<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
STAR GAS PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 5984 06-1437793
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE) IDENTIFICATION NO.)
OF INCORPORATION OR
ORGANIZATION)
2187 ATLANTIC STREET JOSEPH P. CAVANAUGH, PRESIDENT
P.O. BOX 120011 STAR GAS CORPORATION
STAMFORD, CONNECTICUT 06912-0011 2187 ATLANTIC STREET
(203) 328-7300 P.O. BOX 120011
(ADDRESS, INCLUDING ZIP CODE, AND STAMFORD, CONNECTICUT 06912-0011
TELEPHONE NUMBER, INCLUDING AREA CODE, OF (203) 328-7300
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) (NAME, ADDRESS, INCLUDING ZIP CODE,AND
TELEPHONE NUMBER, INCLUDING
AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
ANDREWS & KURTH L.L.P. PHILLIPS NIZER BENJAMIN LATHAM & WATKINS
805 THIRD AVENUE KRIM & BALLON LLP 885 THIRD AVENUE
NEW YORK, NEW YORK 10022 666 FIFTH AVENUE, NEW YORK, NEW YORK
(212) 850-2800 28TH FLOOR 10022-4802
ATTN: MICHAEL NEW YORK, NEW YORK 10103 (212) 906-1200
ROSENWASSER, ESQ. (212) 977-9700 ATTN: ROBERT A.
ATTN: ALAN SHAPIRO, ESQ. ZUCCARO, ESQ.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] .
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] .
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED
AMOUNT MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(1)(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Units represent-
ing
limited partner inter-
ests................. 7,820,000 $19.375 $151,512,500 $42,121
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Includes Common Units which may be purchased by the underwriters pursuant
to an over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY +
+NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN +
+OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE +
+SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION, DATED DECEMBER 3, 1998
6,800,000 COMMON UNITS
STAR GAS PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
-----------
We are offering Common Units representing limited partner interests through
this prospectus. This offering of Common Units is made in connection with and
conditioned upon our acquisition of Petroleum Heat and Power Co., Inc.,
referred to in this prospectus as "Petro." We are the eighth largest retail
distributor of propane and, upon our acquisition of Petro, will be the largest
retail distributor of home heating oil in the United States.
We intend, to the extent we have sufficient cash available from operations,
to distribute to each holder of Common Units a distribution of at least $0.575
per Common Unit per quarter, which is the Minimum Quarterly Distribution, or
$2.30 per Common Unit on a yearly basis. Our general partner has broad
discretion in making cash disbursements and establishing reserves. During the
subordination period, which generally will not end prior to July 1, 2002, we
will make that Minimum Quarterly Distribution to holders of Common Units before
any distributions will be made on our subordinated partnership interests.
The Common Units are listed on the New York Stock Exchange under the symbol
"SGU." The last reported sale price of Common Units on the NYSE on December 2,
1998 was $19.00 per Common Unit.
YOU SHOULD READ "RISK FACTORS" BEGINNING ON PAGE 33 OF THIS PROSPECTUS FOR A
DISCUSSION OF THE MATERIAL RISKS RELATING TO AN INVESTMENT IN THE COMMON UNITS.
THESE RISKS INCLUDE:
. Propane and home heating oil sales are affected by weather patterns,
product prices and competition, including competition from other energy
sources.
(Additional risk factors are summarized on page 2.)
-----------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Per Common Unit Total
<S> <C> <C>
Public Offering Price.................................... $ $
Underwriting Discounts and Commissions................... $ $
Proceeds to Partnership.................................. $ $
</TABLE>
The underwriters may also purchase up to an additional 1,020,000 Common Units
on the same terms set forth above within 30 days from the date of this
prospectus to cover over-allotments, if any. The underwriters are offering the
Common Units subject to various conditions and may reject all or part of any
order.
-----------
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER
DONALDSON, LUFKIN & JENRETTE
A.G. EDWARDS & SONS, INC.
LEHMAN BROTHERS
PRUDENTIAL SECURITIES INCORPORATED
DAIN RAUSCHER WESSELS
a division of Dain Rauscher
Incorporated
-----------
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
. Cash distributions are not guaranteed and will depend on our future
operating performance.
. Petro has a history of operational and financial difficulties (including
high leverage and recent substantial net losses) and the success of our
acquisition of Petro will depend upon our ability to, among other
things, continue to: (1) make acquisitions of home heating oil
businesses at attractive prices; (2) reduce the home heating oil
customer attrition rate; and (3) improve the per gallon margin on the
distribution of home heating oil.
. Because the propane and home heating oil industries are both mature,
acquisitions are our principal means of growth. There can be no
assurance that we will continue to identify attractive acquisition
candidates or that we will be able to make acquisitions on economically
acceptable terms.
. We will be significantly leveraged with indebtedness that is substantial
in relation to our partners' equity.
. Conflicts of interest may arise between (1) our general partner and its
affiliates and (2) the holders of Common Units.
. The federal income tax benefits of your investment in Common Units
largely depends on our classification as a partnership for that purpose.
2
<PAGE>
FORWARD-LOOKING STATEMENTS
Many of the statements contained in this prospectus, including, without
limitation, statements regarding our business strategy, plans and objectives of
our management for future operations and statements made under "Cash Available
for Distribution" are forward-looking within the meaning of the federal
securities laws. These statements use forward-looking words, such as
"anticipate," "continue," "expect," "may," "will," "estimate," "believe" or
other similar words. These statements discuss future expectations or contain
projections. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, actual results may differ from those
suggested by the forward-looking statements for various reasons, including:
. the effect of weather conditions on our financial performance;
. our ability to obtain new customers and retain existing customers;
. the price and supply of propane and home heating oil;
. our ability to successfully identify and close strategic acquisitions
and make cost saving changes in operations;
. the effect of national and regional economic conditions;
. the condition of the capital markets in the U.S.; and
. the political and economic stability of the oil producing regions of the
world.
When considering forward-looking statements, you should keep in mind the risk
factors referred to in this prospectus. The risk factors could cause our actual
results to differ materially from those contained in any forward-looking
statement. We disclaim any obligation to update the above list or to announce
publicly the result of any revisions to any of the forward-looking statements
to reflect future events or developments.
You should consider the above information when reading any forward-looking
statement in:
. this prospectus; or
. documents incorporated by reference in this prospectus.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
FORWARD-LOOKING STATEMENTS............ 3
GUIDE TO READING THIS PROSPECTUS...... 6
PROSPECTUS SUMMARY.................... 7
The Business........................ 7
Summary Selected Historical
Financial and Operating Data--
Propane Operations................. 15
Summary Selected Historical
Financial and Operating Data--Home
Heating Oil Operations............. 16
Summary Selected Unaudited Pro Forma
Condensed Consolidated Financial
Information........................ 18
The Offering........................ 19
Risk Factors........................ 24
Cash Available for Distribution..... 29
Summary of Tax Considerations....... 30
RISK FACTORS.......................... 33
Risks Inherent in Our Businesses.... 33
Risks Arising Out of the
Transaction........................ 37
Risks Inherent in an Investment in
the Partnership.................... 38
Conflicts of Interest and Fiduciary
Responsibility..................... 40
Tax Risks to Common Unitholders..... 41
THE TRANSACTION....................... 45
Outstanding Partnership Units....... 46
USES OF FUNDS FROM THIS OFFERING AND
THE DEBT OFFERING.................... 47
CAPITALIZATION........................ 48
PARTNERSHIP STRUCTURE AND MANAGEMENT
FOLLOWING THE TRANSACTION............ 49
PRICE RANGE OF COMMON UNITS AND
DISTRIBUTIONS........................ 52
CASH DISTRIBUTION POLICY.............. 53
General............................. 53
Quarterly Distributions of Available
Cash............................... 53
Distributions of Available Cash from
Operating Surplus During the
Subordination Period............... 54
Distributions of Available Cash from
Operating Surplus After the
Subordination Period............... 55
Incentive Distributions During the
Subordination Period............... 55
</TABLE>
<TABLE>
<S> <C>
Incentive Distributions After the
Subordination Period.............. 56
Distributions from Capital
Surplus........................... 56
Limitation on Distributions on
Subordinated Interests............ 57
Adjustment of Minimum Quarterly
Distribution and Target
Distribution Levels............... 58
Issuance of Additional Senior
Subordinated Units................ 58
Distributions of Cash upon
Liquidation During the
Subordination Period.............. 59
Distributions of Cash upon
Liquidation After the
Subordination Period.............. 61
Cash Available for Distribution.... 62
BUSINESS............................. 63
General............................ 63
Industry Characteristics........... 63
Competitive Strengths.............. 64
Business Strategy.................. 65
Propane............................ 65
Home Heating Oil................... 69
Other.............................. 73
MANAGEMENT........................... 76
Partnership Management............. 76
Reimbursement of Expenses of the
General Partner................... 79
BENEFICIAL OWNERSHIP OF PRINCIPAL
UNITHOLDERS AND MANAGEMENT.......... 80
CONFLICTS OF INTEREST AND FIDUCIARY
RESPONSIBILITY...................... 81
Conflicts of Interest.............. 81
Fiduciary Duties of the General
Partner........................... 83
DESCRIPTION OF THE COMMON UNITS...... 85
The Units.......................... 85
Transfer Agent and Registrar....... 85
Transfer of Units.................. 85
THE PARTNERSHIP AGREEMENT............ 87
Organization and Duration.......... 87
Purpose............................ 87
Power of Attorney.................. 87
Restrictions on Authority of the
General Partner with Respect to
Extraordinary Transactions; Lack
of Dissenters' Rights............. 88
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Withdrawal or Removal of the General
Partner; Approval of Successor
General Partner.................... 88
Transfer of General Partner
Interest........................... 89
Reimbursement for Services.......... 89
Status as Limited Partner or
Assignee........................... 90
Non-citizen Assignees; Redemption... 90
Issuance of Additional Securities... 90
Limited Call Right.................. 91
Amendment of Partnership Agreement.. 91
Meetings; Voting.................... 93
Indemnification..................... 94
Limited Liability................... 94
Books and Reports................... 95
Right to Inspect Partnership Books
and Records........................ 96
Termination and Dissolution......... 96
Liquidation and Distribution of
Proceeds........................... 96
Registration Rights................. 96
DESCRIPTION OF CERTAIN
INDEBTEDNESS....................... 97
Senior Subordinated Notes Due 2009.. 97
Existing Indebtedness............... 97
UNITS ELIGIBLE FOR FUTURE SALE...... 100
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS..................... 102
Legal Opinions and Advice........... 102
Partnership Status.................. 103
Tax Treatment of Unitholders........ 104
Tax-Exempt Organizations and Certain
Other Investors.................... 108
</TABLE>
<TABLE>
<S> <C>
Tax Treatment of Operations....... 109
Administrative Matters............ 111
Disposition of Units................ 113
State and Local Tax Considerations.. 116
INVESTMENT IN THE PARTNERSHIP BY
EMPLOYEE BENEFIT PLANS AND
INDIVIDUAL RETIREMENT ACCOUNTS..... 118
UNDERWRITING........................ 119
VALIDITY OF COMMON UNITS............ 120
EXPERTS............................. 120
WHERE YOU CAN FIND MORE
INFORMATION........................ 121
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE....................... 121
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL
INFORMATION........................ 122
Pro Forma Condensed Consolidated
Balance Sheet (Unaudited)........ 123
Pro Forma Condensed Consolidated
Statement of Operations
(Unaudited)...................... 124
STATEMENT OF OPERATIONS............. 125
ANNEX A--APPLICATION FOR TRANSFER OF
COMMON UNITS....................... A-1
ANNEX B--GLOSSARY OF TERMS.......... B-1
ANNEX C--PARTNERSHIP AGREEMENT...... C-1
ANNEX D--PRO FORMA AVAILABLE CASH
FROM OPERATING SURPLUS............. D-1
</TABLE>
5
<PAGE>
GUIDE TO READING THIS PROSPECTUS
The following should help you understand some of the conventions and defined
terms used in this prospectus:
. Throughout this prospectus, we refer to ourselves, Star Gas Partners, L.P.,
as "we," "us" or "the Partnership." Generally we refer to ourselves as "we"
or "us" when discussing operations (such as "We are the eighth largest
retail distributor of propane............''), and as ""the Partnership'' when
discussing our entity or its structure (such as ""The Partnership conducts
its operations through the Operating Partnership...'').
. When we refer to a fiscal year, we are referring to the Partnership's fiscal
year that ends September 30. Historically, Petro has operated on a calendar
year basis.
. Except as the context otherwise requires, references to:
(1) the "Transaction" refer to our proposed acquisition of Petro and
certain related transactions including this offering;
(2) our operations prior to the consummation of the Transaction include
the operations of Star Gas Propane, L.P., referred to in this prospectus as
the "Operating Partnership" and its subsidiary); and
(3) our operations from the time of consummation of the Transaction
include all of the operations cited above together with Petro's home heating
oil operations.
. This prospectus generally treats Petro's home heating oil operations as if
they had historically been owned and operated by the Partnership. Prior to
the Transaction, the home heating oil business and operations referred to in
this prospectus were owned and operated by Petro which was the parent of our
general partner. Following the Transaction, the home heating oil business
and operations will be operated by Petro (which will then be our wholly-
owned subsidiary), Petro's immediate parent corporation, Petro Holdings,
Inc., referred to in this prospectus as "Petro Holdings," and Petro's
wholly-owned subsidiaries.
. As part of the Transaction, we will have a new general partner, Star Gas
LLC. References to the "General Partner" generally refer to Star Gas LLC
unless the context refers to the period prior to the Transaction, in which
case we are referring to Star Gas Corporation.
. For ease of reference, a Glossary of certain terms used in this prospectus
is included as Annex B to this prospectus. Capitalized terms not otherwise
defined herein have the meanings given in the Glossary.
. Unless otherwise specified, the information in this prospectus assumes that
the underwriters' over-allotment option is not exercised.
6
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may not
contain all of the information that is important to you. To understand this
offering fully, you should read the entire prospectus carefully, including the
risk factors, financial statements, annexes and all information incorporated by
reference.
THE BUSINESS
GENERAL
We are the eighth largest retail distributor of propane and, upon our
acquisition of Petro, will be the largest retail distributor of home heating
oil in the United States. Our propane operations serve approximately 166,000
customers in the Midwest and Northeast regions, and the home heating oil
operations the Partnership is acquiring serve approximately 340,000 customers
in the Northeast and Mid-Atlantic regions. On a pro forma basis for the twelve
months ended September 30, 1998, giving effect to the Transaction and the
acquisitions made in fiscal 1998, we had $568.8 million in revenues and $50.9
million in EBITDA, which is defined later in this prospectus, on propane sales
volume of 103.4 million gallons and home heating oil sales volume of 354.1
million gallons. If certain non-recurring restructuring, corporate identity and
Transaction expenses were not subtracted from EBITDA, pro forma EBITDA for the
same period would have been $55.2 million.
Propane Operations
We are the eighth largest retail propane distributor in the United States. We
are primarily engaged in the retail distribution of propane and related
supplies and equipment to residential, commercial, industrial, agricultural and
motor fuel customers. We serve our approximately 166,000 propane customers from
55 branch locations and 32 satellite storage facilities in the Midwest and 19
branch locations and 14 satellite storage facilities in the Northeast. In
addition to our retail business, we also serve approximately 30 wholesale
customers from our facilities in southern Indiana.
For the fiscal year ended September 30, 1998, on a pro forma basis giving
effect to acquisitions in fiscal 1998, our propane operations had EBITDA of
$20.2 million on sales of $116.1 million. Approximately 80% of these sales (by
volume of gallons sold) were to retail customers and approximately 20% were to
wholesale customers. Our retail sales have historically had a greater profit
margin, more stable customer base and less price sensitivity than our wholesale
business.
Home Heating Oil Operations
We are the largest retail home heating oil distributor in the United States
and a leading consolidator in the highly fragmented home heating oil industry.
We serve approximately 340,000 home heating oil customers from 24 branch
locations in the Northeast and Mid-Atlantic regions. We also install and repair
heating equipment 24 hours a day, seven days a week, 52 weeks a year, generally
within four hours of request. These services are an integral part of our basic
home heating oil service, and are designed to maximize customer satisfaction
and loyalty.
As a result of a major strategic study, in 1996 we began to implement an
operational restructuring program designed to take advantage of our size within
the home heating oil industry. This program involves regionalization of our
home heating oil operation into three profit centers which allows us to operate
more efficiently. In addition, this program enables us to access developments
in communication and computer technology that are in use by other large
distribution businesses, but are generally not used by other retail heating oil
companies. This program is designed to reduce operating costs, improve customer
service and establish a brand image among heating oil consumers.
For the twelve months ended September 30, 1998, our home heating oil
operations had total sales of $452.8 million and EBITDA of $30.7 million. If
certain non-recurring restructuring, corporate identity and
7
<PAGE>
Transaction expenses were not subtracted from EBITDA, pro forma EBITDA for the
same period would have been $34.9 million. For the twelve months ended
September 30, 1998, approximately 83% of our total sales were from sales of
home heating oil, approximately 13% were from the installation and repair of
heating equipment and approximately 4% were from the sale of other petroleum
products, including diesel fuel and gasoline, to commercial customers. Our home
heating oil business' sales volume, cash flow and EBITDA have increased
significantly since 1979, when current management assumed control, primarily
due to the acquisition of 188 home heating oil businesses over the period.
INDUSTRY CHARACTERISTICS
Propane is used primarily for space heating, water heating and cooking by
residential and commercial customers. Home heating oil is used primarily as a
source of residential space heating. The retail propane and home heating oil
industries are both mature, with total demand expected to remain relatively
flat or to decline slightly. We believe that these industries are relatively
stable and predictable due to the largely non-discretionary nature of propane
and home heating oil use. Accordingly, the demand for propane and home heating
oil has historically been relatively unaffected by general economic conditions
and has been a function of weather conditions.
According to the American Petroleum Institute, the domestic retail market for
propane is approximately 9.4 billion gallons annually, accounting for
approximately 4% of household energy consumption in the United States,
according to the Energy Information Administration. Similarly, according to the
Energy Information Administration, the domestic retail market for home heating
oil is approximately 7.4 billion gallons annually and the Northeast accounts
for approximately two-thirds of the demand for home heating oil in the United
States. In 1997, approximately 6.9 million or 36% of all homes in the Northeast
were heated by oil.
Generally, home heating oil and propane distribution profitability is
unaffected by the changes in wholesale heating oil and propane prices since
prices charged to customers are adjusted to reflect underlying wholesale costs.
However, during periods of sharp price fluctuations in supply costs,
distributors may be unable or unwilling to pass entire cost increases or
decreases through to customers. In such cases, significant increases or
decreases in per gallon margins may result. In addition, the timing of cost
pass-throughs can significantly affect margins.
The propane and home heating oil distribution industries are highly
fragmented, characterized by a large number of relatively small, independently
owned and operated local distributors. Each year a significant number of local
distributors have sought to sell their business for reasons that include
retirement and estate planning. In addition, the propane and heating oil
distribution industries are becoming more complex due to increasing
environmental regulations and escalating capital requirements needed to acquire
advanced, customer oriented technologies. Primarily as a result of these
factors, both industries are undergoing consolidation, and the Partnership and
Petro have been active consolidators in their respective markets.
COMPETITIVE STRENGTHS
We believe that we are well-positioned to compete in the propane and home
heating oil industries. Our competitive strengths include:
. High Percentage of Sales to Stable, Higher Margin Residential
Customers. Our propane and home heating oil operations concentrate on sales
to residential customers. Residential customers tend to generate higher
margins and are generally more stable purchasers than our other customers.
For the year ended September 30, 1998, sales to residential customers
represented 56% of our retail propane gallons sold and 66% of propane gross
profit. In addition, we own approximately 95% of the propane tanks located
at our customers' homes, which further enhances our profitability and
customer stability. For the twelve months ended September 30, 1998, sales
to residential customers represented 83% of Petro's total heating oil
gallons sold and 91% of total heating oil gross profit.
8
<PAGE>
. Proven Acquisition Expertise. Petro has a proven track record in the
acquisition of home heating oil companies. Petro has achieved substantial
growth since 1979 through the acquisition and consolidation of 188 retail
home heating oil distributors in both new and existing markets. In
addition, since January 1994, our propane operations have acquired 12
distributors, including seven distributors in fiscal 1998.
. Premium Service Provider with Brand Name Recognition. In our New York and
Mid-Atlantic regions, our home heating oil business now operates only under
the name "Petro," rather than the acquired brand names previously in use.
We have been building this brand name by focusing on delivering premium
service to our customers.
. Operating Leverage. As the largest retail distributor of home heating oil
and a leading retail distributor of propane in the United States, we are
able to realize economies of scale in operating, marketing, information
technology and other areas by spreading our costs over a larger base of
sales. In our home heating oil business, we are utilizing communication and
computer technology that is generally not used by our competitors, which
has allowed us to realize operating efficiencies.
BUSINESS STRATEGY
Our primary objective is to increase cash flow on a per Unit basis. We intend
to pursue this objective principally through the following strategies:
. Pursuing Strategic Acquisitions. We intend to continue to grow through
acquisitions. Both the propane and home heating oil distribution industries
are highly fragmented, characterized by a large number of relatively small,
independently owned and operated local distributors. We believe that, as a
result of the Transaction, the field of potential acquisition candidates
will be broadened due to our ability to acquire propane companies, home
heating oil companies and companies with both propane and home heating oil
operations. In addition, our increased size will enable us to consider
larger transactions.
. Realizing Operating Efficiencies in Existing and Acquired Operations. We
intend to continue to implement our restructuring and cost reduction
programs in our home heating oil business to improve profitability and
realize cost savings at both existing and acquired operations. We intend to
continue to focus our propane operations in high margin markets with a
large proportion of residential customers.
. Focusing on Customer Growth and Retention. We intend to continue to seek
internal growth through individual branch marketing programs in our propane
business. In our home heating oil business, we seek to maximize customer
retention by providing premium customer service and building brand
awareness and customer loyalty.
. Enhancing Our Brand Awareness. We believe that the impact of Petro's
branding efforts may offer competitive advantages in the home heating oil
industry, due to the lack of comparable branding and extremely low consumer
awareness in the industry.
There can be no assurance that we will be able to implement the above
strategies.
THE TRANSACTION
The Partnership will acquire Petro as part of a four-part transaction,
referred to in this prospectus as the "Transaction." Each part of the
Transaction is meant to be consummated at the same time. The four principal
parts of the Transaction are described below.
. Acquisition of Petro. Petro will become a wholly-owned, indirect subsidiary
of the Partnership through (1) a merger of one of the Partnership's wholly-
owned subsidiaries into Petro and (2) an exchange by affiliates of Petro of
their Petro Common Stock for Senior Subordinated Units, Junior Subordinated
Units and General Partner Units.
9
<PAGE>
. Financings and Refinancings. We are offering Common Units representing
limited partner interests. Separately, senior subordinated notes, referred
to in this prospectus as the "Notes," are being offered by Petro pursuant
to a transaction referred to in this prospectus as the "Debt Offering." The
Partnership, along with Petro Holdings, will guarantee the Notes. The
Partnership will use the proceeds from these offerings to redeem or
restructure certain public and private debt and preferred stock of Petro.
. New General Partner. As a result of the Transaction, Star Gas Corporation
will become a subsidiary of the Partnership. We will be substituting a new
general partner, Star Gas LLC, for Star Gas Corporation. This substitution
is necessary because a general partner cannot be a subsidiary of a limited
partnership of which it is a general partner.
. Amendment of Partnership Agreement. We will be amending our partnership
agreement in effect prior to the Transaction. The amendment will, among
other things, facilitate the consummation of the Transaction and increase
our minimum quarterly distribution (the "Minimum Quarterly Distribution")
from $0.55 to $0.575 per Common Unit per quarter.
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 26.8%
Issued to Petro Junior Preferred
Stockholders..................... -- -- 102,773 0.7
Issued in this offering(a)........ -- -- 6,800,000 47.3
--------- ----- ---------- -----
Subtotal........................ 3,858,999 60.5 10,761,772 74.8
SUBORDINATED UNITS
Existing Subordinated Units....... 2,396,078 37.5 -- --
Senior Subordinated Units......... -- -- 2,767,058 19.2
Junior Subordinated Units......... -- -- 568,478 4.0
--------- ----- ---------- -----
Subtotal........................ 2,396,078 37.5 3,335,536 23.2
GENERAL PARTNER INTERESTS/UNITS(B).. 127,655 2.0 287,700 2.0
--------- ----- ---------- -----
Total........................... 6,382,732 100.0% 14,385,008 100.0%
========= ===== ========== =====
</TABLE>
- --------
(a) Estimate based on an assumed offering price of $20.00 per Common Unit. The
exact number of Common Units to be issued in this offering will increase or
decrease inversely in relation to the public offering price of the Common
Units.
(b) Stated in equivalent Units before the Transaction and includes the General
Partner's interest in the Operating Partnership.
10
<PAGE>
USES OF FUNDS FROM THIS OFFERING AND THE DEBT OFFERING
The uses of funds from this offering and the Debt Offering are currently
anticipated to be as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
SOURCES
This offering, net(a).......................................... $128,300
Debt Offering, net(b).......................................... 115,400
--------
$243,700
========
USES
Redeem Petro 12 1/4% Senior Subordinated Debentures due
2005(c)(d).................................................... $ 84,094
Redeem Petro 10 1/8% Senior Subordinated Notes due 2003(d)..... 50,000
Redeem Petro 9 3/8% Senior Subordinated Debentures due
2006(d)....................................................... 75,000
Redeem Petro Public Preferred Stock............................ 27,600
Repurchase Petro 1989 Preferred Stock.......................... 4,167
Transaction fees and expenses(e)(f)............................ 2,839
--------
$243,700
========
</TABLE>
- --------
(a) Assumes the sale of 6.8 million Common Units at $20.00 per Common Unit, net
of underwriting discounts and commissions and expenses. The exact number of
Common Units to be issued in this offering will increase or decrease
inversely in relation to the public offering price of the Common Units.
(b) Net of underwriting discounts and commissions and expenses.
(c) Includes prepayment premium of $2.8 million.
(d) The amounts set forth across from the Petro 12 1/4% Senior Subordinated
Debentures, the Petro 10 1/8% Senior Subordinated Notes, and the Petro 9
3/8% Senior Subordinated Debentures (1) include the principal amount of
subordinated debt that was not exchanged in Petro's October 1998 exchange
offer pursuant to which this senior subordinated debt was issued and (2)
assume that Petro will redeem or otherwise repurchase 100% of these
securities. Upon consummation of the Transaction, Petro has the right to
redeem up to an aggregate of 98.5% of the principal amount of these
securities. We intend to purchase the remaining securities on comparable
terms.
(e) Does not include reserves for dissenters' rights which may be exercised by
former Petro stockholders.
(f) Petro will pay an additional $3.2 million of expenses from its existing
cash balances.
The estimated sources and uses of funds may change, depending on market
conditions, the Partnership's and Petro's operations and other factors.
11
<PAGE>
CAPITALIZATION
The following table shows the Partnership's historical capitalization as of
September 30, 1998 (1) actual, (2) as adjusted to give pro forma effect to the
acquisition of Petro and (3) as further adjusted to give pro forma effect to
the closing of this offering and the Debt Offering and our application of the
net proceeds therefrom as described in "Uses of Funds From this Offering and
the Debt Offering." You should read this table together with the historical and
pro forma financial statements and notes included and incorporated by reference
in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------
PRO FORMA ADJUSTED
ACTUAL COMBINED(A) PRO FORMA(A)
-------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash........................................ $ 1,115 $ 19,782 $ 16,550
======== ======== ========
Debt:
Operating Partnership First Mortgage
Notes.................................... $ 96,000 $ 96,000 $ 96,000
Operating Partnership Acquisition
Facility................................. 8,308 8,308 8,308
The Notes................................. -- -- 120,000
Petro Public Debt(b)...................... -- 209,094 --
Petro Private Debt(c)..................... -- 76,056 81,686
-------- -------- --------
Total Long-Term debt.................... 104,308 389,458 305,994
-------- -------- --------
Redeemable Preferred Stock:
Petro Public Preferred Stock.............. -- 27,600 --
Partners' capital:
Common Unitholders........................ 58,686 60,741 189,041
Existing Subordinated Unitholders......... (1,446) -- --
Senior Subordinated Unitholders........... -- 19,253 19,253
Junior Subordinated Unitholders........... -- 3,291 3,291
General Partner........................... 107 1,666 1,666
-------- -------- --------
Total partners' capital................. 57,347 84,951 213,251
-------- -------- --------
Total capitalization.................... $161,655 $502,009 $519,245
======== ======== ========
</TABLE>
- --------
(a) See "Unaudited Pro Forma Condensed Consolidated Financial Information of
Star Gas Partners, L.P.," for a discussion of the pro forma adjustments.
The foregoing table does not include $4.2 million of the current portion of
Petro's 1989 Preferred Stock, which will be paid with the proceeds of this
offering. See "Uses of Funds From this offering and the Debt Offering."
(b) The Petro Public Debt consists of $84.1 million of 12 1/4% Senior
Subordinated Debentures due 2005, $50.0 million of 10 1/8% Senior
Subordinated Notes due 2003 and $75.0 million of 9 3/8% Senior Subordinated
Debentures due 2006. The amounts set forth (1) include the principal amount
of subordinated debt that was not exchanged in Petro's October 1998
exchange offer pursuant to which this senior subordinated debt was issued
and (2) assume that Petro will redeem or otherwise repurchase 100% of these
securities. Upon consummation of the Transaction, Petro has the right to
redeem up to an aggregate of 98.5% of the principal amount of these
securities. We intend to purchase the remaining securities on comparable
terms.
(c) The Petro Private Debt consists of $63.1 million of 9% Senior Notes due
2002, $4.3 million of 10 1/4% Subordinated and Senior Notes due 2001 and
$14.3 million of notes payable in connection with the purchase of fuel oil
dealers maturing at various dates through 2004. See "Description of Certain
Indebtedness--Existing Indebtedness--Other Petro Debt."
12
<PAGE>
PARTNERSHIP STRUCTURE AND MANAGEMENT FOLLOWING THE TRANSACTION
Our propane operations are conducted through the Operating Partnership and
its wholly-owned corporate subsidiaries. In addition, substantially all of our
propane operations' consolidated assets and liabilities are accounted for by
the Operating Partnership in which the Partnership owns a 99.99% limited
partnership interest and the General Partner owns a 0.01% general partner
interest. The General Partner directs and manages all activities of the
Partnership and the Operating Partnership and is reimbursed on a monthly basis
for all related direct and indirect expenses it incurs on their behalf. Our
home heating oil operations will be conducted through Petro Holdings, Petro and
Petro's subsidiaries.
Upon completion of the Transaction, Star Gas LLC will become our general
partner and the general partner of the Operating Partnership. All of the
membership interests in Star Gas LLC will be owned by certain of our current
affiliates. Some of the officers of Star Gas Corporation and Petro before the
Transaction will become officers of Star Gas LLC following the Transaction.
The ability of the Partnership to make distributions is restricted by various
debt instruments of the Operating Partnership and Petro. See "Description of
Certain Indebtedness."
Star Gas Partners, L.P.'s principal executive offices are located at 2187
Atlantic Street, Stamford, CT 06902. Our telephone number is (203) 328-7300.
The chart below illustrates the organization and ownership of the
Partnership, the Operating Partnership and its subsidiaries and Star Gas LLC
immediately following the Transaction, assuming an offering price of $20.00 per
Common Unit. 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.
13
<PAGE>
[IMMEDIATELY FOLLOWING THE TRANSACTION]
[ CHART TO APPEAR ]
14
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL AND OPERATING DATA--PROPANE OPERATIONS
The following table sets forth summary selected historical financial and
operating data for the Partnership. The summary selected historical financial
data as of and for each of the fiscal years in the three year period ended
September 30, 1998 are derived from our audited consolidated financial
statements. This data should be read in conjunction with our consolidated
financial statements, Management's Discussion and Analysis of Financial
Condition and Results of Operations and accompanying notes contained in our
1998 Annual Report on Form 10-K which is incorporated in this prospectus by
reference. See "Incorporation of Certain Documents by Reference." These
historical results of operations are not necessarily indicative of future
results.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1996(A) 1997 1998
-------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Sales............................. $ 119,634 $ 135,159 $ 111,685
Gross profit...................... 61,077 62,948 62,187
Depreciation and amortization..... 9,808 10,405 11,638
Operating income.................. 9,802 9,003 6,997
Interest expense, net............. 7,124 6,966 7,927
Net income (loss)................. 2,593 2,012 (955)
Basic and diluted net income
(loss) per Unit(b)............... 0.11(c) 0.37 (0.16)
Cash distribution declared per
Unit............................. 1.17(c) 2.20 2.20
BALANCE SHEET DATA (END OF PERIOD)
Current assets.................... $ 17,842 $ 14,165 $ 17,947
Total assets...................... 156,913 147,469 179,607
Long-term debt.................... 85,000 85,000 104,308
Partners' capital................. 61,398 51,578 57,347
OPERATING DATA
EBITDA(d)......................... $ 19,870 $ 19,703 $ 18,906
Retail propane gallons............ 96,294 94,893 98,870
Total capital expenditures(e)..... $ 5,332 $ 5,279 $ 5,015
</TABLE>
- --------
(a) Reflects the results of operations of our predecessor for the period
October 1, 1995 through December 20, 1995 and our results 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 from December 20, 1995
through September 30, 1996, see Item 14, page F-4 of our 1998 Annual Report
on Form 10-K, which is incorporated by reference in this prospectus. See
"Incorporation of Certain Documents by Reference."
(b) Net income (loss) per Unit is computed by dividing the limited partners'
interest in net income (loss) by the limited partners' weighted average
number of Units outstanding.
(c) 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 our ability to make the
Minimum Quarterly Distribution. For a discussion of the cash flows provided
by (used in) our operating, investing and financing activities, see the
statements of cash flows in our consolidated financial statements
incorporated by reference in this prospectus. The definition of "EBITDA"
set forth above may be different from the definition of "EBITDA" used by
other companies.
(e) Includes net maintenance capital expenditures for fiscal 1996 of $2.3
million, for fiscal 1997 of $3.1 million and for fiscal 1998 of $2.6
million.
15
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL AND OPERATING DATA--
HOME HEATING OIL OPERATIONS
The following table sets forth summary selected historical financial and
operating data for Petro. The summary selected historical financial data as of
and for the years ended December 31, 1996 and 1997 are derived from Petro's
audited consolidated financial statements. The data should be read in
conjunction with Petro's consolidated financial statements and accompanying
notes incorporated by reference from the Partnership's Current Report on Form
8-K dated November 20, 1998. Since the Partnership's initial public offering in
December 1995, the Partnership has been accounted for under the equity method
of accounting in Petro's financial statements. The historical financial data as
of and for the nine months ended September 30, 1997 and 1998 are derived from
Petro's unaudited consolidated financial statements but have been prepared on
the same basis as Petro's audited consolidated financial statements. In the
opinion of management, the unaudited financial data 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 of operations are not necessarily indicative of future
results.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------
1996 1997 1997 1998
----------- ----------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales...................... $ 608,161 $ 548,141 $386,855 $291,479
Gross profit................... 180,773 168,393 115,586 99,971
Operating expenses............. 138,703 132,383 96,292 81,758
Restructuring, corporate
identity, pension curtailment
and Transaction expenses...... 4,366 7,640 5,142 1,716
Depreciation, amortization and
other non-cash costs(a)....... 30,818 30,311 22,664 21,708
Operating income (loss)........ 6,886 (1,941) (8,512) (5,211)
Interest expense, net.......... 32,412 31,668 23,777 22,912
Other income, net.............. 1,842 11,445 65 127
Share of income (loss) of Star
Gas Partners, L.P............. 2,283 (235) (1,808) (1,890)
Income (loss) before
extraordinary item............ (21,901) (22,899) (34,382) (30,211)
Net income (loss).............. (28,315) (22,899) (34,382) (30,211)
Basic and Diluted earnings
(losses) per common share(b)
Class A and Class C Common
Stock......................... $ (1.20) $ (1.06) $ (1.47) $ (1.29)
Cash dividends declared per
common share(b)
Class A and Class C Common
Stock......................... $ 0.60 $ 0.30 $ 0.23 $ --
Weighted average number of common
shares outstanding
Basic(b)
Class A Common Stock........... 22,983 23,441 23,339 23,960
Class C Common Stock........... 2,598 2,598 2,598 2,598
Diluted(b)
Class A Common Stock........... 23,339 23,960
Class C Common Stock........... 2,598 2,598
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA (END
OF PERIOD)
Current assets........ $ 130,010 $ 105,124 $ 105,124 $ 82,712
Total assets.......... 275,025 247,846 223,918 198,678
Long-term debt........ 291,337 288,957 288,774 278,864
Redeemable preferred
stock
(long-term portion).. 8,333 32,489 34,167 28,555
Stockholders'
(deficiency)......... (145,733) (177,033) (189,361) (209,618)
OPERATING DATA
EBITDA(c)............. $ 37,704(d) $ 28,370(d)(e) $ 14,152(d) $ 16,497(d)(f)
Heating oil gallons... 456,141 410,291 282,806 226,579(f)
</TABLE>
- --------
(a) Other non-cash costs include provision for supplemental benefits.
(b) At December 31, 1996 and 1997 there were approximately 12,000 and 11,000
shares of Class B Common Stock outstanding, respectively. At September 30,
1997 and 1998 there were 11,000 shares of Class B Common Stock outstanding
for both periods. For all periods presented, shares of Class B Common
Stock 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. The
definition of "EBITDA" set forth above may be different from that used by
other companies. In addition, in the nine months ended September 30, 1998,
Petro recorded $1.0 million related to Transaction expenses.
(d) 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 nine months ended September 30, 1997 and 1998, Petro recorded
expenditures for these programs of $4.4 million, $7.6 million, $5.1
million and $1.7 million, respectively.
(e) The decline in overall levels of EBITDA for the year ended December 31,
1997, as compared to the year ended December 31, 1996 was primarily due to
warmer weather experienced in 1997.
(f) For the nine months ended September 30, 1998, home heating oil volume
declined by 19.9% as compared to the nine months ended September 30, 1997
primarily due to abnormally warm temperatures. While volume declined
19.9%, EBITDA increased 16.6% over the prior period due to a reduction in
operating costs largely attributable to the completion of our
restructuring and cost reduction programs.
