwise use in any manner any and all assets of the
Partnership and to enter into any contracts on behalf of the Partnership, and
such Person shall be entitled to deal with the General Partner or any such
officer as if it were the Partnership's sole party in interest, both legally and
beneficially. The Limited Partner hereby waives any and all defenses or other
remedies that may be available against such Person to contest, negate or
disaffirm any action of the General Partner or any such officer in connection
with any such dealing. In no event shall any Person dealing with the General
Partner or any such officer or its representatives be obligated to ascertain
that the terms of this Agreement have been complied with or to inquire into the
necessity or expedience of any act or action of the General Partner or any such
officer or its representatives. Each and every certificate, document or other
instrument executed on behalf of the Partnership by the General Partner or any
such officer or its representatives shall be conclusive evidence in favor of any
and every Person relying thereon or claiming thereunder that (a) at the time of
the execution and delivery of such certificate, document or instrument, this
Agreement was in full force and effect, (b) the Person executing and delivering
such certificate, document or instrument was duly authorized and empowered to do
so for and on behalf of the Partnership and (c) such certificate, document or
instrument was duly executed and delivered in accordance with the terms and
provisions of this Agreement and is binding upon the Partnership.
36
<PAGE>
ARTICLE VII
RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNER
Section 7.1 Limitation of Liability.
The Limited Partner shall have no liability under this Agreement except as
expressly provided in this Agreement or the Delaware Act.
Section 7.2 Management of Business.
The Limited Partner, in its capacity as such, shall not participate in the
operation, management or control (within the meaning of the Delaware Act) of the
Partnership's business, transact any business in the Partnership's name or have
the power to sign documents for or otherwise bind the Partnership. The
transaction of any such business by the General Partner, any of its Affiliates
or any officer, director, employee, partner, agent or trustee of the General
Partner or any of its Affiliates, in its capacity as such, shall not affect,
impair or eliminate the limitations on the liability of the Limited Partner
under this Agreement.
Section 7.3 Return of Capital.
The Limited Partner shall not be entitled to the withdrawal or return of
its Contribution, except to the extent, if any, that distributions made pursuant
to this Agreement or upon termination of the Partnership may be considered as
such by law and then only to the extent provided for in this Agreement.
Section 7. Right of the Limited Partner Relating to the Partnership.
(a) In addition to other rights provided by this Agreement or by
applicable law, and except as limited by Section 7.4(b), the Limited Partner
shall have the right, for a purpose reasonably related to the Limited Partner's
interest as a limited partner in the Partnership, upon reasonable demand and at
the Limited Partner's own expense:
(i) to obtain true and full information regarding the
status of the business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of
the Partnership's federal, state and local tax returns for each year;
(iii) to have furnished to it, upon notification to the
General Partner, a current list of the name and last known business,
residence or mailing address of each Partner;
37
<PAGE>
(iv) to have furnished to it, upon notification to the
General Partner, a copy of this Agreement and the Certificate of Limited
Partnership and all amendments thereto, together with a copy of the
executed copies of all powers of attorney pursuant to which this Agreement,
the Certificate of Limited Partnership and all amendments thereto have been
executed;
(v) to obtain true and full information regarding the amount
of cash and a description and statement of the Net Agreed Value of any
other Capital Contribution by each Partner and which each Partner has
agreed to contribute in the future, and the date on which each became a
Partner; and
(vi) to obtain such other information regarding the affairs of
the Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partner
for such period of time as the General Partner deems reasonable, (i) any
information that the General Partner reasonably believes to be in the nature of
trade secrets or (ii) other information the disclosure of which the General
Partner in good faith believes (A) is not in the best interests of the
Partnership Group, (B) could damage the Partnership Group or (C) that the
Partnership Group is required by law or by agreements with third parties to keep
confidential (other than agreements with Affiliates the primary purpose of which
is to circumvent the obligations set forth in this Section 7.4).
ARTICLE VII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting.
The General Partner shall keep or cause to be kept at the principal office
of the Partnership appropriate books and records with respect to the
Partnership's business, including all books and records necessary to provide to
the Limited Partner any information required to be provided pursuant to Section
7.4(a). Any books and records maintained by or on behalf of the Partnership in
the regular course of its business, including books of account and records of
Partnership proceedings, may be kept on, or be in the form of, computer disks,
hard drives, punch cards, magnetic tape, photographs, micrographics or any other
information storage device, provided, that the books and records so maintained
are convertible into clearly legible written form within a reasonable period of
time. The books of the Partnership shall be maintained, for financial reporting
purposes, on an accrual basis in accordance with generally accepted accounting
principles.
38
<PAGE>
Section 8.2 Fiscal Year.
The fiscal year of the Partnership shall be October 1 to September 30.
ARTICLE IX
TAX MATTERS
Section 9.1 Preparation of Tax Returns.
The General Partner shall timely file all returns of the Partnership that
are required for federal, state and local income tax purposes on the basis of
the accrual method and a taxable year ending on December 31. The tax
information reasonably required by the Record Holders for federal and state
income tax reporting purposes with respect to a taxable year shall be furnished
to them within 90 days of the close of the calendar year in which the
partnership's taxable year ends. The classification, realization, and
recognition of income, deductions and other items shall be on the accrual method
of accounting for federal income tax purposes.
Section 9.2 Tax Elections.
(a) The Partnership shall make the election under Section 754 of
the Code in accordance with applicable regulations thereunder, subject to the
reservation of the right to seek to revoke any such election upon the General
Partner's determination that such revocation is in the best interests of the
Limited Partners.
(b) The Partnership shall elect to deduct expenses incurred in
organizing the Partnership ratably over a sixty-month period as provided in
Section 709 of the Code.
(c) Except as otherwise provided herein, the General Partner
shall determine whether the Partnership should make any other elections
permitted by the Code.
Section 9.3 Tax Controversies.
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in Section 6231 of the Code) and is authorized
and required to represent the Partnership (at the Partnership's expense) in
connection with all examinations of the Partnership's affairs by tax
authorities, including resulting administrative and judicial proceedings, and to
expend Partnership funds for professional services and costs associated
therewith. Each Partner agrees to cooperate with the General Partner and to do
or refrain from doing any or all things reasonably required by the General
Partner to conduct such proceedings.
39
<PAGE>
Section 9.4 Withholding.
Notwithstanding any other provision of this Agreement, the General Partner
is authorized to take any action that it determines in its sole discretion to be
necessary or appropriate to cause the Partnership to comply with any withholding
requirements established under the Code or any other federal, state or local law
including, without limitation, pursuant to Sections 1441, 1442, 1445 and 1446 of
the Code. To the extent that the Partnership is required to withhold and pay
over to any taxing authority any amount resulting from the allocation or
distribution of income to any Partner (including, without limitation, by reason
of Section 1446 of the Code), the amount withheld shall be treated as a
distribution of cash pursuant to Section 5.3 in the amount of such withholding
from such Partner.
ARTICLE X
TRANSFER OF INTERESTS
10.1 Transfer
(a) The term "transfer, "when used in this Article X with
respect to a Partnership Interest, shall be deemed to refer to a transaction by
which a Partner assigns its Partnership Interest to another Person and includes
a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange
or any other disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in
part, except in accordance with the terms and conditions set forth in this
Article X. Any transfer or purported transfer of a Partnership Interest not made
in accordance with this Article X shall be null and void.
(c) Nothing contained in this Article X shall be construed to
prevent a disposition by the parent entity of the General Partner of any or all
of the issued and outstanding capital stock of the General Partner.
Section 10.2 Transfer of the General Partner's Partnership Interest.
If the general partner of the MLP transfers its partnership interest as the
general partner therein to any Person in accordance with the provisions of the
MLP Agreement, the General Partner shall contemporaneously therewith transfer
its Partnership Interest as the general partner of the Partnership to such
Person, and the Limited Partner hereby expressly consents to such transfer.
Except as set forth in the immediately preceding sentence, or in connection with
any pledge of (or any related foreclosure on) the General Partner's general
partner interest in the Partnership solely for the purpose of securing, directly
or indirectly, indebtedness of the Partnership or the MLP or the General
Partner's guarantee obligations under that certain Guarantee Agreement dated
December 13, 1995 between the General Partner and Marine Midland Bank, as such
agreement may be
40
<PAGE>
amended, supplemented, refinanced or modified from time to time, the General
Partner may not transfer all or any part of its Partnership Interest as the
general partner in the Partnership.
Section 10.3 Transfer of the Limited Partner's Partnership Interest.
If the Limited Partner merges, consolidates or otherwise combines with or
into any other Person or transfers all or substantially all of its assets to
another Person, such Person may become a Substituted Limited Partner pursuant to
Article XI. Except as set forth in the immediately preceding sentence, or in
connection with any pledge of (or any related foreclosure on) the Limited
Partner's limited partner interest in the Partnership solely for the purpose of
securing, directly or indirectly, indebtedness of the Partnership or the MLP,
and except for the transfers contemplated by Sections 4.2 and 11.1, the Limited
Partner may not transfer all or any part of its Partnership Interest or withdraw
from the Partnership.
ARTICLE XI
ADMISSION OF PARTNERS
Section 11.1 Admission of Star Gas as a Limited Partner.
Upon the making by Star Gas of the Capital Contributions described in
Section 4.2, Star Gas was admitted to the Partnership as a limited partner.
Upon the transfer by Star Gas of its Partnership Interest as limited partner to
the MLP, Star Gas shall withdraw and cease to be a limited partner of the
Partnership.
Section 11.2 Admission of Substituted Limited Partners.
Any person that is the successor in interest to a Limited Partner as
described in Section 10.3 shall be admitted to the Partnership as a limited
partner upon (a) furnishing to the General Partner (i) acceptance in form
satisfactory to the General Partner of all of the terms and conditions of this
Agreement and (ii) such other documents or instruments as may be required to
effect its admission as a limited partner in the Partnership and (b) obtaining
the consent of the General Partner, which consent may be given or withheld in
the General Partner's sole discretion. Such Person shall be admitted to the
Partnership as a limited partner immediately prior to the transfer of the
Partnership Interest, and the business of the Partnership shall continue without
dissolution.
Section 11.3 Admission of Successor General Partner.
A successor General Partner approved pursuant to Section 12.1 or 12.2 or
the transferee of or successor to all of the General Partner's Partnership
Interest as the general partner in the Partnership pursuant to Section 10.2 who
is proposed to be admitted as a successor General Partner shall, subject to
compliance with the terms of Section 12.3, if applicable, be admitted to the
Partnership as the successor General Partner, effective immediately prior to the
withdrawal or
41
<PAGE>
removal of the General Partner pursuant to Section 12.1 or 12.2 or the transfer
of the General Partner's Partnership Interest as the general partner of the
Partnership pursuant to Section 10.2. Any such successor shall, subject to the
terms hereof, carry on the business of the Partnership without dissolution. In
each case, the admission of such successor General Partner to the Partnership
shall, subject to the terms hereof, be subject to the successor General Partner
executing and delivering to the Partnership an acceptance of all of the terms
and conditions of this Agreement and such other documents or instruments as may
be required to effect such admission.
Section 11.4 Amendment of Agreement and Certificate of Limited Partnership.
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act to
amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practical an amendment of this Agreement and,
if required by law, to prepare and file an amendment to the Certificate of
Limited Partnership, and the General Partner may for this purpose, among others,
exercise the power of attorney granted pursuant to Section 1.4.
Section 11.5 Admission of Additional Limited Partners.
(a) A Person (other than the General Partner, the MLP or a
Substituted Limited Partner) who makes a Capital Contribution to the Partnership
in accordance with this Agreement shall be admitted to the Partnership as an
Additional Limited Partner only upon furnishing to the General Partner (i)
evidence of acceptance in form satisfactory to the General Partner of all of the
terms and conditions of this Agreement, including the granting of the power of
attorney granted in Section 1.4, and (ii) such other documents or instruments as
may be required in the discretion of the General Partner to effect such Person's
admission as an Additional Limited Partner.
(b) Notwithstanding anything to the contrary in this Section
11.5, no Person shall be admitted as an Additional Limited Partner without the
consent of the General Partner, which consent may be given or withheld in the
General Partner's sole discretion. The admission of any Person as an Additional
Limited Partner shall become effective on the date upon which the name of such
Person is recorded as such in the books and records of the Partnership,
following the consent of the General Partner to such admission.
ARTICLE XII
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 12.1 Withdrawal of the General Partner.
(a) The General Partner shall be deemed to have withdrawn from
the Partnership upon the occurrence of any one of the following events (each
such event herein referred to as an "Event of Withdrawal");
42
<PAGE>
(i) the General Partner voluntarily withdraws from the
Partnership by giving written notice to the Limited Partner;
(ii) the General Partner transfers all of its rights as General
Partner pursuant to Section 10.2;
(iii) the General Partner is removed pursuant to Section 12.2; or
(iv) the general partner of the MLP withdraws from, or is
removed as the general partner of, the MLP.
If an Event of Withdrawal specified in Section 12.1(a)(iv) occurs, the
withdrawing General Partner shall give notice to the Limited Partner within 30
days after such occurrence. The Partners hereby agree that only the Events of
Withdrawal described in this Section 12.1 shall result in the withdrawal of the
General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Initial Closing Date and ending at 12:00 midnight, Eastern
Standard Time, on December 31, 2005, the General Partner voluntarily withdraws
by giving at least 90 days' advance notice of its intention to withdraw to the
Limited Partner, provided that prior to the effective date of such withdrawal,
the Limited Partner approves such withdrawal and the General Partner delivers to
the Partnership an Opinion of Counsel ("Withdrawal Opinion of Counsel") that
such withdrawal (following the selection of the successor General Partner) would
not result in the loss of the limited liability of the Limited Partner, any
limited partner of the Limited Partner, or any limited partner of any Group
Member, or cause the Limited Partner or any Group Member to be treated as an
association taxable as a corporation or otherwise to be taxed as an entity for
federal income tax purposes; (ii) at any time after 12:00 midnight, Eastern
Standard Time, on December 31, 2005, the General Partner voluntarily withdraws
by giving at least 90 days' advance notice to the Limited Partner, such
withdrawal to take effect on the date specified in such notice; (iii) at any
time that the General Partner ceases to be the General Partner pursuant to
Section 12.1(a)(ii), (iii) or (iv). If the General Partner gives a notice of
withdrawal pursuant to Section 12. l(a)(i) or Section 13.1(a)(i) of the MLP
Agreement, the Limited Partner may, prior to the effective date of such
withdrawal or removal, elect a successor General Partner, provided that such
successor shall be the same Person, if any, that is elected by the limited
partners of the MLP pursuant to Section 13.1 of the MLP Agreement as the
successor to the General Partner in its capacity as general partner of the MLP.
If, prior to the effective date of the General Partner's withdrawal, a successor
is not selected by the Limited Partner as provided herein or the Partnership
does not receive a Withdrawal Opinion of Counsel, the Partnership shall be
dissolved in accordance with Section 13.1. Any successor General Partner elected
in accordance with the terms of this Section 12.1 shall be subject to the
provisions of Section 11.3.
43
<PAGE>
Section 12.2 Removal of the General Partner.
The General Partner shall be removed if such General Partner is removed as
a general partner of the MLP pursuant to Section 13.2 of the MLP Agreement.
Such removal shall be effective concurrently with the effectiveness of the
removal of such General Partner as the general partner of the MLP pursuant to
the terms of the MLP Agreement. If a successor General Partner is elected in
connection with the removal of such General Partner as a general partner of the
MLP, such successor General Partner shall, upon admission pursuant to Article
XI, automatically become a successor General Partner of the Partnership. The
admission of any such successor General Partner to the Partnership shall be
subject to the provisions of Section 11.3.
Section 12.3 Interest of Departing Partner and Successor General Partner..
The Partnership Interest of a Departing Partner departing as a result of
withdrawal or removal pursuant to Section 12.1 or 12.2 shall (unless it is
otherwise required to be converted into Common Units pursuant to Section 13.3(b)
of the MLP Agreement) be purchased by the successor to the Departing Partner for
cash in the manner specified in the MLP Agreement. Such purchase (or conversion
into Common Units, as applicable) shall be a condition to the admission to the
Partnership of the successor as the General Partner. Any successor General
Partner shall indemnify the Departing General Partner as to all debts and
liabilities of the Partnership arising on or after the effective date of the
withdrawal or removal of the Departing Partner.
Section 12.4 Reimbursement of Departing Partner.
The Departing Partner shall be entitled to receive all reimbursements due
such Departing Partner pursuant to Section 6.4, including any employee-related
liabilities (including severance liabilities), incurred in connection with the
termination of any employees employed by such Departing Partner for the benefit
of the Partnership.
Section 12.5 Withdrawal of the Limited Partner.
Without the prior consent of the General Partner, which may be granted or
withheld in its sole discretion, and except as provided in Section 11.1, the
Limited Partner shall not have the right to withdraw from the Partnership.
44
<PAGE>
ARTICLE XIII
DISSOLUTION AND LIQUIDATION
Section 13.1 Dissolution.
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, any successor General Partner
shall continue the business of the Partnership. The Partnership shall dissolve
and, subject to Section 13.2, its affairs should be wound up, upon:
(a) the expiration of its term as provided in Section 1.5;
(b) an Event of Withdrawal of the General Partner as provided in
Section 12.1(a) (other than Section 12.1(a)(ii)), unless a successor is elected
and an Opinion of Counsel is received as provided in Section 12.1(b) or 12.2 and
such successor is admitted to the Partnership pursuant to Section 11.3;
(c) an election to dissolve the Partnership by the General
Partner that is approved by the Limited Partner;
(d) entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Delaware Act;
(e) the sale of all or substantially all of the assets and
properties of the Partnership Group; or
(f) the dissolution of the MLP.
Section 13.2 Continuation of the Business of the Partnership After
Dissolution.