17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION
The following table sets forth summary selected unaudited pro forma condensed
consolidated financial and operating data for the Partnership. The data as of
and for the twelve months ended September 30, 1998 give effect to, among other
things, the Transaction, as if the Transaction had taken place on October 1,
1997, in the case of the pro forma condensed consolidated statement of
operations, or on September 30, 1998 in the case of the pro forma condensed
consolidated balance sheet. 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 certain assumptions. This information 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 included in the documents described under "Incorporation of
Certain Documents by Reference" and the unaudited pro forma condensed
consolidated financial information of the Partnership and Petro and
accompanying discussion and notes set forth under "Unaudited Pro Forma
Condensed Consolidated Financial Information" in this prospectus. The unaudited
pro forma consolidated amounts below are not necessarily indicative of what the
financial condition or the results of operations of the Partnership and Petro,
on a consolidated basis, would have been had the Transaction been consummated
on the dates set forth above. The unaudited pro forma amounts do not
necessarily indicate our future financial condition or the Partnership's future
results of operations after the Transaction.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30, 1998
-------------------
(IN THOUSANDS,
EXCEPT PER UNIT
DATA)
<S> <C>
STATEMENT OF OPERATIONS DATA
Sales..................................................... $568,836
Gross profit.............................................. 217,379
Depreciation and amortization............................. 38,070
Operating income.......................................... 23,702
Interest expense, net..................................... 26,859
Net income (loss)......................................... (3,657)
Net income (loss) per Unit(a)............................. $ (0.25)
BALANCE SHEET DATA (END OF PERIOD)
Current assets............................................ $ 97,427
Total assets.............................................. 679,960
Long-term debt............................................ 305,994
Total partners' capital................................... 213,251
OPERATING DATA
EBITDA(b)(c).............................................. $ 50,945
Retail propane gallons.................................... 103,417
Heating oil gallons....................................... 354,064
</TABLE>
- --------
(a) Net income (loss) per Unit is computed by dividing the limited partners'
interest in net income (loss) by the limited partners' weighted average
number of Units outstanding.
(b) "EBITDA" is defined as operating income plus depreciation and
amortization, less net gain (loss) on sale of businesses and equipment and
provision for supplemental benefits. 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 our 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 prospectus. The definition of "EBITDA"
set forth above is different from the definition of "EBITDA" used by other
companies.
(c) EBITDA has been reduced by $4.2 million in expenses associated with
Petro's restructuring and corporate identity program and expenses relating
to the Transaction. The restructuring program included reductions in both
corporate and field personnel, the consolidation of employee benefit plans
and the rationalization of branch facilities.
18
<PAGE>
THE OFFERING
Securities Offered by
the Partnership........ 6,800,000 Common Units, excluding up to 1,020,000
Common Units issuable upon exercise of the over-
allotment option described in "Underwriting"(assuming
an offering price of $20.00 per Common Unit).
Units to be Outstanding
After this Offering.... 10,761,772 Common Units (assuming an offering price
of $20.00 per Common Unit), 2,767,058 Senior
Subordinated Units, 568,478 Junior Subordinated Units
and 287,700 General Partner Units.
Distributions of . ""Available Cash" for any quarter will consist
Available Cash......... 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 generally be distributed
approximately 45 days after each March 31, June 30,
September 30 and December 31 to Unitholders of
record on the applicable record date subject to the
limitations discussed below.
. Available Cash will first be distributed to Common
Unitholders, then, subject to certain limitations
discussed below, to Senior Subordinated
Unitholders, and then proportionately 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 proportionately
to all Unitholders, except that if Available Cash
exceeds specified 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 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 Partnership Agreement provides that
the aggregate amount of distributions that may be
paid on the Senior Subordinated Units, Junior
Subordinated Units and General Partner Units during
the quarters ending June 30, 1999 and September 30,
1999 will depend on whether the combined results
with Petro exceed certain financial benchmarks.
. The Partnership Agreement further 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 us since October 1,
1999.
Distributions to . We intend, to the extent there is sufficient
Unitholders............. 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 a yearly basis).
19
<PAGE>
. With respect to each quarter during the
Subordination Period, which will generally not end
earlier than July 1, 2002: (1) 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 (2) 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.
. 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.
. Cash distributions with respect to the quarter
ending March 31, 1999 will be paid to the Common
Unitholders, including those issued in this
offering, on or about May 15, 1999 to the holders
of record on or about May 3, 1999 in the same
amount per Common Unit, regardless of how many days
such Common Units have been outstanding.
. If we meet certain tests set forth in the
Partnership Agreement, the first distribution
permitted to be paid to the holders of the Senior
Subordinated Units, Junior Subordinated Units and
General Partner Units may be paid with respect to
the quarter ending June 30, 1999 and will be paid
on or about August 14, 1999 to the holders of
record on or about August 3, 1999. Such
distribution, if paid, will include also a pro rata
distribution for the period between the completion
of the Transaction and March 31, 1999. 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, the financial tests will be satisfied
when:
(1) distributions of Available Cash from
Operating Surplus on all outstanding Units
equals or exceeds 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;
(2) 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
(3) there are no arrearages in payment of the
Minimum Quarterly Distribution on the Common
Units.
20
<PAGE>
. Upon expiration of the Subordination Period, all
Senior Subordinated Units and 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 Class B Common Units if our home heating
oil operations meet certain financial goals.
. 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. See "--Removal and
Withdrawal of the General Partner."
Incentive If quarterly distributions of Available Cash from
Distributions........... Operating Surplus exceed the Target Distribution
Levels, the Senior Subordinated Units, Junior
Subordinated Units and General Partner 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
have rights to receive Incentive Distributions, as
defined below.
The following table illustrates the percentage of
Available Cash from Operating Surplus distributed
proportionately 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 only ("Incentive Distributions") at the Target
Distribution Levels. The percentages set forth in the
table below are based on the number of Units
outstanding immediately after the completion of the
Transaction.
<TABLE>
<CAPTION>
PERCENTAGE OF AVAILABLE CASH DISTRIBUTED
AS INCENTIVE DISTRIBUTIONS TO
PERCENTAGE OF PERCENTAGE OF THE SPECIFIED UNIT CLASS
QUARTERLY AVAILABLE CASH AVAILABLE CASH ------------------------------------------------------
DISTRIBUTION DISTRIBUTED AS DISTRIBUTED AS SENIOR JUNIOR
AMOUNT PER BASE INCENTIVE SUBORDINATED SUBORDINATED GENERAL
COMMON UNIT DISTRIBUTIONS DISTRIBUTIONS UNITS UNITS PARTNER 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 17.9 3.7 1.9
Thereafter.............. -- 51.0 49.0 37.4 7.7 3.9
</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 proportional
issuances of such Units.
21
<PAGE>
Adjustment of Minimum
Quarterly Distribution
and Target
Distribution Levels....
The Minimum Quarterly Distribution and the Target
Distribution Levels are subject to downward
adjustments in the event that Unitholders receive
distributions of Available Cash from Capital Surplus
(which generally includes cash from transactions such
as borrowings (other than working capital
borrowings), refinancings, sales of securities or
sales or other dispositions of assets constituting a
return of capital under the Partnership Agreement, as
distinguished from cash from Partnership operations),
or in the event legislation is enacted or existing
law is modified or interpreted in a manner that
causes us 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."
Partnership's Ability
to Issue Additional The Partnership Agreement authorizes the General
Units.................. Partner to cause us 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, we may not issue equity securities ranking
senior to the Common Units or more than 2,500,000
additional Common Units (excluding (1) Common Units
issued in this offering, (2) Class B Common Units
issued upon conversion of Senior Subordinated Units
and Junior Subordinated Units as described in this
prospectus and (3) Common Units issued in connection
with certain capital improvements, acquisitions or to
repay certain indebtedness), or an equivalent number
of securities ranking on a parity with the Common
Units without the approval of the holders of at least
a majority of the outstanding Common Units, excluding
Common Units owned by the General Partner and its
affiliates. See "Risk Factors--Risks Arising Out of
the Transaction--There is Potential Significant
Dilution of the Interests of Common Unitholders" and
"The Partnership Agreement--Issuance of Additional
Securities."
Limited Call Right...... If at any time not more than 20% of the outstanding
limited partner interests of any class are held by
persons other than the General Partner and its
affiliates, the General Partner may purchase all of
the remaining limited partner interests of such class
that it does not already own at specified prices. In
certain instances, if we acquire in a twelve month
period, 66 2/3% or more of the total Class B Common
Units, we may purchase all of the remaining Class B
Common Units during the following twelve-month period
at specified prices. See "The Partnership Agreement--
Limited Call Right."
22
<PAGE>
Limited Voting Rights... Unitholders have only limited voting rights on
matters affecting our business. See "The Partnership
Agreement--Meetings; Voting."
Removal and Withdrawal
of the General The General Partner may be removed upon the approval
Partner................ 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 of
the class or classes for which a meeting is proposed.
The General Partner has agreed not to voluntarily
withdraw as our general partner and general partner
of the Operating Partnership prior to December 31,
2005, subject to limited exceptions, without
obtaining the approval of at least a Unit Majority
and furnishing an Opinion of Counsel. A change in the
General Partner will constitute a change of control
and may result in default under certain Debt
Instruments. See "Risk Factors--Risks Inherent in Our
Business--We Have Debt With Change of Control
Provisions," "The Partnership Agreement--Withdrawal
or Removal of the General Partner; Approval of
Successor General Partner," and "--Meetings; Voting."
Liquidation If we liquidate during the Subordination Period under
Preference............. certain circumstances holders of outstanding Common
Units will be entitled to receive more per Unit in
liquidating distributions than holders of outstanding
Senior Subordinated Units, Junior Subordinated Units
and General Partner Units. The per Unit difference
will be dependent upon the amount of gain or loss
recognized by us in liquidating our assets. Following
conversion of the Senior Subordinated Units and
Junior Subordinated Units into Class B Common Units,
all Units will be treated the same upon liquidation
of the Partnership to the extent possible depending
on the amount of gain or loss recognized by us in
liquidating our assets. See "Cash Distribution
Policy--Distributions of Cash Upon Liquidation During
the Subordination Period" and "--Distributions of
Cash After the Subordination Period."
Use of Proceeds......... We estimate that the net proceeds we will receive
from the sale of the Common Units offered through
this prospectus will be $128.3 million after
deducting estimated underwriting discounts and
commissions and the estimated expenses of this
offering. All of the net proceeds of this offering,
together with the $115.4 million of net proceeds from
the Debt Offering, will be used: (1) to redeem $236.7
million of Petro's Public Debt and Petro's Public
Preferred Stock; (2) to repurchase Petro's 1989
Preferred Stock; and (3) to pay for a portion of the
expenses of the Transaction.
Conditions to this The offering is conditioned upon, among other things,
Offering............... the acquisition of Petro by the Partnership.
NYSE Trading Symbol..... SGU.
23
<PAGE>
RISK FACTORS
Limited partner interests are inherently different from the capital stock of
a corporation, although many of the business risks to which we will be subject
are similar to those that would be faced by a corporation engaged in a similar
business. You should consider the following factors in evaluating an investment
in the Common Units. As stated under "Forward Looking Statements," many
statements included in this prospectus, including, without limitation,
statements regarding our business strategy, the plans and objectives of
management for future operations and the statements under "Cash Distribution
Policy," are forward-looking statements. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we
can give no assurance that the expectations will prove to be correct. Important
factors that could cause actual results to differ materially from our
expectations are discussed below, under "Risk Factors" and elsewhere in this
prospectus.
Risks Inherent in Our Propane and Home Heating Oil Businesses
. Weather. Weather conditions have a significant impact on the demand for
both propane and home heating oil because our customers depend on these
products principally for heating purposes. During the peak heating season
of October through March, sales of propane represent approximately 70% to
75% of our annual retail propane volume and sales of home heating oil
represent approximately 75% to 80% of our annual home heating oil volume.
Actual weather conditions can vary substantially from year to year,
significantly affecting our financial performance. Furthermore, warmer
than normal temperatures in one or more regions in which we operate can
significantly decrease the total volumes we sell and the gross profit
realized on those sales and, consequently, our results of operations. In
fiscal 1998, temperatures were significantly warmer than normal for the
areas in which we sell propane and home heating oil. We believe that the
overall levels of both pro forma Available Cash from Operating Surplus and
EBITDA generated during fiscal 1998 were adversely affected due to this
abnormally warm weather. We cannot predict if or when a similar weather
phenomenon will affect the markets we serve.
. Customer Attrition in Our Home Heating Oil Business. The net attrition of
our existing home heating oil customers has been between approximately 5%
to 6% per year over the past five years, excluding additional customers
obtained through acquisitions. Customer losses are the result of various
factors, including customer relocation, price, natural gas conversions and
credit problems. We cannot assure you that we will be able to maintain or
reduce our customer net attrition rate in the future.
. Prices of Wholesale Products. The retail propane and home heating oil
industries are "margin-based" businesses in which gross profits depend on
the excess of retail sales prices over wholesale prices. Consequently, our
profitability is sensitive to changes in wholesale prices of propane and
heating oil caused by changes in supply or other market conditions. Many
of these factors are beyond our control and thus, when there are increases
in the wholesale costs of propane and heating oil, we may not be able to
pass on these increases to our customers through retail sales prices. In
addition, the timing of cost pass-throughs can significantly affect
margins. Wholesale price increases could reduce our gross profits and
could, if continuing over an extended period of time, reduce demand by
encouraging conservation or conversion to alternative energy sources.
. Acquisitions. A significant portion of our growth in the past decade has
come from acquiring businesses. Our growth strategy continues to be
focused on the acquisition of complementary businesses. This is due in
part to the mature nature of the propane and home heating oil industries,
with total demand expected to remain relatively flat or to decline
slightly. We cannot assure you that we will be able to identify attractive
acquisition candidates (whether in the home heating oil or propane sector)
in the future or that we will be able to acquire businesses on
economically acceptable terms. In particular, competition for acquisitions
in the propane business have intensified and become more costly. Any
acquisition may involve potential risks, including:
24
<PAGE>
. an increase in our indebtedness;
. the inability to integrate the operations of the acquired business;
. diversion of management's attention from other business concerns; and
. excess customer loss or loss of key employees from the acquired business.
. Significant Leverage. We have indebtedness that is substantial in relation
to our partners' capital. Assuming we had completed the Transaction on
September 30, 1998, our total consolidated indebtedness would have been
$306.0 million, which as a percentage of our total book capitalization,
would have been 58.9%. Principal and interest payable on our indebtedness
will reduce cash available to make distributions on the Common Units.
Under certain circumstances, the terms of our consolidated indebtedness
will limit our ability to distribute cash to Common Unitholders and to
borrow additional funds.
. Home Heating Oil's History of Losses. Petro has a history of operational
and financial difficulties (including high leverage and recent substantial
net losses) and the success of our acquisition of Petro will depend upon
our ability to, among other things, continue to: (1) make acquisitions of
home heating oil businesses at attractive prices, (2) reduce the home
heating oil customer attrition rate and (3) improve the margin on the
distribution of home heating oil on a per gallon basis. We cannot assure
you that we will be able to generate a profit from the home heating oil
operations or that those operations will not have a material adverse
effect on our consolidated financial performance.
. Competition for Customers. Our profitability is affected by the
competition for retail customers in the propane and home heating oil
industry. Some of our competitors and potential competitors are larger or
have greater financial resources than we do, which may provide those
competitors with certain advantages. Competition with other companies in
the retail propane and home heating oil industries is based primarily on
customer service and price. As a result of common industry practices that
tend to build customer loyalty, particularly in the propane business, it
may be difficult for us to acquire new retail customers. In addition, our
products compete with other sources of energy (such as natural gas) and
other purchase methods (such as buying cooperatives) and we cannot assure
you that our existing customers will continue to use our products.
. Casualty Risk. Our operations are subject to all operating hazards and
risks normally incidental to handling, storing and transporting and
otherwise providing customers with combustible liquids such as propane and
home heating oil. As a result, we may be a defendant in various legal
proceedings and litigation arising in the ordinary course of business. We
maintain insurance policies with insurers in such amounts and with such
coverage and deductibles as we believe are reasonable. However, there can
be no assurance that such insurance will be adequate to protect us from
all material expenses related to potential future claims for personal and
property damage or that such levels of insurance will be available in the
future at economical prices. In addition, the occurrence of an explosion,
whether or not we are involved, may have an adverse effect on the public's
desire to use our products.
. Alternative Energy Sources. Propane and home heating oil compete with
other sources of energy, some of which can be less costly for equivalent
energy value. We compete for customers against suppliers of natural gas.
Because of the significant cost advantage of natural gas over propane,
propane is generally not competitive with natural gas in those areas where
natural gas is readily available. To a lesser extent, our propane business
also competes for customers against suppliers of electricity and fuel oil.
We could face additional price competition from alternative heating
sources such as electricity and natural gas as a result of deregulation in
those industries. Over the past five years, conversions by our
25
<PAGE>
customers from heating oil to other sources, primarily natural gas, have
averaged approximately 1% per year of the homes we serve. This conversion
trend is not entirely within our control and may worsen. We cannot predict
the effect that the development of alternative energy sources might have
on our operations.
. Reliance on Suppliers. Historically, we have purchased significant
percentages of propane and home heating oil from a limited number of
suppliers of propane and heating oil (74% of fiscal 1998 propane purchases
from 10 suppliers and 70% of fiscal 1998 home heating oil purchases from
11 suppliers). In addition, in the past, a substantial portion of propane
purchased has originated from storage facilities in Mont Belvieu, Texas
and has been shipped to us through a major common carrier pipeline. While
substantially all of our home heating oil 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
our home heating oil business. We believe that alternate sources of
propane and home heating oil are readily available in the event that we
are unable to purchase propane or home heating oil from such large
suppliers or there are significant interruptions in service in storage
facilities in Mont Belvieu, Texas, the common carrier pipeline or foreign
sources. Nonetheless, we recognize that we may depend on these suppliers.
Accordingly, a failure to obtain alternate sources of supply at
competitive prices and on a timely basis could have a material adverse
effect on our operations.
. Change of Control. Certain of our debt instruments contain provisions
relating to change of control. Upon the occurrence of certain kinds of
change of control, we may be required to purchase our outstanding debt. It
is possible that we will not have sufficient funds at the time of the
change of control to make the required repurchases of our debt or that
restrictions in our debt instruments will not permit such repurchases. In
some cases, lenders would have the right to foreclose on our assets if we
failed to purchase debt upon a change of control. In addition, the
indenture governing the Notes contains provisions relating to a change of
control of the Partnership or General Partner. Furthermore, there is no
restriction on the ability of the General Partner to enter into a
transaction that would trigger the change of control provisions.
Risks Arising out of the Transaction
. Conflicts of Interest in Structuring the Transaction. Petro and Star Gas
Corporation developed and structured the Transaction. Star Gas Corporation
is a wholly-owned subsidiary of Petro. Petro currently owns all the
Subordinated Units of the Partnership, and all but two of the directors of
the Star Gas Corporation Board of Directors (the "Star Gas Corporation
Board") are also directors or officers of Petro. As a result, members of
the Petro Board of Directors (the "Petro Board") and Petro's
representatives on the Star Gas Corporation Board have interests that are
different from, and in conflict with, the interests of the Common
Unitholders.
. Shift of Primary Business to Home Heating Oil. The Transaction includes
our acquisition of a business that is substantially larger than our
propane business in terms of assets, liabilities and revenues. As a result
of the Transaction, our primary business will shift from the retail
distribution of propane to the retail distribution of home heating oil.
The home heating oil business has a number of risks and is highly
competitive.
. Taxes Payable by Petro Will Reduce Distributions. We expect the
Transaction to result in nominal taxes to Petro although our determination
could be subject to challenge by the Internal Revenue Service (the "IRS").
A successful challenge would reduce the amount of cash we have available
for distribution. We believe that Petro and its corporate affiliates (the
"Corporate Group") will not pay significant federal income tax for several
years immediately following the Transaction; however, over
26
<PAGE>
time we expect that the amount of federal income taxes paid by the
Corporate Group will increase, also reducing the amount of cash that we
can distribute to Common Unitholders. If the IRS successfully challenges
the deduction by the Corporate Group of depreciation or interest on
certain debt, the Corporate Group's tax liability will increase and our
ability to distribute cash to Common Unitholders will be adversely
affected.
Although we believe that the Corporate Group will not pay significant
federal income tax for several years, we expect the Corporate Group will
generate earnings and profits during that time such that a portion of the
distributions from the Corporate Group to us out of earnings and profits
will be taxable dividend or interest income to the Unitholders that cannot
be offset by losses generated by our propane activities.
Risks Inherent in an Investment in the Partnership
. Cash Distributions. Cash distributions are not guaranteed and may
fluctuate based upon our performance. The General Partner may establish
reserves that reduce the amount of Available Cash. Because our business is
seasonal, the General Partner anticipates that it will make additions to
reserves during certain of our fiscal quarters (those covering the colder
periods) in order to fund operating expenses, interest payments and cash
distributions to partners with respect to other fiscal quarters (those
covering the warmer periods). Cash distributions are dependent primarily
on cash flow, including cash from reserves, and not on profitability,
which is affected by non-cash items. Therefore, cash distributions may be
made during periods when we record losses and may not be made during
periods when we record profits. Certain covenants in the debt indenture
governing the Notes and other debt agreements may restrict distributions
by the Operating Partnership and the Partnership. As a result of these and
other factors, we cannot give any assurance regarding the actual levels of
cash distributions.
. Removal of General Partner. The Partnership Agreement contains certain
provisions that may discourage a person or group from attempting to remove
the General Partner as general partner or otherwise change our management.
The Partnership Agreement provides that in certain circumstances if the
General Partner is removed other than for Cause, the Subordination Period
will end, all arrearages on the Common Units will terminate and all
outstanding Senior Subordinated Units and Junior Subordinated Units will
convert into Common Units. The effect of these provisions may be to
diminish the price at which the Common Units will trade under certain
circumstances.
. Limited Rights of Limited Partners. We are managed and operated by the
General Partner, and holders of Common Units have no right to participate
in our management and operation. Common Unitholders have no right to elect
the General Partner on an annual or other continuing basis, and have only
limited voting rights on matters affecting our business.
. Dilution. Under the terms of the Partnership Agreement, subject to certain
limitations, we may issue additional Common Units and other interests, the
effect of which may be to (1) dilute the value of the interests of the
then-existing holders of Common Units in our net assets, (2) dilute the
interests of holders of Common Units in our distributions, (3) reduce the
support provided by the subordination feature and (4) make it more
difficult for a person or group to remove the General Partner as our
general partner or otherwise change our management.
. Limited Call Right. If at any time (1) 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, or (2) we acquire in a
twelve month period, 66 2/3% or more of the total Class B Common Units,
the General Partner, in case of (1) above, or we, in the case of (2)
above, may purchase all of the remaining limited partner interests of such
class at specified prices. See "The Partnership Agreement--Limited Call
Right."
27
<PAGE>
. Reimbursements to General Partner Will Have Priority Over
Distributions. Prior to making any distributions on the Units, we 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 our behalf, 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 us for which we
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 our ability to make distributions.
. Liability of Limited Partners. Under certain circumstances, holders of
Common Units, Senior Subordinated Units and Junior Subordinated Units
could lose their limited liability and could become liable for amounts we
improperly distribute to them. See "The Partnership Agreement--Limited
Liability."
Conflicts of Interest and Fiduciary Responsibility
. Borrowings. The Partnership Agreement provides that any of our borrowings
will not constitute a breach of any duty owed by the General Partner,
including borrowings that have the purpose or effect of enabling the
General Partner to receive Incentive Distributions or hasten the
conversion of the Senior and Junior Subordinated Units into Common Units.
. Competition with the General Partner. The Partnership Agreement permits
the General Partner's affiliates to compete with us under certain
circumstances and to a limited extent. We cannot give any assurance that
there will not be competition between us and the General Partner's
affiliates.
Tax Considerations
. Classification as a Partnership. Your federal income tax benefits from
investing in us depend, in large part, on our classification as a
partnership for federal income tax purposes. Based on certain
representations by the General Partner, Andrews & Kurth L.L.P., special
counsel to the General Partner and us, is of the opinion that we have been
and will continue to be classified as a partnership for federal income tax
purposes.
. No Ruling from the IRS. We have not requested any rulings from the IRS on
our classification as a partnership for federal income tax purposes,
whether our propane operations generate "qualifying income" under Section
7704 of the Internal Revenue Code of 1986, as amended (the "Code"), or any
other matter affecting us.
. Income Taxes. As a Unitholder, you will be required to pay income taxes on
your allocable share of our income including interest and dividend income,
whether or not you receive a cash distribution from us.
. Tax-Exempt Entities. An investment in Units by certain tax-exempt
entities, regulated investment companies and foreign persons raises issues
unique to them. For example, much of the taxable income derived by most
organizations exempt from federal income tax (including Individual
Retirement Accounts and other retirement plans) from the ownership of a
Unit will be taxable to such a Unitholder because it is unrelated business
taxable income.
. Passive Losses. In the case of taxpayers subject to the passive loss rules
(generally individuals and closely held corporations), any losses
generated by us can only be used to offset income generated by us in the
future, and cannot be used to offset income from other activities,
including passive activities or investments and any dividend income from
the Corporate Group or interest income we generate. Passive losses which
are not deductible because they exceed your share of our income may be
deducted in full when you dispose of your entire investment in us in a
fully taxable transaction to an unrelated party.
28
<PAGE>
See "Risk Factors," "Conflicts of Interest and Fiduciary Responsibility,"
"Description of the Common Units," "The Partnership Agreement" and "Certain
Federal Income Tax Considerations" for a more detailed description of these and
other risk factors that should be considered in evaluating an investment in the
Common Units.
CASH AVAILABLE FOR DISTRIBUTION
We believe that we will generate sufficient Available Cash from Operating
Surplus for the first full four quarter period following the completion of the
Transaction to cover the Minimum Quarterly Distribution for such four quarter
period on all then outstanding Units. Our belief is based on a number of
assumptions, including the assumptions that normal weather conditions will
prevail in our operating areas, that our operating margins will remain constant
and that market and overall economic conditions will not change substantially.
Although we believe our assumptions are within a range of reasonableness, most
of the assumptions are not within our control 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 our
assumptions may prove to be inaccurate. As a result, our Operating Surplus
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 the four quarter period following the
completion of the Transaction on the Common Units, Senior Subordinated Units,
Junior Subordinated Units and General Partner Units to be outstanding
immediately after the completion of the Transaction is $33.1 million ($24.7
million for the Common Units, $6.4 million for the Senior Subordinated Units,
$1.3 million for the Junior Subordinated Units and $0.7 million for the General
Partner Units). The amount of pro forma Available Cash constituting Operating
Surplus generated during the twelve months ended September 30, 1998 would have
been $18.7 million; if certain non-recurring restructuring, corporate identity
and Transaction expenses were not subtracted from this calculation, pro forma
Available Cash constituting Operating Surplus for the same period would have
been $22.9 million. In fiscal 1998, temperatures were significantly warmer than
normal for the areas in which we conduct our propane operations and our home
heating oil operations. We believe that overall levels of both pro forma
Available Cash from Operating Surplus and EBITDA were adversely affected during
fiscal 1998 due to this abnormally warm weather. In addition, 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."
We are required by some of our debt agreements to establish reserves for the
future payment of principal and interest on certain of our indebtedness. There
are other provisions in such agreements and the indenture governing the Notes
that will, under certain circumstances, restrict our ability to make
distributions to our Unitholders. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Description of Certain
Indebtedness" incorporated in this prospectus by reference in our 1998 Annual
Report on Form 10-K. The indenture relating to the Notes issued by Petro has
provisions that will, under certain circumstances, similarly restrict our
ability to make distributions to Unitholders.
29
<PAGE>
SUMMARY OF TAX CONSIDERATIONS
The tax consequences of an investment in us will depend in part on your own
tax circumstances. You should consult your own tax advisor about the federal,
state and local tax consequences of an investment in Common Units.
The following is a brief summary of the material expected tax consequences of
owning and disposing of Common Units. The following discussion, insofar as it
relates to federal income tax laws, is based in part upon the opinion of
Andrews & Kurth L.L.P., special counsel to the General Partner and us,
described in "Certain Federal Income Tax Considerations." This summary is
qualified by the discussion in "Certain Federal Income Tax Considerations,"
particularly the qualifications on the opinions of counsel described there.
Partnership Status
In the opinion of counsel, based on certain assumptions and representations,
we have been and will continue to be classified for federal income tax purposes
as a partnership, and the beneficial owners of Common Units (and other Units)
will be considered our partners. Accordingly, we will pay no federal income
taxes, and a Common Unitholder (and other Unitholders) will be required to
report in his federal income tax return his share of our income, gains, losses
and deductions. In general, cash distributions to a Common Unitholder will be
taxable only if, and to the extent that, they exceed his tax basis in his
Common Units.
Partnership Allocations and Distributions
In general, our annual income and loss will be allocated to the General
Partner and the Unitholders for each taxable year in accordance with their
respective percentage interests in us, as determined annually and prorated on a
monthly basis and subsequently apportioned among the General Partner and the
Unitholders of record as of the opening of the first business day of the month
to which they relate, even though Unitholders may dispose of their Units during
the month in question. A Unitholder will be required to take into account, in
determining his federal income tax liability, his share of our taxable income
for each of our taxable years 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 our taxable income (and possibly the income tax payable
by him with respect to that income) may exceed the cash distributed to him.
Ratio of Taxable Income to Distributions
We estimate that if you purchase Common Units in this offering and hold them
through December 31, 2001, you will be allocated, on a cumulative basis, an
amount of federal taxable income for that period which is less than 20% of the
cash distributed for that period. We further estimate that for taxable years
beginning after December 31, 2001, the taxable income allocable to a Unitholder
will constitute a significantly higher percentage of cash distributed to him.
These estimates are based upon the assumption that gross income from
operations, including dividend and interest income from the Corporate Group,
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 our control.
Further, these estimates are based on current tax law and certain tax reporting
positions that we have adopted or intend to adopt and with which the IRS could
disagree. Accordingly, no assurance can be given that these estimates will be
correct. The actual percentage of distributions that will constitute taxable
income could be higher or lower, and any differences could be material and
could materially affect the value of the Common Units. See "Certain Federal
Income Tax Considerations--Tax Treatment of Unitholders--Ratio of Taxable
Income to Distributions."
30
<PAGE>
Basis of Common Units
A Unitholder's initial tax basis in his Unit will be the amount paid for that
Unit. A Unitholder's basis is generally increased by his share of our income
and decreased by his share of our losses and distributions.
Passive Loss Limitations on Deductibility of Partnership Losses
In the case of taxpayers subject to the passive loss limitations (generally,
individuals and closely held corporations), our losses will only be available
to offset our future income and cannot be used to offset income from other
activities, including passive activities or investments and dividend income and
interest from the Corporate Group. Any losses unused by virtue of these rules
can be deducted when a Unitholder disposes of all of his Units in a fully
taxable transaction with an unrelated party.
Ownership of Common Units by Tax-Exempt Organizations and Certain Other
Investors
An investment in Units by tax-exempt organizations (including IRAs and other
retirement plans), regulated investment companies and foreign persons raises
issues unique to them. Much of the income derived by a Unitholder which is a
tax-exempt organization will be taxable to it because it is unrelated business
taxable income; no significant amount of our gross income will be qualifying
income for purposes of determining whether a Unitholder will qualify as a
regulated investment company, at least in the first few years; and a Unitholder
who is a nonresident alien, foreign corporation or other foreign person will be
subject to withholding on his distributions and will be required to file
federal income tax returns and to pay tax on his share of our taxable income.
See "Certain Federal Income Tax Considerations--Tax-exempt Organizations and
Certain Other Investors."
Tax Shelter Registration
The Code generally requires that "tax shelters" be registered with the
Secretary of the Treasury. It is arguable that we are not subject to this
requirement on the basis that we are not a tax shelter. Nevertheless, we are
registered as a tax shelter with the IRS and the IRS has issued the following
tax shelter registration number to us: 96026000016. ISSUANCE OF THE
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN US OR THE CLAIMED
TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. See "Certain
Federal Income Tax Considerations--Administrative Matters--Registration as a
Tax Shelter."
Disposition of Common Units
A Unitholder who sells his Common Units will recognize gain or loss equal to
the difference between the amount realized and his adjusted basis in such
Common Units. Thus, our distributions to a Unitholder in excess of his share of
our income 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.
Section 754 Election
We have 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 of our assets.
Other Tax Considerations
In addition to federal income taxes, a Unitholder will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which he resides and in which we do business or own property.
A Unitholder will
31
<PAGE>
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 these
requirements. We anticipate that substantially all of our income will be
generated in the following states: Connecticut, Indiana, Kentucky, Maine,
Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island and West Virginia. Each of these states currently
imposes a personal income tax; however, New Hampshire's tax applies only to
interest and dividend income. Some of them may require us to withhold a
percentage of income from amounts to be distributed to a Unitholder who is not
a resident of that state. Withholding, which may be more or less than a
particular Unitholder's income tax liability owed to the state, may not relieve
him 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 we have distributed. Based on current law and our estimate of future
operations, we anticipate that any amounts required to be withheld will not be
material.
It is your responsibility to investigate the legal and tax consequences,
under the laws of pertinent states and localities, of your investment in us.
Accordingly, you should consult, and must depend upon, your 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. Counsel has not rendered an opinion on the state and local tax
consequences of an investment in the Partnership.
32
<PAGE>
RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many of the business risks to which the Partnership is
subject are similar to those that would be faced by a corporation engaged in a
similar business. Prospective purchasers of the Common Units should consider
the following risk factors in evaluating an investment in the Common Units.
RISKS INHERENT IN OUR BUSINESSES
Weather Conditions Affect the Demand for Propane and Home Heating Oil
Weather conditions have a significant impact on the demand for both propane
and home heating oil because our customers depend on these products principally
for heating purposes. During the peak heating season of October through March,
sales of propane represent approximately 70% to 75% of our annual retail
propane volume and sales of home heating oil represent approximately 75% to 80%
of our annual home heating oil volume. Actual weather conditions can vary
substantially from year to year, significantly affecting our financial
performance. Furthermore, warmer than normal temperatures in one or more
regions in which we operate can significantly decrease the total volumes we
sell and the gross profit realized on those sales and, consequently, our
results of operations. In fiscal 1998, temperatures were significantly warmer
than normal for the areas in which we sell propane and home heating oil. We
believe that overall levels of both pro forma Available Cash from Operating
Surplus and EBITDA generated during fiscal 1998 were adversely affected during
fiscal 1998 primarily due to this abnormally warm weather. We cannot predict if
or when a similar weather phenomenon will affect the markets we serve. Weather
variations also affect demand for propane from agricultural customers, as dry
weather during the harvest season reduces demand for propane used in crop
drying. There can be no assurance that average temperatures in future years
will not be above historical averages.
Our Home Heating Oil Business Has Significant Customer Attrition
The net attrition of our existing home heating oil customers has been between
approximately 5% to 6% per year over the past five years. This rate represents
our annual gross customer loss rate of approximately 15% to 16%, offset by
customer gains of approximately 10% per year, excluding additional customers
gained through acquisitions. Customer losses are the result of various factors,
including customer relocation, price, natural gas conversions and credit
problems. Customer gains are a result of our marketing and service programs and
other incentives. We cannot assure you that we will be able to maintain or
reduce our customer net attrition rate in the future.
We Are Subject to Pricing and Inventory Risk for Both Propane and Home Heating
Oil
The retail propane and home heating oil industries are "margin-based"
businesses in which gross profits depend on the excess of retail sales prices
over supply costs. Consequently, our profitability is sensitive to changes in
wholesale prices of propane and heating oil caused by changes in supply or
other market conditions. Many of these factors are beyond our control and thus,
when there are increases in the wholesale costs of propane and heating oil, we
may not be able to pass on these increases to our customers through retail
sales prices. In addition, the timing of cost pass-throughs can significantly
affect margins. Wholesale price increases could reduce our gross profits and
could, if continuing over an extended period of time, reduce demand by
encouraging conservation or conversion to alternative energy sources.
Approximately 25% of our 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. We currently enter into forward
purchase contracts for most of the oil we sell to "capped-price" customers.
This practice permits us to purchase oil at a fixed price in advance of our
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
33
<PAGE>
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 our home heating oil
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
our other retail customers, thereby negatively affecting our operating results.
There can be no assurance that this trend will not continue in the future, and
thereby continue to negatively affect our financial performance.
Propane is available from numerous sources, including integrated
international oil companies, independent refiners and independent wholesalers.
We purchase propane from a variety of suppliers under supply contracts and on
the spot market. The major portion of propane purchased by us (approximately
95% in fiscal 1998) is produced domestically. To the extent that we purchase
propane from Canadian sources (approximately 5% in fiscal 1998), our propane
business will be subject to risks of disruption in foreign supply. We attempt
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, we have on occasion purchased, and may purchase in the future, large
volumes of propane at relatively attractive prices for storage in our 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 we purchased propane held in inventory,
thereby adversely affecting gross margin or sales or rendering sales from such
inventory unprofitable. We 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.
Our Ability to Grow Depends Upon Acquisitions
A significant portion of our growth in the past decade has come from acquired
businesses. Our growth strategy continues to be focused on the acquisition of
complementary businesses. This is in part due to the mature nature of the
propane and home heating oil industries, with total demand expected to remain
relatively flat or to decline slightly. We cannot assure you that we will be
able to identify attractive acquisition candidates (whether in the home heating
oil or propane sector) in the future or that we will be able to acquire
businesses on economically acceptable terms. In particular, competition for
acquisitions in the propane business have intensified and become more costly.
Factors that may adversely affect our propane and home heating oil operating
and financial results, such as warm weather patterns, may limit our access to
capital and adversely affect our ability to make acquisitions. Any acquisition
may involve potential risks, including:
. an increase in our indebtedness;
. the inability to integrate the operations of the acquired business;
. diversion of management's attention from other business concerns; and
. excess customer loss or loss of key employees from the acquired business.
In addition, acquisitions may be dilutive to earnings and distributions to
the Unitholders and any additional debt incurred to finance acquisitions may
affect our ability to make distributions to the Unitholders.
Our Indebtedness May Affect Operations and Limit Our Ability to Make
Distributions
We have indebtedness that is substantial in relation to our partners'
capital. Assuming we had completed the Transaction on September 30, 1998, our
total consolidated indebtedness would have been $306.0 million, which as a
percentage of our total book capitalization, would have been 58.9%. Principal
and interest payable on our indebtedness will reduce cash available to make
distributions on the Common Units. Under certain
34
<PAGE>
circumstances, the terms of our consolidated indebtedness, including the Notes,
will limit our ability to distribute cash to Common Unitholders and to borrow
additional funds. The limitations and restrictions in new debt we issue may be
more restrictive than those in our current indebtedness. Certain of our
indebtedness is secured by liens on substantially all of the assets of the
Operating Partnership. In the case of our continuing default 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 us and the Common
Unitholders.
Home Heating Oil's History of Net Losses
Petro has a history of operational and financial difficulties (including high
leverage and recent substantial net losses) and the success of our acquisition
of Petro will depend upon our ability to, among other things, continue to: (1)
make acquisitions of home heating businesses at attractive prices, (2) reduce
the home heating oil customer attrition rate and (3) improve the margin on the
distribution of home heating oil on a per gallon basis. We cannot assure you
that we will be able to generate a profit from the home heating oil operations
or that those operations will not have a material adverse effect on our
consolidated financial performance.
Our Business Is Highly Competitive
Our profitability is affected by the competition for retail customers in the
propane and home heating oil industries. Some of our competitors and potential
competitors are larger or have greater financial resources than we do, which
may provide those competitors with certain advantages. Competition with other
companies in the retail propane and home heating oil industries is based
primarily on customer service and price.
Competition within the propane distribution industry stems primarily from
three types of participants: larger, multistate marketers; smaller, local
independent marketers; and farm cooperatives. Generally, competition in the
past few years has intensified, partly as a result of warmer-than-normal
weather and general economic conditions. Most of our propane retail branch
locations compete with five or more marketers or distributors. Each branch
location operates in its own competitive environment, as retail marketers are
typically located in close proximity to their customers to lower the cost of
providing service. The principal factors influencing competition with other
retail marketers are price, reliability and quality of service, responsiveness
to customer needs and safety concerns. We cannot assure you that we will be
able to compete successfully on the basis of these factors in the future.
As a result of long-standing customer relationships that are typical in the
retail home propane industry, the inconvenience to customers of switching tanks
(which is required when changing suppliers) and suppliers and the lack of
meaningful growth in the industry, our propane business experiences difficulty
in acquiring new retail customers (other than through acquisitions).
Similar to the propane business, our home heating oil business is highly
competitive. Our home heating oil business competes with heating oil
distributors offering a broad range of services and prices, from full service
distributors, like us, to those offering delivery only. Long-standing customer
relationships are typical in the industry. 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. As a result of the factors noted above, among others, it may be
difficult for us to compete successfully for new home heating oil customers.
We Are Subject to Operating and Litigation Risks That May Not Be Covered by
Insurance
Our operations are subject to all operating hazards and risks normally
incidental to handling, storing and transporting and otherwise providing
customers with combustible liquids such as propane and home heating oil. As a
result, we may be a defendant in various legal proceedings and litigation
arising in the ordinary course of business. We maintain insurance policies with
insurers in such amounts and with such coverages and
35
<PAGE>
deductibles as we believe are reasonable. However, there can be no assurance
that such insurance will be adequate to protect us from all material expenses
related to potential future claims for personal and property damage or that
such levels of insurance will be available in the future at economical prices.
In addition, the occurrence of an explosion, whether or not we are involved,
may have an adverse effect on the public's desire to use our products.
We Are Subject to Competition From Alternative Energy Sources
Propane is sold in competition with other sources of energy, some of which at
times are less costly for equivalent energy value. Propane competes for
customers against suppliers of natural gas. Because of the significant cost
advantage of natural gas over propane, propane is generally not competitive
with natural gas in those areas where natural gas is readily available. The
expansion of the nation's natural gas distribution systems has resulted in the
availability of natural gas in areas that previously depended upon propane. To
a lesser extent, our propane business also competes for customers against
suppliers of electricity and fuel oil. We cannot predict the effect that the
development of alternative energy sources might have on our operations. See
"Business--Propane--Competition" and "Business--Home Heating Oil--Competition."
Our home heating oil operations also compete for retail customers with
suppliers of alternative energy products, principally natural gas. We could
face additional price competition from alternative heating sources such as
electricity and natural gas as a result of deregulation in those industries.
Over the past five years, conversions by our customers from heating oil to
other sources, primarily natural gas, have averaged approximately 1% per year
of the homes we serve. This conversion trend is not entirely within our
control, and may worsen.
We Are Dependent on Principal Suppliers
During fiscal year 1998, 28% of our volume of propane purchases in the
Midwest was purchased on the spot market from various Mont Belvieu, Texas
sources, 27% was purchased from three refineries in Illinois, Kentucky and
Michigan owned by Marathon Ashland Petroleum, LLC and 23% was purchased from
three refineries in Illinois and Indiana owned by Amoco Canada Marketing Group.
Although we believe that alternative sources of propane are readily available,
in the event that we were unable to purchase propane from any 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 our propane operations.
Substantially all of our propane supply for our Northeast retail operations is
purchased under annual or longer term supply contracts. Historically, a
substantial portion of the propane purchased has originated from storage
facilities in Mont Belvieu, Texas and has been shipped to us 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 our propane business.
Similarly, our home heating oil business has market price based contracts for
substantially all its petroleum requirements with 11 different suppliers, the
majority of which have significant domestic sources for their product, and many
of which have been our suppliers for over 10 years. For the twelve months ended
September 30, 1998, our principal suppliers were: Amerada Hess Corporation;
Citgo Petroleum Corp.; Coastal New York; George E. Warren Corp.; Global
Petroleum Corp.; Koch Refining Company, L.P.; Louis Dreyfus Energy Corp.;
Mieco, Inc.; Mobil Oil Corporation; Sprague Energy; Sun Oil Company and Tosco
Refining Co. While substantially all of our home heating oil 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 our home heating oil business.
We Have Debt with Change of Control Provisions
Certain of our debt instruments contain provisions relating to a change of
control. In particular, the Notes, the First Mortgage Notes and the Bank Credit
Facilities require the General Partner to serve as our general partner and to
maintain with its affiliates ownership of a minimum number of Units. If such
change of control
36
<PAGE>
provisions are triggered, (1) under the Bank Credit Facilities and the Notes,
all outstanding indebtedness may become due and (2) under the First Mortgage
Notes, the indebtedness will be re-rated by a rating agency and such
outstanding indebtedness may become due. It is possible that we will not have
sufficient funds at the time of the change of control to make the required
repurchases of our debt or that restrictions in our other debt instruments will
not permit such repurchases. In some cases, lenders would have the right to
foreclose on our assets if we failed to purchase debt upon a change of control.
Furthermore, there is no restriction on the ability of the General Partner to
enter into a transaction that would trigger the change of control provisions.
Inflation Increases Our Costs
Inflation increases our operating and administrative costs. We will attempt
to limit the effects of inflation on our results of operations through cost
control efforts, productivity improvement and increases in per gallon gross
profit margins, but we may not be successful.
Our Home Heating Oil Business Is Subject to Governmental Regulation and Could
Have Significant Costs with Respect to Environmental and Other Regulatory
Matters
Our home heating oil business is subject to federal and state laws and
regulations related to a wide range of environmental and other regulatory
matters. Our home heating oil business has implemented environmental programs
and policies designed to avoid potential liability and costs under applicable
environmental laws. There can be no assurance, however, that we 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
our home heating oil operations, including underground storage and
transportation of home heating oil. In addition, the environmental risks
inherently associated with our home heating oil operations, such as the risks
of accidental releases or spills, are greater than those associated with our
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.
RISKS ARISING OUT OF THE TRANSACTION
Conflicts of Interest in Structuring the Transaction
Petro and Star Gas Corporation developed and structured the Transaction. Star
Gas Corporation is a wholly-owned subsidiary of Petro. Petro currently owns all
the existing Subordinated Units of the Partnership, and all of the directors of
Star Gas Corporation, other than the two 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 Petro's representatives on the Star Gas
Corporation Board have interests that are different from, and in conflict with,
the interests of the Common Unitholders. The Star Gas Corporation Board
appointed the two members of the Special Committee to negotiate the acquisition
of Petro on behalf of the Common Unitholders. Each member of the Special
Committee has received an additional fee of $40,000 for serving on the Special
Committee. See "Conflicts of Interest and Fiduciary Responsibility."
Investment in Our Home Heating Oil Business Will Substantially Change Our
Business
The Transaction includes the acquisition by the Partnership of Petro's home
heating oil business that is substantially larger than the Partnership's
propane business in terms of assets, liabilities and revenues. As a result of
the Transaction, our primary business will shift from the retail distribution
of propane to the retail distribution of home heating oil. The home heating oil
business has a number of risks and is highly competitive. See "Risks Inherent
in Our Business."
No Assurance That the Transaction Will Result in Increased Distributions Per
Common Unit
We structured the Transaction based on our belief that it would increase the
cash available to be distributed per Common Unit. This belief is based, in
part, on our expectation that we will be able to (1) effect
37
<PAGE>
a significant and successful program of acquiring home heating oil distributors
at attractive prices and (2) complete the restructuring program in the home
heating oil operations, which is designed to reduce customer losses and improve
operating margins. Our home heating oil business is not currently negotiating
any potential acquisitions and is not a party to any binding acquisition
agreements. See "--Our Ability to Grow Depends on Acquisitions." Moreover,
there can be no assurance that our home heating oil operation's implementation
of the restructuring program will reduce customer losses and improve operating
margins.
There Is Potential Significant Dilution of the Interests of Common Unitholders
Under the Partnership Agreement, during the Subordination Period, the
Partnership can issue 2,500,000 additional Common Units or units on a parity
with the Common Units without obtaining any Unitholder approval, which may have
the following effects:
. dilution of the value of the interests of the then-existing holders of
Common Units in the net assets of the Partnership;
. dilution of the interests of holders of Common Units in distributions by
the Partnership; and
. reduction of the support provided by the subordination feature of the
Senior Subordinated Units, Junior Subordinated Units and General Partner
Units. In addition, 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.
Prior to the Transaction, the existing Subordinated Units represent a 37.5%
limited partner interests in the Partnership. After the Transaction, the Senior
Subordinated Units, Junior Subordinated Units and General Partner Units will
represent only a 25.2% limited 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.
Taxes Payable by Petro Will Reduce Distributions
We expect the Transaction to result in nominal taxes to Petro although our
determination could be subject to challenge by the IRS. A successful challenge
would reduce the amount of cash we have available for distribution by us. We
believe that the Corporate Group will not pay significant federal income tax
for the several years immediately following the Transaction; however, over time
we expect that the amount of federal income taxes paid by the Corporate Group
will increase, also reducing the amount of cash that we can distribute to
Common Unitholders. If the IRS successfully challenges the deduction by the
Corporate Group of depreciation or interest on certain debt, the Corporate
Group's tax liability will increase and our ability to distribute cash to
Common Unitholders will be adversely affected.
Although we believe that the Corporate Group will not pay significant federal
income tax for several years, we expect the Corporate Group to generate
earnings and profits during that time such that a portion of the distributions
from the Corporate Group to us out of earnings and profits will be taxable
dividend or interest income to the Unitholders that cannot be offset by losses
generated by our propane activities.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
Cash Distributions Are Not Guaranteed and May Fluctuate With Our Performance
Although we distribute all of our Available Cash, we can give no assurances
regarding the amounts of Available Cash that we will generate. The actual
amounts of Available Cash will depend upon numerous factors, including
profitability of operations, required principal and interest payments on our
debt, the cost of acquisitions (including related debt service payments), our
issuance of debt and equity securities, fluctuations in working capital,
capital expenditures, limitations imposed by our debt agreements, adjustments
in reserves, prevailing economic conditions and financial, business and other
factors, some of which may be beyond the control of the General Partner. Cash
distributions are dependent primarily on cash flow, including from
38
<PAGE>
reserves, and not on profitability, which is affected by non-cash items.
Therefore, cash distributions may be made during periods when we record losses
and may not be made during periods when we record profits.
The Partnership Agreement gives the General Partner discretion in
establishing reserves for the proper conduct of our business that will affect
the amount of Available Cash. Because our business is seasonal, the General
Partner expects that it will make additions to reserves during certain of our
fiscal quarters (i.e., those covering the colder periods) in order to fund
operating expenses and distributions to partners with respect to other fiscal
quarters (i.e., those covering the warmer periods). Cash distributions are
dependent primarily on cash flow, including from reserves, and not on
profitability, which is affected by non-cash items. Therefore, cash
distributions may be made during periods when we record losses and may not be
made during periods when we record profits. In addition, we are required to
make reserves for the future payment of principal and interest on our First
Mortgage Notes and in certain instances for the future payment of principal and
interest under our Bank Credit Facilities and other indebtedness. The Notes and
the guarantee by the Partnership issued pursuant to the Debt Offering will
restrict distributions to Common Unitholders under certain circumstances
including failure to meet a cash flow to fixed charges coverage test. As a
result of these and other factors, we can give no assurance regarding the
actual levels of our cash distributions, and our ability to distribute cash may
be limited during the existence of any events of default under any of our debt
instruments.
It May Be Difficult to Remove the General Partner
The Partnership Agreement contains certain provisions that may discourage a
person or group from attempting to remove the General Partner as general
partner or otherwise change our management. The Partnership Agreement provides
that if the General Partner is removed other than for Cause, except in certain
circumstances the Subordination Period will end, all arrearages on the Common
Units will terminate and all outstanding Senior Subordinated Units and Junior
Subordinated Units will convert into Common Units. See "The Partnership
Agreement--Withdrawal or Removal of the General Partner; Approval of Successor
General Partner." The effect of these provisions may be to diminish the price
at which the Common Units will trade under certain circumstances.
Holders of Common Units Have Limited Voting Rights; We Are Managed and
Operated by the General Partner
We are managed and operated by the General Partner. Unlike the holders of
common stock in a corporation, holders of our outstanding common units have
only limited voting rights on matters affecting our business. Holders of Common
Units have no right to elect the General Partner on an annual or other
continuing basis, and the General Partner generally may not be removed except
pursuant to the vote of the holders of not less than 66 2/3% of the Common
Units, excluding those held by the General Partner and its affiliates. As a
result, holders of Common Units have limited influence on matters affecting our
operation and third parties may find it difficult to attempt to gain control or
influence our activities. See "The Partnership Agreement--Withdrawal or Removal
of the General Partner; Approval of Successor General Partner."
The General Partner Will Have a Limited Call Right with Respect to the Common
Units and Other Units
If at any time not more than 20% of the then issued and outstanding Units of
limited partner interests of any class 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 rights to any of its affiliates or to us. As a
consequence, a holder of Units may be required to sell such Units at an
undesirable time or at an undesirable price. Also, upon expiration of the
Subordination Period, if we acquire more the 66 2/3% of the Class B Common
Units in a twelve-month period, then we will have a call right that is similar
to that of the General Partner described above.
39
<PAGE>
Reimbursements to General Partner Will Have Priority Over Distributions
Prior to making any distributions on the Units, we 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
our behalf, 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 us for which we 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 our ability to make
distributions.
Unitholders May Not Have Limited Liability in Certain Circumstances
A number of states have not clearly established limitations on the liability
of holders of Common Units for the obligations of a limited partnership. If it
were determined that we had been conducting business in any state without
compliance with the applicable limited partnership statute, or that the right
or the exercise of the right by the holders of Common Units as a group to
remove or replace the General Partner, to make certain amendments to the
Partnership Agreement or to take other action pursuant to the Partnership
Agreement constituted participation in the "control" of our business, then a
holder of Common Units could be held liable under certain circumstances for our
obligations to the same extent as the General Partner. See "The Partnership
Agreement--Limited Liability" for a discussion of the limitations on liability
and the implications thereof to a holder of Common Units.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITY
Conflicts of interest have arisen and could arise in the future as a result
of the relationships between the General Partner and its affiliates, on the one
hand, and the Partnership or any of our partners, on the other. The directors
and officers of the General Partner have fiduciary duties to manage the General
Partner in a manner beneficial to the members of the General Partner. At the
same time, the General Partner, as general partner, has fiduciary duties to
manage us in a manner beneficial to us and our Unitholders. The duties of the
General Partner, to us, therefore, may come into conflict with the duties of
the directors and officers of the General Partner to its members.
Conflicts of interest might arise in the following situations, among others:
(1) Decisions of the General Partner with respect to the amount and
timing of cash expenditures, borrowings, issuances of additional Units and
reserves in any quarter will affect whether or the extent to which there is
sufficient Available Cash from Operating Surplus to meet the Minimum
Quarterly Distribution and Target Distribution Levels on all Units in a
given quarter. In addition, actions by the General Partner could enable the
General Partner to receive Incentive Distributions or accelerate the
expiration of the Subordination Period or the conversion of Senior
Subordinated Units and the Junior Subordinated Units into Class B Common
Units.
(2) Whenever possible, the General Partner intends to limit its liability
under contractual arrangements to all or particular assets of the
Partnership, and thus avoid recourse against the General Partner or its
assets.
(3) Any agreements between us and the General Partner and its affiliates
will not grant to the holders of Common Units, separate and apart from us,
the right to enforce the obligations of the General Partner and those
affiliates in our favor. Therefore, the General Partner, in its capacity as
our general partner, will be primarily responsible for enforcing such
obligations.
(4) Under the Partnership Agreement, the General Partner or its
affiliates can be reimbursed for any services rendered on terms that are
fair and reasonable to us and can enter into additional contractual
arrangements with any of those entities on our behalf. Neither the
Partnership Agreement nor any of the other agreements, contracts and
arrangements between us, on the one hand, and the General Partner and its
affiliates, on the other, are the result of arm's-length negotiations.
40
<PAGE>
(5) The General Partner may exercise its right to call for and purchase
Units as provided in the Partnership Agreement or assign such right to one
of its affiliates or to us.
(6) Under the Partnership Agreement subject to certain restrictions, it
will not constitute a breach of the General Partner's fiduciary duties to
us or the Unitholders for the General Partner's affiliates to engage in
activities of the type conducted by the Partnership, even if in direct
competition with us. The General Partner and its affiliates have no
obligation to present business opportunities to us.
Except for Irik P. Sevin, who is subject to an agreement limiting his ability
to compete with our propane and home heating oil operations, there are no
restrictions on the ability of any affiliates of the General Partner to engage
in the sale of propane or to trade or store propane. The General Partner has
advised us that its affiliates currently have no plans to acquire any propane
business, or engage in the sale of propane in competition with the Partnership.
Unless provided for otherwise by a partnership agreement, Delaware law
generally requires a general partner of a Delaware limited partnership to
adhere to fiduciary duty standards. Under these standards, a limited
partnership owes its limited partners the highest duties of good faith,
fairness and loyalty and a general partner cannot take any action or engage in
any transaction as to which it has a conflict of interest. The Partnership
Agreement expressly permits the General Partner to resolve conflicts of
interest between itself or its affiliates on the one hand, and the Partnership
or the Unitholders on the other, and to consider, in resolving such conflicts
of interest, actions of the General Partner and its affiliates that might
otherwise be prohibited, including those described in paragraphs (1) to (6)
above. Furthermore, the Partnership Agreement provides that such conflicts of
interest and actions do not constitute a breach by the General Partner of any
duty stated or implied by law or equity. The General Partner will not be in
breach of its obligations under the Partnership Agreement or its duties to us
or the Unitholders if the resolution of such conflict is fair and reasonable to
us. The latitude given in the Partnership Agreement to the General Partner in
resolving conflicts of interest may significantly limit the ability of a
Unitholder to challenge what might otherwise be a breach of fiduciary duty. The
General Partner believes, however, that such latitude is necessary and
appropriate to enable it to serve as our general partner without undue risk of
liability.
The Partnership Agreement expressly limits the liability of the General
Partner by providing that the General Partner, its affiliates and its officers
and directors will not be liable for monetary damages to the Partnership, the
limited partners or assignees for errors of judgment or for any actual
omissions if the General Partner and other persons acted in good faith. In
addition, we are required to indemnify the General Partner, its affiliates and
their respective officers, directors, employees and agents, to the fullest
extent permitted by law, against liabilities, costs and expenses incurred by
the General Partner or such other persons if the General Partner or such
persons acted in good faith and in a manner they reasonably believed to be in,
or not opposed to, our best interests and, with respect to any criminal
proceedings, had no reasonable cause to believe the conduct was unlawful.
The provisions of Delaware law that allow the common law fiduciary duties of
a general partner to be modified by a partnership agreement have not been
resolved in a court of law, and the General Partner has not obtained a legal
opinion covering the provisions set forth in the Partnership Agreement that
purport to waive or restrict the fiduciary duties of the General Partner that
would be in effect under common law were it not for the Partnership Agreement.
TAX RISKS TO COMMON UNITHOLDERS
Taxes Payable by Our Home Heating Oil Business
We expect the Transaction to result in only nominal taxes to Petro although
that could be subject to challenge by the IRS. A successful challenge would
reduce the cash available for distribution by us. We believe that the Corporate
Group will not pay significant federal income tax for several years immediately
following the Transaction; however, over time we expect that the amount of
federal income taxes paid by the Corporate
41
<PAGE>
Group will increase thus reducing the amount of cash that we can distribute to
Unitholders. If the IRS successfully challenges the deduction by the Corporate
Group of depreciation or interest on certain debt, the Corporate Group's tax
liability will increase and our ability to distribute cash to Unitholders will
be adversely affected.
Although we believe that the Corporate Group will not pay significant federal
income tax for several years, we expect the Corporate Group to generate
earnings and profits during that time such that distributions from the
Corporate Group to us will be taxable dividend income to the Unitholders.
Dividend income cannot be offset by losses generated by our propane activities.
For a general discussion of the expected federal income tax consequences of
owning and disposing of Units, see "Certain Federal Income Tax Considerations."
Tax Treatment Is Dependent on Partnership Status
The availability to a Unitholder of the federal income tax benefits of an
investment in the Common Units depend, in large part, on our classification as
a partnership for federal income tax purposes (unless the context requires
otherwise, references in this subdivision to "us" are references to both the
Partnership and the Operating Partnership). Based on certain representations by
the General Partner, counsel is of the opinion that, under current law, we have
been and will continue to be classified as a partnership for federal income tax
purposes. However, no ruling from the IRS as to such status has been or will be
requested, and the opinion of counsel is not binding on the IRS. One of the
representations of the General Partner on which the opinion of counsel is based
is that at least 90% of our gross income for each taxable year has been and
will be income which counsel has opined is "qualifying income" within the
meaning of Section 7704 of the Code. Whether we will continue to be classified
as a partnership in part depends, in part on our ability to meet this
qualifying income test in the future. See "Certain Federal Income Tax
Considerations--Partnership Status."
If we were classified as a corporation for federal income tax purposes, we
would pay tax on our income at corporate rates, distributions would generally
be taxed to the Unitholders as corporate distributions, and no income, gain,
losses or deductions would flow through to the Unitholders. Because a tax would
be imposed upon us as an entity, the cash available for distribution to the
Unitholders would be substantially reduced. Our treatment as a taxable entity
would result in a material reduction in the anticipated cash flow and after-tax
return to the Unitholders and this would likely result in a substantial
reduction in the value of the Units. See "Certain Federal Income Tax
Considerations--Partnership Status."
There can be no assurance that the law will not be changed so as to cause us
to be treated as an entity taxable as a corporation for federal income tax
purposes or otherwise to be subject to entity-level taxation. The Partnership
Agreement provides that, if a law is enacted or existing law is modified or
interpreted in a manner that subjects us to taxation as a corporation or
otherwise subjects us to entity-level taxation for federal, state or local
income tax purposes, certain provisions of the Partnership Agreement relating
to the subordination of distributions on Subordinated Units will be subject to
change, including a decrease in the amount of the Minimum Quarterly
Distribution (and Target Distribution Levels) to reflect the impact of such law
on us. See "Cash Distribution Policy--Quarterly Distributions of Available
Cash" and "--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels."
No IRS Ruling with Respect to Tax Consequences Leaves Uncertainty
We have not requested any rulings from the IRS with respect to our
classification as a partnership for federal income tax purposes, whether our
propane operations generate "qualifying income" under Section 7704 of the Code,
or any other matter affecting us. Accordingly, the IRS may adopt positions that
differ from counsel's conclusions. 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 those conclusions ultimately may not
be sustained. Any such contest with the IRS may materially and adversely impact
the market value of the Units.
42
<PAGE>
In addition, the costs of any contest with the IRS will be borne directly or
indirectly by the Unitholders and the General Partner.
There Are Limits on Deductibility of Losses
In the case of taxpayers subject to the passive loss rules, any losses
generated by us will only be available to offset our future income and cannot
be used to offset income from other activities, including passive activities or
investments and any dividend income from the Corporate Group or interest income
we generated. Unused losses may be deducted when the Unitholder disposes of all
of his Units in a fully taxable transaction with an unrelated party. A
Unitholder's share of our net passive income may be offset by his unused losses
carried over from prior years, but not by losses from other passive activities,
including losses from other publicly traded partnerships. Other limitations
also apply. See "Certain Federal Income Tax Considerations--Tax Treatment of
Unitholders--Limitations on Deductibility of Partnership Losses."
Risk of Tax Liability Exceeding Cash Distribution; Portfolio Income
A Unitholder will be required to pay federal income tax and, in certain
cases, state and local income taxes on his share of our income, even if he
receives no cash distributions from us. No assurance can be given that a
Unitholder will receive from us cash distributions equal to his allocable share
of our taxable income or even the tax liability to him resulting from that
income. Further, a Unitholder may incur a tax liability in excess of the amount
of cash received upon the sale of his Units. See "Certain Federal Income Tax
Considerations--Tax Treatment of Unitholders" and "--Disposition of Units."
We expect that the Corporate Group will not pay significant federal income
tax for some period of time, and we expect the Corporate Group to generate
earnings and profits during that time such that a portion of the distribution
from the Corporate Group to us will result in taxable dividend income to the
Unitholders. Any dividend income from the Corporate Group cannot be offset by
past or future losses generated by our propane activities.
Bunching of Income
Each Unitholder will be required to include in income his share of our
income, gain, loss and deduction for our fiscal year 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 Units
following the close of our taxable year but before the close of his taxable
year must include his share of our 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 share of more than one year of our income,
gain, loss and deduction. See "Certain Federal Income Tax Considerations--
Disposition of Units--Allocations Between Transferors and Transferees."
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 them. 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 in the first few years to be taxable to such a
Unitholder because it is unrelated business taxable income. See "Certain
Federal Income Tax Considerations--Tax-exempt Organizations and Certain Other
Investors."
Tax Shelter Registration Could Increase Risk of Potential IRS Audit
We are registered with the Secretary of the Treasury as a "tax shelter." The
IRS has issued to us the following tax shelter registration number:
96026000016. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN
INVESTMENT IN US OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR
APPROVED BY THE IRS. No assurance can be given that we will not be audited by
the IRS or that tax adjustments will not be made. The rights of a Unitholder
owning less than a 1% profit interest in us to participate in the income tax
43
<PAGE>
audit process are very limited. Further, any adjustments in our returns will
lead to adjustments in the Unitholders' returns and may lead to audits of
Unitholders' returns and adjustments of items unrelated to us. Each Unitholder
would bear the cost of any expenses incurred in connection with such an
examination of his personal tax return.
There Is a Possibility of Loss of Tax Benefits Relating to Non-uniformity of
Units and Nonconforming Depreciation Conventions
Because we cannot match transferors and transferees of Units and because of
other reasons, we have adopted certain depreciation and amortization
conventions that do not conform with all aspects of certain proposed and final
Treasury Regulations. A successful challenge to those conventions by the IRS
could adversely affect the amount of tax benefits available to a purchaser of
Units and could have a negative impact on the value of the Units. See "Certain
Federal Income Tax Considerations--Tax Treatment of Operations--Uniformity of
Units."
There Are State, Local and Other Tax Considerations
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property. A Unitholder will likely
be required to file state and local income tax returns and pay state and local
income taxes in some or all of the various jurisdictions in which we do
business or own property and may be subject to penalties for failure to comply
with those requirements. We anticipate that substantially all of our income
will be generated in the following states: Connecticut, Indiana, Kentucky,
Maine, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island and West Virginia, each of which currently imposes a
personal income tax; however, New Hampshire's tax applies only to interest and
dividend income. It is the responsibility of each Unitholder to file all United
States federal, state and local tax returns that may be required of him.
Counsel has not rendered an opinion on the state or local tax consequences of
an investment in us. See "Certain Federal Income Tax Considerations--State and
Local Tax Considerations."
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 and his adjusted tax basis in those
Units. See "Certain Federal Income Tax Considerations--Tax Treatment of
Unitholders--Treatment of Partnership Distributions." Thus, prior distributions
in excess of cumulative net taxable income in respect of a Unit which decreased
a Unitholder's tax basis in the Unit will, in effect, become taxable income if
that Unit is sold at a price greater than the Unitholder's tax basis in that
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 we use, 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
We will furnish each holder of Units with a Schedule K-1 that sets forth his
allocable share of income, gains, losses and deductions. In preparing these
schedules, we will use the various accounting and reporting conventions and
adopt various depreciation and amortization methods. There is no assurance that
these schedules will yield a result that conforms to statutory or regulatory
requirements or to administrative pronouncements of the IRS. Further, our 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.
44
<PAGE>
THE TRANSACTION
The Partnership will acquire Petro through a four part transaction. Each part
of the Transaction is meant to close at the same time. The four principal parts
of the Transaction are described below.
Acquisition of Petro
On October 22, 1998, Petro, the Partnership, the Operating Partnership and a
wholly-owned subsidiary of the Operating Partnership, executed a merger
agreement (the "Merger Agreement"). Under the Merger Agreement, upon the
completion of the Transaction, the subsidiary 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 Class A Common Stock, par value $.10 per share, of Petro and Class C Common
Stock, par value $.10 per share of Petro (together, "Petro Common Stock")
(other than shares which have been exchanged pursuant to the Exchange or as to
which dissenters' rights have been perfected) will be converted into .13064
Senior Subordinated Units; each outstanding share of junior convertible
preferred 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, par value $.10 per share
(the "Class B Shares") of Petro currently outstanding, representing less than
.01% of the issued and outstanding shares of Petro Common Stock, which will
remain outstanding following the completion of the Transaction.
The "Exchange" will occur immediately prior to the merger and is comprised of
the following elements.
(a) Certain holders of Petro Common Stock consisting of Irik P. Sevin,
Audrey L. Sevin, Hanseatic Corp. and Hanseatic Americas LDC (the "LLC
Owners"), will form Star Gas LLC, to which they will contribute a portion
of their shares of Petro Common Stock in exchange for all of the limited
liability company interests in Star Gas LLC. Star Gas LLC will contribute
those shares to the Partnership in exchange for General Partner Units. In
addition, the LLC Owners will contribute their remaining shares of Petro
Common Stock to the Partnership in exchange for Junior Subordinated Units.
(b) Certain other common stockholders who are affiliates of Petro will
contribute shares of Petro Common Stock to the Partnership in exchange for
Senior Subordinated Units.
Financings and Refinancings
An integral element of the Transaction is the refinancing of Petro's
outstanding debt and preferred stock to substantially reduce Petro's ongoing
borrowing costs. This refinancing will be accomplished through several related
transactions, which will close at the same time as the closing of the
Transaction.
To accomplish this refinancing, we are offering Common Units and Petro is
offering the Notes. We are offering for sale to the public 6.8 million Common
Units in this offering, the net proceeds of which are estimated to be $128.3
million. Petro will sell to the public $120.0 million of the Notes, the net
proceeds of which are estimated to be $115.4 million. The Partnership and Petro
Holdings, Inc., a Minnesota corporation that is the direct parent of Petro and
a wholly-owned, indirect subsidiary of the Partnership, will guarantee the
Notes.
All of the net proceeds of this offering, together with the $115.4 million of
net proceeds from the Debt Offering will be used:
. to redeem Petro's 12 1/4% Senior Subordinated Debentures due 2005,
Petro's 10 1/8% Senior Subordinated Notes due 2003, Petro's 9 3/8%
Senior Subordinated Debentures due 2006 and the Public Preferred Stock;
45
<PAGE>
. to repurchase Petro's 1989 Preferred Stock; and
. to pay for a portion of the expenses of the Transaction.
See "Uses of Funds From this Offering and the Debt Offering."
New General Partner
Since Star Gas Corporation is a wholly-owned subsidiary of Petro and will be
acquired as our subsidiary in the Transaction, it will no longer be able to
serve as our general partner. Our new general partner 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 our general partner. Star Gas LLC is not
expected to have a significant net worth except for its interest in the
Partnership.
Amendment of Partnership Agreement
In order to consummate the Transaction, certain amendments must be made to
the Partnership Agreement and Operating Partnership Agreement in effect prior
to the Transaction. The amendment will, among other matters, increase the
Minimum Quarterly Distribution from $0.55 to $0.575 per Unit. See "The
Partnership Agreement."
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 26.8%
Issued to Petro Junior Preferred
Stockholders..................... -- -- 102,773 0.7
Issued in this offering(a)........ -- -- 6,800,000 47.3
--------- ----- ---------- -----
Subtotal........................ 3,858,999 60.5 10,761,772 74.8
SUBORDINATED UNITS
Existing Subordinated Units....... 2,396,078 37.5 -- --
Senior Subordinated Units......... -- -- 2,767,058 19.2
Junior Subordinated Units......... -- -- 568,478 4.0
--------- ----- ---------- -----
Subtotal........................ 2,396,078 37.5 3,335,536 23.2
GENERAL PARTNER INTERESTS/UNITS(B).. 127,655 2.0 287,700 2.0
--------- ----- ---------- -----
Total........................... 6,382,732 100.0% 14,385,008 100.0%
========= ===== ========== =====
</TABLE>
- --------
(a) Estimated based on an assumed offering price of $20.00 per Unit. The exact
number of Common Units to be issued in this offering will increase or
decrease inversely in relation to the public offering price of the Common
Units.
(b) Stated in equivalent units before the Transaction and include the General
Partner's interest in the Operating Partnership.
46
<PAGE>
USES OF FUNDS FROM THIS OFFERING AND THE DEBT OFFERING
The uses of funds from this offering and the Debt Offering are currently
anticipated to be as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
SOURCES
This offering, net(a)....................................... $128,300
Debt Offering, net(b)....................................... 115,400
--------
$243,700
========
USES
Redeem Petro 12 1/4% Senior Subordinated Debentures due
2005(c)(d)................................................. $ 84,094
Redeem Petro 10 1/8% Senior Subordinated Notes due 2003(d).. 50,000
Redeem Petro 9 3/8% Senior Subordinated Debentures due
2006(d).................................................... 75,000
Redeem Petro Public Preferred Stock......................... 27,600
Repurchase Petro 1989 Preferred Stock....................... 4,167
Transaction fees and expenses(e)(f)......................... 2,839
--------
$243,700
========
</TABLE>
- --------
(a) Assumes the sale of 6.8 million Common Units at $20.00 per Common Unit, net
of underwriting discounts and commissions and expenses. The exact number of
Common Units to be issued in this offering will increase or decrease
inversely in relation to the public offering price of the Common Units.
(b) Net of underwriting discounts and commissions and expenses.
(c) Includes prepayment premium of $2.8 million.
(d) The amounts set forth across from the Petro 12 1/4% Senior Subordinated
Debentures, the Petro 10 1/8% Senior Subordinated Notes, and the Petro 9
3/8% Senior Subordinated Debentures (1) include the principal amount of
subordinated debt that was not exchanged in Petro's October 1998 exchange
offer pursuant to which this senior subordinated debt was issued and (2)
assume that Petro will redeem or otherwise repurchase 100% of these
securities. Upon consummation of the Transaction, Petro has the right to
redeem up to an aggregate of 98.5% of the principal amount of these
securities. We intend to purchase the remaining securities on comparable
terms.
(e) This does not include reserves for dissenters' rights which may be
exercised by former Petro stockholders.
(f) Petro will pay an additional $3.2 million of expenses from its existing
cash balances.
These estimated sources and uses of funds may change, depending on market
conditions, the Partnership's and Petro's operations and other factors.
47
<PAGE>
CAPITALIZATION
The following table shows the Partnership's historical capitalization as of
September 30, 1998, (1) actual (2) as adjusted to give pro forma effect to the
acquisition of Petro and (3) as further adjusted to give pro forma effect to
the closing of this offering and the Debt Offering and our application of the
net proceeds therefrom as described in "Uses of Funds From this Offering and
the Debt Offering." You should read this table in conjunction with the
historical and pro forma financial statements and notes included and
incorporated by reference elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------
PRO FORMA ADJUSTED PRO
ACTUAL COMBINED(A) FORMA(A)
-------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash........................................ $ 1,115 $ 19,782 $ 16,550
======== ======== ========
Debt:
Operating Partnership First Mortgage
Notes.................................... $ 96,000 $ 96,000 $ 96,000
Operating Partnership Acquisition
Facility................................. 8,308 8,308 8,308
The Notes................................. -- -- 120,000
Petro Public Debt(b)...................... -- 209,094 --
Petro Private Debt(c)..................... -- 76,056 81,686
-------- -------- --------
Total Long-Term Debt.................... 104,308 389,458 305,994
-------- -------- --------
Redeemable Preferred Stock:
Petro Public Preferred Stock.............. -- 27,600 --
Partners' capital:
Common Unitholders........................ 58,686 60,741 189,041
Existing Subordinated Unitholders......... (1,446) -- --
Senior Subordinated Unitholders........... -- 19,253 19,253
Junior Subordinated Unitholders........... -- 3,291 3,291
General Partner........................... 107 1,666 1,666
-------- -------- --------
Total partners' capital................. 57,347 84,951 213,251
-------- -------- --------
Total capitalization.................... $161,655 $502,009 $519,245
======== ======== ========
</TABLE>
- --------
(a) See the "Unaudited Pro Forma Condensed Consolidated Financial Information
of Star Gas Partners, L.P.," for a discussion of the pro forma adjustments.
The foregoing table does not include $4.2 million of the current portion of
Petro's 1989 Preferred Stock, which will be paid with the proceeds of this
offering. See "Uses of Funds From this offering and the Debt Offering."
(b) The Petro Public Debt consists of $84.1 million of 12 1/4% Senior
Subordinated Debentures due 2005, $50.0 million of 10 1/8% Senior
Subordinated Notes due 2003 and $75.0 million of 9 3/8% Senior Subordinated
Debentures due 2006. The amounts set forth (1) include the principal amount
of subordinated debt that was not exchanged in Petro's October 1998
exchange offer pursuant to which this senior subordinated debt was issued
and (2) assume that Petro will redeem or otherwise repurchase 100% of these
securities. Upon consummation of the Transaction, Petro has the right to
redeem up to an aggregate of 98.5% of the principal amount of these
securities. We intend to purchase the remaining securities on comparable
terms.
(c) The Petro Private Debt consists of $63.1 million of 9% Senior Notes due
2002, $4.3 million of 10 1/4% Subordinated and Senior Notes due 2001 and
$14.3 million of notes payable in connection with the purchase of fuel oil
dealers maturing at various dates through 2004. See "Description of Certain
Indebtedness--Existing Indebtedness--Other Petro Debt."
48
<PAGE>
PARTNERSHIP STRUCTURE AND MANAGEMENT
FOLLOWING THE TRANSACTION
Following the Transaction, our propane operations will be conducted through
the Operating Partnership and its wholly-owned corporate subsidiaries. Our home
heating oil operations will be conducted through Petro Holdings, Petro and
Petro's subsidiaries.
Upon the completion of the Transaction, Star Gas LLC will become our general
partner and the general partner of the Operating Partnership. All of the
membership interests in Star Gas LLC will be owned by Irik P. Sevin, Audrey L.
Sevin, and two entities affiliated with Wolfgang Traber. Some of the current
officers of Star Gas Corporation and Petro before the Transaction will become
officers of Star Gas LLC following the Transaction.