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 12.1(a)(i) or (iii) and following a failure of the Limited Partner to
appoint a successor General Partner as provided in Section 12.1 or 12.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 13.1(a)(iv), (v) or
(vi) of the MLP Agreement, then within 180 days thereafter, the Limited Partner
may elect to reconstitute the Partnership and continue its business on the same
terms and conditions set forth in this Agreement by forming a new limited
partnership on terms identical to those set forth in this Agreement and having
as a general partner a Person approved by the Limited Partner. In addition,
upon dissolution of the Partnership pursuant to Section 13.1(f), if the MLP is
reconstituted pursuant to Section 14.2 of the MLP Agreement, the reconstituted
MLP may, within 180 days after such event of dissolution,
45
<PAGE>
as the Limited Partner, elect to reconstitute the Partnership in accordance with
the immediately preceding sentence. Upon any such election by the Limited
Partner, all Partners shall be bound thereby and shall be deemed to have
approved same. Unless such an election is made within the applicable time period
as set forth above, the Partnership shall conduct only activities necessary to
wind up its affairs. If such an election is so made, then:
(i) the reconstituted Partnership shall continue until the
end of the term set forth in Section 1.5 unless earlier dissolved in
accordance with this Article XIII;
(ii) if the successor General Partner is not the former
General Partner, then the interest of the former General Partner shall be
purchased by the successor General Partner or converted into Common Units
of the MLP as provided in the MLP Agreement; and
(iii) all necessary steps shall be taken to cancel this
Agreement and the Certificate of Limited Partnership and to enter into and,
as necessary, to file a new partnership agreement and certificate of
limited partnership, and the successor General Partner may for this purpose
exercise the powers of attorney granted the General Partner pursuant to
Section 1.4; provided, that the right to approve a successor General
Partner and to reconstitute and to continue the business of the Partnership
shall not exist and may not be exercised unless the Partnership has
received an Opinion of Counsel that (x) the exercise of the right would not
result in the loss of limited liability of the Limited Partner or any
limited partner of the Limited Partner and (y) neither the Partnership, the
reconstituted limited partnership nor any Group Member would be treated as
an association taxable as a corporation or otherwise be taxable as an
entity for federal income tax purposes upon the exercise of such right to
continue.
Section 13.3 Liquidator.
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 13.2, the General Partner, or in the event the dissolution is the result
of an Event of Withdrawal, a liquidator or liquidating committee approved by the
Limited Partner, shall be the Liquidator. The Liquidator (if other than the
General Partner) shall be entitled to receive such compensation for its services
as may be approved by the Limited Partner. The Liquidator shall agree not to
resign at any time without 15 days' prior notice and (if other than the General
Partner) may be removed at any time, with or without cause, by notice of removal
approved by the Limited Partner. Upon dissolution, removal or resignation of
the Liquidator, a successor and substitute Liquidator (who shall have and
succeed to all rights, powers and duties of the original Liquidator) shall
within 30 days thereafter be approved by the Limited Partner. The right to
approve a successor or substitute Liquidator in the manner provided herein shall
be deemed to refer also to any such successor or substitute Liquidator approved
in the manner herein provided. Except as expressly provided in this Article
XIII, the Liquidator approved in the manner provided herein shall have and may
exercise, without further authorization or consent of any of the parties hereto,
all of the powers conferred upon the General Partner under the terms of this
46
<PAGE>
Agreement (but subject to all of the applicable limitations, contractual and
otherwise, upon the exercise of such powers, other than the limitation on sale
set forth in Section 6.3(b)) to the extent necessary or desirable in the good
faith judgment of the Liquidator to carry out the duties and functions of the
Liquidator hereunder for and during such period of time as shall be reasonably
required in the good faith judgment of the Liquidator to complete the winding-up
and liquidation of the Partnership as provided for herein.
Section 13.4 Liquidation.
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner and
over such period as the Liquidator determines to be in the best interest of the
Partners, subject to the following:
(a) Disposition of Assets. The assets may be disposed of by
public or private sale or by distribution in kind to one or more Partners on
such terms as the Liquidator and such Partner or Partners may agree. If any
property is distributed in kind, the Partner receiving the property shall be
deemed for purposes of Section 13.4(c) to have received cash equal to its fair
market value; and contemporaneously therewith, appropriate cash distributions
must be made to the other Partners.
(b) Discharge of Liabilities. Liabilities of the Partnership
include amounts owed to Partners otherwise in respect of their distribution
rights under Article V. With respect to any liability that is contingent or is
otherwise not yet due and payable, the Liquidator shall either settle such claim
for such amount as it thinks appropriate or establish a reserve of cash or other
assets to provide for its payment. When paid, any unused portion of the reserve
shall be distributed as additional liquidation proceeds.
(c) Liquidation Distributions. All property and all cash in
excess of that required to discharge liabilities as provided in Section 13.4(b)
shall be distributed to the Partners in accordance with the positive balances in
their respective Capital Accounts, as determined after taking into account all
Capital Account adjustments (other than those made by reason of this clause) for
the taxable year of the Partnership during which the liquidation of the
Partnership occurs (with the date of such occurrence being determined pursuant
to Treasury Regulation Section 1.704-1 (b)(2)(ii)(g)); and such distribution
shall be made by the end of such taxable year (or, if later, within 90 days
after said date of such occurrence).
Section 13.5 Cancellation of Certificate of Limited Partnership.
Upon the completion of the distribution of Partnership cash and property as
provided in Sections 13.3 and 13.4 in connection with the liquidation of the
Partnership, the Partnership shall be terminated and the Certificate of Limited
Partnership and all qualifications of the Partnership as a foreign limited
partnership in jurisdictions other than the State of Delaware shall be canceled
and such other actions as may be necessary to terminate the Partnership shall be
taken.
47
<PAGE>
Section 13.6 Return of Contributions.
The General Partner shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Contributions of the Limited Partner,
or any portion thereof, it being expressly understood that any such return shall
be made solely from Partnership assets.
Section 13.7 Waiver of Partition.
Each Partner hereby waives any right to partition of the Partnership
property.
Section 13.8 Capital Account Restoration.
No Limited Partner shall have any obligation to restore any negative
balance in its Capital Account upon liquidation of the Partnership. The General
Partner shall be obligated to restore any negative balance in its Capital
Account upon liquidation of its interest in the Partnership by the end of the
taxable year of the Partnership during which such liquidation occurs, or, if
later, within 90 days after the date of such liquidation.
ARTICLE XIV
AMENDMENT OF PARTNERSHIP AGREEMENT
Section 14.1 Amendment to be Adopted Solely by General Partner.
The Limited Partner agrees that the General Partner (pursuant to its powers
of attorney from the Limited Partner), without the approval of the Limited
Partner, may amend any provision of this Agreement, and execute, swear to,
acknowledge, deliver, file and record whatever documents may be required in
connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners
in accordance with this Agreement;
(c) a change that, in the sole discretion of the General
Partner, is necessary or advisable to qualify or continue the qualification of
Partnership as a limited partnership or a partnership in which the limited
partners have limited liability under the laws of any state or to ensure that
neither the Partnership nor the MLP will be treated as an association taxable as
a corporation or otherwise be taxable as an entity for federal income tax
purposes;
48
<PAGE>
(d) a change that, in the sole discretion of the General
Partner, (i) does not adversely affect the Limited Partner in any material
respect, (ii) is necessary or advisable to satisfy any requirements, conditions
or guidelines contained in any opinion, directive, order, ruling or regulation
of any federal or state agency or judicial authority or contained in any federal
or state statute (including the Delaware Act), compliance with any of which the
General Partner determines in its sole discretion to be in the best interests of
the Partnership and the Limited Partner, (iii) is required to effect the intent
of the provisions of this Agreement or is otherwise contemplated by this
Agreement or (iv) is required to conform the provisions of this Agreement with
the provisions of the MLP Agreement as the provisions of the MLP Agreement may
be amended, supplemented or restated from time to time;
(e) a change in the fiscal year and taxable year of the
Partnership and any changes that, in the sole discretion of the General Partner,
are necessary or advisable as a result of a change in the fiscal year and
taxable year of the Partnership, including, if the General Partner shall so
determine, a change in the definition of "Quarter" and the dates on which
distributions are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel,
to prevent the Partnership or the General Partner or its directors or officers
from in any manner being subjected to the provisions of the Investment Company
Act of 1940, as amended, the Investment Advisers Act of 1940, as amended, or
"plan asset" regulations adopted under the Employee Retirement Income Security
Act of 1974, as amended, regardless of whether such are substantially similar to
plan asset regulations currently applied or proposed by the United States
Department of Labor;
(g) any amendment expressly permitted in this Agreement to be
made by the General Partner acting alone;
(h) an amendment effected, necessitated or contemplated by a
Merger Agreement approved in accordance with Section 15.3;
(i) an amendment that, in the sole discretion of the General
Partner, is necessary or advisable to reflect, account for and deal with
appropriately the formation by the Partnership of, or investment by the
Partnership in, any corporation, partnership, joint venture, limited liability
company or other entity, in connection with the conduct by the Partnership of
activities permitted by the terms of Section 3.1; or
(j) any other amendments substantially similar to the foregoing.
Section 14.2 Amendment Procedures.
Except with respect to amendments of the type described in Section 14.1,
all amendments to this Agreement shall be made in accordance with the following
requirements. Amendments to this Agreement may be proposed only by or with the
consent of the General Partner. Each such
49
<PAGE>
proposal shall contain the text of the proposed amendment. A proposed amendment
shall be effective upon its approval by the Limited Partner.
ARTICLE XV
MERGER
Section 15.1 Authority.
The Partnership may merge or consolidate with one or more corporations,
business trusts or associations, real estate investment trusts, common law
trusts or unincorporated businesses, including a general partnership or limited
partnership, formed under the laws of the State of Delaware or any other state
of the United States of America, pursuant to a written agreement of merger or
consolidation ("Merger Agreement") in accordance with this Article XV.
Section 15.2 Procedure for Merger or Consolidation.