Upon the completion of the Transaction, the officers and employees of Star
Gas Corporation will become officers and employees of the Operating
Partnership. In addition, upon the completion of the Transaction, the officers
and employees of Petro will continue to be officers and employees of Petro.
The ability of the Partnership to make distributions is restricted by various
debt instruments at the Operating Partnership and Petro. See "Description of
Certain Indebtedness."
The first chart below illustrates the organization and ownership of the
Partnership, the Operating Partnership and its subsidiaries and Star Gas
Corporation 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 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.
49
<PAGE>
[PRIOR TO THE TRANSACTION]
[CHART TO APPEAR]
50
<PAGE>
[IMMEDIATELY FOLLOWING THE TRANSACTION]
[CHART OF OPERATING PARTNERSHIP]
51
<PAGE>
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS
The Common Units are listed and traded on the New York Stock Exchange (the
"NYSE") under the symbol "SGU." The Common Units began trading on December 20,
1995 on the Nasdaq National Market System under the symbol "SGASZ," at an
initial public offering price of $20.00 per Common Unit. The following table
sets forth the closing high and low sales prices for the Common Units on the
Nasdaq National Market System through May 28, 1998, and thereafter, on the NYSE
and the cash distribution declared per Common Unit for the periods indicated.
COMMON UNIT CLOSING SALES PRICE RANGE
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998 FISCAL 1997
-------------------------------- -------------------------- --------------------------
CASH CASH CASH
FISCAL QUARTER ENDED HIGH LOW DISTRIBUTION HIGH LOW DISTRIBUTION HIGH LOW DISTRIBUTION
- -------------------- ------ ------ ------------ ------ ------ ------------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31,............ $21.75(a) $18.13(a) $0.55 $23.38 $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 23.50 21.00 0.55
</TABLE>
- --------
(a) From October 1, 1998 through December 2, 1998.
As a result of the Transaction, the Minimum Quarterly Distribution will be
increased from $0.550 to $0.575 per Unit (or from $2.20 to $2.30 per Unit on an
annualized basis). The first distribution on the Common Units offered hereby is
expected to be paid on or about May 15, 1999 to holders of record as of May 3,
1999 and will relate to the full first quarter of 1999.
The last reported sale price of Common Units on the NYSE on December 2, 1998
was $19.00 per Common Unit.
As of December 2, there were approximately 175 holders of record of the
Partnership's Common Units.
In addition, as a result of the Transaction, the Senior Subordinated Units
will be listed on the NYSE under the symbol " ."
52
<PAGE>
CASH DISTRIBUTION POLICY
GENERAL
In general, we distribute to our partners on a quarterly basis all of our
Available Cash in the manner described in this prospectus. "Available Cash" is
defined in the Glossary and generally means, with respect to any of our fiscal
quarters, 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 (1) provide for the proper conduct of the Partnership's
business, (2) comply with applicable law or any of our debt instruments or
other agreements or (3) 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 us 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 (1) the cash
balance of the Partnership on the date we commenced operations, plus
approximately $16 million plus all of our cash receipts (excluding cash
receipts from Capital Surplus), less (2) all of our operating expenses
(including expenses of the General Partner incurred on our behalf), debt
service payments, maintenance capital expenditures and reserves established for
our future 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 from Operating Surplus or Capital Surplus, all Available Cash
distributed from any source will be treated as distributed from Operating
Surplus until the sum of all Available Cash distributed since our commencement
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 Operating Surplus and Capital Surplus will
cease, and all distributions will be treated as if from Operating Surplus. The
General Partner does not expect that there will be significant distributions
from Capital Surplus.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
We will make distributions to our partners with respect to each of its fiscal
quarters prior to liquidation in an amount equal to all of our 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. The first distribution on the Common Units, including
those issued in this offering, subsequent to the completion of the Transaction
will be paid with respect to the quarter ending March 31, 1999 on or about May
14, 1999 to holders of record on or about May 3, 1999 in the same amount per
Common Unit regardless of how many days such Common Units have been
outstanding. If we meet certain tests set forth in the Partnership Agreement,
the first distribution permitted to be paid to the holders of the Senior
Subordinated
53
<PAGE>
Units, Junior Subordinated Units and General Partner Units will be paid with
respect to the quarter ending June 30, 1999 and will be paid on or about August
14, 1999 to holders of record on or about August 3, 1999. Such distribution, if
paid, will include a pro rata distribution for the period between the
completion of the Transaction and March 31, 1999. 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 (1)
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 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, (2) 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 (including, 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 the
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 (3) 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, 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 Partnership
Agreement--Withdrawal or Removal of the General Partner; Approval of Successor
General Partner."
Distributions by us 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;
54
<PAGE>
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 completion of the Transaction, 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% interest in the Operating Partnership. References in this
prospectus to distributions on the General Partner Units disregard the General
Partner's 0.01% interest in the Operating Partnership.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AFTER THE SUBORDINATION
PERIOD
Distributions by us 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, proportionately 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"); and
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) 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 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 (each such class voting separately).
55
<PAGE>
The following table illustrates the percentage of Available Cash from
Operating Surplus distributed 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 only ("Incentive Distributions") at the Target Distribution Levels. The
percentages set forth in the table below are based on the number of Units
outstanding immediately after the completion of the Transaction.
<TABLE>
<CAPTION>
PERCENTAGE OF AVAILABLE CASH DISTRIBUTED
AS INCENTIVE DISTRIBUTIONS TO
THE SPECIFIED UNIT CLASS
-----------------------------------------------------
PERCENTAGE OF
AVAILABLE PERCENTAGE OF
QUARTERLY CASH AVAILABLE CASH
DISTRIBUTION DISTRIBUTED DISTRIBUTED AS SENIOR JUNIOR GENERAL
AMOUNT PER AS BASE INCENTIVE SUBORDINATED SUBORDINATED PARTNER
COMMON UNIT DISTRIBUTIONS DISTRIBUTIONS UNITS UNITS UNITS
------------ ------------- -------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Minimum Quarterly
Distribution........... $0.575 100.00% -- -- -- --
First Target
Distribution........... 0.604 100.00 -- -- -- --
Second Target
Distribution........... 0.711 86.7 13.3% 10.2% 2.1% 1.0%
Third Target
Distribution........... 0.926 76.5 23.5 17.9 3.7 1.9
Thereafter.............. -- 51.0 49.0 37.4 7.7 3.9
</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.
INCENTIVE DISTRIBUTION 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, 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 Units 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
thereafter, 51.0% to all Units, pro rata, and 49.0% to all Class B Common
Units and General Partner Units, pro rata.
DISTRIBUTIONS FROM CAPITAL SURPLUS
Our distributions of Available Cash from Capital Surplus will be made 100% on
all Units, pro rata, until we 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 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.
56
<PAGE>
When "payback" of the Initial Unit Price has occurred (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 rights to Incentive Distributions will be
entitled, with respect to such rights, to receive 49% 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 completion of the
Transaction 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 consolidated
(combined from October 1, 1998 until the completion of the Transaction) 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
(1) $57,172,000, plus or minus
(2) 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
(3) 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
(4) 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
(1) $25,307,000 plus or minus
(2) 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
(3) 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
(4) 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
(5) 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.
57
<PAGE>
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 us
since October 1, 1999 (which does not include the approximately $16 million and
our cash balance on the date we commenced operations).
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, (1) the Minimum Quarterly Distribution, (2) the Target
Distribution Levels, (3) the Unrecovered Initial Unit Price, (4) the number of
additional Common Units issuable during the Subordination Period without a
Unitholder vote, (5) the number of Class B Common Units issuable upon
conversion of the Senior Subordinated Units and (6) 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 Units (whether effected by a distribution payable in 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 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 us
to become taxable as a corporation or otherwise subjects us 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 (1) the
respective Minimum Quarterly Distribution or Target Distribution Level
multiplied by (2) one minus, the sum of (x) the highest marginal federal
corporate (or other entity as applicable) income tax rate to which we are then
subject as an entity plus (y) the effective overall state and local income tax
rate expressed as a percentage to which we are 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), but only to the extent of the
increase in such rates resulting from such legislation or interpretation. For
example, assuming we were not previously subject to state and local income tax,
if we were to become taxable as an entity for federal income tax purposes and
we 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 Partnership Agreement provides that for each full non-overlapping four
quarter period ending on or after the first anniversary of the completion of
the Transaction, but prior to the fifth anniversary of the completion of the
Transaction, in which the dollar amount of Petro Adjusted Operating Surplus (as
defined hereinafter) per Petro Unit (as defined hereinafter) equals or exceeds
$2.90, we 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. We
will not issue any fractional Senior Subordinated Units or Class B Common Units
in
58
<PAGE>
connection with the issuance of the additional Units. We will pay to each
holder who would otherwise be entitled to a fractional Senior Subordinated Unit
or Class B Common 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 completion of the Transaction,
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 of the
Board of Directors of the General Partner consisting of the two members of the
Board of Directors who are not officers of the General Partner (the "Audit
Committee")). In calculating Petro Adjusted Operating Surplus, (1) 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 (2) 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 (1) the excess of
the number of Units outstanding at the completion of the Transaction over the
number of Units outstanding immediately prior to the completion of the
Transaction (assuming the simultaneous closing of this offering), (2) 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), (3) the number of Senior Subordinated Units or Class B Common Units
issued pursuant to the Partnership Agreement based on the performance of Petro
and (4) the deemed number of Units outstanding based upon a contribution of
capital to Petro by the Partnership or any affiliate thereof upon completion of
the Transaction (which contribution is not covered by (2) 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 (4)
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.
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 our dissolution and liquidation, 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 our creditors in the
order of priority provided in the
59
<PAGE>
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 our liquidation 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
Partnership Agreement. If our liquidation 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;
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;
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 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 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 per Common Unit 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 but not in excess of the Third Target
Distribution of 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.
60
<PAGE>
Any loss or unrealized loss will be allocated to the Unitholders as follows:
first, 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 such Senior Subordinated Unitholders' 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 until the positive
balances in their 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 our liquidation 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 (plus the amount of the Minimum Quarterly
Distribution for the fiscal quarter during which the dissolution occurs);
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 the 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 fourth 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 fifth 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 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 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 and Class B Common 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.
Interim adjustments to Capital Accounts will be made at the time we issue
additional interests in the Partnership or make 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.
61
<PAGE>
CASH AVAILABLE FOR DISTRIBUTION
We believe that we will generate sufficient Available Cash from Operating
Surplus for the first full four quarter period following the completion of the
Transaction to cover the full Minimum Quarterly Distribution for such four
quarter period on all then outstanding Units. Our belief is based on a number
of assumptions, including the assumptions that normal weather conditions will
prevail in our and Petro's operating areas, that our and Petro's operating
margins will remain constant and that market and overall economic conditions
will not change substantially. Although we believe our assumptions are within a
range of reasonableness, most of the assumptions are not within our control 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 our assumptions may prove to be inaccurate. As a
result, our Operating Surplus 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 completion of the Transaction (assuming no
exercise of the underwriters' overallotment option in this offering) is
approximately $33.1 million ($24.7 million for the Common Units, $6.4 million
for the Senior Subordinated Units, $1.3 million for the Junior Subordinated
Units and $0.7 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, 1998
would have been approximately $18.7 million; if certain non-recurring
restructuring, corporate identity and Transaction expenses were not subtracted
from this calculation pro forma Available Cash constituting Operating Surplus
for the same period would have been $22.9 million. In fiscal 1998, temperatures
were significantly warmer than normal for the areas in which we conduct our
propane operations and our home heating oil operations. We believe that overall
levels of both pro forma Available Cash from Operating Surplus and EBITDA
generated during fiscal 1998 were adversely affected due to this abnormally
warm weather. In addition, the pro forma results for such period also do not
reflect certain costs savings that Petro implemented in fiscal 1998. See
"Selected Unaudited Pro Forma Condensed Consolidated Financial Information."
We are required by some of our debt agreements to establish reserves for the
future payment of principal and interest on certain of our indebtedness. There
are other provisions in such agreements that will, under certain circumstances,
restrict our ability to make distributions to our Unitholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Description of Certain Indebtedness" incorporated by reference in
this prospectus in our 1998 Annual Report on Form 10-K. The indenture governing
the Notes has provisions that will, under certain circumstances, similarly
restrict the Partnership's ability to make distributions to its Unitholders.
62
<PAGE>
BUSINESS
GENERAL
We are the eighth largest retail distributor of propane and, upon our
acquisition of Petro, will be the largest retail distributor of home heating
oil in the United States. Our propane operations serve approximately 166,000
customers in the Midwest and Northeast regions, and the home heating oil
operations the Partnership is acquiring serve approximately 340,000 customers
in the Northeast and Mid-Atlantic regions. On a pro forma basis for the twelve
months ended September 30, 1998, giving effect to the Transaction and the
acquisitions made in fiscal 1998, we had $568.8 million in revenues and $50.9
million in EBITDA, as defined in this prospectus, on propane sales volume of
103.4 million gallons and home heating oil sales volume of 354.1 million
gallons. If certain non-recurring restructuring, corporate identity and
Transaction expenses were not subtracted from EBITDA, pro forma EBITDA for the
same period would have been $55.2 million.
Propane Operations
We are the eighth largest retail propane distributor in the United States. We
are primarily engaged in the retail distribution of propane and related
supplies and equipment to residential, commercial, industrial, agricultural and
motor fuel customers. We serve our approximately 166,000 propane customers from
55 branch locations and 32 satellite storage facilities in the Midwest and 19
branch locations and 14 satellite storage facilities in the Northeast. In
addition to our retail business, we also serve approximately 30 wholesale
customers from our facilities in southern Indiana.
For the fiscal year ended September 30, 1998, on a pro forma basis giving
effect to acquisitions in fiscal 1998, our propane operations had EBITDA of
$20.2 million on sales of $116.1 million. Approximately 80% of these sales (by
volume of gallons sold) were to retail customers and approximately 20% were to
wholesale customers. Our retail sales have historically had a greater profit
margin, more stable customer base and less price sensitivity than our wholesale
business.
Home Heating Oil Operations
We are the largest retail home heating oil distributor in the United States
and a leading consolidator in the highly fragmented home heating oil industry.
We serve approximately 340,000 home heating oil customers from 24 branch
locations in the Northeast and Mid-Atlantic regions. We also install and repair
heating equipment 24 hours a day, seven days a week, 52 weeks a year, generally
within four hours of request. These services are an integral part of our basic
home heating oil service, and are designed to maximize customer satisfaction
and loyalty.
For the twelve months ended September 30, 1998, our home heating oil
operations had total sales of $452.8 million and EBITDA of $30.7 million. If
certain non-recurring restructuring, corporate identity and Transaction
expenses were not subtracted from EBITDA, pro forma EBITDA for the same period
would have been $34.9 million. For the twelve months ended September 30, 1998,
approximately 83% of our total sales were from sales of home heating oil,
approximately 13% were from the installation and repair of heating equipment
and approximately 4% were from the sale of other petroleum products, including
diesel fuel and gasoline, to commercial customers. Our home heating oil
business' sales volume, cash flow and EBITDA have increased significantly since
1979, when current management assumed control, primarily due to the acquisition
of 188 home heating oil businesses over the period.
INDUSTRY CHARACTERISTICS
Propane is used primarily for space heating, water heating and cooking by
residential and commercial customers. Home heating oil is used primarily as a
source of residential space heating. The retail propane and home heating oil
industries are both mature, with total demand expected to remain relatively
flat or to decline slightly. We believe that these industries are relatively
stable and predictable due to the largely non-discretionary nature of propane
and home heating oil use. Accordingly, the demand for propane and home heating
oil has historically been relatively unaffected by general economic conditions
and has been a function of weather conditions.
63
<PAGE>
It is common practice in both the propane and home heating oil distribution
industries to price products to customers based on a per gallon margin over
wholesale costs. As a result, distributors generally seek to maintain their
margins by passing costs through to customers, thereby insulating themselves
from the volatility in wholesale heating oil and propane prices. However,
during periods of sharp price fluctuations in supply costs, distributors may be
unable or unwilling to pass entire cost increases or decreases through to
customers. In such cases, significant increases or decreases in per gallon
margins may result. In addition, the timing of cost pass-throughs can
significantly affect margins.
The propane and home heating oil distribution industries are highly
fragmented, characterized by a large number of relatively small, independently
owned and operated local distributors. Each year a significant number of these
local distributors have sought to sell their business for reasons that include
retirement and estate planning. In addition, the propane and heating oil
distribution industries are becoming more complex due to increasing
environmental regulations and escalating capital requirements needed to acquire
advanced, customer oriented technologies. Primarily as a result of these
factors, both industries are undergoing consolidation, and the Partnership and
Petro have been active consolidators in their respective markets.
COMPETITIVE STRENGTHS
We believe that we are well-positioned to compete in the propane and home
heating oil industries. Our competitive strengths include:
. High Percentage of Sales to Stable, Higher Margin Residential
Customers. Our propane and home heating oil operations concentrate on
sales to residential customers. Residential customers tend to generate
higher margins and are generally more stable purchasers than our other
customers. For the year ended September 30, 1998, sales to residential
customers represented 56% of our retail propane gallons sold and 66% of
propane gross profit. In addition, we own approximately 95% of the propane
tanks located at our customers' homes, which further enhances our
profitability and customer stability. For the twelve months ended
September 30, 1998, sales to residential customers represented 83% of
Petro's total heating oil gallons sold and 91% of total heating oil gross
profit. Although overall demand for heating oil and propane is affected by
weather and other factors, we believe that our residential business is
relatively stable due to the largely non-discretionary nature of most
heating oil and propane purchases by residential customers. In our propane
operations, we own over 95% of the propane tanks utilized by our
customers. In many states, fire safety regulations restrict the refilling
of a leased tank solely to the propane supplier that owns the tank. These
regulations, which require customers to switch propane tanks when they
switch suppliers, help enhance the stability of our customer base because
of the inconvenience involved.
. Proven Acquisition Expertise. Petro has a proven track record in the
acquisition of home heating oil companies. Petro has achieved substantial
growth since 1979 through the acquisition and consolidation of 188 retail
heating oil distributors in both new and existing markets. In addition,
since January 1994, our propane operations have acquired 12 distributors,
including seven distributors in fiscal 1998.
. Premium Service Provider with Brand Name Recognition. In our New York and
Mid-Atlantic regions, our home heating oil business now operates only
under the name "Petro," rather than the acquired brand names previously in
use. We have been building this brand name by focusing on delivering
premium service to our customers. We have also adopted operational
initiatives to provide a full range of services to our heating oil
customers, including supply, repair and maintenance.
. Operating Leverage. As the largest retail distributor of home heating oil
and a leading retail distributor of propane in the United States, we are
able to realize economies of scale in operating, marketing, information
technology and other areas by spreading our costs over a larger base of
sales. In our home heating oil business, we are utilizing communication
and computer technology that is generally not used by our competitors,
which has allowed us to realize operating efficiencies.
64
<PAGE>
BUSINESS STRATEGY
Our primary objective is to increase cash flow on a per Unit basis. We intend
to pursue this objective principally through the following strategies:
. Pursuing Strategic Acquisitions. We intend to continue to grow through
acquisitions. Both the propane and home heating oil distribution industries
are highly fragmented, characterized by a large number of relatively small,
independently owned and operated local distributors. We believe that, as a
result of the Transaction, the field of potential acquisition candidates
will be broadened due to our ability to acquire propane companies, home
heating oil companies and companies with both propane and home heating oil
operations. In addition, our increased size will enable us to consider
larger transactions.
. Realizing Operating Efficiencies in Existing and Acquired Operations. We
intend to continue to implement our restructuring and cost reduction
programs in our home heating oil business to improve profitability and
realize cost savings at both existing and acquired operations. We intend to
continue to focus our propane operations in high margin markets with a
large proportion of residential customers.
. Focusing on Customer Growth and Retention. We intend to continue to seek
internal growth through individual branch marketing programs in our propane
business. In our home heating oil business, we seek to maximize customer
retention by providing premium customer service and building brand
awareness and customer loyalty.
. Enhancing Our Brand Awareness. We believe that the impact of Petro's
branding efforts may offer competitive advantages in the home heating oil
industry, due to the lack of comparable branding and extremely low consumer
awareness in the industry.
There can be no assurance that we will be able to implement the above
strategies.
PROPANE
General
Propane is used primarily for space heating, water heating, clothes drying
and cooking by residential and commercial customers. Residential customers are
typically homeowners and commercial customers include motels, restaurants,
retail stores and laundromats. Industrial users, such as manufacturers, use
propane as a heating and energy source in manufacturing and drying processes.
In addition, propane is used to supply heat for drying crops and curing tobacco
and as a fuel source for certain motor vehicles.
Propane is extracted from natural gas or oil wellhead gas at processing
plants or separated from crude oil during the refining process. Propane is
normally transported and stored in a liquid state under moderate pressure or
refrigeration for ease of handling in shipping and distribution. When the
pressure is released or the temperature is increased, it is usable as a
flammable gas. Propane is colorless and odorless; an odorant is added to allow
its detection. Propane is clean-burning, producing negligible amounts of
pollutants when consumed. According to the American Petroleum Institute, the
domestic retail market for propane is approximately 9.4 billion gallons
annually. Based upon information contained in the Energy Information
Administration's Annual Energy Review-1995, propane accounts for approximately
4% of household energy consumption in the United States.
The retail market for propane is seasonal because it is used primarily for
heating in residential and commercial buildings. Approximately 70% to 75% of
our retail propane volume is sold during the peak heating season from October
through March.
65
<PAGE>
Consequently, sales and operating profits are largely generated in the first
and second fiscal quarters (October through March). To the extent necessary, we
will reserve cash flows from the first and second fiscal quarters for
distribution to Unitholders in the third and fourth fiscal quarters. In
addition, sales volume traditionally fluctuates from year to year in response
to variations in weather, prices and other factors. We believe that the broad
geographic distribution of our operations helps to minimize exposure to
regional weather or economic patterns.
Operations
As of September 30, 1998, we distributed propane to approximately 166,000
retail customers in 13 states from 74 branch locations. Our propane operations
are conducted under a number of trademarks and trade names, including: Star
Gas(R), Star Gas Service(TM), Silgas(TM), Blue Flame(R), Maingas(TM), Arrow
Gas(TM), Mid-Hudson Valley Propane(TM), Coleman Gas Service(TM), H & S Gas(TM),
Isch Gas(TM), Wilhoyte L.P. Gas(TM), Rural Natural Gas(TM), Pearl Gas(TM), Bay
State-Arrow Gas(TM), Knowles L.P. Gas(TM) and Lowe Bros. & Dad. We do not have
the right to use the trademark Star Gas(R) in the State of New York nor do we
have the right to use the Blue Flame(R) trademark in certain limited areas
outside of our current area of propane operations. We market propane primarily
in rural areas, but also include suburban areas where energy alternatives to
propane such as natural gas are generally not available.
Our retail propane operations are located primarily in the Northeast and
Midwest regions of the United States:
NORTHEAST MIDWEST MICHIGAN
- --------- ------- Charlotte
CONNECTICUT INDIANA Hillsdale
Stamford Akron Somerset Center
Hartford Batesville
Bedford OHIO
MAINE Bluffton Coal Bowling
Fairfield City College Green
Corner Columbia Cincinnati
Fryeburg CityDecatur Defiance
Skowhegan Wells Ferdinand Deshler Ft.
Windham Greencastle Recovery Hebron
Jeffersonville Ironton Kenton
MASSACHUSETTS Linton Madison Lancaster
Belchertown New Salisbury Lewisburg
Rochdale N. Manchester Lynchburg Macon
Westfield N. Vernon N. Maumee McClure
Swansea Webster Milford Mt.
Portland Orab North Star
NEW HAMPSHIRE Remington Ripley Sabina
(from Fryeburg, ME) Richmond Salem Waverly West
Seymour Sulphur Union
NEW JERSEY Springs
Maple Shade Versailles WEST VIRGINIA
Tuckahoe Warren Waterloo (from Ironton, H)
Winamac
NEW YORK
Addison KENTUCKY
Poughkeepsie Dry Ridge
Washingtonville Glencoe
Prospect
PENNSYLVANIA Shelbyville
Hazelton Wind
Gap
RHODE ISLAND
Davisville
66
<PAGE>
From our branch locations, we also sell, install and service equipment
related to our propane distribution business, including heating and cooking
appliances and, at some locations, we rent water softeners. Typical branch
locations consist of an office, appliance showroom and warehouse and service
facilities, with one or more 12,000 to 30,000 gallon bulk storage tanks on or
near the premises. Satellite facilities typically contain only storage tanks.
The distribution of propane at the retail level involves large numbers of
small deliveries averaging 100 to 150 gallons each to the majority of our
customer base. Retail deliveries of propane are usually made to customers by
means of our fleet of bobtail and rack trucks. As of September 30, 1998, we had
280 bobtail and rack trucks. Propane is pumped from the bobtail truck, which
generally holds 2,000 to 3,000 gallons, into a stationary storage tank at the
customer's premises. The capacity of these tanks ranges from approximately 24
gallons to approximately 1,000 gallons. We also deliver propane to retail
customers in portable cylinders, which typically are picked up and replenished
at our distribution locations, then returned to the retail customer. To a
limited extent, we also deliver propane to certain end users of propane in
larger trucks known as transports (which have an average capacity of
approximately 9,000 gallons). End users receiving transport deliveries include
industrial customers, large-scale heating accounts, such as local gas utilities
that use propane as a supplemental fuel to meet peak demand requirements, and
large agricultural accounts which use propane for crop drying and space
heating.
Customers
During the fiscal year ended September 30, 1998, on a pro forma basis
approximately 80% of our propane sales (by volume of gallons sold) were to
retail customers (of which approximately 56% were sales to residential
customers, 18% to industrial/commercial customers, 19% to agricultural
customers and 7% to motor fuel customers) and approximately 20% were to
wholesale customers. Sales to residential customers in fiscal year 1998
accounted for 66% of our propane gross profit on propane sales, reflecting the
higher-margin nature of this segment of the market.
A majority of our residential customers receive their propane supply pursuant
to an automatic delivery system. Under the automatic delivery system, we
deliver propane to our heating customers an average of approximately six times
during the year. We determine the amount delivered based on weather conditions
and historical consumption patterns. Thus, the automatic delivery system
eliminates the customer's need to make an affirmative purchase decision. In
addition, we provide emergency service 24 hours a day, seven days a week, 52
weeks a year. In excess of 95% of our retail propane customers lease their
tanks from us. In most states, due to fire safety regulations, a leased tank
may only be refilled by the propane distributor that owns that tank. The
inconvenience associated with switching tanks greatly reduces a propane
customer's tendency to change distributors.
Suppliers and Supply Arrangements
We obtain propane from over 30 sources, all of which are domestic or Canadian
oil companies, including Amoco Canada Marketing Group, Bayway Refining Company,
Domex, Inc., Enron Gas Liquids, Inc., Ferrell North America, Marathon Ashland
Petroleum, LLC, Markwest Hydrocarbons, Mobil Oil Company, Petro Canada LPG
Inc., Sea-3 Inc., Shell Canada Limited, Shell Oil Company, and Warren Gas
Liquids, Inc. Supplies from these sources have traditionally been readily
available, although no assurance can be given that supplies of propane will be
readily available in the future.
Substantially all of our propane supply for our Northeast retail operations
is purchased under annual or longer term supply contracts that generally
provide for pricing in accordance with market prices at the time of delivery.
Certain of the contracts provide for minimum and maximum amounts of propane to
be purchased. During the year ended September 30, 1998, none of our Northeast
suppliers accounted for more than 10% of our volume.
67
<PAGE>
We typically supply our Midwest retail and wholesale operations by a
combination of (1) spot purchases from suppliers at Mont Belvieu, Texas, that
are transported by pipeline to our 21 million gallon underground storage
facility in Seymour, Indiana (the "Seymour Facility"), and then delivered to
the Midwest branches and (2) purchases from a number of Midwest refineries that
are transported by truck to the branches either directly or via the Seymour
Facility. Most of the refinery purchases are purchased under market based
contracts.
The Seymour Facility is located on the TEPPCO Partners, L.P. pipeline system.
The pipeline is connected to the Mont Belvieu storage facilities and is one of
the largest conduits of supply for the U.S. propane industry. The Seymour
Facility allows us to buy and store large quantities of propane during periods
of low demand that generally occur during the summer months. We believe that
this ability allows us to achieve cost savings to an extent generally not
available to our competitors in our Midwest markets.
For fiscal 1998, 28% of our Midwest volume was purchased on the spot market
from various Mont Belvieu, Texas sources, 27% was purchased from three
refineries in Illinois, Kentucky and Michigan owned by Marathon Ashland
Petroleum, LLC, and 23% was purchased from three refineries in Illinois and
Indiana owned by Amoco Canada Marketing Group. Five other refineries provided
the remaining propane. We believe that our diversification of suppliers will
enable us to purchase all of our supply needs at market prices if supplies are
interrupted from any of the sources without a material disruption of our
operations. See "Risk Factors--Risks Inherent in Our Business--We Are Dependent
on Principal Suppliers."
Propane is generally transported from refineries, pipeline terminals and
storage facilities (including our Seymour Facility) and coastal terminals to
our branch location bulk plants by a combination of our own highway transport
fleet, common carriers, owner-operators and railroad tank cars. Branches and
their related satellites typically have one or more 12,000 to 30,000 gallon
storage tanks.
Effect of Propane Price Volatility
Profits in the retail propane business are primarily based on margins, the
cents-per-gallon difference between the purchase price and the sales price of
propane. We generally purchase propane pursuant to market based contracts, and
in the spot market, primarily from natural gas processors and major oil
companies, for our short-term requirements. Therefore, our supply costs
fluctuate with market price fluctuations. Should wholesale propane prices
decline in the future, our margins on our retail propane distribution business
should increase in the short-term because retail prices tend to change less
rapidly than wholesale prices. Should the wholesale cost of propane increase,
for similar reasons retail margins and profitability would likely be reduced at
least for the short-term until retail prices can be increased. The timing of
those cost pass-throughs can significantly affect margins.
Competition
Our propane business is highly competitive. However, long-standing customer
relationships are typical of the retail propane industry. The ability to
compete effectively within the propane industry further depends on the
reliability of service, responsiveness to customers and the ability to maintain
competitive prices. We believe that our superior service capabilities and
customer responsiveness differentiate us from many of our competitors. Branch
operations offer emergency service 24 hours a day, seven days a week, 52 weeks
a year.
Competition in the propane industry is highly fragmented and generally occurs
on a local basis with other large full-service multi-state propane marketers,
smaller local independent marketers and farm cooperatives. Based on industry
publications, we believe that the ten largest multi-state marketers, including
us, account for approximately 35% of the total retail sales of propane in the
United States, and that no single marketer has a greater than 10% share of the
total retail market in the United States. Most of our branches compete with
five or more marketers or distributors. The principal factors influencing
competition among propane marketers are price and service. Each retail
distribution outlet operates in its own competitive environment as retail
marketers
68
<PAGE>
locate in close proximity to customers to lower the cost of providing service.
The typical retail distribution outlet has an effective marketing radius of
approximately 35 miles. See "Risk Factors--Our Business Is Highly Competitive."
In addition, propane competes primarily with electricity, natural gas and
fuel oil as an energy source on the basis of price, availability and
portability. In certain parts of the country, propane is generally less
expensive to use than electricity for space heating, water heating, clothes
drying and cooking. Propane is generally more expensive than natural gas, but
serves as an alternative to natural gas in rural and suburban areas where
natural gas is unavailable or portability of product is required. The expansion
of natural gas into traditional propane markets has historically been inhibited
by the capital costs required to expand distribution and pipeline systems.
Although the extension of natural gas pipelines tends to displace propane
distribution in the areas affected, we believe that new opportunities for
propane sales arise as more geographically remote areas are developed. Although
propane is similar to fuel oil in space heating and water heating applications
as well as in market demand and price, propane and fuel oil have generally
developed their own distinct geographic markets. Because furnaces that burn
propane will not operate on fuel oil, a conversion from one fuel to the other
requires the installation of new equipment.
Properties
As of September 30, 1998, our propane operations owned 60 of our 74 branch
locations and 36 of our 46 satellite storage facilities and leased the balance.
In addition, the Partnership owns the Seymour Facility, in which it stores
propane for itself and third parties. Our propane operations lease its
corporate headquarters in Stamford, Connecticut, as well as office and training
facilities in the Midwest.
The transportation of propane requires specialized equipment. The trucks used
for this purpose carry specialized steel tanks that maintain the propane in a
liquefied state. As of September 30, 1998, the Partnership had a fleet of 29
tractors, 37 transport trailers, 280 bobtail and rack trucks and 302 other
service and pick-up trucks, the majority of which are owned. Our propane
operations own 14 and lease 34 automobiles. As of September 30, 1998, our
propane operations owned approximately 237 bulk storage tanks with typical
capacities of 12,000 to 30,000 gallons, approximately 206,000 stationary
customer storage tanks with typical capacities of 24 to 1,000 gallons and
approximately 30,000 portable propane cylinders with typical capacities of 5 to
24 gallons.
Our obligations under our borrowings are secured by liens and mortgages on
all of our real and personal property.
HOME HEATING OIL
General
Home heating oil is a primary source of home heat in the Northeast. The
Northeast accounts for approximately two-thirds of the demand for home heating
oil in the United States and, during 1997, approximately 6.9 million homes, or
approximately 36% of all homes in the Northeast, were heated by oil. In recent
years, demand for home heating oil has been affected by conservation efforts
and conversions to natural gas. In addition, as the number of new homes that
use oil heat has not been significant, there has been virtually no increase in
the customer base due to housing starts. As a result, residential home heating
oil consumption in the Northeast has declined from approximately 5.3 billion
gallons in 1982 to approximately 4.6 billion gallons in 1993 (most recent
available data).
The home heating oil distribution business is highly fragmented and
characterized by numerous local fuel oil distributors, most of which have fewer
than 20 employees and operate within a 25-mile radius from their distribution
facility. According to the United States Bureau of Census, there were
approximately 3,700 independently owned and operated home heating oil
distributors in the Northeast at the end of 1997.
69
<PAGE>
Operations
Our home heating oil operations serve approximately 340,000 customers in the
Northeast and Mid-Atlantic states. In addition to selling home heating oil, we
install and repair heating equipment. To a limited extent, we also market other
petroleum products, including diesel fuel and gasoline, to commercial
customers. During the twelve months ended September 30, 1998, approximately 83%
of our total sales were from sales of home heating oil; approximately 13% were
from the installation and repair of heating equipment, and approximately 4%
were from the sale of other petroleum products, including diesel fuel and
gasoline, to commercial customers.
We provide home heating equipment repair service 24 hours a day, seven days a
week, 52 weeks a year, generally within four hours of request, and regularly
provide various service incentives to obtain and retain customers. Our home
heating oil business is consolidating its operations under one brand name, and
is building that brand name by employing an upgraded, professionally trained
and managed sales force and using a professionally developed marketing
campaign, including radio and print advertising media. Our home heating oil
operations have a nationwide toll free telephone number, 1-800-OIL-HEAT, which
we believe helps us to build customer awareness and brand identity.
As a result of a major strategic study, in 1996 we began to implement an
operational restructuring program designed to take advantage of our size within
the home heating oil industry. This program involves regionalization of our
home heating oil operation into three profit centers which allows us to operate
more efficiently. In addition, this program enables us to access developments
in communication and computer technology that are in use by other large
distribution businesses, but are generally not used by other retail heating oil
companies. This program is designed to reduce operating costs, improve customer
service and establish a brand image among heating oil consumers.
As part of the implementation of this operational restructuring program, in
April 1996, our home heating oil business opened a regional customer service
center on Long Island, New York. This state-of-the-art facility currently
conducts all activities which interface with our approximately 110,000 Long
Island and New York City home heating oil customers, including sales, customer
service, credit and accounting. We are also operating our home heating oil
business under the single brand name of "Petro" throughout this area, rather
than the many acquired brand names previously used. Since we have this customer
service center, eight full-function branches were consolidated into four
strategically located delivery and service depots to serve our home heating oil
business's customers more efficiently. Furthermore, in keeping with the focus
of our operating strategy, late in 1997 we continued to reorganize select
branch and corporate responsibilities in order to eliminate redundant
functions, and regionalize responsibilities where they can best serve customers
and our home heating oil business.
70
<PAGE>
Customers
Our home heating oil business currently serves approximately 340,000
customers in the following 26 markets:
<TABLE>
<CAPTION>
NEW YORK MASSACHUSETTS NEW JERSEY
-------- ------------- ----------
<S> <C> <C>
Bronx, Queens and Kings Boston (Metropolitan) Camden
Counties
Duchess County Northeastern Massachusetts Neptune
Staten Island (Centered in Lawrence) Newark (Metropolitan)
Eastern Long Island Worcester North Brunswick
Western Long Island Rockaway
Trenton
<CAPTION>
CONNECTICUT PENNSYLVANIA RHODE ISLAND
----------- ------------ ------------
<S> <C> <C>
Bridgeport--New Haven Allentown Providence
Litchfield County Berks County Newport
Southern Fairfield Country (Centered in Reading)
(Metropolitan) Bucks Country
(Centered in Southampton)
Lebanon Country
(Centered in Palmyra)
<CAPTION>
MARYLAND/VIRGINIA/D.C.
----------------------
<S> <C> <C>
Arlington
Baltimore
Washington, D.C. (Metropolitan)
</TABLE>
During the twelve months ended September 30, 1998, approximately 85% of our
heating oil sales were made to homeowners, with the remainder to industrial,
commercial and institutional customers.
Our home heating oil business' net attrition of existing customers has been
approximately 5% to 6% per year over the past five years. This rate represents
the net of our annual gross customer loss rate of approximately 15% to 16%
offset by customer gains of approximately 10% per year. Gross customer losses
are the result of various factors, including customers relocation, price,
natural gas conversions and credit problems. Customer gains are a result of our
marketing and service programs and other incentives. While our home heating oil
business often loses customers when they move from their homes, we are able to
retain a majority of such homes by obtaining the new home purchaser as a
customer.
In addition, approximately 90% of our customers receive their home heating
oil pursuant to an automatic delivery system without the customer having to
make an affirmative purchase decision. These deliveries are scheduled by
computer, based upon each customer's historical consumption patterns and
prevailing weather conditions. We deliver home heating oil approximately six
times during the year to the average customer. Our practice is to bill
customers promptly after delivery. In addition, approximately 40% of our
customers are on our budget payment plan, whereby their estimated annual oil
purchases and service contract are paid for in a series of equal monthly
payments over a twelve month period.
Suppliers and Supply Arrangements
We obtain fuel oil in either barge or truckload quantities, and have
contracts with over 80 terminals for the right to temporarily store our heating
oil at facilities not owned by us. Purchases are made pursuant to supply
71
<PAGE>
contracts or on the spot market. Our home heating oil business has market price
based contracts for substantially all its petroleum requirements with 11
different suppliers, the majority of which have significant domestic sources
for their product, and many of which have been our suppliers for over 10 years.
Our current suppliers are: Amerada Hess Corporation; Citgo Petroleum Corp.;
Coastal New York; Global Petroleum Corp.; Koch Refining Company, L.P.; Louis
Dreyfus Energy Corp.; Mieco, Inc.; Mobil Oil Corporation; Sprague Energy; Sun
Oil Company; and Tosco Refining Co. Typically supply contracts have terms of 12
months. All of the supply contracts provide for maximum and in some cases
minimum quantities, and in most cases do not establish in advance the price at
which fuel oil is sold, which, like our home heating oil business's price to
most of its customers, is based upon market prices at the time of delivery.
We believe that our policy of contracting for substantially all of our supply
needs with diverse and reliable sources will enable us to obtain sufficient
product should unforeseen shortages develop in worldwide supplies and further
believe that relations with our current suppliers are satisfactory.
Insulation from Oil Price Volatility
Although the price of crude oil can be volatile, historically this has not
materially affected our performance since over the years we have added a gross
margin onto our wholesale costs, designed to offset the impact of inflation,
account attrition and weather. As a result, variability in supply prices has
affected net sales, but generally has not affected gross profit or net income,
and as such, our margins are most meaningfully measured on a per gallon basis
and not as a percentage of sales. While fluctuations in wholesale prices have
not significantly affected demand to date, it is possible that significant
wholesale price increases over an extended period of time could have the effect
of encouraging conservation. If demand were reduced and we were unable to
increase our gross profit margin or reduce our operating expenses, the effect
of the decrease in volume would be to reduce net income.
Approximately 25% of our home heating oil total sales are made to individual
customers under an agreement pre-establishing the maximum sales price of oil
over a twelve month period. The maximum price at which oil is sold to these
individual customers is renegotiated in April of each year in light of then
current market conditions. We currently enter into forward purchase contracts
and futures contracts for a substantial majority of the oil we sell to these
capped-price customers in advance and at a fixed cost. This practice permits us
to purchase oil at a fixed price in advance of our obligations to supply such
oil. Should events occur after a capped-sales price is established that
increases the cost of oil above the amount anticipated, margins for the capped-
price customers whose oil was not purchased in advance would be lower than
expected, while those customers whose oil was purchased in advance would be
unaffected. Conversely, should events occur during this period that decrease
the cost of oil below the amount anticipated, margins for the capped-price
customers whose oil was purchased in advance could be lower than expected,
while margins for those customers whose oil was not purchased in advance would
be unaffected or higher than expected.
Our home heating oil business uses put options to hedge and reduce the risk
associated with a substantial portion of the heating oil forward purchase
contracts and futures contracts acquired as of December 31, 1998. Should the
cost of heating oil significantly decline below the acquisition cost, these
options would substantially offset the effects of such decline.
Competition
Like the propane industry, the home heating oil industry is highly
competitive. Our home heating oil operations compete with heating oil
distributors offering a broad range of services and prices, from full service
distributors, like us, to those offering delivery only. Long-standing customer
relationships are typical in the industry. Many companies in the industry,
including our home heating oil business, 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 our home heating oil business,
provide home heating equipment repair service on a 24-hour per day basis. This
72
<PAGE>
tends to build customer loyalty. As a result of the factors noted above, among
others, it may be difficult for our home heating oil business to acquire new
retail customers (other than through acquisitions). 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.
Our home heating oil business also competes for retail customers with
suppliers of alternative energy products, principally natural gas. The rate of
conversion from the use of home heating oil to natural gas is primarily
affected by the relative prices of the two products and the cost of replacing
an oil fired heating system with one that uses natural gas. We believe that
approximately 1% of our home heating oil customer base annually converts from
home heating oil to natural gas.
OTHER
Employees
The Partnership itself has historically had no employees except for certain
employees of its corporate subsidiary, Stellar Propane Service Corp. As of
September 30, 1998, Star Gas Corporation had 624 employees providing full time
services to the Operating Partnership of which 44 were employed by the
corporate office in Stamford, Connecticut and 580 were located in branch
offices; 177 of Star Gas Corporation's employees were administrative, 286 were
engaged in transportation and storage and 117 were engaged in field servicing.
Approximately 78 of Star Gas Corporation's employees are represented by six
different local chapters of labor unions. Management believes that its
relations with both its union and non-union employees are satisfactory.
As of September 30, 1998, our home heating oil business had 1,729 employees,
of whom 471 were office, clerical and customer service personnel, 634 were
heating equipment repairmen, 285 were oil truck drivers and mechanics, 199 were
management and staff and 181 were employed in sales. Approximately 50 of those
employees are seasonal and are rehired annually to support the requirements of
the heating season. Approximately 700 employees are represented by 16 different
local chapters of labor unions.
Management believes that its relations with both its union and non-union
employees are satisfactory.
Government Regulations
We are subject to various federal, state and local environmental, health and
safety laws and regulations. Generally, these laws impose limitations on the
discharge of pollutants and establish standards for the handling of solid and
hazardous wastes. These laws include the Resource Conservation and Recovery
Act, the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), the Clean Air Act, the Occupational Safety and Health Act, the
Emergency Planning and Community Right to Know Act, the Clean Water Act and
comparable state statues. CERCLA, also known as the "Superfund" law, imposes
joint and several liability without regard to fault or the legality of the
original conduct on certain classes of persons that are considered to have
contributed to the release or threatened release of a hazardous substance into
the environment. Propane is not a hazardous substance within the meaning of
CERCLA. Such laws and regulations could result in civil or criminal penalties
in cases of non-compliance or impose liability for remediation costs. To date,
we have not been named as a party to any litigation in which we are alleged to
have violated or otherwise incurred liability under any of the foregoing laws
and regulations.
In connection with acquisitions that involve the purchase of real estate, we
conduct a due diligence investigation to attempt to determine whether any
substance has been sold from, or stored on, any such real estate prior to its
purchase.
Such due diligence includes questioning the seller, obtaining representations
and warranties concerning the seller's compliance with environmental laws and
performing site assessments in which our employees, and, in certain cases,
independent environmental consulting firms we hire review historical records
and data bases and
73
<PAGE>
conduct physical investigations of the property to look for evidence of
hazardous substances, compliance violations and the existence of underground
storage tanks.
National Fire Protection Association Pamphlets No. 54 and No. 58, which
establish rules and procedures governing the safe handling of propane, or
comparable regulations, have been adopted as the industry standard in all of
the states in which we operate. In some states these laws are administered by
state agencies, and in others they are administered on a municipal level. With
respect to the transportation of propane by truck, we are subject to
regulations promulgated under the Federal Motor Carrier Safety Act. These
regulations cover the transportation of hazardous materials and are
administered by the United States Department of Transportation. We conduct
ongoing training programs to help ensure that our operations are in compliance
with applicable regulations. We maintain various permits that are necessary to
operate some of our facilities, some of which may be material to our
operations. Management believes that the procedures currently in effect at all
of our facilities for the handling, storage and distribution of propane are
consistent with industry standards and are in compliance in all material
respects with applicable laws and regulations.
On August 18, 1997, the U.S. Department of Transportation ("DOT") published
its Final Rule for Continued Operation of the Present Propane Trucks ("Final
Rule"). The Final Rule is intended to address perceived risks during the
transfer of propane. The Final Rule required certain immediate changes in
industry operating procedures, including retrofitting all propane delivery
trucks. The Partnership, as well as the National Propane Gas Association
("NPGA"), and the propane industry in general, believe that the Final Rule
cannot practicably be complied with in its current form. On October 15, 1997,
five of the principal multi-state propane marketers (unrelated to the
Partnership) filed an action against the DOT in the United States District
Court for the Western District of Missouri seeking to enjoin enforcement of the
Final Rule. On February 13, 1998, the Court issued a preliminary injunction
prohibiting the enforcement of the Final Rule pending further action by the
Court. The NPGA subsequently filed a similar suit. Both suits are still
pending. In addition, Congress passed, and on October 21, 1998, the President
of the United States signed, the FY 1999 Transportation Appropriations Act
which included a provision restricting the authority of the DOT from enforcing
certain provisions of the Final Rule. At this time, the Partnership cannot
determine the likely outcome of the litigation or the proposed legislation or
what the ultimate long-term cost of compliance with the Final Rule will be to
the Partnership and the propane industry in general.
The United States Environmental Protection Agency ("EPA") has included
propane in the list of substances subject to section 112(r)(3) of the Clean Air
Act which would require substantially all propane dealers and certain large
commercial users of propane to develop a Risk Management Program and to file a
Risk Management Plan ("RMP"). The RMP would detail the worst and most likely
case scenario in case of an accident at the dealer's or customer's facility,
the methods of controlling such an accident and mandates training to protect
against such an event. The Partnership is in substantial compliance with
National Fire Protection Code Pamphlet 58 which covers most of the RMP
requirements and does not anticipate material costs to fully comply, should the
rule become effective. However, propane is the only product used as a fuel
included in the RMP and such inclusion could cause a negative impact on current
and potential consumers resulting in switching to alternate fuels. The industry
believes that propane should not be included and is presently working through
legislative means to have propane removed from the program.
Future developments, such as stricter environmental, health or safety laws
and regulations thereunder, could affect our operations. It is not anticipated
that our compliance with or liabilities under environmental, health and safety
laws and regulations, including CERCLA, will have a material adverse effect on
us. To the extent that we do not know of any environmental liabilities or
environmental, health or safety laws or regulations are made more stringent,
there can be no assurance that our results of operations will not be materially
and adversely affected.
Litigation
Our operations are subject to all operating hazards and risks normally
incidental to handling, storing and transporting and otherwise providing for
use by consumers of combustible liquids such as propane and home
74
<PAGE>
heating oil. As a result, at any given time we are a defendant in various legal
proceedings and litigation arising in the ordinary course of business. We
maintain insurance policies with insurers in such amounts and with such
coverages and deductibles as the General Partner believes are reasonable and
prudent, and Star Gas LLC, the general partner following the merger, has
informed us that it intends to maintain existing policies with respect to
insurance. However, there can be no assurance that such insurance will be
adequate to protect us from all material expenses related to potential future
claims for personal and property damage or that such levels of insurance will
be available in the future at economical prices. In addition, the occurrence of
an explosion may have an adverse effect on the public's desire to use our
products.
75
<PAGE>
MANAGEMENT
PARTNERSHIP MANAGEMENT
General Partner
Upon completion of the Transaction, our general partner and the general
partner of the Operating Partnership will become Star Gas LLC. The membership
interests in Star Gas LLC will be owned by Audrey L. Sevin, Irik P. Sevin,
Hanseatic Corp. and Hanseatic Americas LDC.
The General Partner manages and operates our activities. Unitholders do not
directly or indirectly participate in our management or operation. The General
Partner owes a fiduciary duty to the Unitholders. See "Risk Factors--Conflicts
of Interest and Fiduciary Responsibility." Notwithstanding any limitation on
obligations or duties, the General Partner is liable, as our general partner,
for all of our debts (to the extent not paid from our assets), except for
indebtedness or other obligations that 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.
As is commonly the case with publicly traded limited partnerships, the
Partnership does not directly employ any of the persons responsible for our
management or operation. Instead, the Partnership is managed and operated by
the directors and officers of our General Partner.
Directors and Executive Officers of the General Partner
Upon completion of the Transaction, 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 Corporation: 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. Elizabeth Lanier will withdraw as a
director upon consummation of the Transaction as a result of additional duties
associated with a new job. She 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, who is neither an officer nor an employee of the
General Partner or any of its affiliates, and another independent director to
be selected by the Star Gas LLC Board, will serve on the Audit Committee of the
Star Gas LLC Board. The Audit Committee will have 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 us. Any matters approved by the Audit Committee will be
conclusively deemed to be fair and reasonable to us, approved by all of our
partners and not a breach by the General Partner of any duties it may owe us or
the Unitholders. In addition, the Audit Committee reviews our external
financial reporting, recommends engagement of independent accountants and
reviews our procedure for internal auditing and the adequacy of our internal
accounting controls. With respect to the 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 Star Gas LLC Board,
its recommendations will be advisory.
76
<PAGE>
Directors are elected for one-year terms. The following table sets forth
certain information with respect to the directors and executive officers of the
General Partner upon completion of the Transaction.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE GENERAL PARTNER
---- --- ---------------------------------
<S> <C> <C>
Irik P. Sevin(a)(b)(c).............. Chairman of the Board and Chief Executive
51 Officer
William G. Powers, Jr.(b)........... 45 Executive Vice President--Heating Oil and
Member of the Office of President
Joseph P. Cavanaugh................. 61 Executive Vice President--Propane and Member
of the Office of President
George Leibowitz.................... 61 Treasurer
Richard F. Ambury................... 41 Vice President
James Bottiglieri................... 42 Vice President
Audrey L. Sevin..................... 72 Secretary
Thomas J. Edelman................... 47 Director
Paul Biddelman(c)................... 52 Director
Wolfgang Traber(a).................. 54 Director
William P. Nicoletti(d)............. 53 Director
</TABLE>
- --------
(a) Member of the Compensation Committee
(b) Member of the Management Committee
(c) Member of the Distribution Committee
(d) Member of the Audit Committee
Irik P. Sevin has been the Chairman of the Board of Directors of Star Gas
Corporation since December 1993. Mr. Sevin has been a director of Petro since
its organization in October 1983 and Chairman of the Board of Petro since
January 1993. Mr. Sevin has been President of Petro, Inc. (a predecessor of
Petro) since November 1979 and was President of Petro from 1983 through January
1997. Mr. Sevin was an associate in the investment banking division of Kuhn
Loeb & Co. and then Lehman Brothers Kuhn Loeb Incorporated from February 1975
to December 1978.
William G. Powers, Jr. has been a Director of Star Gas Corporation since
December 1997. Mr. Powers has been President of Petro since December 1997. Mr.
Powers was President of Star Gas Corporation from December 1993 through
November 1997. Prior to joining Star Gas Corporation, he was employed by Petro
from 1984 to 1993 where he served in various capacities, including Regional
Operations Manager and Vice President of Acquisitions. He has participated in
over 90 acquisitions for Petro. From 1977 to 1983, he was employed by The
Augsbury Corporation, a company engaged in the wholesale and retail
distribution of fuel oil and gasoline throughout New York and New England and
served as Vice President of Marketing and Operations.
Joseph P. Cavanaugh has been President and Chief Executive Officer of Star
Gas Corporation since December 1997. Mr. Cavanaugh was Senior Vice President--
Safety and Compliance of Petro from January 1993 through November 1997. From
October 1985 to January 1993, Mr. Cavanaugh was Vice President of Petro. Mr.
Cavanaugh was Controller of Petro, Inc. from 1973 to 1993 and of Petro from its
organization until 1994. Mr. Cavanaugh has also taken an active role in
assisting our management with the development of safety/compliance programs,
assisting with acquisitions and their subsequent integration into the
Partnership.
George Leibowitz has been Treasurer of Petro since April 1997. From November
1992 to March 1997 he was Senior Vice President--Finance and Corporate
Development of Petro. From 1985 to 1992, Mr. Leibowitz was the Chief Financial
Officer of Slomin's Inc., a retail heating oil dealer. From 1984 to 1985, Mr.
Leibowitz was the President of Lawrence Energy Corp., a consulting and oil
trading company. From 1971 to 1984, Mr. Leibowitz was Vice President--Finance
and Treasurer of Meenan Oil Co., Inc. Mr. Leibowitz is a Certified Public
Accountant.
77
<PAGE>
Richard F. Ambury has been Vice President of Finance of Star Gas Corporation
since February 1996. Prior to joining Star Gas Corporation, he was employed by
Petro from 1983 through 1996 where he served in various accounting/finance
capacities. Prior to joining Petro, Mr. Ambury was employed by a predecessor
firm of KPMG Peat Marwick LLP. Mr. Ambury has been a Certified Public
Accountant since 1981.
James J. Bottiglieri has been Controller of Petro since 1994. He was
Assistant Controller of Petro from 1985 to 1994 and was elected Vice President
in December 1992. From 1978 to 1984, Mr. Bottiglieri was employed by a
predecessor firm of KPMG Peat Marwick LLP, a public accounting firm. Mr.
Bottiglieri has been a Certified Public Accountant since 1980.
Audrey L. Sevin has been a director of Star Gas Corporation since December
1993 and the Secretary of Star Gas Corporation since June 1994. Mrs. Sevin has
been a director and Secretary of Petro since its organization in October 1983.
Mrs. Sevin was a director, executive officer and principal shareholder of A. W.
Fuel Co., Inc. from 1952 until its purchase by Petro Inc. in May 1981.
Thomas J. Edelman has been a Director of Star Gas Corporation since October
1995. He also served in that capacity from December 1993 through June 1995. Mr.
Edelman has been a Director of Petro since its organization in October 1983.
Mr. Edelman has been the Chairman and Chief Executive Office of Patina Oil &
Gas Corporation since its formation in 1996. Mr. Edelman also serves as
Chairman of Range Resources Corporation (formerly Lomak Petroleum, Inc.). He
co-founded Snyder Oil Corporation and was its President and a Director from
1981 through early 1997. Prior to 1981, he was a Vice President of The First
Boston Corporation. From 1975 through 1980, Mr. Edelman was with Lehman
Brothers Kuhn Loeb Incorporated. Mr. Edelman also serves as a Director of
Paradise Music & Entertainment, Inc., and as a Trustee of The Hotchkiss School.
Paul Biddelman has been a director of Star Gas Corporation since October
1995. He also served in that capacity from December 1993 through June 1995. Mr.
Biddelman has been a director of Petro since October 1994. Mr. Biddelman has
been President of Hanseatic Corporation since December 1997. From April 1992
through December 1997, he was Treasurer of Hanseatic Corporation. Mr. Biddelman
joined Hanseatic from Clements Taee Biddelman Incorporated, a merchant banking
firm which he co-founded in 1991. From 1982 through 1990, he was a Managing
Director in Corporate Finance at Drexel Burnham Lambert Incorporated. Mr.
Biddelman also worked in corporate finance at Kuhn, Loeb & Co. from 1975 to
1979, and at Oppenheimer & Co. from 1979 to 1982. Mr. Biddelman is a director
of Celadon Group, Inc., Electronic Retailing Systems International, Inc.,
Institution Technologies, Inc., Natural Gas Vehicle Systems, Inc. and Premier
Parks, Inc.
Wolfgang Traber has been a director of Star Gas Corporation since October
1995. He also served in that capacity from December 1993 through June 1995. Mr.
Traber has been a director of Petro since its organization in October 1983. Mr.
Traber is Chairman of the Board of Hanseatic Corporation, a private investment
corporation in New York, New York. Mr. Traber is a director of Deltec Asset
Management Corporation, Blue Ridge Real Estate Company and M.M. Warburg & Co.
William P. Nicoletti has been a director of Star Gas Corporation since
November 1995. Since March 1998, Mr. Nicoletti has been a managing director of
McDonald Investments Inc., an investment banking firm. Previously, he was
Managing Director of Nicoletti & Company Inc., a private investment bank
serving clients in energy related industries. From 1988 through 1990, he was a
Managing Director and head of the Energy and Natural Resources Group of
PaineWebber Incorporated. From 1969 through 1987 he was with E.F. Hutton &
Company Inc., where from 1980 through 1987 he was a Senior Vice President and
head of the Energy and Natural Resources Group.
Audrey Sevin is the mother of Irik P. Sevin. There are no other familial
relationships between any of the directors and executive officers.
78
<PAGE>
Operating Partnership
Upon completion of the Transaction, the officers and employees of Star Gas
Corporation who managed our operations and business will become officers and
employees of the Operating Partnership.
It is expected that the following persons who comprise Star Gas Corporation's
executive officers prior to the Transaction will serve as executive officers of
the Operating Partnership following the Transaction: 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 Corporation (as predecessor general
partner to Star Gas Corporation) is incorporated by reference or set forth in
our 1998 Annual Report on Form 10-K and is incorporated by reference in this
prospectus. In order to obtain copies of such documents, you may contact us at
our address or telephone number indicated under "Where You Can Find More
Information."
Petro
Upon completion of the Transaction, the officers and employees of Petro will
continue to be employed by Petro.
It is expected that the following persons who serve as executive officers of
Petro prior to the Transaction will serve as executive officers of our home
heating oil business following the Transaction: 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.
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 the Partnership's behalf,
including the costs of compensation described in this prospectus 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. In addition, the General Partner and its affiliates may
provide services to us for which we will be charged reasonable fees as
determined by the General Partner.
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."
79
<PAGE>
BENEFICIAL OWNERSHIP OF PRINCIPAL
UNITHOLDERS AND MANAGEMENT
The following table set forth the beneficial ownership upon completion of the
Transaction of Common Units, Senior Subordinated Units, Junior Subordinated
Units and General Partner Units 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 NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
---- ------ ---------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Star Gas LLC............ -- -- % -- -- % -- -- % 287,700(b) 100%
Irik P. Sevin........... -- -- -- -- 99,514 17.5 287,700(e) 100
Audrey L. Sevin......... -- -- -- -- 248,718 43.8 287,700(e) 100
Wolfgang Traber......... 10,400(c) * 1,181 * 220,246(d) 38.6 287,700(e) 100
Paul Biddelman.......... -- -- 311 * 220,246(d) 38.6 287,700(e) 100
Thomas Edelman.......... -- -- 102,203(f) 3.7 -- -- -- --
Richard F. Ambury....... 625 * 46 * -- -- -- --
George Leibowitz........ -- -- -- * -- -- -- --
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 7.5 568,475 99.9 287,700 100
</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 .01% general
partner interest in the Operating Partnership.
(c) Represents 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 220,246 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 of Star Gas LLC and the LLC Owners (and Messrs. Traber and
Biddelman through their positions with Hanseatic, a member of Star Gas LLC)
maybe be deemed to beneficially own all of Star Gas LLC's General Partner
Units, as to which the LLC Owners and Messrs. Traber and Biddelman disclaim
beneficial ownership.
(f) Includes 9,929 Senior Subordinated Units owned by Mr. Edelman's wife and
trusts for the benefit of his minor children.
80
<PAGE>
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITY
CONFLICTS OF INTEREST
Certain conflicts of interest have arisen and could arise in the future as a
result of the General Partner's relationships with its security holders, on the
one hand, and us, 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
security holders. In general, the General Partner has a fiduciary duty to
manage us in a manner beneficial to us and the Unitholders. However, the
Partnership Agreement contains provisions that allow the General Partner to
take into account the interests of parties in addition to ours in resolving
conflicts of interest, thereby limiting the General Partner's fiduciary duty to
the Unitholders. There are also 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 us and the Unitholders. The Audit Committee of the Board of
Directors of the General Partner which is comprised of two independent
directors 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 us on the other. See "Management--Partnership Management--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
"Delaware Act") that allow the fiduciary duties of a general partner to be
waived or restricted by a partnership agreement have not been resolved in a
court of law. Furthermore, the General Partner has not obtained an opinion of
counsel covering the provisions set forth in the Partnership Agreement that
purport to waive or restrict fiduciary duties of the General Partner.
Unitholders should consult their own legal counsel concerning the fiduciary
responsibilities of the General Partner and its officers and directors and the
remedies available to the Unitholders.
Conflicts of interest could arise in the situations described below, among
others:
Certain Actions Taken by the General Partner May Affect the Amount of Cash
Available for Distribution to Unitholders or Accelerate the Right to Convert
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, issuances of additional Units and reserves in any quarter may
affect whether, or the extent to which, there is sufficient Available Cash from
Operating Surplus to meet the Minimum Quarterly Distribution and Target
Distribution Levels on all Units in such quarter or subsequent quarters. The
Partnership Agreement provides that any borrowings by the Partnership or the
approval thereof by the General Partner shall not constitute a breach of any
duty owed by the General Partner to the Partnership or the Unitholders
including borrowings that have the purpose or effect, directly or indirectly,
of enabling the General Partner to receive Incentive Distributions, hasten the
expiration of the Subordination Period or the conversion of the Senior
Subordinated 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 breach any duty of the General Partner to the
Partnership or the Unitholders. See "Risk Factors--Conflicts of Interest and
Fiduciary Responsibility" and "Cash Distribution Policy."
Our Borrowings May Enable the General Partner to Permit Payments of
Distributions on the Senior Subordinated Units, Junior Subordinated Units and
General Partner Units
The General Partner generally must act as a fiduciary to us and the
Unitholders, and therefore must generally consider our best interests when
deciding whether to make capital or operating expenditures or take other steps
with respect to our business. It is not a breach of the General Partner's
fiduciary duty under the
81
<PAGE>
Partnership Agreement if our borrowings are effected in a manner that, directly
or indirectly, enables the General Partner to permit the payment of
distributions on the Senior Subordinated Units, Junior Subordinated Units and
General Partner Units.
The Partnership Reimburses the General Partner and Its Affiliates for Certain
Expenses
Under the terms of the Partnership Agreement, the General Partner and its
affiliates are reimbursed by the Partnership for certain expenses incurred on
our behalf. The Partnership Agreement provides that the General Partner shall
determine the expenses that are allocable to us in any reasonable manner
determined by the General Partner in its sole discretion. See "Management--
Reimbursement of Expenses of the General Partner."
The General Partner Intends to Limit Its Liability with Respect to Our
Obligations
Whenever possible, the General Partner intends to limit the Partnership's
liability under contractual arrangements so that the other party only has
recourse to all or particular assets of the Partnership, and not against the
General Partner or its assets. The Partnership Agreement provides that any
action by the General Partner to limit the liability of the General Partner
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.
Unitholders Have No Right to Enforce Obligations of the General Partner and
Its Affiliates Under Agreements with the Partnership
The Partnership will require or provide certain services from or to the
General Partner and its affiliates on an ongoing basis. The agreements relating
to these arrangements 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 May Not Be the Result of Arm's-Length Negotiations
Under the terms of the Partnership Agreement, the General Partner is not
restricted from paying the General Partner or its affiliates for any services
rendered (provided such services are rendered on terms fair and reasonable to
the Partnership) or entering into additional contractual arrangements with any
of them on our behalf. Neither the Partnership Agreement nor any of the other
agreements, contracts and arrangements between the Partnership, on the one
hand, and the General Partner and its affiliates, on the other, are or will be
the result of arm's-length negotiations. All of such transactions entered into
are required to be on terms which are fair and reasonable to the Partnership,
provided that any transaction shall be deemed fair and reasonable if (1) such
transaction is approved by the Audit Committee, (2) its terms are no less
favorable to the Partnership than those generally being provided to or
available from unrelated third parties or (3) 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 General Partner may exercise 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 may use its own discretion, free of
fiduciary duty restrictions, in determining whether to exercise such right. As
a consequence,
82
<PAGE>
a Common Unitholder may have its Common Units purchased even though it 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 its Common Units. For a description of
such right, see "The Partnership Agreement--Limited Call Right."
The General Partner's Affiliates May Compete With the Partnership
The General Partner may not engage in any business or activity or incur any
debts or liabilities except in connection with or incidental to (1) its
performance as general partner of us or of the Operating Partnership or (2) the
acquiring, owning or disposing of debt or equity securities of such entities.
In 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
propane or 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, Audrey L. 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. There are no restrictions on the ability of any other affiliate
of the General Partner to engage in the sale of propane or to trade or store
propane.
The General Partner Is Not Restricted from Engaging in a Transaction Which
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 which would trigger such change of
control provisions.
FIDUCIARY DUTIES OF THE GENERAL PARTNER
The General Partner is accountable to us and the Unitholders as a fiduciary.
Consequently, the General Partner must exercise good faith and integrity in
handling our assets and affairs. In contrast to the relatively well-developed
law concerning fiduciary duties owed by officers and directors to the
shareholders of a corporation, the law concerning the duties owed by general
partners to other partners and to partnerships is relatively undeveloped.
Neither the Delaware Act nor case law defines with particularity the fiduciary
duties owed by general partners to limited partners or a limited partnership.
The Delaware Act provides that Delaware limited partnerships may, in their
partnership agreements, restrict or expand the fiduciary duties that might
otherwise be applied by a court in analyzing the standard of duty owed by
general partners to limited partners and the partnership.
Fiduciary duties are generally considered to include an obligation to act
with the highest good faith, fairness and loyalty. Such duty of loyalty, in the
absence of a provision in a partnership agreement providing otherwise, would
generally prohibit a general partner of a Delaware limited partnership from
taking any action or engaging in any transaction as to which it has a conflict
of interest. In order to induce the General Partner to manage our business, the
Partnership Agreement, as permitted by the Delaware Act, contains various
provisions intended to have the effect of restricting the fiduciary duties that
might otherwise be owed by the General Partner to us and our 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,
a holder of Common Units is required to agree to be bound by the provisions
thereof, including the provisions discussed above. This is in accordance with
the policy of the Delaware Act favoring the principle of freedom of contract
and the enforceability of partnership agreements. The Delaware Act also
provides that a partnership agreement is not unenforceable by reason of its not
having been signed by a person being admitted as a limited partner or becoming
an assignee in accordance with the terms thereof.
83
<PAGE>
The Partnership Agreement provides that whenever a conflict of interest
arises between the General Partner or its affiliates, on the one hand, and us
or any other partner, on the other, the General Partner shall resolve such
conflict. The General Partner shall not be in breach of its obligations under
the Partnership Agreement or its duties to us or the Unitholders if the
resolution of such conflict is fair and reasonable to us, and any resolution
shall conclusively be deemed to be fair and reasonable to us if such resolution
is (1) 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), (2) on terms no less favorable to
us than those generally being provided to or available from unrelated third
parties or (3) fair to us, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to us). In resolving such
conflict, the General Partner may (unless the resolution is specifically
provided for in the Partnership Agreement) consider (1) the relative interests
of the parties involved in such conflict or affected by such action, (2) any
customary or accepted industry practices or historical dealings with a
particular person or entity and, if applicable, (3) generally accepted
accounting or engineering practices or principles and such other factors as it
deems relevant. Thus, unlike the strict duty of a fiduciary who must act solely
in the best interests of his beneficiary, the Partnership Agreement permits the
General Partner to consider the interests of all parties to a conflict of
interest, including the interests of the General Partner. In connection with
the resolution of any conflict that arises, unless the General Partner has
acted in bad faith, the action taken by the General Partner shall not
constitute a breach of the Partnership Agreement, any other agreement or any
standard of care or duty imposed by the Delaware Act or other applicable law.
The Partnership Agreement also provides that in certain circumstances the
General Partner may act in its sole discretion, in good faith or pursuant to
other appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on behalf of a partnership (a partnership derivative action) to recover damages
from a third party where the general partner has refused to institute the
action or where an effort to cause the general partner to do so is not likely
to succeed. In addition, the statutory or case law of certain jurisdictions may
permit a limited partner to institute legal action on behalf of himself or all
other similarly situated limited partners (a class action) to recover damages
from a general partner for violations of its fiduciary duties to the limited
partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited, to the extent permitted by law,
as required to permit the General Partner and its officers and directors to act
under the Partnership Agreement or any other agreement contemplated therein and
to make any decision pursuant to the authority prescribed in the Partnership
Agreement so long as such action is reasonably believed by the General Partner
to be in, or not inconsistent with, our best interests. Further, the
Partnership Agreement provides that the General Partner and its officers and
directors will not be liable for monetary damages to us, the limited partners
or assignees for errors of judgment or for any acts or omissions if the General
Partner and such other persons acted in good faith.
In addition, under the terms of the Partnership Agreement, we are 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, our best
interests and, with respect to any criminal proceedings, had no reasonable
cause to believe the conduct was unlawful. See "The Partnership Agreement--
Indemnification." Thus, the General Partner could be indemnified for its
negligent acts if it meets such requirements concerning good faith and the best
interests of the Partnership.
84
<PAGE>
DESCRIPTION OF THE COMMON UNITS
The Common Units 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 (the "SEC").
Purchasers of Common Units in this offering and subsequent transferees of
Common Units (or their brokers, agents or nominees on their behalf) will be
required to execute Transfer Applications, the form of which is included as
Annex A to this prospectus and which is also set forth on the reverse side of
the certificate representing Common Units. Purchasers may hold Common Units in
nominee accounts, provided that the broker (or other nominee) executes and
delivers a Transfer Application and becomes a limited partner. We will be
entitled to treat the nominee holder of a Common Unit as the absolute owner
thereof, and the beneficial owner's rights will be limited solely to those that
it has against the nominee holder as a result of or by reason of any
understanding or agreement between such beneficial owner and nominee holder.
THE UNITS
Generally, the Common Units represent limited partner interests, which
entitle the holders thereof to participate in our distributions and exercise
the rights or privileges available to limited partners under the Partnership
Agreement. For a description of the relative rights and preferences of holders
of Common Units in and to our distributions, see "Cash Distribution Policy."
For a description of the rights and privileges of limited partners under the
Partnership Agreement, see "The Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
We have retained BankBoston N.A. as registrar and transfer agent (the
"Transfer Agent") for the Common Units. The Transfer Agent receives a fee from
us for serving in such capacities. All fees charged by the Transfer Agent for
transfers of Common Units will be borne by us and not by the holders of Common
Units, except that fees similar to those customarily paid by stockholders for
surety bond premiums to replace lost or stolen certificates, taxes and other
governmental charges, special charges for services requested by a holder of a
Common Unit and other similar fees or charges will be borne by the affected
holder. There will be no charge to holders for disbursements of cash
distributions. We will indemnify the Transfer Agent, its agents and each of
their respective shareholders, directors, officers and employees against all
claims and losses that may arise out of acts performed or omitted in respect of
its activities as such, except for any liability due to any negligence, gross
negligence, bad faith or intentional misconduct of the indemnified person or
entity.
The Transfer Agent may at any time resign, by notice to us, or be removed by
us, such resignation or removal to become effective upon the appointment by the
General Partner of a successor transfer agent and registrar and its acceptance
of such appointment. If no successor has been appointed and accepted such
appointment within 30 days after notice of such resignation or removal, the
General Partner is authorized to act as the transfer agent and registrar until
a successor is appointed.
TRANSFER OF UNITS
Until a Common Unit has been transferred on our books, the Partnership and
the Transfer Agent, notwithstanding any notice to the contrary, may treat the
record holder thereof as the absolute owner for all purposes, except as
otherwise required by law or stock exchange regulations. The transfer of the
Common Units to persons that purchase directly from the underwriters will be
accomplished through the completion, execution and delivery of a Transfer
Application by such purchaser in connection with such purchase. Any subsequent
transfers of a Common Unit will not be recorded by the Transfer Agent or
recognized by us unless the transferee executes and delivers a Transfer
Application. By executing and delivering a Transfer Application, the transferee
of Common Units (1) becomes the record holder of such Units and shall
constitute an assignee
85
<PAGE>
until admitted into the Partnership as a substituted limited partner, (2)
automatically requests admission as a substituted limited partner in the
Partnership, (3) agrees to be bound by the terms and conditions of, and
executes, the Partnership Agreement, (4) represents that such transferee has
the capacity, power and authority to enter into the Partnership Agreement, (5)
grants powers of attorney to the General Partner and any liquidator of the
Partnership as specified in the Partnership Agreement and (6) makes the
consents and waivers contained in the Partnership Agreement. An assignee will
become a substituted limited partner in respect of the transferred Common Units
upon the consent of the General Partner, which may be withheld for any reason
in its sole discretion, and the recordation of the name of the assignee on our
books and records.
Common Units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in respect of the transferred Common Units. A
purchaser or transferee of Common Units who does not execute and deliver a
Transfer Application obtains only (a) the right to assign the Common Units to a
purchaser or other transferee and (b) the right to transfer the right to seek
admission as a substituted limited partner with respect to the transferred
Common Units. Thus, a purchaser or transferee of Common Units who does not
execute and deliver a Transfer Application will not receive cash distributions
unless the Common Units are held in a nominee or "street name" account and the
nominee or broker has executed and delivered a Transfer Application with
respect to such Common Units, and may not receive certain federal income tax
information or reports furnished to record holders of Common Units. The
transferor of Common Units will have a duty to provide such transferee with all
information that may be necessary to obtain registration of the transfer of the
Common Units, but a transferee agrees, by acceptance of the certificate
representing Common Units, that the transferor will not have a duty to insure
the execution of the Transfer Application by the transferee and will have no
liability or responsibility if such transferee neglects or chooses not to
execute and forward the Transfer Application to the Transfer Agent. See "The
Partnership Agreement--Status as Limited Partner or Assignee."
86
<PAGE>
THE PARTNERSHIP AGREEMENT
In connection with the Transaction, the agreements of limited partnership of
the Partnership and the Operating Partnership will be amended and restated at
the effective time of the merger. The form of the Partnership Agreement is
included in this prospectus as Annex C. The form of the amended and restated
agreement of limited partnership of the Operating Partnership (the "Operating
Partnership Agreement") is included as Annex C attached to this prospectus. The
Partnership will provide prospective investors with a copy of the form of the
Operating Partnership Agreement upon request at no charge. The following
discussion is a summary of the material provisions of the Partnership Agreement
and is qualified in its entirety by reference to the Partnership Agreement and
the Operating Partnership Agreement. The Partnership is the sole limited
partner of the Operating Partnership, which owns, manages and operates the
Partnership's propane business. The General Partner serves as the general
partner of the Partnership and of the Operating Partnership, owning a 1.99%
general partner interest in the Partnership and a 0.01% general partner
interest in the Operating Partnership. The Unitholders (including the General
Partner as an owner of Units other than General Partner Units) hold a 98%
interest as limited partners in the Partnership and the Operating Partnership
on a combined basis. Unless specifically described otherwise, references herein
to the term "Partnership Agreement" constitute references to the amended and
restated agreements of limited partnership of the Partnership and the Operating
Partnership, collectively.
Certain provisions of the Partnership Agreement are summarized elsewhere in
this prospectus under various headings. With regard to various transactions and
relationships of the Partnership with the General Partner and its affiliates,
See "Risk Factors--Conflicts of Interest and Fiduciary Responsibility." With
regard to the management of the Partnership, see "Management." With regard to
the transfer of Units, see "Description of the Common Units." With regard to
distributions of Available Cash, see "Cash Distribution Policy." With regard to
allocations of taxable income and taxable loss, see "Certain Federal Income Tax
Considerations." Prospective investors are urged to review these sections of
this prospectus and the Partnership Agreement carefully.
ORGANIZATION AND DURATION
The Partnership and the Operating Partnership were organized in 1995 as
Delaware limited partnerships. The Partnership will dissolve on December 31,
2085, unless sooner dissolved pursuant to the terms of the Partnership
Agreement.
PURPOSE
The purpose of the Partnership is limited to serving as the limited partner
of the Operating Partnership and engaging in any other activity approved by the
General Partner. The General Partner will have the ability under the
Partnership Agreement to cause the Partnership and the Operating Partnership to
engage in activities that may pose a greater risk to investors than the propane
marketing business 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
Partnership Agreement in accordance with the terms thereof and to make consents
and waivers contained in the Partnership Agreement.