Merger or consolidation of the Partnership pursuant to this Article XV
requires the prior approval of the General Partner. If the General Partner
shall determine, in the exercise of its sole discretion, to consent to the
merger or consolidation, the General Partner shall approve the Merger Agreement,
which shall set forth:
(a) The names and jurisdictions of formation or organization of
each of the business entities proposing to merge or consolidate;
(b) The name and jurisdictions of formation or origination of
the business entity that is to survive the proposed merger or consolidation (the
"Surviving Business Entity");
(c) The terms and conditions of the proposed merger or
consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property or
general or limited partner interests, rights, securities or obligations of the
Surviving Business Entity; and (i) if any general or limited partner interests,
securities or rights of any constituent business entity are not to be exchanged
or converted solely for, or into, cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving Business Entity,
the cash, property or general or limited partner interests, rights, securities
or obligations of any limited partnership, corporation, trust or other entity
(other than the Surviving Business Entity) which the holders of such general or
limited partner interests, securities or rights are to receive in exchange for,
or upon conversion of, their general or limited partner interests, securities or
rights, and (ii) in the case of securities represented by certificates, upon the
surrender of such certificates, which cash, property or general or limited
partner interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited
50
<PAGE>
partnership, corporation, trust or other entity (other than the Surviving
Business Entity), or evidences thereof, are to be delivered;
(e) A statement of any changes in the constituent documents or
the adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or agreement
of limited partnership or other similar charter or governing document) of the
Surviving Business Entity to be effected by such merger or consolidation;
(f) The effective time of the merger, which may be the date of
the filing of the certificate of merger pursuant to Section 15.4 or a later date
specified in or determinable in accordance with the Merger Agreement (provided,
that if the effective time of the merger is to be later than the date of the
filing of the certificate of merger, the effective time shall be fixed no later
than the time of the filing of the certificate of merger and stated therein);
and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General Partner.
Section 15.3 Approval by Limited Partner of Merger or Consolidation.
(a) The General Partner, upon its approval of the Merger
Agreement, shall direct that a copy or a summary of the Merger Agreement be
submitted to the Limited Partner for its approval.
(b) The Merger Agreement shall be approved upon receiving the
approval of the Limited Partner. After such approval by the Limited Partner, and
at any time prior to the filing of the certificate of merger pursuant to Section
15.4, the merger or consolidation may be abandoned pursuant to provisions
therefor, if any, set forth in the Merger Agreement.
Section 15.4 Certificate of Merger.
Upon the required approval by the General Partner and the Limited Partner
of a Merger Agreement, a certificate of merger shall be executed and filed with
the Secretary of State of the State of Delaware in conformity with the
requirements of the Delaware Act.
Section 15.5 Effect of Merger.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the
business entities that has merged or consolidated, and all property, real,
personal and mixed, and all debts due to any of those business entities and
all other things and causes of action belonging to each of those business
entities shall be vested in the Surviving Business Entity and after the
51
<PAGE>
merger or consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business entity;
(ii) the title to any real property vested by deed or otherwise
in any of those constituent business entities shall not revert and is not
in any way impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security
interests in property of any of those constituent business entities shall
be preserved unimpaired; and
(iv) all debts, liabilities and duties of those constituent
business entities shall attach to the Surviving Business Entity, and may be
enforced against it to the same extent as if the debts, liabilities and
duties had been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall
not be deemed to result in a transfer or assignment of assets or liabilities
from one entity to another having occurred.
ARTICLE XVI
GENERAL PROVISIONS
Section 16.1 Addresses and Notices.
Any notice, demand, request or report required or permitted to be given or
made to a Partner under this Agreement shall be in writing and shall be deemed
given or made when received by it at the principal office of the Partnership
referred to in Section 1.3.
Section 16.2 References.
Except as specifically provided otherwise, references to "Articles" and
"Sections" are to Articles and Sections of this Agreement.
Section 16.3 Pronouns and Plurals.
Whenever the context may require, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns, pronouns and verbs shall include the plural and vice versa.
52
<PAGE>
Section 16.4 Further Action.
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
Section 16.5 Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 16.6 Integration.
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto.
Section 16.7 Creditors.
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
Section 16.8 Waiver.
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach or any other covenant, duty, agreement or condition.
Section 16.9 Counterparts.
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto, independently of the signature of any other party.
Section 16.10 Applicable Law.
This Agreement shall be construed in accordance with and governed by the
laws of the State of Delaware, without regard to the principles of conflicts of
law.
53
<PAGE>
Section 16.11 Invalidity of Provisions.
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GENERAL PARTNER:
STAR GAS LLC
By:___________________________________
Name:
Title:
LIMITED PARTNER:
STAR GAS PARTNERS, L.P.
By:___________________________________
Star Gas Corporation, as General
Partner
By:___________________________________
Name:
Title:
54
<PAGE>
DRAFT
EXHIBIT 8.1
[LETTERHEAD OF ANDREWS & KURTH L.L.P. APPEARS HERE]
October __, 1998
Star Gas Partners, L.P.
2187 Atlantic Street
Stamford, Connecticut 06902
Ladies and Gentlemen:
We have acted as special counsel to Star Gas Partners, L.P. (the
"Partnership") in connection with the offering of up to 3,676,058 Senior
Subordinated Units representing limited partner interests ("Senior Subordinated
Units") and 102,773 common units representing limited partner interests ("Common
Units" and, together with the Senior Subordinated Units, the "Units") in the
Partnership pursuant to the Registration Statement on Form S-4 of the
Partnership (Registration No. ________) relating to the Units (the "Registration
Statement"). Capitalized terms used herein but not defined are defined in the
Registration Statement.
All statements of legal conclusions contained in the discussion that is
contained in the section entitled "Certain Federal Income Tax Considerations" in
the prospectus included in the Registration Statement (the "Prospectus"), unless
otherwise noted, reflect our opinion with respect to the matters set forth
therein as of the effective date of the Registration Statement after giving
effect to those transactions.
We are of the opinion that the Merger and the transactions contemplated by
the Merger Agreement will not cause the Partnership or Star Propane to be
treated as an association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes and the section in the Registration
Statement entitled "Certain Federal Income Tax Considerations" accurately sets
forth the material federal income tax consequences to the holders of Common
Units of the transactions contemplated by the Merger Agreement.
We hereby consent to the references to our firm and this opinion contained
in the Prospectus.
Very truly yours,
ANDREWS & KURTH L.L.P.
<PAGE>
EXHIBIT 10.13
CERTAIN PROJECTIONS OF PETRO AND THE PARTNERSHIP
Petro and the Partnership provided A.G. Edwards and Dain Rauscher Wessels
(the "Financial Advisors") with certain projected financial data for the years
1999 through 2003 (the "Projections"). The Projections were not prepared with a
view to public disclosure or compliance with published guidelines of the
Securities and Exchange Commission or the guidelines established by the American
Institute of Certified Public Accountants regarding projections. Neither the
Financial Advisors nor KPMG Peat Marwick, LLP, the Partnership's independent
certified public accountants, examined, compiled or applied any procedures with
respect to the Projections or expressed any opinion or provided any kind of
assurance thereon. None of the Financial Advisors, Petro, the Partnership, the
Special Committee nor any of their respective affiliates or advisors assumes any
responsibility for the reasonableness or completeness of the Projections.
While presented with numerical specificity, the Projections are based on a
variety of assumptions relating to the business of Petro and the Partnership
that, although considered appropriate by Petro and the Partnership at the time,
may not be realized. Moreover, the Projections and the assumptions upon which
they are based are subject to significant uncertainties and contingencies, many
of which are beyond the control of Petro and the Partnership. Consequently, the
Projections and the underlying assumptions are necessarily speculative in
nature and inherently imprecise, and there can be no assurance that projected
financial results will be realized. It is expected that there will be
differences between actual and projected results, and projected results and
actual results are likely to vary materially from those shown, and such
variance will likely increase over time. None of the Financial Advisors, Petro,
the Partnership, the Special Committee nor any of their respective affiliates
or advisors intends to update or otherwise revise the Projections.
The inclusion of the Projections herein should not be regarded as an
indication that the Financial Advisors, Petro, the Partnership, the Special
Committee or any of their respective affiliates or advisors considers the
Projections likely to be an accurate prediction of future results. Common
Unitholders and Common Stockholders are cautioned not to place undue reliance
on the Projections, which should be read in conjunction with the information
relating to the business, assets and financial condition of the Partnership
included in the Proxy Statement.
The Projections contain forward-looking information and are subject to a
number of risks discussed in the Proxy Statement. See "Risk Factors." These
risks are likely to cause actual results in the future to differ significantly
from results expressed or implied in the Projections.
The Projections filed herein are earlier versions of numerous projections
provided to the Financial Advisors. The most recent versions have been included
as part of the Proxy Statement.