87
<PAGE>
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
Partnership Agreement. The General Partner is prohibited, without the prior
approval of holders of record of at least a Unit Majority, from, among other
things, selling, exchanging or otherwise disposing of all or substantially all
of the Partnership's assets in a single transaction or a series of related
transactions (including by way of merger, consolidation or other combination)
or approving on behalf of the Partnership the sale, exchange or other
disposition of all or substantially all of the assets of the Operating
Partnership; provided that the Partnership may mortgage, pledge, hypothecate or
grant a security interest in all or substantially all of the Partnership's
assets without such approval. The Partnership may also sell all or
substantially all of its assets pursuant to a foreclosure or other realization
upon the foregoing encumbrances without such approval. The Unitholders are not
entitled to dissenters' rights of appraisal under the Partnership Agreement or
applicable Delaware law in the event of a merger or consolidation of the
Partnership 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 at
least a Unit Majority and furnishing an opinion of counsel that such withdrawal
(following the selection of a successor general partner) will not result in the
loss of the limited liability of the limited partners of the Partnership or
cause the Partnership to be treated as an association taxable as a corporation
or otherwise taxed as an entity for federal income tax purposes (an "Opinion of
Counsel"). On or after December 31, 2005, the General Partner may withdraw as
general partner by giving 90 days written notice (without first obtaining
approval from the Unitholders), and such withdrawal will not constitute a
violation of the Partnership Agreement. Notwithstanding the foregoing, the
General Partner may withdraw without Unitholder approval upon 90 days notice to
the limited partners if more than 50% of the outstanding Units are held or
controlled by one person and its affiliates (other than the General Partner and
its affiliates). In addition, the Partnership Agreement permits the General
Partner (in certain limited instances) to sell all of its general partner
interest (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 the
Partnership and to the appointment of a successor general partner. See "--
Termination and Dissolution."
Pursuant to the terms of the 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 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
88
<PAGE>
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 equally 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 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 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 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 at least a Unit Majority; provided that, in each case
such transferee assumes the rights and duties of the General Partner, agrees to
be bound by the provisions of the Partnership Agreement, furnishes an Opinion
of Counsel and agrees to purchase all (or the appropriate portion thereof as
applicable) of the General Partner's partnership interest in the Operating
Partnership. At any time, 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 Partnership Agreement provides that the General Partner is not entitled
to receive any compensation for its services as general partner of the
Partnership; the General Partner is, however, entitled to be reimbursed on a
monthly basis (or such other basis as the General Partner may reasonably
determine) for all direct and indirect expenses it incurs or payments it makes
on behalf of the Partnership, and all other necessary or appropriate expenses
allocable to the Partnership or otherwise reasonably incurred by the General
Partner in connection with the operation of the Partnership's business
(including expenses allocated to the General Partner by its affiliates). The
Partnership Agreement provides that the General Partner shall determine the
expenses that are allocable to the Partnership in any reasonable manner
determined by the General Partner in its sole discretion.
89
<PAGE>
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 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 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 and will not receive cash distributions, federal income tax
allocations or reports furnished to record holders of Common Units. See
"Description of the Common Units--Transfer of Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If, 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 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, 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 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 this 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 (1) in connection with an
Acquisition or a Capital Improvement or (2) 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, would have 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 unlimited number of additional
90
<PAGE>
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
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 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 PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the General Partner. In order to adopt a proposed amendment, the
General Partner is required to seek written approval of the holders of the
number of Units required to approve such amendment or call a meeting of the
limited partners to consider and vote upon the proposed amendment, except as
described below.
91
<PAGE>
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:
(1) enlarge the obligations of any limited partner, without its consent,
(2) 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,
(3) change the term of the Partnership,
(4) provide that the Partnership is not dissolved upon expiration of its
term or
(5) 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 Partnership Agreement without
the approval of any limited partner or assignee of the Partnership to reflect:
(1) 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,
(2) admission, substitution, withdrawal or removal of partners in
accordance with the Partnership Agreement,
(3) 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,
(4) an amendment that is necessary, in the opinion of counsel to the
Partnership, to prevent the Partnership or the General Partner or their
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,
(5) 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 in the sole discretion of the
General Partner is necessary or advisable in connection with the
authorization of additional limited or general partner interests,
(6) any amendment expressly permitted in the Partnership Agreement to be
made by the General Partner acting alone,
(7) an amendment effected, necessitated or contemplated by a merger
agreement that has been approved pursuant to the terms of the Partnership
Agreement,
(8) any amendment that, in the sole discretion of the General Partner, is
necessary or advisable in connection with the formation by the Partnership
of, or its investment in, any corporation, partnership or other entity
(other than the Operating Partnership) as otherwise permitted by the
Partnership Agreement,
(9) a change in the fiscal year and taxable year of the Partnership and
changes related thereto, and
(10) any other amendments substantially similar to the foregoing.
92
<PAGE>
In addition, the General Partner may make amendments to the Partnership
Agreement without the approval of any limited partner or assignee if such
amendments:
(1) do not adversely affect the limited partners in any material respect,
(2) 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,
(3) 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
(4) are required or contemplated by the 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 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 Partnership Agreement will be entitled to notice of, and to
vote at, meetings of limited partners of the Partnership and to act with
respect to matters as to which approvals may be solicited. With respect to
voting rights attributable to 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 meeting in connection
with the Transaction. 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).
93
<PAGE>
Each record holder of a Unit has a vote according to his percentage interest
in the Partnership, although additional limited partner interests having
special voting rights could be issued by the General Partner. See "--Issuance
of Additional Securities." The Partnership Agreement provides that Units held
in nominee or street name account will be voted by the broker (or other
nominee) pursuant to the instruction of the beneficial owner unless the
arrangement between the beneficial owner and his nominee provides otherwise.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of Units (regardless of whether such
record holder has been admitted as a limited partner) under the terms of the
Partnership Agreement will be delivered to the record holder by the Partnership
or by the Transfer Agent at the request of the Partnership.
INDEMNIFICATION
The Partnership Agreement provides that the Partnership will indemnify (1)
the General Partner; (2) any Departing Partner, (3) any Person who is or was an
affiliate of the General Partner or any Departing Partner, (4) 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, (5) 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").
The Partnership will indemnify these persons to the fullest extent permitted
by law, from and against any and all losses, claims, damages, liabilities
(joint or several), expenses (including, without limitation, legal fees and
expenses), judgments, fines, penalties, interest, settlements and other amounts
arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in which any
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, by reason of its status as any of the foregoing; provided that in
each case the Indemnitee acted in good faith and in a manner that such
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Partnership and, with respect to any criminal proceeding, had no reasonable
cause to believe its conduct was unlawful.
Any indemnification under these provisions will 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 Delaware Act and that he
otherwise acts in conformity with the provisions of the Partnership Agreement,
his liability under the Delaware Act will be limited, subject to certain
possible exceptions, to the amount of capital he is obligated to contribute to
the Partnership in respect of his Units plus his share of any undistributed
profits and assets of the Partnership. If it were determined, however, that the
right or exercise of the right by the limited partners as a group to remove or
replace the General Partner, to approve certain amendments to the Partnership
Agreement or to take other action pursuant to the Partnership Agreement
constituted "participation in the control" of the Partnership's business for
the purposes of the Delaware Act, then the limited partners could be held
personally liable for the Partnership's obligations under the laws of the State
of Delaware to the same extent as the General Partner with respect to persons
who transact business with the Partnership reasonably believing, based on the
limited partner's conduct, that the limited partner is a general partner.
94
<PAGE>
Under the Delaware Act, a limited partnership may not make a distribution to
a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
nonrecourse liabilities, exceed the fair value of the assets of the limited
partnership. For the purpose of determining the fair value of the assets of a
limited partnership, the Delaware Act provides that the fair value of property
subject to nonrecourse liability shall be included in the assets of the limited
partnership only to the extent that the fair value of that property exceeds
that nonrecourse liability. The Delaware Act provides that a limited partner
who receives such a distribution and knew at the time of the distribution that
the distribution was in violation of the Delaware Act shall be liable to the
limited partnership for the amount of the distribution for three years from the
date of the distribution. Under the Delaware Act, an assignee who becomes a
substituted limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to the partnership, except
the assignee is not obligated for liabilities unknown to him at the time he
became a limited partner and that could not be ascertained from the Partnership
Agreement.
The Operating Partnership conducts business in at least 13 states.
Maintenance of limited liability may require compliance with legal requirements
in such jurisdictions in which the Operating Partnership conducts business,
including qualifying the Operating Partnership to do business therein.
Limitations on the liability of limited partners for the obligations of a
limited partnership have not been clearly established in many jurisdictions. If
it were determined that the Partnership was, by virtue of its limited partner
interest in the Operating Partnership or otherwise, conducting business in any
state without compliance with the applicable limited partnership statute, or
that the right or exercise of the right by the limited partners as a group to
remove or replace the General Partner, to approve certain amendments to the
Partnership Agreement, or to take other action pursuant to the Partnership
Agreement constituted "participation in the control" of the Partnership's
business for the purposes of the statutes of any relevant jurisdiction, then
the limited partners could be held personally liable for the Partnership's
obligations under the law of such jurisdiction to the same extent as the
General Partner under certain circumstances. The Partnership will operate in
such manner as the General Partner deems reasonable and necessary or
appropriate to preserve the limited liability of Unitholders.
BOOKS AND REPORTS
The General Partner is required to keep appropriate books of the business of
the Partnership at the principal offices of the Partnership. The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
The fiscal year of the Partnership (for accounting but not for tax purposes) is
October 1 to September 30.
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the General Partner will furnish each record holder of
Units (as of a Record Date selected by the General Partner) with an annual
report containing audited financial statements of the Partnership for the past
fiscal year, prepared in accordance with generally accepted accounting
principles. As soon as practicable, but in no event later than 90 days after
the close of each quarter (except the last quarter of each fiscal year), the
General Partner will furnish each record holder of Units (as of a Record Date
selected by the General Partner) a report containing unaudited financial
statements of the Partnership with respect to such quarter and such other
information as may be required by law.
The General Partner will use all reasonable efforts to furnish each record
holder of a Unit 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.
95
<PAGE>
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a limited partner can, for a purpose
reasonably related to such limited partner's interest as a limited partner,
upon reasonable demand and at his/her own expense, be furnished with (1) a
current list of the name and last known address of each partner, (2) a copy of
the Partnership's tax returns, (3) 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, (4) copies of the Partnership Agreement, the
certificate of limited partnership of the Partnership, amendments thereto and
powers of attorney pursuant to which the same have been executed, (5)
information regarding the status of the Partnership's business and financial
condition and (6) such other information regarding the affairs of the
Partnership as is just and reasonable. The General Partner may, and intends to,
keep confidential from the limited partners trade secrets or other information
the disclosure of which the General Partner believes in good faith is not in
the best interests of the Partnership or which the Partnership is required by
law or by agreements with third parties to keep confidential.
TERMINATION AND DISSOLUTION
The Partnership will continue until December 31, 2085, unless sooner
terminated pursuant to the Partnership Agreement. The Partnership will be
dissolved upon (1) the election of the General Partner to dissolve the
Partnership, if approved by holders of at least a Unit Majority, (2) the sale,
exchange or other disposition of all or substantially all of the assets and
properties of the Partnership and the Operating Partnership, (3) the entry of a
decree of judicial dissolution of the Partnership or (4) withdrawal or removal
of the General Partner or any other event that results in its ceasing to be the
General Partner (other than by reason of a transfer of its general partner
interest in accordance with the Partnership Agreement or withdrawal or removal
following approval and admission of a successor). Upon a dissolution pursuant
to clause (4), the holders of at least a majority of the outstanding Units
(excluding Units held by the Departing General Partner and its affiliates) may
also elect, within certain time limitations, to reconstitute the Partnership
and continue its business on the same terms and conditions set forth in the
Partnership Agreement by forming a new limited partnership on terms identical
to those set forth in the Partnership Agreement and having as a general partner
a person or entity approved by at least the holders of a majority of the
outstanding Units (excluding Units held by the Departing General Partner and
its affiliates), subject to receipt by the Partnership of an Opinion of
Counsel.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is reconstituted
and continued as a new limited partnership, the person authorized to wind up
the affairs of the Partnership (the "Liquidator") will, acting with all of the
powers of the General Partner that such Liquidator deems necessary or desirable
in its good faith judgment in connection therewith, liquidate the Partnership's
assets and apply the proceeds of the liquidation as provided in "Cash
Distribution Policy--Distributions of Cash Upon Liquidation After the
Subordination Period." Under certain circumstances and subject to certain
limitations, the Liquidator may defer liquidation or distribution of the
Partnership's assets for a reasonable period of time or distribute assets to
partners in kind if it determines that a sale would be impractical or would
cause undue loss to the partners.
REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Partnership has agreed (1) 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 (2) 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.
96
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR SUBORDINATED NOTES DUE 2009
At the same time as this offering of Common Units, Petro is offering $120.0
million in aggregate principal amount of % Senior Subordinated Notes due 2009
(the "Notes"). The following description is a summary of certain provisions of
the indenture governing the Notes. It does not restate the indenture in its
entirety.
The Notes are general unsecured obligations of Petro and are subordinated in
right of payment to all existing and future Senior Debt of Petro. The Notes
will mature on , 2009 and bear interest at % per annum, payable semi-
annually on and of each year. The Notes will be unconditionally
guaranteed, on an unsecured senior subordinated basis, jointly and severally,
by the Partnership and Petro Holdings. In the future, subsidiaries of Petro may
be required to guarantee the Notes under certain circumstances. After ,
2004, Petro may redeem all or any part of the Notes at redemption prices (plus
accrued and unpaid interest) starting at % of principal (plus accrued and
unpaid interest) during the 12-month period beginning , 2004 and declining
annually to 100% of principal (plus accrued and unpaid interest) on , 2007
and thereafter.
In addition, during the first 36 months after the date of the indenture
governing the Notes, Petro may on any one or more occasions redeem up to 35% of
the aggregate principal amount of Notes originally issued under such indenture
governing the Notes at a redemption price of % of the principal amount thereof
(plus accrued and unpaid interest) with the net cash proceeds of one or more
public offerings of common equity of Parents (as defined in the indenture
governing the Notes ) of Petro; provided that at least 65% of the aggregate
principal amount of Notes originally issued under such indenture remains
outstanding immediately after the occurrence of such redemption (excluding
Notes held by Petro and its affiliates).
If a Change of Control (as defined in the indenture governing the Notes)
occurs, each holder of Notes will have the right to require Petro to repurchase
all or any part of such holder's Notes at a purchase price equal to 101% of the
principal amount thereof (plus accrued and unpaid interest). A Change of
Control includes certain events related to the Partnership and the General
Partner.
The indenture relating to the Notes contains a number of covenants
restricting the operations of the Partnership, Petro Holdings, Petro and their
respective subsidiaries. Among other things, the indenture limits the ability
of (1) Petro, Petro Holdings and their respective subsidiaries to incur
additional Indebtedness and issue preferred stock; (2) the Partnership, Petro
Holdings, Petro and their respective subsidiaries to pay dividends or make
distributions; and (3) Petro Holdings, Petro and their respective subsidiaries
to sell assets. Under the indenture, subject to certain exceptions, (1) none of
Petro Holdings, Petro or any of their respective subsidiaries can make a
distribution unless the Fixed Charge Coverage Ratio (as defined in the
indenture) of Petro Holdings is 1.75 to 1.00 and (2) none of the Partnership or
any of its subsidiaries (other than Petro Holdings, Petro or any of their
respective subsidiaries) can make a distribution if the Fixed Charge Coverage
Ratio of the Partnership is 1.75 to 1.00. The indenture also limits the
aggregate amount of distributions that can be made in any four-quarter period.
Upon the occurrence of an Event of Default (as defined in the indenture
governing the Notes), with certain exceptions, the indenture trustee or the
holders of at least 25% in principal amount of the then outstanding Notes may
accelerate the maturity of all the Notes as provided in the indenture governing
the Notes.
EXISTING INDEBTEDNESS
Description of First Mortgage Notes
The Operating Partnership currently has outstanding approximately $96 million
in First Mortgage Notes (the "First Mortgage Notes"). The Operating
Partnership's obligations under the First Mortgage Note Agreement and the First
Mortgage Notes are secured, on an equal and ratable basis with the Operating
Partnership's obligations under the Bank Credit Facilities, by a mortgage on
substantially all of the real
97
<PAGE>
property and liens on substantially all of the operating facilities, equipment
and other assets of the Operating Partnership (collectively, the "Mortgaged
Property"). Eighty-five million dollars of the First Mortgage Notes mature by
September 15, 2009 and $11 million of the First Mortgage Notes mature by
September 15, 2010. The First Mortgage Notes will require semiannual
prepayments, without premium, of the principal thereof beginning March 15,
2001. The Operating Partnership, at its option, and under certain circumstances
following the disposition of assets, may be required to offer to prepay the
First Mortgage Notes, in whole or in part.
The First Mortgage Note Agreement contains various restrictive and
affirmative covenants, including restrictions on the payment of dividends or
other distributions in respect of any partnership interest if the pro forma
ratio of Consolidated Cash Flow to Consolidated Interest Expense (each as
defined in the First Mortgage Note Agreement) is less than 1.75 to 1.0. Upon
the completion of this offering, after giving pro forma effect to this
Transaction, the Operating Partnership would be in compliance with the
restrictive and affirmative covenants applicable under the First Mortgage Note
Agreement.
Under the First Mortgage Note Agreement, so long as no default exists or
would result, the Operating Partnership is permitted to make cash distributions
to the Partnership not more frequently than quarterly in an amount not to
exceed Available Cash (as defined in the First Mortgage Note Agreement) for the
immediately preceding calendar quarter. If an event of default exists on the
First Mortgage Notes, the Noteholders may accelerate the maturity of the First
Mortgage Notes and exercise other rights and remedies, including foreclosures
upon the Mortgaged Property.
In connection with the closing of the Transaction, Star/Petro, Inc., a
wholly-owned subsidiary of the Operating Partnership and the parent corporation
of Petro Holdings, will become jointly and severally liable for the Operating
Partnership's obligations under the First Mortgage Notes and the First Mortgage
Note Agreement.
Description of Star Bank Credit Facilities
In December 1995, the Operating Partnership entered into the Bank Credit
Facilities with a group of commercial banks. The Bank Credit Facilities, as
amended, consist of a $25.0 million Operating Partnership Acquisition Facility
and a $12.0 million Operating Partnership Working Capital Facility. At
September 30, 1998, $9.0 million was outstanding under the Operating
Partnership Acquisition Facility and $4.8 was outstanding under the Operating
Partnership Working Capital Facility.
The agreement governing the Bank Credit Facilities contains covenants and
default provisions generally similar to those contained in the First Mortgage
Note Agreement.
The Operating Partnership Working Capital Facility will expire on June 2000,
but may be extended annually thereafter with the consent of the banks. The
Operating Partnership Acquisition Facility will revolve until September 30,
1999 after which time any outstanding loans thereunder will amortize quarterly
in equal principal payments over the period from September 30, 1999 through
September 30, 2002. Amounts borrowed under the Operating Partnership
Acquisition Facility are subject to a 30-day clean-up requirement during the
period from April 1 to September 30 of each year.
Petro Credit Agreement
The Petro Credit Agreement provides for maximum aggregate advances of $47
million to finance working capital requirements of Petro with a sublimit under
a borrowing base established each month. Amounts borrowed under the revolving
credit loans are subject to a 90-day clean-up requirement during the period
from April 1 to September 30 of each year and the revolving credit portion of
the facility terminates on June 29, 1999. At September 30, 1998, there were no
revolving credit loans outstanding.
Petro's obligations under the Petro Credit Agreement are secured by all of
its and its subsidiaries' customer lists, trade names and trademarks. Petro has
further secured its obligations under the Petro Credit Agreement with a lien on
accounts receivable and inventories.
98
<PAGE>
The Petro Credit Agreement contains significant financial and other
covenants.
The Petro Credit Agreement contains various events of default customary for
agreements of such type. If an Event of Default occurs and is occurring, the
lenders may, without notice, terminate the revolving credit loans the term
loans and/or declare all obligations under the Petro Credit Agreement
immediately due and payable, except that in the case of an Event of Default
arising from certain events of bankruptcy or insolvency, all such obligations
will become due and payable without declaration, notice or demand.
Other Petro Debt
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).
Pursuant to the Private Debt Agreements at the effective time of the
Transaction:
(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").
The agreements under which Petro will issue the New Private Debt contain
various financial and other covenants relating to the maintenance of corporate
existence, timely payments of taxes, preservation of Petro's assets and
engaging in other businesses. Such agreements also contain covenants relating
to limitations on funded debt, restricted payments, mergers, consolidations
and sale of assets and transactions with affiliates which are generally
comparable to those contained in the indenture governing the Notes.
Petro also had outstanding as of September 30, 1998 an aggregate of $14.3
million of notes, primarily in connection with the purchase of fuel oil
dealers, which notes are due variously in monthly, quarterly and annual
installments with interest at various rates ranging from 8% to 15%, maturing
at various dates through 2004.
In addition, Petro has outstanding $1.3 million of 10 1/8% Subordinated
Debentures due 2003 (the "10 1/8% Notes") and $0.7 million of 9 3/8%
Subordinated Notes due 2006 (the "9 3/8% Notes") and $1.1 million of 12 1/4%
Subordinated Notes due 2005 (the "12 1/4% Notes" and, together with the 9 3/8%
Notes and the 10 1/8% Notes, the "Old Public Debt"). In October 1998, the
indentures under which the Old Public Debt was issued were amended to
eliminate substantially all of the covenant protection provided by such
indentures.
99
<PAGE>
UNITS ELIGIBLE FOR FUTURE SALE
As of the date of this prospectus after giving effect to the Transaction, the
General Partner and the LLC Owners would have held 568,478 Junior Subordinated
Units and 287,700 General Partner Units. The sale of Units owned by the General
Partner and the LLC Owners could have an adverse impact on the price of the
Common Units.
The Common Units sold in this offering will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any Common Units owned by an "affiliate"(as that term is defined in the
rules and regulations under the Securities Act) of ours may not be resold
publicly except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption therefrom under Rule 144 thereunder
("Rule 144") or otherwise. Rule 144 permits securities acquired by an affiliate
of the issuer in an offering to be sold into the market in an amount that does
not exceed, during any three-month period, the greater of (1) 1% of the total
number of such securities outstanding or (2) the average weekly reported
trading volume of the Common Units for the four calendar weeks prior to such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about us and holders of restricted securities under Rule 144 may be
subject to a one-year holding period. A person who is not deemed to have been
an affiliate of ours at any time during the three months preceding a sale, and
who has beneficially owned his Units for at least two years, would be entitled
to sell such Units under Rule 144 without regard to the public information
requirements, volume limitations, manner of sale provisions or notice
requirements of Rule 144.
Prior to the end of the Subordination Period, we may not issue equity
securities 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 (excluding Common Units issued upon
conversion of Senior Subordinated Units and Junior Subordinated Units, or in
connection with certain capital improvements, acquisitions or to repay certain
indebtedness) without the approval of the holders of at least a majority of the
outstanding Common Units. The Common Units offered hereby are excluded from
such 2,500,000 Common Units. After the Subordination Period, the General
Partner, without a vote of the Unitholders, may cause us to issue additional
Common Units or other equity securities on a parity with or senior to the
Common Units. In such circumstance, the General Partner will have certain
preemptive rights. The Partnership Agreement does not impose any restriction on
our ability to issue equity securities ranking junior to the Common Units at
any time. Any issuance of additional Units would result in a corresponding
decrease in the proportionate ownership interest in the Partnership represented
by, and could adversely affect the cash distributions to and market price of,
Common Units then outstanding. See "The Partnership Agreement--Issuance of
Additional Securities."
Pursuant to the Partnership Agreement, the General Partner and its affiliates
will have the right, upon the terms and subject to the conditions therein, to
cause the Partnership to register under the Securities Act the offer and sale
of any Units held by such party. Subject to the terms and conditions of the
Partnership Agreement, such registration rights allow the General Partner and
its affiliates, or their assignees, holding any Units to require registration
of any such Units and to include any such Units in a registration by us of
other Units, including Units offered by us or by any Unitholder. Such
registration rights will continue in effect for two years following any
withdrawal or removal of the General Partner as our general partner. Also, the
Partnership has agreed 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. In connection
with any such registrations, we will indemnify each holder of Units
participating in such registration and its officers, directors and controlling
persons from and against any liabilities under the Securities Act or any state
securities laws arising from the registration statement or prospectus. We will
bear the reasonable costs of any such registration. In addition, the General
Partner and its affiliates may sell their Units in private transactions at any
time, in accordance with applicable law.
100
<PAGE>
The Partnership, on behalf of itself and its affiliates, and certain
executives and other persons have agreed that, for a period of 120 days from
the date of this prospectus, that we will not, without the prior written
consent of PaineWebber Incorporated directly or indirectly, offer, pledge,
sell, contract to sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of any Common Units or rights to acquire Common
Units or any security convertible into or exercisable or exchangeable for
Common Units (including, without limitation, Common Units which may be deemed
to be beneficially owned in accordance with the rules and regulations of the
SEC) other than the Common Units subject to the underwriters' over-allotment
option, subject to certain limited exceptions.
101
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
This section is a summary of the 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 us ("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 even with retroactive effect. Subsequent changes in these
authorities may cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise requires, references
in this section to us are references to both us and the Operating Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting us or the Unitholders. Moreover, the
discussion focuses on Unitholders who are individual citizens or residents of
the United States and has only limited application to corporations, estates,
trusts, non-resident aliens or other Unitholders subject to specialized tax
treatment (such as tax-exempt institutions, foreign persons, individual
retirement accounts, REITs or mutual funds). Accordingly, each prospective
Unitholder should consult, and should depend on, his own tax advisor in
analyzing the federal, state, local and foreign tax consequences peculiar to
him of the ownership or disposition of Units.
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 that (i) we 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 our partners (but not as partners of the Operating Partnership). In
addition, all statements as to matters of law and legal conclusions contained
in this section, unless otherwise noted or attributed to us, are the opinion of
Counsel. (All references to "us," "we" or "our" are to the Partnership and not
to Counsel.)
We have not requested, and do not expect to request, any ruling from the IRS
with respect to our classification as a partnership for federal income tax
purposes, whether our operations generate "qualifying income" under Section
7704 of the Code or any other matter affecting us or prospective Unitholders.
Instead, we have relied, and will rely, on the opinions of Counsel as to these
matters stated here.
An opinion of counsel represents only that counsel's best legal judgment and
does not bind the IRS or the courts. No assurance can be provided that the
opinions and statements here would be sustained by a court if contested by the
IRS. Any such contest with the IRS could materially and adversely impact the
market for the Units and the prices at which Units trade even if we prevail. In
addition, the costs of any contest with the IRS will be borne directly or
indirectly by the Unitholders and the General Partner. Furthermore, no
assurance can be given that our treatment or an investment in us will not be
significantly modified by future legislative or administrative changes or court
decisions. Any such modifications may even 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 Unitholders--Treatment of Short
Sales"), (ii) whether a Unitholder acquiring Units in separate transactions
must maintain a single adjusted tax basis in all of his Units (see "--
Disposition of Units, Recognition of Gain or Loss"), (iii) whether our 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 our method for depreciating Section
743 adjustments is sustainable (see "--Disposition of Units--Section 754
Election") and (v) whether the allocations of recapture income contained in our
Partnership Agreement will be respected (see "--Tax Treatment of Unitholders--
Allocation of Our Income, Gain, Loss and Deduction").
102
<PAGE>
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 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 to him. Distributions by a partnership to a partner are generally not
taxable unless the amount of cash distributed to a partner is in excess of his
adjusted basis in his partnership interest.
As we said earlier, we have not requested, and do not expect to request, any
ruling from the IRS as to our status as a partnership or that of the Operating
Partnership for federal income tax purposes. Instead, we have 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, we 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 us and the General Partner. For taxable years
beginning before December 31, 1996 those factual representations are:
(a) With respect to us 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 us and the Operating Partnership and any notes
or receivables due from those partnerships, equal to at least $6.0
million;
(b) We have been operated in accordance with (i) all applicable partnership
statutes, (ii) our Partnership Agreement and (iii) the description of
our Partnership Agreement in this registration statement on Form S-3
filed with the SEC on December 3, 1998 (Registration No. 333- )
(the "Registration 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 of its
Partnership Agreement in this Registration 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 our gross income 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 income which Counsel
believes is qualifying income within the meaning of Section 7704(d) of
the Code.
For taxable years beginning after December 31, 1996 those factual
representations are:
(a) Neither we nor the Operating Partnership has elected, or will elect, to
be treated as an association or corporation;
(b) We have been and will be operated in accordance with (i) all applicable
partnership statutes, (ii) the Partnership Agreement, and (iii) the
description of our Partnership Agreement in this Registration Statement;
(c) The Operating Partnership has been and will be operated in accordance
with (i) all applicable partnership statutes, (ii) its Operating
Partnership Agreement, and (iii) the description of its Partnership
Agreement in this Registration Statement; and
(d) For each taxable year, more than 90% of our gross income 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 income which Counsel believes is "qualifying income" within the
meaning of Section 7704(d) of the Code.
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 90% or more of whose gross income for every taxable year consists
of "qualifying income." Qualifying income includes interest (from other than a
financial business), dividends and income and
103
<PAGE>
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 our
representations and those of the General Partner and a review of the applicable
legal authorities, Counsel is of the opinion that at least 90% of our gross
income will constitute qualifying income. We estimate that less than 6.0% of
our gross income for each taxable year will not constitute qualifying income.
If we fail to meet the Qualifying Income Exception (other than a failure that
is determined by the IRS to be inadvertent and is cured within a reasonable
time after discovery), we will be treated as if we transferred all of our
assets (subject to liabilities) to a newly formed corporation (on the first day
of the year in which we fail to meet the Qualifying Income Exception) in return
for stock in that corporation, and then distributed that stock to the partners
in liquidation of their interests in us. This contribution and liquidation
should be tax-free to Unitholders and to us, so long as we, at that time, do
not have liabilities in excess of the tax basis of our assets. Thereafter, we
would be treated as a corporation for federal income tax purposes.
If we 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, our income, gain, loss and deduction
would be reflected only on our tax return rather than being passed through to
the Unitholders, and our net income would be taxed to us 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
our 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 us 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 we will be classified as
a partnership for federal income tax purposes.
TAX TREATMENT OF UNITHOLDERS
Limited Partner Status
Unitholders who have become our limited partners will be treated as our
partners for federal income tax purposes. Assignees who have executed and
delivered Transfer Applications, and are awaiting admission as limited
partners, and 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 our
partners for federal income tax purposes. Because there is no direct authority
addressing assignees of Units who are entitled to, but do not, execute and
deliver Transfer Applications, it is not clear whether that conclusion applies
to them. (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 appears to lose his status as a partner with
respect to such Units for federal income tax purposes. See
"--Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
Unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by such a Unitholder would therefore be fully taxable as
ordinary income. These holders should consult their own tax advisors with
respect to their status as our partners for federal income tax purposes.
104
<PAGE>
Flow-through of Taxable Income
We will pay no federal income tax except for minimal taxes expected to be
paid by a corporate subsidiary. Instead, each Unitholder will be required to
report on his income tax return his share of our income, gains, losses and
deductions without regard to whether we make cash distributions to him.
Consequently, a Unitholder may be taxed on our income even if we do not make a
cash distribution to him. Each Unitholder will be required to include in income
his share of our income, gain, loss and deduction for our taxable year ending
with or within his taxable year.
Although we do not expect that the Corporate Group will pay significant
federal income tax for some period of time, we expect that the Corporate Group
will generate earnings and profits during that time such that distributions
from the Corporate Group to us will result in taxable dividend income to the
Unitholders. Counsel has not rendered any opinion with respect to these
matters.
Treatment of Partnership Distributions
Our distributions to a Unitholder generally will not be taxable to him for
federal income tax purposes to the extent of his tax basis in his Units
immediately before the distribution. Our cash distributions in excess of a
Unitholder's tax basis generally will be considered to be gain from the sale or
exchange of the Units, taxable in accordance with the rules described under
"Disposition of Units" below. Any reduction in a Unitholder's share of our
liabilities for which no partner, including the General Partner, bears the
economic risk of loss ("nonrecourse liabilities") will be treated as a
distribution of cash to that Unitholder. To the extent that our distributions
cause a Unitholder's "at risk" amount to be less than zero at the end of any
taxable year, he must recapture any losses deducted in previous years. See "--
Limitations on Deductibility of Partnership Losses."
A decrease in a Unitholder's percentage interest in us because of our
issuance of additional Units will decrease his share of our nonrecourse
liabilities, and will result in a corresponding deemed distribution of cash. A
non-pro rata distribution of money or property may result in ordinary income to
a Unitholder, regardless of his tax basis in his Units, if such distribution
reduces his share of our "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, he will be treated as having been distributed his proportionate share
of the Section 751 Assets and having exchanged such assets with us in return
for the non-pro rata portion of the actual distribution made to him. This
latter deemed exchange will generally result in his realization of ordinary
income under Section 751(b) of the Code. That income will equal the excess of
(1) the non-pro rata portion of such distribution over (2) his tax basis for
the share of such Section 751 Assets deemed relinquished in the exchange.
Ratio of Taxable Income to Distributions
We estimate that a purchaser of Common Units in this Offering who owns them
through December 31, 2001, will be allocated, on a cumulative basis, an amount
of federal taxable income for that period which is less than 20% of the cash
distributed for that period. We further estimate that for taxable years
beginning after December 31, 2001, the taxable income allocable to a Unitholder
will constitute a significantly higher percentage of cash distributed to him.
These 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 our control.
Further, these estimates are based on current tax law and certain tax reporting
positions that we have adopted or intend to adopt and with which the IRS could
disagree. Accordingly, no assurance can be given that these estimates will be
correct. The actual percentage of distributions that will constitute taxable
income could be higher or lower, and any differences could be material and
could materially affect the value of the Common Units.
105
<PAGE>
Tax Rate
The top marginal income tax rate for individuals for 1999 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.
Alternative Minimum Tax
Each Unitholder will be required to take into account his share of any items
of our income, gain, deduction, or loss for purposes of the alternative minimum
tax. The minimum tax rate for non-corporate 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.
Basis of Units
A Unitholder will have an initial tax basis for his Units equal to the price
he paid for them. His basis will be increased by his share of our income and by
any increases in his share of our nonrecourse liabilities. That basis will be
decreased (but not below zero) by distributions made by us to him, by his share
of our losses, by any decrease in his share of our nonrecourse liabilities and
by his share of our expenditures that are not deductible in computing our
taxable income and are not required to be capitalized. A limited partner will
have no share of our debt which is recourse to the General Partner, but will
have a share, generally based on his share of profits, of our nonrecourse
liabilities. See "--Disposition of Units--Recognition of Gain or Loss."
Limitations on Deductibility of Partnership Losses
The deduction by a Unitholder of his share of our losses will be limited to
the tax basis in his Units and, in the case of an individual Unitholder or a
corporate Unitholder (if more than 50% of the value of its stock is owned
directly or indirectly by five or fewer individuals or certain tax-exempt
organizations), to the amount for which the Unitholder is considered to be "at
risk" with respect to our activities, if that is less than his tax basis. A
Unitholder who is subject to the at risk rules must recapture losses deducted
in previous years to the extent that distributions made to him by us cause his
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 his 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 our
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 us, 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 his tax
basis of the Units increases or decreases (other than tax basis increases or
decreases attributable to increases or decreases in his share of our
nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses generated by us will only be available to offset our future
passive income 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 us, such as dividends from the
106
<PAGE>
Corporate Group, or salary or active business income. Passive losses which are
not deductible because they exceed a Unitholder's income generated by us may be
deducted in full when he disposes of his entire investment in us in a fully
taxable transaction to an unrelated party. The passive activity loss rules are
applied after other applicable limitations on deductions such as the at risk
rules and the basis limitation.
A Unitholder's share of our net income may be offset by his share of our
suspended passive losses, 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 share of our net passive income will be treated as
investment income for this purpose. In addition, the Unitholder's share of our
portfolio income will be treated as investment income. Investment interest
expense includes (i) interest on indebtedness properly allocable to property
held for investment, (ii) our 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 Our Income, Gain, Loss and Deduction
In general, if we have 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 us. 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 we have 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 our 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 our 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 us 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 we do not
expect that our operations will result in the creation of negative capital
accounts, if negative capital accounts nevertheless result, items of our income
and gain will be allocated in an amount and manner sufficient to eliminate the
negative balance as quickly as possible.
Regulations provide that an allocation of items of partnership income, gain,
loss or deduction, other than an allocation required by Section 704(c) of the
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
107
<PAGE>
effect for federal income tax purposes in determining a partner's distributive
share of an item of income, gain, loss or deduction only if the allocation has
substantial economic effect. In any other case, a partner's distributive share
of an item will be determined on the basis of the partner's interest in the
partnership, which will be determined by taking into account all the facts and
circumstances, including the partner's relative contributions to the
partnership, the interests of the partners in economic profits and losses, the
interest of the partners in cash flow and other nonliquidating distributions
and rights of the partners to distributions of capital upon liquidation.
Counsel is of the opinion that allocations under our 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.
Entity-Level Collections
If we are required or elect under applicable law to pay any federal, state or
local income tax on behalf of any Unitholder or any General Partner or any
former Unitholder, we are authorized to pay those taxes from our funds. That
payment, if made, will be treated as a distribution of cash to the partner on
whose behalf the payment was made. If the payment Is made on behalf of a person
whose identity cannot be determined, we are authorized to treat the payment as
a distribution to current Unitholders. The General Partner is authorized to
amend our Partnership Agreement in the manner necessary to maintain uniformity
of 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 our Partnership Agreement are
maintained as nearly as is practicable. Any such payments by us could give rise
to an overpayment of tax on behalf of an individual partner in which event the
partner could file a claim for credit or refund.
Treatment of Short Sales
A Unitholder whose Units are loaned to a "short seller" to cover a short sale
of Units may be considered as having disposed 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 of our 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 those distributions would appear to be treated as ordinary income.
Unitholders desiring to assure their status as partners and avoid the risk of
gain recognition should modify any applicable brokerage account agreements to
prohibit their brokers from borrowing their Units. The IRS has announced that
it is actively studying issues relating to the tax treatment of short sales of
partnership interests. See also "--Disposition of 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, at least in the next few years, will be unrelated business taxable income
and thus will be taxable to such a Unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income, at least in the next few years.
Under current rules applicable to publicly-traded partnerships, we are
required to withhold as taxes 39.6% of any cash distributions made to foreign
Unitholders. A foreign Unitholder may claim a credit for those taxes. If that
tax exceeds the taxes due from the foreign Unitholder, he may claim a refund.
Each foreign Unitholder
108
<PAGE>
must obtain a taxpayer identification number from the IRS and submit that
number to our Transfer Agent on a Form W-8 in order to obtain a credit for the
taxes withheld. A change in applicable law may require the Partnership to
change these procedures. In addition, non-resident aliens and foreign
corporations, trusts or estates which own 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 our income, gain, loss or deduction and pay federal income tax
at regular rates on any net income or gain.
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 at a rate of 30%, in addition to regular federal
income tax, on its share of our income and gain (as adjusted for changes in the
foreign corporation's "U.S. net equity") which are effectively connected with
the conduct of a United States trade or business. 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 an IRS ruling, 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 his United States trade or business. Except to the extent the ruling
applied (as to which Counsel has not opined), a foreign Unitholder will not be
taxed or subject to withholding upon the disposition of a Unit if he has owned
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.
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year
We use the year ending December 31 as our taxable year and we have adopted
the accrual method of accounting for federal income tax purposes. Each
Unitholder will be required to include in income his share of our income, gain,
loss and deduction for our taxable year ending within or with his taxable year.
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 our
taxable year but before the close of his taxable year must include his share of
our 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
share of more than one year of our income, gain, loss and deduction. See "--
Disposition of Units--Allocations Between Transferors and Transferees."
Initial Tax Basis, Depreciation and Amortization
The tax basis of our assets 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 "--Tax Treatment of Unitholders--Allocation of Our Income, Gain,
Loss and Deduction."
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions in the early years
assets are placed in service. We will not be entitled to any amortization
deductions with respect to goodwill conveyed to us on formation. Property
subsequently acquired or constructed by us may be depreciated using accelerated
methods permitted by the Code.
If we dispose of depreciable property by sale, foreclosure, or otherwise, all
or a portion of any gain (determined by reference to the amount of depreciation
previously deducted and the nature of the property) may be subject to the
recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a Unitholder who has taken cost recovery or depreciation deductions
with respect to our property may be required to recapture such deductions as
ordinary income upon a sale of his interest in us. See "--Tax Treatment of
Unitholders--Allocation of Our Income, Gain, Loss and Deduction" and "--
Disposition of Units
- --Recognition of Gain or Loss."
109
<PAGE>
Uniformity of Units
Because we cannot match transferors and transferees of Units, uniformity of
the economic and tax characteristics of the Units to a purchaser of such Units
must be maintained. In the absence of uniformity, compliance with a number of
federal income tax requirements, both statutory and regulatory, could be
substantially diminished. A lack of uniformity can result from a literal
application of 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 "--Disposition of Units--Section
754 Election."
We intend 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 apparent 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 our assets)). See "--Disposition of Units--Section 754 Election." To
the extent such Section 743(b) adjustment is attributable to appreciation in
value in excess of the unamortized Book-Tax Disparity, we will apply the rules
described in the Regulations and legislative history. If we determine that such
a position cannot reasonably be taken, we 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 our property. If such an
aggregate approach is adopted, it may result in lower annual depreciation and
amortization deductions than would otherwise be allowable to certain
Unitholders and risk the loss of depreciation and amortization deductions not
taken in the year that such deductions are otherwise allowable. This convention
will not be adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on the Unitholders.
If we choose not to utilize this aggregate method, we may use any other
reasonable depreciation and amortization convention to preserve the uniformity
of the intrinsic tax characteristics of any 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."
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 our estimates of the relative fair market values, and
determinations of the initial tax bases, of our assets. Although we may from
time to time consult with professional appraisers with respect to valuation
matters, we will make many of the relative fair market value estimates. These
estimates and determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair market value or
determinations of basis are subsequently found to be incorrect, the character
and amount of items of income, gain, loss or deductions previously reported by
Unitholders might change, and Unitholders might be required to adjust their tax
liability for prior years.
State and Local Tax Considerations
For a discussion of the state and local tax considerations arising from an
investment in Common Units, see "--State and Local Tax Considerations" at the
end of this "Certain Federal Income Tax Considerations."
110
<PAGE>
ADMINISTRATIVE MATTERS
Information Returns and Audit Procedures
We intend to furnish to each Unitholder, within 90 days after the close of
each calendar year, certain tax information, including a Schedule K-1, which
sets forth each Unitholder's share of our income, gain, loss and deduction for
our preceding taxable year. In preparing this information, which will generally
not be reviewed by counsel, we will use various accounting and reporting
conventions, some of which have been mentioned earlier, to determine the
Unitholder's share of our 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. Neither we nor Counsel can assure prospective Unitholders that the IRS
will not successfully contend in court that such accounting and reporting
conventions are impermissible. Any such challenge by the IRS could negatively
affect the value of the Units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from any such audit may require each Unitholder to adjust a prior
year's tax liability, and possibly may result in an audit of the Unitholder's
own return. Any audit of a Unitholder's return could result in adjustments not
related to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of our 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. Our Partnership
Agreement appoints the General Partner as our Tax Matters Partner.
The Tax Matters Partner will make certain elections on our behalf and on
behalf of Unitholders. In addition, the Tax Matters Partner can extend the
statute of limitations for assessment of tax deficiencies against Unitholders
with respect to items in our returns. The Tax Matters Partner may bind a
Unitholder with less than a 1% profits interest in us to a settlement with the
IRS unless that Unitholder elects, by filing a statement with the IRS, not to
give such authority to the Tax Matters Partner. The Tax Matters Partner may
seek judicial review (by which all the Unitholders are bound) of a final
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 profits and by the Unitholders having in the aggregate at least
a 5% profits interest. However, only one action for judicial review will go
forward, and each Unitholder with an interest in the outcome may participate.
However, if we elect to be treated as a large partnership (which we do not
currently intend to do), a Unitholder 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 our return. Intentional or negligent disregard of the
consistency requirement may subject a Unitholder to substantial penalties.
However, if we elect to be treated as a large partnership (which we currently
do not intend to do), its partners would be required to treat all partnership
items in a manner consistent with our 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 an electing large partnership take
111
<PAGE>
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. Although we are
authorized under our Partnership Agreement to do so, we do not expect to elect
to have the large partnership provisions apply to us because of the various
costs of their application.
Nominee Reporting
Persons who hold an interest in us as a nominee for another person are
required to furnish to us
(a) the name, address and taxpayer identification number of the beneficial
owner and the nominee; (b) whether the beneficial owner is (i) a person that is
not a United States person, (ii) a foreign government, an international
organization or any wholly- owned agency or instrumentality of either of the
foregoing, or (iii) a tax-exempt entity; (c) the amount and description of
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 us. The nominee is required to supply the beneficial
owner of the Units with the information furnished to us.
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. Nevertheless, it is
arguable that we are not subject to the registration requirement on the basis
that we do not constitute a tax shelter. However, the predecessor general
partner, as our principal organizer, has registered us as a tax shelter with
the Secretary of the Treasury in the absence of assurance that we 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 us:
96026000016. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT
INVESTMENT IN US OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR
APPROVED BY THE IRS.
We must furnish the registration number to the Unitholders, and a Unitholder
who sells or otherwise transfers a 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 our tax shelter
registration number on Form 8271 to be attached to the tax return on which any
of our deductions, losses or other benefits are claimed or our income is
included. A Unitholder who fails to disclose the tax shelter registration
number on his return, without reasonable cause for that failure, will be
subject to a $250 penalty for each failure. Any penalties discussed herein are
not deductible for federal income tax purposes.
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 causes,
including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Code. No penalty will be imposed, however, with respect to any
portion of an underpayment if it is shown that there was a reasonable cause for
that portion and that the taxpayer acted in good faith with respect to that
portion.
112
<PAGE>
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 us. If any item of our
income, gain, loss or deduction included in the distributive shares of
Unitholders might result in such an "understatement" of income for which no
"substantial authority" exists, we must disclose the pertinent facts on its
return. In addition, we will make a reasonable effort to furnish sufficient
information for Unitholders to make adequate disclosure on their returns to
avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000
for most corporations). If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
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 our nonrecourse
liabilities. Because the amount realized includes a Unitholder's share of our
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 distributions from us 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 our convention to amortize only a portion
of the Section 743(b) adjustment (described under "--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 us.
The term "unrealized receivables" includes potential recapture items, including
depreciation recapture. Ordinary income attributable to unrealized receivables,
inventory items and depreciation recapture may exceed net taxable gain realized
upon the sale of the 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.
113
<PAGE>
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If this
ruling is applicable to the holders of 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 us, because, as is the
case with corporate stock, interests in us 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, our 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 our 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 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), our taxable income or losses might be reallocated among the
Unitholders. We are authorized to revise our method of allocation between
transferors and transferees (as well as among partners whose interests
otherwise vary during a taxable period) to conform to a method permitted under
future Treasury Regulations.
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 our income, gain, loss and deductions
attributable to such quarter but will not be entitled to receive that cash
distribution.
Section 754 Election
We have made the election permitted by Section 754 of the Code, which
generally permits us to adjust a Unit purchaser's tax basis in our 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 belongs to the purchaser and not to other Unitholders. (For
purposes of this discussion, a Unitholder's inside basis in our assets will be
considered to have two components: (1) his share of our tax basis in such
assets ("Basis") and (2) his Section 743(b) adjustment to that basis.)
114
<PAGE>
Proposed Treasury Regulations promulgated under Section 743 of the Code would
require, if adopted in their current form, if the remedial allocation method is
adopted (which we have 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
apparent inconsistencies if finalized in their current form, the depreciation
and amortization methods and useful lives associated with the Section 743(b)
adjustment may differ from the methods and useful lives generally used to
depreciate the basis in such properties. Pursuant to our 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 certain
Treasury Regulations. See "Tax Treatment of Operations--Uniformity of Units."
Although Counsel is unable to opine as to the validity of such an approach,
we intend to depreciate the portion of a Section 743(b) adjustment attributable
to unrealized appreciation in the value of Contributed Property (to the extent
of any unamortized Book-Tax Disparity) using a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the 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, we will apply the rules described in the Regulations and legislative
history. If we determine that such position cannot reasonably be taken, we 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 our assets. Such
an aggregate approach may result in lower annual depreciation or amortization
deductions than would otherwise be allowable to certain Unitholders. See "Tax
Treatment of Operations--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 us to goodwill which, as an intangible asset,
would be amortizable over a longer period of time than our tangible assets.
A Section 754 election is advantageous if the transferee's tax basis in his
Units is higher than such Units' share of the aggregate tax basis to us of our
assets immediately prior to the transfer. In such a case, as a result of the
election, the transferee would have a higher tax basis in his share of our
assets for purposes of calculating, among other items, his depreciation and
depletion deductions and his share of any gain or loss on a sale of our 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 our 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 we will
make them on the basis of certain assumptions as to the value of our assets and
other matters. There is no assurance that our determinations will not be
successfully challenged by the IRS and that the deductions resulting from them
will not be reduced or disallowed altogether. Should the IRS require a
different basis adjustment to be made, and should, in our opinion, the expense
of compliance exceed the benefit of the election, we may seek permission from
the IRS to revoke our Section 754 election. If such permission is granted, a
subsequent purchaser of Units may be allocated more income than he would have
been allocated had the election not been revoked.
115
<PAGE>
Notification Requirements
A Unitholder who sells or exchanges Units is required to notify us in writing
of that sale or exchange within 30 days after the sale or exchange and in any
event by no later than January 15 of the year following the calendar year in
which the sale or exchange occurred. We are required to notify the IRS of that
transaction and to furnish certain information to the transferor and
transferee. However, these reporting requirements do not apply with respect to
a sale by an individual who is a citizen of the United States and who effects
the sale or exchange through a broker. Additionally, a 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 our goodwill or going concern value. Failure to
satisfy these reporting obligations may lead to the imposition of substantial
penalties.
Constructive Termination
We will be considered to have been terminated if there is a sale or exchange
of 50% or more of the total interests in our capital and profits within a 12-
month period. A termination of us will cause a termination of the Operating
Partnership. A termination of us will result in the closing of our taxable
year. In the case of a Unitholder reporting on a taxable year other than a
fiscal year ending December 31, the closing of our tax year may result in more
than 12 months' of our taxable income or loss being includable in his taxable
income for the year of termination. Tax elections required to be made by us,
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 our
depreciation deductions. A termination could also result in penalties if we are
unable to determine that the termination had occurred. Moreover, a termination
might either accelerate the application of, or subject us to, any tax
legislation enacted prior to the termination.
STATE AND LOCAL TAX CONSIDERATIONS
In addition to federal income taxes, a Unitholder will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which he resides and in which we do business or own property.
Although an analysis of those various taxes is not presented here, each
prospective Unitholder should consider their potential impact on his investment
in us. A Unitholder will likely be required to file state and local income tax
returns and pay state and local income taxes in some or all of the various
jurisdictions in which we do business or own property and may be subject to
penalties for failure to comply with those requirements. We anticipate that
substantially all of our income will be generated in the following states:
Connecticut, Indiana, Kentucky, Maine, Massachusetts, Michigan, New Hampshire,
New Jersey, New York, Ohio, Pennsylvania, Rhode Island and West Virginia. Each
of these states currently imposes a personal income tax; however, 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, we have 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 us, or we
may elect, to withhold a percentage of income from amounts to be distributed to
a Unitholder who is not a resident of the state. Withholding, the amount of
which may be greater or less than a particular Unitholder's income tax
liability to the state, generally does not relieve the non-resident Unitholder
from the obligation to file an income tax return. Amounts withheld may be
treated as if distributed to Unitholders for purposes of determining the
amounts distributed by us. See "--Tax Treatment of Unitholders--Entity-Level
Collections." Based on current law and our estimate of our future operations,
we do not anticipate that any amounts required to be withheld will be material.
116
<PAGE>
IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO INVESTIGATE THE LEGAL AND TAX
CONSEQUENCES, UNDER THE LAWS OF PERTINENT STATES AND LOCALITIES OF HIS
INVESTMENT IN US. ACCORDINGLY, EACH PROSPECTIVE UNITHOLDER SHOULD CONSULT, AND
MUST DEPEND UPON, HIS OWN TAX COUNSEL OR OTHER ADVISOR WITH REGARD TO THOSE
MATTERS. FURTHER, IT IS THE RESPONSIBILITY OF EACH UNITHOLDER TO FILE ALL STATE
AND LOCAL, AS WELL AS U.S. FEDERAL, TAX RETURNS THAT MAY BE REQUIRED. COUNSEL
HAS NOT RENDERED AN OPINION ON THE STATE OR LOCAL TAX CONSEQUENCES OF AN
INVESTMENT IN US.
117
<PAGE>
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE
BENEFIT PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
An investment in the Partnership by an employee benefit plan is subject to
certain additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and restrictions imposed by Section 4975 of the Code. As used in this
prospectus, the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans,
simplified employee pension plans and tax deferred annuities or IRAs
established or maintained by an employer or employee organization. Among other
things, consideration should be given to (a) whether such investment is prudent
under Section 404(a)(1)(B) of ERISA; (b) whether in making such investment,
such plan will satisfy the diversification requirements of Section 404(a)(1)(C)
of ERISA; and (c) (1) the fact that such investment could result in recognition
of unrelated business taxable income by such plan even if there is no net
income, (2) the effect of an imposition of income taxes on the potential
investment return for an otherwise tax exempt investor (if gross income is
$1,000 or more) and (3) the requirement on such an investor plan of filing an
additional federal income tax return. The person with investment discretion
with respect to the assets of an employee benefit plan (a "fiduciary") should
determine whether an investment in the Partnership is authorized by the
appropriate governing instrument and is a proper investment for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to IRAs
that are not considered part of an employee benefit plan) prohibit an employee
benefit plan from engaging in certain transactions involving "plan assets" with
parties that are "parties in interest" under ERISA or "disqualified persons"
under the Code with respect to the plan.
In addition to considering whether the purchase of Common Units is a
prohibited transaction, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in the Partnership, be deemed to own an
undivided interest in the assets of the Partnership, with the result that the
General Partner also would be a fiduciary of such plan and the operations of
the Partnership would be subject to the regulatory restrictions of ERISA,
including its prohibited transaction rules, as well as the prohibited
transaction rules of the Code.
The Department of Labor regulations provide guidance with respect to whether
the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under certain circumstances. Pursuant
to these regulations, an entity's assets would not be considered to be "plan
assets" if, among other things, (a) the equity interests acquired by employee
benefit plans are publicly offered securities--i.e., the equity interests are
widely held by 100 or more investors independent of the issuer and each other,
freely transferable and registered pursuant to certain provisions of the
federal securities laws, (b) the entity is an "operating company," i.e., it is
primarily engaged in the production or sale of a product or service other than
the investment of capital either directly or through a majority-owned
subsidiary or subsidiaries or (c) there is no significant investment by benefit
plan investors, which is defined to mean that less than 25% of the value of
each class of equity interest (disregarding certain interests held by the
General Partner, its affiliates, and certain other persons) is held by the
employee benefit plans referred to above, IRAs and other employee benefit plans
not subject to ERISA (such as governmental plans). The Partnership's assets
should not be considered "plan assets" under these regulations because it is
expected that the investment will satisfy the requirements in (a) and (b) above
and may also satisfy the requirements in (c).
118
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, the underwriters named below, for whom PaineWebber
Incorporated, CIBC Oppenheimer Corp., Donaldson, Lufkin & Jenrette Securities
Corporation, A.G. Edwards & Sons, Inc., Lehman Brothers Inc., Prudential
Securities Incorporated and Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated are acting as representatives, have agreed to purchase from us and
we have agreed to sell, the following respective number of Common Units:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER COMMON UNITS
----------- ------------
<S> <C>
PaineWebber Incorporated..........................................
CIBC Oppenheimer Corp.............................................
Donaldson, Lufkin & Jenrette Securities Corporation...............
A.G. Edwards & Sons, Inc. ........................................
Lehman Brothers Inc. .............................................
Prudential Securities Incorporated................................
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated...
---------
Total........................................................... 6,800,000
=========
</TABLE>
The underwriters propose to offer the Common Units at the offering price set
forth on the cover page of this prospectus, and in part to certain securities
dealers (who may include the underwriters) at such price less a concession not
in excess of per Common Unit, and the underwriters and such dealers may
reallot to certain dealers a discount not in excess of per Common Unit.
The Common Units are offered subject to receipt and acceptance by the
underwriters, and to certain other conditions, including the right to reject
orders in whole or in part.
We have granted the underwriters an option to purchase up to 1,020,000
additional Common Units exercisable for 30 days after the date hereof to cover
over-allotments, if any, at the offering price less the underwriting discount
and commissions. The underwriters may purchase such Common Units only to cover
over-allotments made in connection with this offering. If the underwriters
exercise this option, each underwriter will be committed, subject to certain
conditions, to purchase an additional number of Common Units proportionate to
such underwriter's initial commitment.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the federal securities laws, or to
contribute to payments which the underwriters may be required to make in
respect thereof.
The Partnership, on behalf of itself and its affiliates, and certain
executives and other persons has agreed that, for a period of 120 days from the
date of this prospectus, that we will not, without the prior written consent of
PaineWebber Incorporated directly or indirectly, offer, pledge, sell, contract
to sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of any Common Units or rights to acquire Common Units or any security
convertible into or exercisable or exchangeable for Common Units (including,
without limitation, Common Units which may be deemed to be beneficially owned
in accordance with the rules and regulations of the SEC) other than the Common
Units subject to the underwriters' over-allotment option, subject to certain
limited exceptions.
PaineWebber Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation, A.G. Edwards & Sons, Inc., Lehman Brothers Inc. and Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated, have in the past performed
investment banking, broker dealing, lending and financial advisory services for
the Partnership and Petro and may continue to perform, investment banking,
broker dealer, lending and financial advisory services for us, and have
received customary compensation for these services.
119
<PAGE>
In January 1998, A.G. Edwards & Sons, Inc. served as placement agent for
$11,000,000 of the Operating Partnership's 7.17% First Mortgage Notes due
September 15, 2010. They received customary compensation for their services.
A.G. Edwards & Sons, Inc. was hired by the Special Committee of the Operating
Partnership as financial advisor in connection with the potential transaction
with Petro. As compensation for these financial advisory services, the
Operating Partnership agreed to pay A.G. Edwards & Sons, Inc. a fee of
$575,000, of which $325,000 has been paid and $250,000 will be due upon the
closing of the Transaction.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, was hired by
Petro as financial advisor in connection with the potential transaction with
the Partnership. As compensation for these financial advisory services, Petro
paid Dain Rauscher Wessels an engagement fee of $50,000 plus $375,000 upon
receipt of a fairness opinion. Additionally, Petro reimbursed Dain Rauscher
Wessels for approximately $31,000 of expenses.
In connection with this offering, the underwriters may purchase and sell
Common Units in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with this offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Units; and syndicate short positions involve
the sale by the underwriters of a greater number of Common Units than they are
required to purchase from us in this offering. The underwriters may also impose
a penalty bid, whereby selling concessions allowed to syndicate members or
other broker-dealers in respect of the Common Units sold in this offering for
their account, may be reclaimed by the syndicate if such Common Units are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Units, which may be higher than the price that might otherwise prevail
in the open market; and these activities, if commenced, may be discontinued at
any time without notice. These transactions may be effected on the New York
Stock Exchange or otherwise.
Neither we nor the underwriters make any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the Common Units. In addition, neither we nor the
underwriters make any representation that the underwriters will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
VALIDITY OF COMMON UNITS
The validity of the Common Units will be passed upon for the Partnership by
Phillips Nizer Benjamin Krim & Ballon LLP, New York, New York. Certain tax
matters will be passed upon for the Partnership by Andrews & Kurth L.L.P., New
York, New York. Certain legal matters in connection with the Common Units will
be passed upon for the underwriters by Latham & Watkins, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Star Gas Partners, L.P.
and Subsidiary as of September 30, 1997 and 1998 and for the fiscal years ended
September 30, 1996, 1997 and 1998, incorporated by reference in the
Registration Statement, have been incorporated by reference in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference in this prospectus and upon the authority of said
firm as experts in accounting and auditing.
The financial statements and schedule of Petroleum Heat and Power Co., Inc.,
as of December 31, 1996 and 1997 and for the fiscal years ended December 31,
1995, December 31, 1996 and 1997, incorporated by reference in the Registration
Statement, have been incorporated by reference in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, incorporated
by reference in this prospectus and upon the authority of said firm as experts
in accounting and auditing.
120
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read our SEC filings over the Internet at the
SEC's website at http://www.sec.gov. You may also read and copy documents at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Full addresses: Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549; 7 World Trade Center, New York, New York,
10038; Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference rooms.
We have filed with the SEC the Registration Statement on Form S-3, with
respect to the Common Units offered by this prospectus. The SEC allows us to
"incorporate by reference" the information we file with them, which means we
can disclose important information to you by referring you to those documents.
With respect to the Partnership and the Common Units offered by this
prospectus, we refer you to the Registration Statement and the exhibits and
schedules relating thereto for further information.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Partnership with the SEC (File No. 33-
98490) are incorporated by reference in this prospectus:
The Partnership's 1998 Annual Report on Form 10-K.
The Partnership's Current Report on Form 8-K, dated November 20, 1998.
In addition, all other reports and documents, we have filed pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to this offering shall be deemed incorporated by reference
into this prospectus from the date of filing of such reports and documents. Any
statement contained in a document, all or a portion of which is incorporated or
deemed to be incorporated by reference in this prospectus, shall be deemed to
be modified or superseded for purposes of this prospectus to the extent that a
statement contained in this prospectus (and, in case of any statement in an
incorporated document prior to the date of this prospectus), or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference in this prospectus, 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 prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT INCLUDED
WITH THIS PROSPECTUS. SUCH DOCUMENTS (EXCLUDING EXHIBITS TO SUCH DOCUMENTS) ARE
AVAILABLE WITHOUT CHARGE, UPON ORAL OR WRITTEN REQUEST BY ANY PERSON TO WHOM
THIS PROSPECTUS 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. TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE
MADE BY , 1999.
121
<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
information gives effect to the Transaction, including this offering, the Debt
Offering and the application of the net proceeds therefrom as described in
"Uses of Funds From this Offering and the Debt Offering." The information
presented is derived from, should be read in conjunction with, and is qualified
in its entirety by reference to the historical financial statements, and notes
thereto, appearing elsewhere and incorporated by reference in this prospectus.
The unaudited pro forma condensed consolidated balance sheet was prepared as
if the Transaction had occurred on September 30, 1998. The unaudited pro forma
condensed consolidated statement of operations for the twelve months ended
September 30, 1998 was prepared as if the Transaction had occurred on October
1, 1997.
The pro forma adjustments are based upon currently available information and
certain estimates and assumptions, and therefore, the actual adjustments may
differ from the unaudited pro forma adjustments. However, management believes
that the assumptions provide a reasonable basis for representing the
significant effects of the Transaction as contemplated and that the unaudited
pro forma adjustments give appropriate effect to those assumptions and are
properly applied in the unaudited pro forma condensed consolidated financial
statements. The unaudited pro forma condensed consolidated balance sheet and
statement of operations are not necessarily indicative of the financial
position or results of operations of the Partnership if the Transaction had
actually occurred on the dates indicated above. Likewise, the unaudited pro
forma condensed consolidated financial information is not necessarily
indicative of future financial combined position or future results of combined
operations of the Partnership.
122
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
STAR GAS
PARTNERS, L.P.
STAR GAS PRO FORMA PRO FORMA ADJUSTED PRO
PARTNERS, L.P. PETRO ADJUSTMENTS COMBINED THE OFFERINGS FORMA
-------------- --------- ----------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................... $ 1,115 $ 18,667 $ 19,782 $ 115,400 (g) $16,550
128,300 (h)
(246,932)(n)
Accounts receivable.... 5,279 38,163 43,442 43,442
Inventories............ 10,608 13,997 24,605 24,605
Prepaid expenses and
other current assets.. 945 11,885 12,830 12,830
-------- --------- -------- --------- --------
Total current assets... 17,947 82,712 100,659 (3,232) 97,427
-------- --------- -------- --------- --------
Cash collateral
account............... 6,900 6,900 6,900
Property and equipment,
net................... 110,262 28,799 11,310 (d) 150,371 150,371
Intangible and other
assets, net........... 51,398 80,267 5,331 (b) 420,662 4,600 (g) 425,262
2,055 (c)
899 (d)
280,712 (f)
-------- --------- -------- -------- --------- --------
Total assets........... $179,607 $ 198,678 $300,307 $678,592 $ 1,368 $679,960
======== ========= ======== ======== ========= ========
LIABILITIES AND
PARTNERS' CAPITAL
Current liabilities:
Current debt and
preferred stock....... $ 692 $ 12,188 $ 12,880 $ (9,797)(n) $ 3,083
Bank credit facility
borrowings............ 4,770 -- 4,770 4,770
Accounts payable....... 3,097 6,320 9,417 9,417
Unearned service
contract revenue...... 13,599 13,599 13,599
Accrued expenses and
income taxes.......... 2,830 29,281 4,600 (d) 42,782 (6,071)(n) 36,711
6,071 (e)
Accrued interest and
dividends............. 485 -- 583 (a) 1,068 1,068
Customer credit
balances.............. 6,038 28,803 34,841 34,841
-------- --------- -------- -------- --------- --------
Total current
liabilities........... 17,912 90,191 11,254 119,357 (15,868) 103,489
-------- --------- -------- -------- --------- --------
Long-term debt.......... 104,308 278,864 6,286 (b) 389,458 120,000 (g) 305,994
(203,464)(n)
Deferred income taxes... 50,000 (d) 50,000 50,000
Other long-term
liabilities............ 40 10,686 (3,500)(d) 7,226 7,226
Redeemable and
exchangeable preferred
stock.................. 28,555 (955)(b) 27,600 (27,600)(n)
Partners' capital
Common Unitholders..... 58,686 2,055 (c) 60,741 128,300 (h) 189,041
Subordinated
Unitholders........... (1,446) 60,006 (f) 22,544 22,544
(36,016)(d)
General partner........ 107 4,434 (f) 1,666 1,666
(2,875)(d)
Petro's stockholders'
deficiency............ (209,618) (583)(a)
(6,071)(e)
216,272 (f)
-------- --------- -------- -------- --------- --------
Total Partners'
Capital............... 57,347 (209,618) 237,222 84,951 128,300 213,251
-------- --------- -------- -------- --------- --------
Total Liabilities and
Partners' Capital..... $179,607 $ 198,678 $300,307 $678,592 $ 1,368 $679,960
======== ========= ======== ======== ========= ========
</TABLE>
123
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
TWELVE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
STAR GAS
PARTNERS, L.P.
STAR GAS PROPANE PRO FORMA PRO FORMA ADJUSTED PRO
PARTNERS, L.P. ACQUISITIONS(I) PETRO(J) ADJUSTMENTS COMBINED THE OFFERINGS FORMA
-------------- --------------- -------- ----------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................... $111,685 $4,386 $452,765 $568,836 $568,836
Cost of sales........... 49,498 1,972 299,987 351,457 351,457
-------- ------ -------- -------- --------
Gross profit........... 62,187 2,414 152,778 217,379 217,379
Operating expenses...... 43,281 1,090 117,849 162,220 162,220
Restructuring charges... 2,085 2,085 2,085
Transaction expenses.... 1,029 1,029 1,029
Corporate identity
expenses............... 1,100 1,100 1,100
Provision for
supplemental benefits.. 409 409 409
Depreciation and
amortization........... 11,638 548 28,946 $ (3,522)(k) 37,610 $ 460 (m) 38,070
Net gain (loss) on sales
of assets.............. (271) 11,507 11,236 11,236
-------- ------ -------- -------- -------- ------- --------
Operating income........ 6,997 776 12,867 3,522 24,162 (460) 23,702
Interest income
(expense), net......... (7,927) (427) (30,803) (39,157) 12,298 (o) (26,859)
-------- ------ -------- -------- -------- ------- --------
Income (loss) before
income taxes........... (930) 349 (17,936) 3,522 (14,995) 11,838 (3,157)
-------- ------ -------- -------- -------- ------- --------
Income tax expense...... 25 475 500 500
Income before equity
interest in Star Gas
Corporation............ (18,411)
Share of income (loss)
of Star Gas
Corporation............ (317) 317 (l) --
-------- ------ -------- -------- -------- ------- --------
Net income (loss)....... $ (955) $ 349 $(18,728) $ 3,839 $(15,495) $11,838 $ (3,657)
======== ====== ======== ======== ======== ======= ========
General Partner's
interest in net income
(loss)................. (19) (73)
======== ========
Limited Partners'
interest in net income
(loss)................. $ (936) (3,584)
======== ========
Basic and diluted net
income (loss) per
Limited Partner Unit... $ (0.15) $ (0.25)
======== ========
Weighted average number
of Limited Partner
Units outstanding...... 6,228 27 103 (c) 7,297 6,800 (h) 14,097
(2,396)(d)
568 (f)
2,767 (f)
</TABLE>
124
<PAGE>
STAR GAS PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following pro forma adjustments give effect to (1) the offering of
809,000 Common Units by the Partnership on December 16, 1997, (2) the
acquisition of Petro, (3) the Debt Offering and (4) this offering, as if each
transaction had taken place on September 30, 1998, in the case of the pro forma
condensed consolidated balance sheet, or as of October 1, 1997, in the case of
the pro forma condensed consolidated statement of operations. 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 for Petro and therefore the actual results may differ from the
pro forma results. However, management believes that the assumptions provide a
reasonable basis for presenting the significant effects of the transactions as
contemplated, and that the pro forma adjustments give appropriate effect to
those assumptions and are properly applied in the pro forma financial
information.
TRANSACTION RELATED ADJUSTMENTS
(a) Reflects the accrued dividends payable on Petro's redeemable and
exchangeable preferred stock.
(b) Reflects the negotiated premium of approximately $6.3 million to
refinance Petro's Private Debt and Petro's Public Debt and the negotiated
discount of approximately $1.0 million to redeem Petro's public preferred
stock.
(c) Reflects the issue of 0.8 million shares of Junior Preferred Stock of
Petro, which will be converted into 0.1 million Common Units upon completion of
the Transaction at an assumed value of $20.00 per Unit. The Junior Preferred
Stock was issued 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 as consideration for consenting to the early
redemption of such securities.
THE TRANSACTION (MERGER AND EXCHANGE)
(d) Represents: (1) the estimated amount of federal and state taxes to be
incurred in connection with the acquisition of Petro and (2) the preliminary
allocation of excess purchase price to net deferred income tax liabilities,
property plant and equipment and the subordinated units and general partner
interests that have been redeemed.
(e) Reflects the estimated additional amount to be recorded by Petro of
legal, professional and advisory fees incurred by Petro and the Partnership in
the Transaction.
(f) 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.
125
<PAGE>
The following summarizes the preliminary allocation by the Partnership of the
excess of purchase price over the book value of Petro related to the
acquisition of Petro. The allocation of the purchase price is based on the
results of a preliminary appraisal of the assets and the business of Petro. The
preliminary allocation is as follows (in thousands):
<TABLE>
<S> <C>
Assumed value of Units issued................................. $ 64,440 (f)
Book value of Petro, adjusted for accrued dividends of $583
and unpaid transaction costs of $6,071....................... (216,272)(f)
---------
Preliminary excess of purchase price over net book value...... 280,712 (f)
---------
Allocation to property, plant and equipment................... (11,310)(d)
Allocation to Subordinated Units and general partner
interests, redeemed.......................................... (38,891)(d)
Recognition of current and net deferred tax liabilities
incurred in connection with the Transaction.................. 51,100 (d)
---------
899 (d)
---------
Costs associated with the renegotiation of various debt
instruments and preferred stock directly related to the
Transaction.................................................. 7,386 (b)(c)
---------
Estimated intangibles, including customer lists and goodwill.. $ 288,997
=========
</TABLE>
THE DEBT OFFERING AND THIS OFFERING
(g) Reflects the estimated net proceeds to Petro of $115.4 million from the
$120.0 million Debt Offering, net of underwriting discounts and commissions
(estimated to be $3.6 million) and offering expenses (estimated to be $1.0
million).
(h) Reflects the estimated net proceeds to the Partnership of $128.3 million
from the issuance and sale of 6.8 million Common Units at an assumed offering
price of $20.00 per Common Unit, net of underwriting discounts and commissions
(estimated to be $6.8 million) and offering expenses (estimated to be $0.9
million).
THE PROPANE ACQUISITIONS
(i) 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 September 30,
1998 are included in the Partnership's twelve months ended September 30, 1998
results adjusted for:
(1) certain cost savings of $0.3 million, primarily salary and benefit
expenses relating to selling shareholders;
(2) additional depreciation and amortization of $0.3 million; and
(3) additional interest expense of $0.5 million.
THE TRANSACTION (ACQUISITION OF PETRO)
(j) Represents the results of operations of Petro for the twelve months ended
September 30, 1998. Estimated expenses of $7.1 million to be incurred by Petro
as a direct result of its acquisition by the Partnership will be included in
Petro's actual statement of operations. For the twelve months ended
September 30, 1998, Petro has recorded $1.0 million of these expenses.
(k) Adjustment to depreciation and amortization expense attributable to the
acquisition of Petro.
(l) Reflects the elimination of Petro's equity interest in the Partnership.
126
<PAGE>
THE OFFERINGS
(m) Reflects amortization of debt issuance costs attributable to the Debt
Offering.
(n) Reflects the use of the net proceeds from this offering, the Debt
Offering and $3.2 million of Petro's cash to repay $209.1 million of Petro
Public Debt, including $2.8 million of premiums, to retire $31.8 million of
Petro's 12 7/8% Exchangeable Preferred Stock and to pay $6.1 million of
Transaction expenses. In addition, Petro has entered into Private Debt
Agreements with the Private Noteholders of:
(i) its outstanding Senior Notes in the aggregate principal amount of $60
million; and
(ii) its Petro Private Debt in the aggregate principal amount of $4.1
million (after payment of the January 1999 installment).
Pursuant to the Private Debt Agreements at the effective time of the
Transaction:
(i) the holders of the Senior Notes will exchange such Notes for $63.1
million aggregate principal amount of New 9% Notes; and
(ii) the holders of the 14.1% Notes will exchange such notes for the New
10 1/4% Notes. The New Private Notes will be guaranteed by the Partnership
and Petro Holdings.
(o) Reflects the net reduction to interest expense of $12.3 million for the
twelve months ended September 30, 1998. This amount reflects interest expense
on the $120.0 million in principal amount of the Notes at an assumed interest
rate of 9.75% ($11.7 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 with the proceeds of this offering and the
Debt Offering and a reduction in the interest rate/increase in principal on
Petro's Private Debt upon completion of the Transaction.
ANALYSIS OF UNAUDITED PRO FORMA CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Overview
In analyzing the historical results of the Partnership and the unaudited pro
forma condensed consolidated information as provided, the following matters
should be considered. First, the results for the fiscal 1998 pro forma include
only a portion of 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 the 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. In fiscal 1998, temperatures were
significantly warmer than normal for the areas in which we conduct our propane
operations and our home heating oil operations. We believe that overall levels
of both pro forma Available Cash from Operating Surplus and EBITDA generated
during fiscal 1998 were adversely affected due to this abnormally warm weather.
127
<PAGE>
ANNEX A--APPLICATION FOR TRANSFER OF COMMON UNITS
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
-------------------------------------
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
[_] 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
A-1
<PAGE>
interestholder's interest in it, the undersigned hereby certifies the following
(or, if applicable, certifies the following on behalf of the interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is _____.
3. My home address is _____________________________________________________.
B. Partnership, Corporation or Other Interestholder
1. ________________________________________________________ is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as
those terms are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is ____________.
3. The interestholder's office address and place of incorporation (if
applicable) is _____________________________________________________________
________________________________________________________________________.
The interestholder agrees to notify the Partnership within sixty (60) days of
the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this certification
and to the best of my knowledge and believe it is true, correct and complete
and, if applicable, I further declare that I have authority to sign this
document on behalf of
---------------------
(Name of Interestholder)
---------------------
Signature and Date
---------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
A-2
<PAGE>
ANNEX B--GLOSSARY OF TERMS
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 not
related to an Operating Expenditure made during such period and (ii) any net
reduction in cash reserves for Operating Expenditures during such period, and
(b) increase Operating Surplus by (i) any net decrease in Working Capital
Borrowings during such period and (ii) any net increase in cash reserves for
Operating Expenditures during such period required by any debt instrument for
the repayment of principal, interest or premium. Adjusted Operating Surplus
does not include that portion of Operating Surplus included in clause (a) (i)
of the definition of Operating Surplus.
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, provided further, that
disbursements made by a Partnership 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.
Bank Credit Facilities: The $25.0 million Operating Partnership Acquisition
Facility and the $12.0 million Operating Partnership Working Capital Facility,
entered into by the Operating Partnership.
Capital Account: The capital account maintained for a partner pursuant to the
Partnership Agreement. The 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
Capital Account would be if such Common Unit, Senior 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.