1 of 15
<PAGE>
Assumptions
Weather Scenario: 15 Year
Propane Acquisitions: $10.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions: $25.0 million
Acquisition Multiple 4.6x
Attrition Rate: Flat
Margin Improvement: $0.01
<TABLE>
<CAPTION>
NORMALIZED
($ in millions) 1998 1999 2000 2001 2002 2003
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $21,713 $23,850 $25,278 $26,706 $28,134 $29,638
Heating Oil EBITDA 44,749 46,093 49,603 52,821 55,894 59,146
Synergistic Savings 500 500 500 500 500 500
------------- ------------ ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 66,962 70,443 75,381 80,027 84,528 89,284
Depreciation and Amortization 40,339 44,156 49,124 53,935 58,755 63,802
------------- ------------ ------------- ------------- ------------- -------------
EBIT 26,623 26,287 26,257 26,092 25,773 25,482
Interest Expense (27,649) (28,179) (29,108) (30,691) (32,184) (33,694)
------------- ------------ ------------- ------------- ------------- -------------
EBT (1,026) (1,892) (2,851) (4,599) (6,411) (8,212)
Income Taxes (525) (525) (525) (525) (525) (525)
------------- ------------ ------------- ------------- ------------- -------------
Net Income ($1,551) ($2,417) ($3,376) ($5,124) ($6,936) ($8,737)
============= ============ ============= ============= ============= =============
Maintenance Capital Expenditures $6,210 $6,357 $6,479 $6,602 $6,729 $6,858
Average Units Outstanding
Common Units 10,284 10,901 11,769 12,278 12,835 13,392
Senior Subordinated Units 2,790 2,790 3,087 3,384 3,681 3,681
Junior Subordinated Units 552 552 552 552 552 552
Implied GP Units 278 291 314 331 348 360
------------- ------------ ------------- ------------- ------------- -------------
Total Units 13,904 14,534 15,722 16,545 17,416 17,985
============= ============ ============= ============= ============= =============
Total LT Debt $311,679 $316,994 $339,215 $360,122 $380,376 $401,779
</TABLE>
2 of 15
<PAGE>
Assumptions
Weather Scenario: 15 Year
Propane Acquisitions: $10.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions: $25.0 million
Acquisition Multiple 4.6x
Attrition Rate: Flat
Margin Improvement: $0.01
<TABLE>
<CAPTION>
NORMALIZED
($ in millions) 1998 1999 2000 2001 2002 2003
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $21,713 $23,850 $25,278 $26,706 $28,134 $29,638
Heating Oil EBITDA 44,749 46,093 49,603 52,821 55,894 59,146
Synergistic Savings 500 500 500 500 500 500
------------- ------------ ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 66,962 70,443 75,381 80,027 84,528 89,284
Depreciation and Amortization 40,339 44,156 49,124 53,935 58,755 63,802
------------- ------------ ------------- ------------- ------------- -------------
EBIT 26,623 26,287 26,257 26,092 25,773 25,482
Interest Expense (27,652) (28,620) (29,945) (31,466) (32,924) (34,401)
------------- ------------ ------------- ------------- ------------- -------------
EBT (1,029) (2,333) (3,688) (5,374) (7,151) (8,919)
Income Taxes (525) (525) (525) (525) (525) (525)
------------- ------------ ------------- ------------- ------------- -------------
Net Income ($1,554) ($2,858) ($4,213) ($5,899) ($7,676) ($9,444)
============= ============ ============= ============= ============= =============
Maintenance Capital Expenditures $6,210 $6,357 $6,479 $6,602 $6,729 $6,858
Average Units Outstanding
Common Units 10,311 10,655 11,268 11,798 12,356 12,912
Senior Subordinated Units 2,767 2,767 3,064 3,361 3,658 3,658
Junior Subordinated Units 578 578 578 578 578 578
Implied GP Units 279 286 304 321 339 350
------------- ------------ ------------- ------------- ------------- -------------
Total Units 13,935 14,286 15,214 16,058 16,931 17,498
============= ============ ============= ============= ============= =============
Total LT Debt $311,679 $329,144 $350,159 $370,548 $390,375 $411,269
</TABLE>
3 of 15
<PAGE>
Assumptions
Weather Scenario: 15 Year
Propane Acquisitions: $10.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions: $25.0 million
Acquisition Multiple 4.6x
Attrition Rate: Flat
Margin Improvement: $0.01
<TABLE>
<CAPTION>
NORMALIZED
1998 1999 2000 2001 2002 2003
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $21,713 $23,850 $25,278 $26,706 $28,134 $29,638
Heating Oil EBITDA 44,749 46,093 49,603 52,821 55,894 59,146
Synergistic Savings 500 500 500 500 500 500
------------- ------------ ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 66,962 70,443 75,381 80,027 84,528 89,284
Depreciation and Amortization 40,339 44,156 49,124 53,935 58,755 63,802
------------- ------------ ------------- ------------- ------------- -------------
EBIT 26,623 26,287 26,257 26,092 25,773 25,482
Interest Expense (27,625) (28,620) (29,945) (31,466) (32,924) (34,401)
------------- ------------ ------------- ------------- ------------- -------------
EBT (1,002) (2,333) (3,688) (5,374) (7,151) (8,919)
Income Taxes (525) (525) (525) (525) (525) (525)
------------- ------------ ------------- ------------- ------------- -------------
Net Income ($1,527) ($2,858) ($4,213) ($5,899) ($7,676) ($9,444)
============= ============ ============= ============= ============= =============
Maintenance Capital Expenditures $6,210 $6,357 $6,479 $6,602 $6,729 $6,858
Average Units Outstanding
Common Units 9,985 10,312 10,887 11,374 11,883 12,381
Senior Subordinated Units 2,767 2,767 3,064 3,361 3,658 3,658
Junior Subordinated Units 585 585 585 585 585 585
Implied GP Units 272 279 297 313 329 339
------------- ------------ ------------- ------------- ------------- -------------
Total Units 13,609 13,943 14,833 15,633 16,455 16,963
============= ============ ============= ============= ============= =============
Total LT Debt $311,679 $329,144 $350,159 $370,548 $390,375 $411,269
</TABLE>
4 of 15
<PAGE>
Assumptions
Weather Scenario: 30 Year
Propane Acquisitions: $5.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions $30.0 million
Acquisition Multiple 4.5x
Attrition Rate: Declining
Margin Improvement: $0.01
<TABLE>
<CAPTION>
NORMALIZED
1998 1999 2000 2001 2002 2003
------------ ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $23,157 $24,942 $25,656 $26,370 $27,084 $27,817
Heating Oil EBITDA 46,900 53,084 59,085 63,830 70,352 77,540
Synergistic Savings 500 500 500 500 500 500
------------ ------------- ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 70,557 78,526 85,241 90,700 97,936 105,857
Depreciation and Amoritization 40,339 46,969 52,709 58,292 63,883 68,193
------------ ------------- ------------- ------------- ------------- -------------
EBIT 30,218 31,557 32,532 32,408 34,053 37,664
Interest Expense (27,523) (30,051) (31,908) (33,924) (35,934) (37,680)
------------ ------------- ------------- ------------- ------------- -------------
EBIT 2,695 1,506 624 (1,516) (1,881) (16)
Income Taxes (525) (525) (525) (525) (525) (525)
------------ ------------- ------------- ------------- ------------- -------------
Net Income $2,170 $981 $99 ($2,041) ($2,406) ($541)
============ ============= ============= ============= ============= =============
Maintaince Capital Expenditures $6,262 $6,324 $6,445 $6,568 $6,694 $6,822
Average Units Outstanding
Common Units 9,713 9,713 9,713 9,713 9,713 9,713
Senior Subordinated Units 3,421 3,421 3,718 4,015 4,312 4,312
Junior Subordinated Units 577 577 577 577 577 577
Implied GP Units 280 280 286 292 298 298
------------ ------------- ------------- ------------- ------------- -------------
Total Units 13,991 13,991 14,294 14,597 14,900 14,900
============ ============= ============= ============= ============= =============
Total LT Debt $311,679 $338,631 $364,824 $393,676 $420,280 $441,809
</TABLE>
5 of 15
<PAGE>
Assumptions
Weather Scenario: 30 Year
Propane Acquisitions: $ 10.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions: $ 30.0 million
Acquisition Multiple 4.75x
Attrition Rate: Flat
Margin Improvement: $ 0.005
<TABLE>
<CAPTION>
NORMALIZED
($ in millions) 1998 1999 2000 2001 2002 2003
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $21,730 $23,873 $25,301 $26,728 $28,156 $29,660
Heating Oil EBITDA 45,689 49,606 53,672 57,660 61,582 65,771
Synergistic Savings 500 500 500 500 500 500
------------- ------------ ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 67,919 73,979 79,473 84,888 90,238 95,931
Depreciation and Amortization 40,339 44,540 50,278 55,858 61,447 67,267
------------- ------------ ------------- ------------- ------------- -------------
EBIT 27,580 29,439 29,195 29,030 28,791 28,664
Interest Expense (27,616) (28,756) (30,352) (32,152) (33,908) (35,710)
------------- ------------ ------------- ------------- ------------- -------------
EBT (36) 683 (1,157) (3,122) (5,117) (7,046)
Income Taxes (525) (525) (525) (525) (525) (525)
------------- ------------ ------------- ------------- ------------- -------------
Net Income ($561) $158 ($1,682) ($3,647) ($5,642) ($7,571)
============= ============ ============= ============= ============= =============
Maintenance Capital Expenditures $6,210 $6,366 $6,488 $6,612 $6,739 $6,868
Average Units Outstanding
Common Units 10,311 10,604 11,105 11,570 12,156 12,752
Senior Subordinated Units 2,767 2,767 3,064 3,361 3,658 3,658
Junior Subordinated Units 578 578 578 578 578 578
Implied GP Units 279 285 301 317 335 347
------------- ------------ ------------- ------------- ------------- -------------
Total Units 13,935 14,234 15,048 15,826 16,727 17,335
============= ============ ============= ============= ============= =============
Total LT Debt $311,679 $332,906 $357,629 $381,996 $406,071 $431,690
</TABLE>
6 of 15
<PAGE>
Assumptions
Weather Scenario: 30 Year
Propane Acquisitions: $ 10.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions: $ 30.0 million
Acquisition Multiple 4.75x
Attrition Rate: Flat
Margin Improvement: $ 0.005
<TABLE>
<CAPTION>
NORMALIZED
($ in millions) 1998 1999 2000 2001 2002 2003
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $23,157 $25,300 $26,728 $28,156 $29,584 $31,084
Heating Oil EBITDA 45,689 49,606 53,672 57,660 61,582 65,771
Synergistic Savings 500 500 500 500 500 500
------------- ------------ ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 69,346 75,406 80,900 86,316 91,666 97,355
Depreciation and Amortization 40,339 44,540 50,278 55,858 61,447 67,279
------------- ------------ ------------- ------------- ------------- -------------
EBIT 29,007 30,866 30,622 30,458 30,219 30,076
Interest Expense (27,560) (28,989) (30,817) (32,618) (34,374) (36,175)
------------- ------------ ------------- ------------- ------------- -------------
EBT 1,447 1,877 (195) (2,160) (4,155) (6,099)
Income Taxes (525) (525) (525) (525) (525) (525)
------------- ------------ ------------- ------------- ------------- -------------
Net Income $922 $1,352 ($720) ($2,685) ($4,680) ($6,624)
============= ============ ============= ============= ============= =============
Maintenance Capital Expenditures $6,210 $6,405 $6,528 $6,653 $6,780 $6,909
Average Units Outstanding
Common Units 10,284 10,398 10,675 11,044 11,516 11,979
Senior Subordinated Units 2,767 2,767 3,064 3,361 3,658 3,658
Junior Subordinated Units 579 579 579 579 579 579
Implied GP Units 278 280 292 306 321 331
------------- ------------ ------------- ------------- ------------- -------------
Total Units 13,908 14,024 14,610 15,290 16,074 16,547
============= ============ ============= ============= ============= =============
Total LT Debt $311,679 $339,327 $364,050 $388,422 $412,497 $438,098
</TABLE>
7 of 15
<PAGE>
Assumptions
Weather Scenario: 30 Year
Propane Acquisitions: $ 10.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions: $ 30.0 million
Acquisition Multiple 4.75x
Attrition Rate: Flat
Margin Improvement: $ 0.005
<TABLE>
<CAPTION>
NORMALIZED
($ in millions) 1998 1999 2000 2001 2002 2003
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $21,730 $25,299 $26,728 $28,157 $29,586 $31,088
Heating Oil EBITDA 45,689 49,606 53,672 57,660 61,582 65,771
Synergistic Savings 500 500 500 500 500 500
------------- ------------ ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 67,919 75,405 80,900 86,317 91,668 97,359
Depreciation and Amortization 41,289 45,995 51,736 57,486 63,245 69,014
------------- ------------ ------------- ------------- ------------- -------------
EBIT 26,630 29,410 29,164 28,831 28,423 28,345
Interest Expense (27,449) (28,676) (31,026) (33,486) (36,034) (38,568)
------------- ------------ ------------- ------------- ------------- -------------
EBT (819) 734 (1,862) (4,655) (7,611) (10,223)
Income Taxes (525) (525) (525) (525) (525) (525)
------------- ------------ ------------- ------------- ------------- -------------
Net Income ($1,344) $209 ($2,387) ($5,180) ($8,136) ($10,748)
============= ============ ============= ============= ============= =============
Maintenance Capital Expenditures $6,210 $6,826 $6,956 $7,089 $7,224 $7,361
Average Units Outstanding
Common Units 10,419 10,895 10,895 10,895 10,895 10,895
Senior Subordinated Units 2,718 2,718 3,021 3,324 3,627 3,627
Junior Subordinated Units 524 524 524 524 524 524
Implied GP Units 279 289 295 301 307 307
------------- ------------ ------------- ------------- ------------- -------------
Total Units 13,940 14,426 14,735 15,044 15,353 15,353
============= ============ ============= ============= ============= =============
Total LT Debt $311,532 $345,332 $378,301 $412,611 $448,607 $482,491
</TABLE>
8 of 15
<PAGE>
Assumptions
Weather Scenario: 30 Year
Propane Acquisitions: $ 5.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions: $ 30.0 million
Acquisition Multiple 4.5x
Attrition Rate: Declining
Margin Improvement: $ 0.01
<TABLE>
<CAPTION>
NORMALIZED
($ in millions) 1998 1999 2000 2001 2002 2003
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $23,157 $24,942 $25,656 $26,370 $27,084 $27,817
Heating Oil EBITDA 46,900 53,084 59,085 63,830 70,352 77,540
Synergistic Savings 500 500 500 500 500 500
------------- ------------ ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 70,557 78,526 85,241 90,700 97,936 105,857
Depreciation and Amortization 40,339 46,969 52,709 58,292 63,883 68,193
------------- ------------ ------------- ------------- ------------- -------------
EBIT 30,218 31,557 32,532 32,408 34,053 37,664
Interest Expense (27,519) (30,046) (31,892) (33,895) (35,890) (37,619)
------------- ------------ ------------- ------------- ------------- -------------
EBT 2,699 1,511 640 (1,487) (1,837) 45
Income Taxes (525) (525) (525) (525) (525) (525)
------------- ------------ ------------- ------------- ------------- -------------
Net Income $2,174 $986 $115 ($2,012) ($2,362) ($480)
============= ============ ============= ============= ============= =============
Maintenance Capital Expenditures $6,262 $6,324 $6,445 $6,568 $6,694 $6,822
Average Units Outstanding
Common Units 10,310 10,310 10,310 10,310 10,310 10,310
Senior Subordinated Units 2,767 2,767 3,064 3,361 3,658 3,658
Junior Subordinated Units 578 578 578 578 578 578
Implied GP Units 279 279 285 291 297 297
------------- ------------ ------------- ------------- ------------- -------------
Total Units 13,934 13,934 14,237 14,540 14,843 14,843
============= ============ ============= ============= ============= =============
Total LT Debt $311,679 $338,491 $364,520 $393,176 $419,561 $440,850
</TABLE>
9 of 15
<PAGE>
Assumptions
Weather Scenario: 30 Year
Propane Acquisitions: $ 5.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions: $ 50.0 million
Acquisition Multiple 4.5x
Attrition Rate: Declining
Margin Improvement: $ 0.01
<TABLE>
<CAPTION>
NORMALIZED
($ in millions) 1998 1999 2000 2001 2002 2003
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $23,157 $24,942 $25,656 $26,370 $27,084 $27,817
Heating Oil EBITDA 46,900 57,528 67,562 76,080 86,255 97,791
Synergistic Savings 500 500 500 500 500 500
------------- ------------ ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 70,557 82,970 93,718 102,950 113,839 126,108
Depreciation and Amortization 40,339 50,046 58,863 67,523 76,191 83,577
------------- ------------ ------------- ------------- ------------- -------------
EBIT 30,218 32,924 34,855 35,427 37,648 42,531
Interest Expense (27,519) (31,384) (34,472) (37,660) (40,710) (43,310)
------------- ------------ ------------- ------------- ------------- -------------
EBT 2,699 1,540 383 (2,233) (3,062) (779)
Income Taxes (525) (525) (525) (525) (525) (525)
------------- ------------ ------------- ------------- ------------- -------------
Net Income $2,174 $1,015 ($142) ($2,758) ($3,587) ($1,304)
============= ============ ============= ============= ============= =============
Maintenance Capital Expenditures $6,262 $6,324 $6,445 $6,568 $6,694 $6,822
Average Units Outstanding
Common Units 10,310 10,310 10,310 10,310 10,310 10,310
Senior Subordinated Units 2,767 2,767 3,064 3,361 3,658 3,658
Junior Subordinated Units 578 578 578 578 578 578
Implied GP Units 279 279 285 291 297 297
------------- ------------ ------------- ------------- ------------- -------------
Total Units 13,934 13,934 14,237 14,540 14,843 14,843
============= ============ ============= ============= ============= =============
Total LT Debt $311,679 $355,384 $398,800 $442,771 $482,921 $514,500
</TABLE>
10 of 15
<PAGE>
Assumptions
Weather Scenario: 30 Year
Propane Acquisitions: $ 10.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions: $ 30.0 million
Acquisition Multiple 4.6x
Attrition Rate: Declining
Margin Improvement: $ 0.01
<TABLE>
<CAPTION>
NORMALIZED
($ in millions) 1998 1999 2000 2001 2002 2003
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $22,135 $24,491 $26,029 $27,566 $29,104 $30,642
Heating Oil EBITDA 46,900 49,750 56,081 61,971 67,614 73,180
Synergistic Savings 500 500 500 500 500 500
------------- ------------ ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 69,535 74,741 82,610 90,037 97,218 104,322
Depreciation and Amortization 40,339 44,540 50,278 55,858 61,447 67,136
------------- ------------ ------------- ------------- ------------- -------------
EBIT 29,196 30,201 32,332 34,178 35,771 37,186
Interest Expense (27,608) (28,825) (31,079) (33,324) (35,570) (37,731)
------------- ------------ ------------- ------------- ------------- -------------
EBT 1,588 1,376 1,253 854 201 (545)
Income Taxes (525) (525) (525) (525) (525) (525)
------------- ------------ ------------- ------------- ------------- -------------
Net Income $1,063 $851 $728 $329 ($324) ($1,070)
============= ============ ============= ============= ============= =============
Maintenance Capital Expenditures $6,210 $6,273 $6,393 $6,516 $6,641 $6,768
Average Units Outstanding
Common Units 10,311 10,311 10,311 10,311 10,311 10,311
Senior Subordinated Units 2,767 2,767 3,070 3,373 3,676 3,676
Junior Subordinated Units 578 578 578 578 578 578
Implied GP Units 279 279 279 279 279 279
------------- ------------ ------------- ------------- ------------- -------------
Total Units 13,934 13,934 14,237 14,540 14,843 14,843
============= ============ ============= ============= ============= =============
Total LT Debt $310,154 $343,085 $374,239 $404,449 $436,178 $464,061
</TABLE>
11 of 15
<PAGE>
Assumptions
Weather Scenario: 15 Year
Propane Acquisitions: $ 10.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions: $ 25.0 million
Acquisition Multiple 4.6
Attrition Rate: Flat
Margin Improvement: $ 0.01
<TABLE>
<CAPTION>
NORMALIZED
($ in millions) 1998 1999 2000 2001 2002 2003
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $20,731 $23,032 $24,465 $25,898 $27,331 $28,764
Heating Oil EBITDA 44,749 46,093 49,603 52,821 55,894 59,146
Synergistic Savings 500 500 500 500 500 500
------------- ------------ ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 65,980 69,625 74,568 79,219 83,725 88,410
Depreciation and Amortization 40,339 44,156 49,124 53,935 58,755 63,682
------------- ------------ ------------- ------------- ------------- -------------
EBIT 25,641 25,469 25,444 25,284 24,970 24,728
Interest Expense (27,689) (28,186) (29,435) (30,958) (32,418) (33,884)
------------- ------------ ------------- ------------- ------------- -------------
EBT (2,048) (2,717) (3,991) (5,674) (7,447) (9,156)
Income Taxes (525) (525) (525) (525) (525) (525)
------------- ------------ ------------- ------------- ------------- -------------
Net Income ($2,573) ($3,242) ($4,516) ($6,199) ($7,972) ($9,681)
============= ============ ============= ============= ============= =============
Maintenance Capital Expenditures $6,210 $6,298 $6,419 $6,541 $6,667 $6,794
Average Units Outstanding
Common Units 10,311 10,675 11,264 11,705 12,150 12,580
Senior Subordinated Units 2,767 2,767 3,064 3,361 3,658 3,658
Junior Subordinated Units 578 578 578 578 578 578
Implied GP Units 279 286 304 319 334 343
------------- ------------ ------------- ------------- ------------- -------------
Total Units 13,935 14,306 15,211 15,964 16,721 17,160
============= ============ ============= ============= ============= =============
Total LT Debt $310,154 $325,463 $346,500 $366,912 $386,762 $407,335
</TABLE>
12 of 15
<PAGE>
Assumptions
Weather Scenario: 30 Year
Propane Acquisitions: $ 10.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions: $ 30.0 million
Acquisition Multiple 4.6
Attrition Rate: Declining
Margin Improvement: $ 0.01
<TABLE>
<CAPTION>
NORMALIZED
($ in millions) 1998 1999 2000 2001 2002 2003
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $22,135 $24,491 $26,029 $27,566 $29,104 $30,642
Heating Oil EBITDA 46,900 49,317 55,670 61,580 67,240 73,420
Synergistic Savings 500 500 500 500 500 500
------------- ------------ ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 69,535 74,308 82,199 89,646 96,844 104,562
Depreciation and Amortization 40,339 44,540 50,278 55,858 61,447 67,136
------------- ------------ ------------- ------------- ------------- -------------
EBIT 29,196 29,768 31,921 33,788 35,397 37,426
Interest Expense (27,555) (28,952) (31,483) (34,106) (36,605) (38,986)
------------- ------------ ------------- ------------- ------------- -------------
EBT 1,641 815 438 (319) (1,208) (1,560)
Income Taxes (525) (525) (525) (525) (525) (525)
------------- ------------ ------------- ------------- ------------- -------------
Net Income $1,116 $290 ($87) ($844) ($1,733) ($2,085)
============= ============ ============= ============= ============= =============
Maintenance Capital Expenditures $6,210 $6,273 $6,393 $6,516 $6,641 $6,768
Average Units Outstanding
Common Units 10,311 10,311 10,311 10,314 10,385 10,453
Senior Subordinated Units 2,767 2,767 3,064 3,361 3,658 3,658
Junior Subordinated Units 578 578 578 578 578 578
Implied GP Units 279 279 285 291 298 300
------------- ------------ ------------- ------------- ------------- -------------
Total Units 13,935 13,935 14,238 14,545 14,920 14,989
============= ============ ============= ============= ============= =============
Total LT Debt $310,154 $346,605 $381,860 $418,401 $450,792 $484,070
</TABLE>
13 of 15
<PAGE>
Assumptions
Weather Scenario: 15 Year
Propane Acquisitions: $ 10.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions: $ 25.0 million
Acquisition Multiple 4.6x
Attrition Rate: Flat
Margin Improvement: $ 0.01
<TABLE>
<CAPTION>
NORMALIZED
($ in millions) 1998 1999 2000 2001 2002 2003
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $20,731 $23,032 $24,465 $25,898 $27,331 $28,764
Heating Oil EBITDA 44,749 46,093 49,603 52,821 55,894 59,146
Synergistic Savings 500 500 500 500 500 500
------------- ------------ ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 65,980 69,625 74,568 79,219 83,725 88,410
Depreciation and Amortization 40,339 44,156 49,124 53,935 58,755 63,682
------------- ------------ ------------- ------------- ------------- -------------
EBIT 25,641 25,469 25,444 25,284 24,970 24,728
Interest Expense (27,642) (28,184) (29,432) (30,955) (32,415) (33,880)
------------- ------------ ------------- ------------- ------------- -------------
EBT (2,001) (2,715) (3,988) (5,671) (7,444) (9,153)
Income Taxes (525) (525) (525) (525) (525) (525)
------------- ------------ ------------- ------------- ------------- -------------
Net Income ($2,526) ($3,240) ($4,513) ($6,196) ($7,969) ($9,678)
============= ============ ============= ============= ============= =============
Maintenance Capital Expenditures $6,210 $6,298 $6,419 $6,541 $6,667 $6,794
Average Units Outstanding
Common Units 9,746 10,082 10,616 10,996 11,375 11,732
Senior Subordinated Units 2,767 2,767 3,064 3,361 3,658 3,658
Junior Subordinated Units 589 589 589 589 589 589
Implied GP Units 267 274 291 305 319 326
------------- ------------ ------------- ------------- ------------- -------------
Total Units 13,371 13,714 14,561 15,252 15,942 16,306
============= ============ ============= ============= ============= =============
Total LT Debt $310,154 $325,463 $346,500 $366,912 $386,761 $407,335
</TABLE>
14 of 15
<PAGE>
Assumptions
Weather Scenario: 30 Year
Propane Acquisitions: $ 10.0 million
Acquisition Multiple 7.0x
Heating Oil Acquisitions: $ 25.0 million
Acquisition Multiple 4.6
Attrition Rate: Declining
Margin Improvement: $ 0.01
<TABLE>
<CAPTION>
NORMALIZED
($ in millions) 1998 1999 2000 2001 2002 2003
------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Propane EBITDA $22,135 $24,491 $26,029 $27,566 $29,104 $30,642
Heating Oil EBITDA 46,900 49,317 55,670 61,580 67,240 73,420
Synergistic Savings 500 500 500 500 500 500
------------- ------------ ------------- ------------- ------------- -------------
Pro Forma Combined EBITDA 69,535 74,308 82,199 89,646 96,844 104,562
Depreciation and Amortization 40,339 44,156 49,124 53,935 58,755 63,674
------------- ------------ ------------- ------------- ------------- -------------
EBIT 29,196 30,152 33,075 35,711 38,089 40,888
Interest Expense (27,559) (28,769) (30,980) (33,334) (35,721) (37,951)
------------- ------------ ------------- ------------- ------------- -------------
EBT 1,637 1,383 2,095 2,377 2,368 2,937
Income Taxes (525) (525) (525) (525) (525) (525)
------------- ------------ ------------- ------------- ------------- -------------
Net Income $1,112 $858 $1,570 $1,852 $1,843 $2,412
============= ============ ============= ============= ============= =============
Maintenance Capital Expenditures $6,210 $6,273 $6,393 $6,516 $6,641 $6,768
Average Units Outstanding
Common Units 9,746 9,746 9,746 9,746 9,746 9,746
Senior Subordinated Units 2,767 2,767 3,064 3,361 3,658 3,658
Junior Subordinated Units 589 589 589 589 589 589
Implied GP Units 267 267 273 280 286 286
------------- ------------ ------------- ------------- ------------- -------------
Total Units 13,371 13,371 13,674 13,977 14,280 14,280
============= ============ ============= ============= ============= =============
Total LT Debt $310,154 $341,545 $373,026 $405,921 $438,884 $467,419
</TABLE>
15 of 15
<PAGE>
Exhibit 10.14
PROXY
STAR GAS PARTNERS, L.P.
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF THE GENERAL PARTNER
FOR THE
SPECIAL MEETING OF COMMON UNITHOLDERS, ________, 1999
The undersigned hereby constitutes and appoints Irik P. Sevin,
Richard F. Ambury and Joseph P. Cavanaugh, and each of them, the attorneys and
proxies, each with full power of substitution, to represent and act for the
undersigned at the special meeting of Common Unitholders of Star Gas Partners,
L.P. (the "Partnership") to be held at ________________________________________,
on ___________________, 1999 at _____, New York time, and at any adjournment
thereof, and to vote all common units of limited partner interest (the "Common
Units") which the undersigned would be entitled to vote, if personally present,
at said meeting, and with all other powers which the undersigned would possess
if personally present, upon such business as may properly come before the
meeting, including Proposals 1, 2 and 3 set forth below.
THE BOARD OF DIRECTORS OF THE GENERAL PARTNER RECOMMENDS A VOTE FOR
PROPOSALS 1, 2 AND 3.
1. Approval and adoption of (i) the Agreement and Plan of
Merger dated as of October __, 1998, pursuant to which a wholly-owned
subsidiary of the Partnership will be merged with and into Petroleum
Heat and Power Co., Inc. ("Petro"), and Petro Common Stockholders will
receive subordinated units of the Partnership; and (ii) the Exchange
Agreement dated as of October __, 1998, pursuant to which Petro Common
Stockholders considered to be affiliates of Petro will exchange their
shares of Petro Common Stock for subordinated units of the
Partnership, all as more fully described in the Proxy Statement for
the meeting;
FOR [_] AGAINST [_] ABSTAIN [_]
2. Approval and adoption of a proposal to amend the Agreement
of Limited Partnership of the Partnership and the Agreement of Limited
Partnership of Star Gas Propane, L.P; and
FOR [_] AGAINST [_] ABSTAIN [_]
3. Approval and adoption of a proposal to permit Star Gas
Corporation to withdraw as the general partner of the Partnership and
the Operating Partnership and to approve the substitution of Star Gas
LLC as the new general partner.
FOR [_] AGAINST [_] ABSTAIN [_]
PLEASE COMPLETE BY MARKING ONE OF THE ABOVE
<PAGE>
BOXES FOR EACH PROPOSAL AS SHOWN IN THIS EXAMPLE [X],
SIGN AND DATE ON REVERSE SIDE AND RETURN PROMPTLY.
[Reverse]
THIS PROXY WILL BE VOTED AS DIRECTED. UNLESS OTHERWISE SPECIFIED, THIS
PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND 3 ABOVE.
It is important that you be represented at the meeting. Please date,
sign and return your proxy in the enclosed envelope, to insure that your Common
Units will be voted.
Date: _________, 19__ ___________________________________
(Signature of Common Unitholder)
______________________________________
(Signature of Common Unitholder)
Please sign exactly as your name or
names appear hereon. When shares are
jointly held, each person must sign.
When signing as attorney, administrator,
executor, trustee or guardian, please
give your full title.
<PAGE>
Exhibit 10.15
PROXY
PETROLEUM HEAT AND POWER CO., INC.
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF COMMON STOCKHOLDERS, ____________, 1999
The undersigned hereby constitutes and appoints Irik P. Sevin, George
Leibowitz and James Bottiglieri, and each of them, the attorneys and proxies,
each with full power of substitution, to represent and act for the undersigned
at the special meeting of Common Stockholders of Petroleum Heat and Power Co.,
Inc. ("Petro") to be held at __________________________________________________,
on ____________________, 1999 at _____, New York time, and at any adjournment
thereof, and to vote all shares of Class A and Class C Common Stock (the "Common
Stock") which the undersigned would be entitled to vote, if personally present,
at said meeting, and with all other powers which the undersigned would possess
if personally present, upon such business as may properly come before the
meeting, including the Proposal set forth below.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL.
Approval and adoption of (i) the Agreement and Plan of Merger
dated as of October __, 1998, pursuant to which a wholly-owned
subsidiary of Star Gas Partners, L.P. (the "Partnership") will be
merged with and into Petro and Petro Common Stockholders will receive
subordinated units of the Partnership; and (ii) the Exchange Agreement
dated as of October __, 1998, pursuant to which Petro Common
Stockholders considered to be affiliates of Petro will exchange their
shares of Petro Common Stock for subordinated units of the
Partnership, all as more fully described in the Proxy Statement for
the meeting.
FOR [_] AGAINST [_] ABSTAIN [_]
PLEASE COMPLETE BY MARKING ONE OF THE ABOVE
BOXES FOR PROPOSAL AS SHOWN IN THIS EXAMPLE [X]
SIGN AND DATE ON REVERSE SIDE AND RETURN PROMPTLY.
<PAGE>
[Reverse]
THIS PROXY WILL BE VOTED AS DIRECTED. UNLESS OTHERWISE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE ABOVE PROPOSAL.
It is important that you be represented at the meeting. Please date,
sign and return your proxy in the enclosed envelope, to insure that your Common
Units will be voted.
Date: ______, 19__ _______________________________
(Signature of Common Stockholder)
________________________________________
(Signature of Common Stockholder)
Please sign exactly as your name or
names appear hereon. When shares are
jointly held, each person must sign.
When signing as attorney,
administrator, executor, trustee or
guardian, please give your full title.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Star Gas Partners, L.P.
We consent to incorporation by reference in the registration statement to be
filed on Form S-4 of Star Gas Partners, L.P. of our report dated November 7,
1997, relating to the consolidated balance sheets of Star Gas Partners, L.P.
and subsidiary and its Predecessor as of September 30, 1997 and 1996, and the
related consolidated statements of operations, partners' capital and
predecessor equity and cash flows for each of the years in the three-year
period ended September 30, 1997 and related schedule, which report appears in
the September 30, 1997 annual report on Form 10-K of Star Gas Partners, L.P.
Additionally, we consent to incorporation by reference in the registration
statement to be filed on Form S-4 of Star Gas Partners, L.P. of our report
dated March 20, 1998, relating to the consolidated balance sheets of Petroleum
Heat and Power Co., Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, changes in shareholders'
equity (deficiency) and cash flows for each of the years in the three-year
period ended December 31, 1997 and related schedule, which report appears in
the December 31, 1997 annual report on Form 10-K of Petroleum Heat and Power
Co., Inc.
We also consent to the reference to our firm under the heading "Experts" in the
prospectus.
Stamford, CT
October 22, 1998
KPMG Peat Marwick LLP
<PAGE>
EXHIBIT 23.4
[LETTERHEAD OF A.G. EDWARDS & SONS, INC. APPEARS HERE]
October 22, 1998
PERSONAL AND CONFIDENTIAL
Star Gas Partners, L.P.
2187 Atlantic Street
P.O. Box 120011
Stamford, CT 06912-0011
Re: Registration Statement of Star Gas Partners, L.P. (the "Partnership") for
the Partnership and Petroleum Heat and Power Co., Inc. ("Petro") Joint
Proxy Statement and the Partnership Prospectus (the "Proxy Statement")
relating to the proposed acquisition by the Partnership of Petro, and
certain related transactions (as defined in such Proxy Statement) dated as
of October 22, 1998.
Gentlemen:
Reference is made to our opinion letter dated October 16, 1998 with respect
to the fairness, from a financial point of view, of the Transaction (as defined
in such opinion) to the public common unitholders of the Partnership.
The foregoing opinion letter is provided for the information and assistance
of the Special Committee of the Board of Directors of Star Gas Corporation in
connection with its consideration of the Transaction contemplated therein and is
not to be used, circulated, quoted or otherwise referred to for any other
purpose, nor is it to be filed with, included in or referred to in whole or in
part in any registration statement, proxy statement or any other document,
except in accordance with our prior written consent. We understand that the
Partnership has determined to include our opinion in the above-referenced
Registration Statement.
In that regard, we hereby consent to the reference to the opinion of our
Firm and to the inclusion of the foregoing opinion in the Proxy Statement
included in the above-mentioned Registration Statement. In giving such consent,
we do not thereby admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933 or the rules
and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ A.G. Edwards & Sons, Inc.
A.G. EDWARDS & SONS, INC.
<PAGE>
EXHIBIT 23.5
[Dain Rauscher Wessels Letterhead]
October 22, 1998
The Board of Directors
Petroleum Heat & Power Co., Inc.
Clearwater House
2187 Atlantic Street
Stamford, CT 06904-1457
Re: Form S-4 Registration Statement of Star Gas Partners, L.P. relating to the
proposed acquisition by Star Gas Partners, L.P. of Petroleum Heat and Power
Co., Inc.
Lady and Gentlemen:
Reference is made to our opinion letter dated October 6, 1998 with respect to
the fairness from a financial point of view to the non-affiliate, public
holders of Class A common stock and Class C common stock of Petroleum Heat &
Power Co., Inc., a Minnesota corporation ("Petro"), of the terms of the
proposed merger as set forth in the Agreement and Plan of Merger, anticipated
to be executed in October 1998, by and among Petro; Star Gas Propane, L.P. (the
"Operating Partnership"), a Delaware limited partnership and wholly-owned
subsidiary of Star Gas Partners, L.P., a Delaware limited partnership; and a
wholly-owned indirect subsidiary of the Operating Partnership.
The foregoing opinion letter is provided for the information and assistance
of the Board of Directors of Petro in connection with its consideration of the
transaction contemplated therein and is not to be used, circulated, quoted or
otherwise referred to for any other purpose, nor is it to be filed with,
included in or referred to in whole or in part in any registration statement,
proxy statement or any other document, except in accordance with our prior
written consent. We understand that Petro has determined to include our opinion
in the above-referenced Registration Statement.
In that regard, we hereby consent to the reference to the opinion of Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, under the captions
"Proxy Statement Summary - Recommendations of Petro Board and Opinion of Dain
Rauscher Wessels" and "The Transaction - Opinion of Dain Rauscher Wessels" and
to the inclusion of the foregoing opinion in the Proxy Statement/Prospectus
included in the above-mentioned Registration Statement. In giving such consent,
we do not thereby admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933 or the rules
and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
DAIN RAUSCHER WESSELS
A division of Dain Rauscher Wessels
Incorporated