B-1
<PAGE>
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 the Partnership
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 the Partnership
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 in the Partnership
Agreement. All references in the 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 pursuant to the Partnership Agreement.
Cumulative Common Unit Arrearage: With respect to any Common Unit, whenever
issued, and as of the end of any quarter, the excess, if any, of (a) the sum
resulting from adding together the Common Unit Arrearage as to a 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
(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. "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.
B-2
<PAGE>
Departing Partner: A former general partner from and after the effective date
of any withdrawal or removal of such former general partner pursuant to the
provisions of the Amended and Restated Partnership Agreement.
EBITDA: Except as otherwise indicated in this prospectus, EBITDA means
operating income plus depreciation, amortization and other non-cash charges
(excluding expenses related to the consummation of the Transaction. As used in
this Prospectus, EBITDA is not intended to be construed as an alternative to
net income as an indicator of operating performance, or as an alternative to
cash flow as a measure of liquidity or ability to service debt obligations.
Exchange: The exchange of Petro Common Stock for Partnership Units by certain
affiliates of Petro, which, in combination with the Merger, will result in
Petro becoming a wholly- owned, indirect subsidiary of the Partnership.
Final Rule: The rule for Continued Operation of the Present Propane Trucks,
published on August 18, 1997 by the DOT.
First Mortgage Note Agreement: The agreement governing the Partnership's
approximately $96 million in First Mortgage Notes currently outstanding.
General Partner: Star Gas Corporation, a Delaware Corporation, until the
completion of the Transaction and Star Gas LLC, a Delaware limited liability
company, and its successors, following the completion of the Transaction.
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 a General Partner Interest.
Initial Common Units: The Common Units sold in the Initial Offering, on
December 20, 1995.
Initial Offering: The initial offering and sale of Common Units to the public
on December 20, 1995.
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.
B-3
<PAGE>
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 a Junior Subordinated Unit in
the 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 partnership interests and includes any and
all benefits to which a limited partner is entitled as provided in the
Partnership Agreement, together with all obligations of a limited partner to
comply with the terms and provisions of the Partnership Agreement.
Merger: The part of the Transaction whereby, pursuant to the Merger
Agreement, Petro will be merged with and into Mergeco, with Petro surviving the
Merger as a wholly-owned, indirect subsidiary of the Operating Partnership.
Merger Agreement: The agreement executed October 22, 1998, which governs the
Merger of Petro with and into Mergeco, thereby causing Petro to become a
wholly-owned indirect subsidiary of the Operating Partnership.
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 upon completion of the Transaction 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."
NPGA: The National Propane Gas Association.
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 Transaction 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 Acquisition Facility: A $25.0 million revolving credit
facility entered into by the Operating Partnership to be used for acquisitions
and improvements.
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 prospectus is a part).
B-4
<PAGE>
Operating Partnership Working Capital Facility: A $12.0 million revolving
credit facility entered into by the Operating Partnership to be used for
working capital and other Partnership purposes.
Operating Surplus: As to any period prior to liquidation:
(a) the sum of (i) $16.0 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 the 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 Partnership Group member or disbursements on
behalf of a Partnership 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 amended and restated partnership agreement for the
Partnership (the form of which has been attached as Annex C to this
prospectus), and unless otherwise indicated, references to the "Partnership
Agreement" constitute references to the amended and restated 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: Petroleum Heat and Power Co., Inc., a Minnesota corporation. Prior to
the Transaction, a parent corporation of the Partnership, and subsequent to the
Transaction, a wholly-owned, indirect subsidiary of the Partnership.
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 Credit Agreement: The $47.0 million working capital credit agreement
entered into by Petro to be used for working capital and other purposes.
B-5
<PAGE>
Petro Holdings: Petro Holdings, Inc., a Minnesota corporation and the parent
corporation of Petro.
Petro Units: With respect to any date, means the sum of (i) the excess of the
number of Units outstanding upon the completion of the Transaction over the
number of Units outstanding immediately prior to the completion of the
Transaction (assuming the simultaneous closing of this offering and the Debt
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 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 completion of the Transaction (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.
Qualifying Income Exception: The exception to the Section 7704 of the Code
rule requiring publicly-traded partnerships to be taxed as corporations. The
exception applies to a publicly-traded partnership with "qualifying income"
which comprises 90% or more of its gross income for every taxable year.
Qualifying income includes interest (from other than a financial business),
dividends and income and gains from the processing, transportation and
marketing of crude oil, natural gas, and products thereof, including the retail
and wholesale marketing of propane and the transportation of propane and
natural gas liquids.
Record Date: The date established by the General Partner for determining (a)
the identity of the record holders of Units 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 of Units entitled to receive any report or
distribution.
Registration Statement: The registration statement on form S-3 filed with the
SEC on December 3, 1998 (Registration No. 333- ).
Section 751 Assets: A 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.
Section 754 Election: 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.
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 Partnership Agreement.
Star Gas Corporation: A Delaware corporation which, prior to the consummation
of the Transaction, is the General Partner of the Partnership and the Operating
Partnership. As part of the Transaction, Star Gas LLC will replace Star Gas
Corporation as the Partnership's General Partner.
B-6
<PAGE>
Star Gas LLC: A Delaware limited liability company which, at the consummation
of the Transaction, will be the general partner of the Partnership and the
Operating Partnership. Star Gas LLC will replace Star Gas Corporation as the
Partnership's general partner.
Star/Petro, Inc.: Upon completion of the Transaction, a wholly-owned
subsidiary of the Operating Partnership and the parent corporation of Petro
Holdings.
Stellar: Stellar Propane Service Corp., a New York corporation and a
subsidiary of the Operating Partnership.
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 form 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 for 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 During the Subordination Period" and "--Incentive Distributions
After the Subordination Period."
Transfer Application: An application and agreement for transfer of Units in
the form set forth on the back of a certificate or in a form substantially in
the form included in this prospectus as Annex A.
TRA of 1997: Taxpayer Relief Act of 1997.
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.
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.
Unit Option Plan: The 1995 Star Gas Corporation Unit Option Plan, adopted by
the General Partner, which currently authorizes the issuance the Unit Options
and UARS covering up to 300,000 Subordinated Units to certain officers and
employees of the General Partner.
Unit Options: The options which are authorized to be issued by the Unit
Option Plan. The Unit Options: (i) price at $22 per unit, which is an estimate
of the fair market value of the Subordinated Units at the time of grant; (ii)
vest over a five year period; (iii) are exercisable after January 12, 2001,
assuming the lapse of the subordination period; and (iv) expire on the tenth
anniversary of the date of grant.
B-7
<PAGE>
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.
B-8
<PAGE>
ANNEX C--PARTNERSHIP AGREEMENT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
STAR GAS PARTNERS, L.P.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
ARTICLE I
ORGANIZATIONAL MATTERS
Section 1.1 Formation and Continuation................................. C-1
Section 1.2 Name....................................................... C-2
Section 1.3 Registered Office; Principal Office........................ C-2
Section 1.4 Power of Attorney.......................................... C-2
Section 1.5 Term....................................................... C-3
Section 1.6 Possible Restrictions on Transfer.......................... C-3
ARTICLE II
DEFINITIONS
ARTICLE III
PURPOSE
Section 3.1 Purpose and Business....................................... C-19
Section 3.2 Powers..................................................... C-19
ARTICLE IV
CONTRIBUTIONS AND UNITS
Section 4.1 Organization Contributions and Return...................... C-20
Section 4.2 Contributions by Initial Limited Partners.................. C-20
Section 4.3 Contributions at the Effective time; General Partner
Contributions.............................................. C-20
Section 4.4 Issuances of Additional Partnership Securities............. C-20
Section 4.5 Limitations on Issuance of Additional Partnership
Securities................................................. C-21
Section 4.6 Special Issuance of Senior Subordinated Units and
Conversion of Senior Subordinated Units and Junior
Subordinated Units......................................... C-22
Section 4.7 Limited Preemptive Rights.................................. C-22
Section 4.8 Splits and Combinations.................................... C-22
Section 4.9 Capital Accounts........................................... C-23
Section 4.10 Interest and Withdrawal.................................... C-25
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
Section 5.1 Allocations for Capital Account Purposes................... C-25
Section 5.2 Allocations for Tax Purposes............................... C-31
Section 5.3 Requirement and Characterization of Distributions.......... C-33
Section 5.4 Distributions of Operating Surplus......................... C-34
Section 5.5 Distributions of Cash from Capital Surplus................. C-35
Section 5.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels........................................ C-36
Section 5.7 Special Provisions Relating to the Senior Subordinated
Units and Junior Subordinated Units........................ C-36
Section 5.8 Entity-Level Taxation...................................... C-36
</TABLE>
C-i
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE VI
MANAGEMENT AND OPERATION OF BUSINESS
Section 6.1 Management................................................ C-37
Section 6.2 Certificate of Limited Partnership........................ C-38
Section 6.3 Restrictions on General Partner's Authority............... C-38
Section 6.4 Reimbursement of the General Partner...................... C-39
Section 6.5 Outside Activities........................................ C-40
Section 6.6 Loans from the General Partner; Contracts with Affiliates;
Certain Restrictions on the General Partner............... C-40
Section 6.7 Indemnification........................................... C-41
Section 6.8 Liability of Indemnitees.................................. C-43
Section 6.9 Resolution of Conflicts of Interest....................... C-43
Section 6.10 Other Matters Concerning the General Partner.............. C-44
Section 6.11 Title to Partnership Assets............................... C-45
Section 6.12 Purchase or Sale of Units................................. C-45
Section 6.13 Registration Rights....................................... C-45
Section 6.14 Reliance by Third Parties................................. C-47
ARTICLE VII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
Section 7.1 Limitation of Liability................................... C-48
Section 7.2 Management of Business.................................... C-48
Section 7.3 Outside Activities........................................ C-48
Section 7.4 Return of Capital......................................... C-48
Section 7.5 Rights of Limited Partners to the Partnership............. C-48
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting.................................... C-49
Section 8.2 Fiscal Year............................................... C-49
Section 8.3 Reports................................................... C-49
ARTICLE IX
TAX MATTERS
Section 9.1 Tax Returns and Information............................... C-50
Section 9.2 Tax Elections............................................. C-50
Section 9.3 Tax Controversies......................................... C-50
Section 9.4 Withholding............................................... C-50
ARTICLE X
CERTIFICATES
Section 10.1 Certificates.............................................. C-51
Section 10.2 Registration, Registration of Transfer and Exchange....... C-51
Section 10.3 Mutilated, Destroyed, Lost or Stolen Certificates......... C-51
Section 10.4 Record Holder............................................. C-52
</TABLE>
C-ii
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE XI
TRANSFER OF INTERESTS
Section 11.1 Transfer.................................................. C-52
Section 11.2 Transfer of a General Partner's Partnership Interest...... C-52
Section 11.3 Transfer of Units......................................... C-53
Section 11.4 Restrictions on Transfers................................. C-53
Section 11.5 Citizenship Certificates; Non-citizen Assignees........... C-53
Section 11.6 Redemption of Interests................................... C-54
ARTICLE XII
ADMISSION OF PARTNERS
Section 12.1 Admission of Initial Limited Partners..................... C-55
Section 12.2 Admission of Substituted Limited Partners................. C-55
Section 12.3 Admission of Successor General Partner.................... C-56
Section 12.4 Admission of Additional Limited Partners.................. C-56
Section 12.5 Amendment of Agreement and Certificate of Limited
Partnership............................................... C-56
ARTICLE XIII
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 13.1 Withdrawal of the General Partner......................... C-56
Section 13.2 Removal of the General Partner............................ C-57
Section 13.3 Interest of Departing Partner and Successor General
Partner................................................... C-58
Section 13.4 Withdrawal of Limited Partners............................ C-59
ARTICLE XIV
DISSOLUTION AND LIQUIDATION
Section 14.1 Dissolution............................................... C-59
Section 14.2 Continuation of the Business of the Partnership After
Dissolution............................................... C-59
Section 14.3 Liquidator................................................ C-60
Section 14.4 Liquidation............................................... C-60
Section 14.5 Cancellation of Certificate of Limited Partnership........ C-61
Section 14.6 Return of Contributions................................... C-61
Section 14.7 Waiver of Partition....................................... C-61
Section 14.8 Capital Account Restoration............................... C-61
ARTICLE XV
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 15.1 Amendment to be Adopted Solely by General Partner......... C-61
Section 15.2 Amendment Procedures...................................... C-62
Section 15.3 Amendment Requirements.................................... C-63
Section 15.4 Meetings.................................................. C-63
Section 15.5 Notice of a Meeting....................................... C-64
Section 15.6 Record Date............................................... C-64
Section 15.7 Adjournment............................................... C-64
Section 15.8 Waiver of Notice; Approval of Meeting; Approval of
Minutes................................................... C-64
Section 15.9 Quorum.................................................... C-64
</TABLE>
C-iii
<PAGE>
<TABLE>
<C> <S> <C>
Section 15.10 Conduct of Meeting........................................ C-65
Section 15.11 Action Without a Meeting.................................. C-65
Section 15.12 Voting and Other Rights................................... C-65
ARTICLE XVI
MERGER
Section 16.1 Authority................................................. C-66
Section 16.2 Procedure for Merger or Consolidation..................... C-66
Section 16.3 Approval by Limited Partners of Merger or Consolidation... C-67
Section 16.4 Certificate of Merger..................................... C-67
Section 16.5 Effect of Merger.......................................... C-67
ARTICLE XVII
RIGHT TO ACQUIRE UNITS
Section 17.1 Right to Acquire Units.................................... C-68
ARTICLE XVIII
GENERAL PROVISIONS
Section 18.1 Addresses and Notices..................................... C-69
Section 18.2 References................................................ C-69
Section 18.3 Pronouns and Plurals...................................... C-69
Section 18.4 Further Action............................................ C-69
Section 18.5 Binding Effect............................................ C-70
Section 18.6 Integration............................................... C-70
Section 18.7 Creditors................................................. C-70
Section 18.8 Waiver.................................................... C-70
Section 18.9 Counterparts.............................................. C-70
Section 18.10 Applicable Law............................................ C-70
Section 18.11 Invalidity of Provisions.................................. C-70
Section 18.12 Consent of Partners....................................... C-70
EXHIBIT A................................................................ A-1
EXHIBIT B................................................................ B-1
</TABLE>
C-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 , 1999, is entered into by and among STAR GAS
LLC, a Delaware limited liability company, as the General Partner, and 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:
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 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:
ARTICLE I
ORGANIZATIONAL MATTERS
Section 1.1 Formation and Continuation.
The Initial General Partner and the Organizational Limited Partner 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.
C-1
<PAGE>
Section 1.2 Name.
The name of the Partnership 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, 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 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
C-2
<PAGE>
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 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:
C-3
<PAGE>
(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.
(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 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).
"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 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.
C-4
<PAGE>
"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.
"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
C-5
<PAGE>
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).
"Book-Down Event" means an event which triggers a negative adjustment to the
Capital Accounts of the Partners pursuant to Section 4.9(d).
"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.
"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 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
Agreements.
C-6
<PAGE>
"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 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
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).
"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.
"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
C-7
<PAGE>
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 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.
"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.
"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)
that certain Conveyance and Contribution Agreement among the Partnership, the
Operating Partnership, 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).
C-8
<PAGE>
"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 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)17-101, 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.
"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
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, 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.
C-9
<PAGE>
"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).
"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).
"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. and the Initial Underwriters, in each case 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) 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) 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
C-10
<PAGE>
dispositions of inventory in the 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.
"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 Junior Subordinated Units in
this Agreement.
"Limited Partner" means, unless the context otherwise requires, (a) 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.
"Merger Agreement" has the meaning assigned to such term in Section 16.1.
"Minimum Quarterly Distribution" means $0.575 per Unit per Quarter, 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 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.
"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.
C-11
<PAGE>
"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 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
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.
C-12
<PAGE>
"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).
"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,
(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] 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 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.
Notwithstanding the foregoing, "Operating Surplus" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
C-13
<PAGE>
"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.
"Organizational Limited Partner" means William G. Powers, Jr., in his
capacity as the organizational limited partner of the Partnership.
"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 and Limited Partner Interests.
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"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, as to any
Partner or Assignee holding Units, the product of (i) 100% less the percentage
applicable to paragraph (b) multiplied by (ii) the quotient of the number of
Units held by such Partner or Assignee divided by the total number of all
Outstanding Units, and (b) as to the holders of additional Partnership
Securities issued by the Partnership in accordance with Section 4.4, the
percentage established as a part of such issuance.
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association or
other entity.
C-14
<PAGE>
"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.
"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 (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 Class A Common Stock" means the Class A 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 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 in accordance with their respective
Percentage Interests, and (b) when modifying Partners 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. 333-66005) 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.
C-15
<PAGE>
"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.
"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 Junior Subordinated Unit or General Partner Unit or other Partnership
Security, the Person in whose name such 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 Partnership Interests for which a redemption
notice has been given, and has not been withdrawn, pursuant to Section 11.6.
"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).
"Second Target Distribution" means $0.711 per Unit, 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.
"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.
C-16
<PAGE>
"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.
"Subordination Period" means the period that commenced on the Closing Date
and ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning on or after July 1, 2002 in
respect of which (A) (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
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, 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 (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
above, 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
C-17
<PAGE>
(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, 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.
"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
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, 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 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.
"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.
"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
C-18
<PAGE>
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)).
"Unrecovered Initial Unit Price" means, 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.
"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 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 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.
C-19
<PAGE>
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 and was admitted as the general partner of the Partnership, and the
Organizational Limited Partner made an initial Capital Contribution to the
Partnership and was admitted as a limited partner of the Partnership.
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 was
terminated and the Organizational Limited Partner ceased to be a Limited
Partner.
Section 4.3 Contributions at the Effective time; General Partner Contributions.
(a) 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 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 make an additional
Capital Contribution only to the extent necessary such that after taking into
account the additional Capital Contribution made by such Person and the General
Partner pursuant to this Section 4.2(b) the General Partner will have a Capital
Account equal to at least 1.99% of the total of all Capital Accounts.
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-20
<PAGE>
(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, 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 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 the Equity
Offering, (ii) in accordance with Section 4.5(b) and 4.5(c) and (iii) in
connection with the 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-21
<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 at least a majority of the Outstanding Common Units (excluding
Common Units held by the General Partner and its Affiliates).
(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 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 Common Units pursuant to this Section 4.6 within any 365-day period.
(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 of the Subordination Period.
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 4.9(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
C-22
<PAGE>
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.
(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
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.
(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,
C-23
<PAGE>
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.
(ii) If and when a Senior Subordinated Unit is issued pursuant to Section
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 4.6
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.
(iv) If and when a Senior Subordinated Unit or a Class B Common Unit is
issued pursuant to Section 4.6 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 attributable to a Junior Subordinated Unit exceeds the
existing Per Unit Capital Amount of Senior Subordinated Units, 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.
C-24
<PAGE>
(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 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 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 (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.
(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
C-25
<PAGE>
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):
(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;
(2) Second, 100% to all Partners holding Common Units, in
accordance with their relative Percentage Interests, 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;
C-26
<PAGE>
(3) Third, if such Termination Capital Transaction occurs (or is
deemed to occur) prior to the expiration of the Subordination
Period, 100% to all 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 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)(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;
(5) Fifth, 100% to all Partners, in accordance with their relative
Percentage Interests, 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, plus (3) any
then existing Cumulative Common Unit Arrearage, 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");
(6) Sixth, 86.7% to all Partners, in accordance with their
relative Percentage Interests, and 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)(vi) or 5.4(b)(iii) (the sum of (1) plus (2) is
hereinafter defined as the "Second Liquidation Target Amount");
(7) Seventh, 76.5% to all Partners, in accordance with their
relative Percentage Interests, and 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
C-27
<PAGE>
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)(iv); and
(8) Finally, any remaining amount 51% to all Partners, in
accordance with their relative Percentage Interests, and 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).
(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:
(1) First, if such Termination Capital Transaction occurs (or is
deemed to occur) prior to the conversion of the last outstanding
Junior Subordinated Unit, 100% to the Partners holding Junior
Subordinated Units and General Partner Units, Pro Rata, until the
Capital Account in respect of each Junior Subordinated Unit 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 Partners holding Common Units, in
accordance with their relative Percentage Interests, until the
Capital Account in respect of each Common Unit then Outstanding has
been reduced to zero; and
(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.
(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
C-28
<PAGE>
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.
(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
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.
C-29
<PAGE>
(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. 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 per Unit of all other Units of the same
class.
(xi) Curative Allocation.
(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.
(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:
(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
C-30
<PAGE>
been allocated to the Limited Partners under the 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.
(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.
(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) Depreciation. Depreciation deductions of the Partnership for
each period shall be allocated among the Partners in accordance with
their 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) (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 (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.
(ii) (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 (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
C-31
<PAGE>
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 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 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
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 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 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
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
C-32
<PAGE>
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) 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.
(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
C-33
<PAGE>
(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).
(e) Notwithstanding the definitions of Available Cash and Operating Surplus
contained herein, 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, 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, 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
any prior Quarter;
(iii) Third, 100% to the Senior Subordinated Units, 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, 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 Minimum Quarterly Distribution;
(v) Fifth, 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;
C-34
<PAGE>
(vi) Sixth, (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
(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)(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, 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, 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, (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, (A) 76.5% to all Units, Pro Rata, and (B) 23.5% 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, (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, 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.
C-35
<PAGE>
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 pursuant to this
Article V, 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,
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.
C-36
<PAGE>
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 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
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
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-37
<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, 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.
C-38
<PAGE>
(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.
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 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.
C-39
<PAGE>
Section 6.5 Outside Activities.
(a) After the 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 Proxy 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 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 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) 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 at the 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. No Group Member may lend funds to the General
Partner or any of its Affiliates.
C-40
<PAGE>
(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 Sections 4.1, 4.2 and 4.3, the Conveyance
and Contribution Agreement 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 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) 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 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
C-41
<PAGE>
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 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 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.
C-42
<PAGE>
(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 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
C-43
<PAGE>
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.
(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 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 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 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.
C-44
<PAGE>
(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
Units other than Common Units during the Subordination Period. As long as Units
are held by any Group Member, such Units shall not be 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.
(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
C-45
<PAGE>
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 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 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
C-46
<PAGE>
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) 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-47
<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
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:
(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
C-48
<PAGE>
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.
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.
C-49
<PAGE>
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.
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.
C-50
<PAGE>
ARTICLE X
CERTIFICATES
Section 10.1 Certificates.
Upon the Partnership's issuance of Common Units, 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 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 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
C-51
<PAGE>
(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.
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 General Partner Interest to another Person or by
which the holder of a Limited Partner Interest assigns such 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 members of the General Partner of any or all of the issued
and outstanding 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 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 General Partner Interest to (a) an Affiliate of the General Partner or
(b) another Person in connection with the merger or consolidation of
C-52
<PAGE>
the General Partner 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 General Partner Interest 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 General Partner
Interest 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 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 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 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
C-53
<PAGE>
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 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
C-54
<PAGE>
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.
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 in connection with the Initial Offering, the Initial
General Partner was admitted to the Partnership as a Limited Partner. Upon the
issuance by the Partnership of Common Units to the Initial Underwriters in
connection with the Initial Offering and the execution by the Initial
Underwriters of a Transfer Application, the Initial Underwriters were admitted
to the Partnership as Initial Limited Partners.
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.
C-55
<PAGE>
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 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 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 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;
(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
C-56
<PAGE>
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.
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
C-57
<PAGE>
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.
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
C-58
<PAGE>
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 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.
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.
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 Section13.1(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).
C-59
<PAGE>
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 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 shall
be deemed for purposes of Section 14.4(c) to have received cash equal to
its fair market value; and contemporaneously therewith,
C-60
<PAGE>
appropriate cash distributions must be made to the other Partners. For
purposes of computing Net 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.
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.
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
C-61
<PAGE>
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 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 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;
(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
C-62
<PAGE>
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) 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
C-63
<PAGE>
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.
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 (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
C-64
<PAGE>
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 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.
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.
C-65
<PAGE>
(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
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, 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 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
C-66
<PAGE>
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 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.
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.
C-67
<PAGE>
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(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(c) is mailed.
(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
17.1(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 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
C-68
<PAGE>
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).
(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 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 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.
C-69
<PAGE>
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.
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.
C-70
<PAGE>
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 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-71
<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
Ex. 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 survivorship (Cust) (Minor)
and not as tenants in
common under Uniform Gifts to Minors
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.
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.
Ex. A-2
<PAGE>
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 (Signature)
ASSOCIATION OF SECURITIES DEALERS,
INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY _____________________________________
(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.
Ex. 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., as
amended, supplemented or restated to the date hereof (the "Partnership
Agreement"), (b) represents and warrants that the Assignee has all right, power
and authority and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (c) appoints the General Partner and, if a Liquidator
shall be appointed, the Liquidator of the Partnership as the Assignee's
attorney-in-fact to execute, swear to, acknowledge and file any document,
including, without limitation, the Partnership Agreement and any amendment
thereto and the Certificate of Limited Partnership of the Partnership and any
amendment thereto, necessary or appropriate for the Assignee's admission as a
Substituted Limited Partner and as a party to the Partnership Agreement, (d)
gives the powers of attorney provided for in the Partnership Agreement and (e)
makes the waivers and gives the consents and approvals contained in the
Partnership Agreement. Capitalized terms not defined herein have the meanings
assigned to such terms in the Partnership Agreement.
Date: _______________________________
_____________________________________
Signature of Assignee
_____________________________________
Social Security or other identifying
number of Assignee
_____________________________________
Name and Address of Assignee
_____________________________________
Purchase Price including commissions, if any
Type of Entity (check one):
[_] Individual[_] Partnership[_] Corporation
[_] Trust [_] Other (specify) ______
Nationality (check one):
[_] U.S. Citizen, Resident or [_] Non-resident Alien
Domestic Entity
[_] Foreign Corporation
Ex. A-4
<PAGE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is
3. My home address is
B. Partnership, Corporation or Other Interestholder
1. _______________________________________
(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
The interestholder agrees to notify the Partnership within sixty (60) days of
the date the interestholder becomes a foreign person. The interestholder
understands that this certificate may be disclosed to the Internal Revenue
Service by the Partnership and that any false statement contained herein could
be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this certification
and to the best of my knowledge and belief it is true, correct and complete
and, if applicable, I further declare that I have authority to sign this
document on behalf of
_____________________________________
(Name of Interestholder)
_____________________________________
Signature and Date
_____________________________________
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Common Units
shall be made to the best of the Assignee's knowledge.
Ex. A-5
<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
Ex. 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
JT TEN- entireties Custodian
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.
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.
Ex. B-2
<PAGE>
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)
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 (Signature)
ASSOCIATION OF SECURITIES DEALERS,
INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY _____________________________________
(Signature)
SIGNATURE(S) GUARANTEED
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.
Ex. 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 of the Partnership and any
amendment thereto, necessary or appropriate for the Assignee's admission as a
Substituted Limited Partner and as a party to the Partnership Agreement, (d)
gives the powers of attorney provided for in the Partnership Agreement and
(e) makes the waivers and gives the consents and approvals contained in the
Partnership Agreement. Capitalized terms not defined herein have the meanings
assigned to such terms in the Partnership Agreement.
Date: _______________________________
_____________________________________
Signature of Assignee
_____________________________________
Social Security or other identifying
number of Assignee
_____________________________________
Name and Address of Assignee
_____________________________________
Purchase Price including commissions, if any
Type of Entity (check one):
[_] Individual[_] Partnership[_] Corporation
[_] Trust [_] Other (specify) ______
Nationality (check one):
[_] U.S. Citizen, Resident or [_] Non-resident Alien
Domestic Entity
[_] Foreign Corporation
Ex. B-4
<PAGE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers of
property if a holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1. I am not a non-resident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (Social Security Number) is
3. My home address is
B. Partnership, Corporation or Other Interestholder
1. __________________is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as those
terms are defined in the Code and Treasury Regulations).
2. The interestholder's U.S. employer identification number is
3. The interestholder's office address and place of incorporation (if
applicable) is
The interestholder agrees to notify the Partnership within sixty (60) days of
the date the interestholder becomes a foreign person. The interestholder
understands that this certificate may be disclosed to the Internal Revenue
Service by the Partnership and that any false statement contained herein could
be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this certification
and to the best of my knowledge and belief it is true, correct and complete
and, if applicable, I further declare that I have authority to sign this
document on behalf of
_____________________________________
(Name of Interestholder)
_____________________________________
Signature and Date
_____________________________________
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered representative who is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.,
or, in the case of any other nominee holder, a person performing a similar
function. If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the Senior
Subordinated Units shall be made to the best of the Assignee's knowledge.
Ex. B-5
<PAGE>
ANNEX D--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," and the Partnership's unaudited pro forma condensed
consolidated financial information.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
Pro forma net loss........................................... $ (3,657)
Add (deduct):
Loss (gain) on sale of assets(a)........................... (11,236)
Depreciation and amortization.............................. 38,070
Provision for supplemental benefits ....................... 409
Corporate identity expenses(b)............................. 1,100
Restructuring charges(b)................................... 2,085
Transaction expenses(c).................................... 1,029
Maintenance capital expenditures........................... (4,874)
--------
$ 22,926
========
</TABLE>
- --------
(a)Reflects the gain recorded by Petro associated with the disposal of certain
assets in November 1997.
(b)Represents non-recurring charges associated with Petro's branding, corporate
identity and restructuring programs.
(c)Represents expenses associated with the Transaction.
D-1
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO
SELL OR BUY ANY COMMON UNITS IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE
INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF THE DATE SUCH INFORMATION IS
GIVEN.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements............................................... 3
Prospectus Summary....................................................... 7
Risk Factors............................................................. 33
The Transaction.......................................................... 45
Use of Funds from this Offering and the Debt Offering.................... 47
Capitalization........................................................... 48
Partnership Structure and Management Following the Transaction........... 49
Price Range of Common Units and Distributions............................ 52
Cash Distribution Policy................................................. 53
Business................................................................. 63
Management............................................................... 76
Conflicts of Interest and Fiduciary Responsibility....................... 81
Description of the Common Units.......................................... 85
The Partnership Agreement................................................ 87
Description of Certain Indebtedness...................................... 97
Units Eligible for Future Sale........................................... 100
Certain Federal Income Tax Considerations................................ 102
Investment in the Partnership by Employee Benefit Plans and Individual
Retirement Accounts..................................................... 118
Underwriting............................................................. 119
Validity of Common Units................................................. 120
Experts.................................................................. 120
Where You Can Find More Information...................................... 121
Incorporation of Certain Documents by Reference.......................... 121
Unaudited Pro Forma Condensed Consolidated Financial Information......... 122
Annex A -- Application for Transfer of Common Units...................... A-1
Annex B -- Glossary of Terms............................................. B-1
Annex C -- Partnership Agreement......................................... C-1
Annex D -- Pro Forma Available Cash from Operating Surplus............... D-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,800,000
COMMON UNITS
STAR GAS PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
---------------
PROSPECTUS
---------------
PAINEWEBBER INCORPORATED
CIBC OPPENHEIMER
DONALDSON, LUFKIN & JENRETTE
A.G. EDWARDS & SONS, INC.
LEHMAN BROTHERS
PRUDENTIAL SECURITIES INCORPORATED
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
---------------
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
<TABLE>
<S> <C>
SEC Registration Fee................. $42,121
NASD Fee............................. 15,652
Printing and Engraving Expenses...... .
New York Stock Exchange Listing Fee.. .
Accounting Fees and Expenses......... *
Legal Fees and Expenses.............. *
Transfer Agent and Registrar Fees.... *
Miscellaneous........................ *
-------
Total.............................. $ *
=======
</TABLE>
- --------
(1) The amounts set forth above, except for the SEC, NASD and New York Stock
Exchange fees, are in each case estimated.
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Partnership Agreement and the Operating Partnership Agreement provide
that the Partnership or the Operating Partnership, as the case may be, will
indemnify (to the fullest extent permitted by applicable law) certain persons
from and against any and all losses, claims, damages, liabilities (joint or
several), expenses (including, without limitation, legal fees and expenses),
judgements, fines and amounts paid in settlement actually and reasonably
incurred by such Indemnitee in connection with any claim, demand, action, suit
or proceeding to which the Indemnitee is or was an actual or threatened party
and which relates to the Partnership Agreement or the Operating Partnership
Agreement or the property, business, affairs or management of the Partnership
or the Operating Partnership. This indemnity is available only if the
Indemnitee acted in good faith, in a manner in which such Indemnitee 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. Indemnitees include the General Partner, any Departing
Partner, any affiliate of the General Partner or any Departing Partner, any
person who is or was a director, officer, employee or agent of the general
partner or any Departing Partner or any affiliate of either, or any person who
is or was serving at the request of the General Partner, any Departing Partner,
or any such affiliate as a director, officer, partner, trustee, employee or
agent of another person. Expenses subject to indemnity will be paid by the
applicable partnership to the Indemnitee in advance, subject to receipt of an
undertaking by or on behalf of the Indemnitee to repay such amount if it is
ultimately determined by a court of competent jurisdiction that the Indemnitee
is not entitled to indemnification. The Partnership will, to the extent
commercially reasonable, purchase and maintain insurance on behalf of the
Indemnitees, whether or not the Partnership would have the power to indemnify
such Indemnitees against liability under the applicable partnership agreement.
Star Gas Corporation maintains a policy of directors' and officers' liability
insurance on behalf of its officers and directors.
Reference is made to Section . of the Underwriting Agreement filed as
Exhibit 1.1 hereto.
ITEM 16. EXHIBITS
The following is a complete list of Exhibits filed or incorporated by
reference as part of this Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- ----------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Merger Agreement dated as of October 22, 1998 by and
among Petroleum Heat and Power Co. Inc., Star Gas
Partners, L.P. and Star Gas Propane, L.P.+
2.2 Exchange Agreement dated October 17, 1998.+
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- --------------------------------------------------------------
<S> <C>
4.2 Form of Agreement of Limited Partnership of Star Gas Partners,
L.P. (included as Annex C to the Prospectus).
4.3 Form of Agreement of Limited Partnership of Star Gas
Propane, L.P.+
5.1 Opinion of Phillips Nizer Benjamin Krim & Ballon LLP
as to the validity of the securities being registered.
8.1 Opinion of Andrews & Kurth L.L.P. as to certain federal
income tax matters.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Phillips Nizer Benjamin Krim & Ballon LLP
(included in their opinion filed as Exhibit 5.1).
23.3 Consent of Andrews & Kurth L.L.P. (included in their
opinion filed as Exhibit 8.1).
24.1 Powers of Attorney (included on signature page of the
Registration Statement).
</TABLE>
- --------
* To be filed by amendment.
+ Incorporated by reference to an exhibit to the Registrant's Registration
Statement on Form S-4, File No. 333-66005, filed with the Commission on
October 22, 1998.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) 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 provisions described in Item 15 of this Registration
Statement 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 against the Registrant 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.
(c) The undersigned Registrant hereby undertakes that:
(1) 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 part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose 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.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-3 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Stamford, state of Connecticut, on December 3, 1998.
STAR GAS PARTNERS, L.P.
By: STAR GAS CORPORATION, as
General Partner
By: /s/ Joseph P. Cavanaugh
--------------------------
Joseph P. Cavanaugh
President
II-3
<PAGE>
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 or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her 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 or her 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 December 2, 1998
______________________________________ Executive Officer)
JOSEPH P. CAVANAUGH
/s/ Richard F. Ambury Vice President--Finance December 2, 1998
______________________________________ (Principal Financial and
RICHARD F. AMBURY Accounting Officer)
/s/ Irik P. Sevin Director December 2, 1998
______________________________________
IRIK P. SEVIN
/s/ Audrey L. Sevin Director December 2, 1998
______________________________________
AUDREY L. SEVIN
/s/ William Nicoletti Director December 2, 1998
______________________________________
WILLIAM NICOLETTI
/s/ Elizabeth K. Lanier Director December 2, 1998
______________________________________
ELIZABETH K. LANIER
/s/ Paul Biddelman Director December 2, 1998
______________________________________
PAUL BIDDELMAN
/s/ Thomas J. Edelman Director December 2, 1998
______________________________________
THOMAS J. EDELMAN
Director
______________________________________
WOLFGANG TRABER
/s/ William G. Powers, Jr. Director December 2, 1998
______________________________________
WILLIAM G. POWERS, JR.
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
2.1 Merger Agreement dated as of October 22, 1998 by and
among Petroleum Heat and Power Co. Inc., Star Gas Partners,
L.P. and Star Gas Propane, L.P.+
2.2 Exchange Agreement dated October 17, 1998.+
4.2 Form of Agreement of Limited Partnership of Star Gas
Partners, L.P. (included as Annex C to the Prospectus).
4.3 Form of Agreement of Limited Partnership of Star Gas
Propane, L.P.+
5.1 Opinion of Phillips Nizer Benjamin Krim & Ballon LLP
as to the validity of the securities being registered.
8.1 Opinion of Andrews & Kurth L.L.P. as to certain federal
income tax matters.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Phillips Nizer Benjamin Krim & Ballon LLP
(included in their opinion filed as Exhibit 5.1).
23.3 Consent of Andrews & Kurth L.L.P. (included in their
opinion filed as Exhibit 8.1).
24.1 Powers of Attorney (included on signature page of the
Registration Statement).
</TABLE>
- --------
* To be filed by amendment.
+ Incorporated by reference to an exhibit to the Registrant's Registration
Statement on Form S-4, File No. 333-66005, filed with the Commission on
October 22, 1998.
<PAGE>
Exhibit 5.1
Draft
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103-0084
December 3, 1998
Star Gas Partners, L.P.
2187 Atlantic Street
Stamford, CT 06912-0011
Re: Registration Statement on Form S-3
File No. 333-
----------------------------------
Dear Ladies and Gentlemen:
We refer to the above-captioned registration statement (the
"Registration Statement") under the Securities Act of 1933, as amended, filed by
Star Gas Partners, L.P., a Delaware limited partnership (the "Partnership"),
with the Securities and Exchange Commission, relating to 7,820,000 common units
(the "Common Units") of limited partner interests in the Partnership which are
being offered for sale by the Partnership (including Common Units which may be
sold upon exercise of the Underwriters' over-allotment option).
Unless otherwise defined herein, capitalized terms used herein shall
have the meanings ascribed to them in the Registration Statement.
We have made such examination of law and have examined originals or
copies, certified or otherwise authenticated to our satisfaction, of all such
records, agreements and other instruments, certificates and orders of public
officials, certificates of the General Partner and representatives of the
partnership, and other documents that we have deemed necessary to render the
opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to the original thereof of all documents submitted to us as certified
or photostatic copies, and the authenticity of the originals of such latter
documents.
<PAGE>
Star Gas Partners, L.P. - 2 - December 3, 1998
Based on the foregoing, we are of the opinion that:
1. The Partnership has been duly formed and is validly existing as a
limited partnership in good standing under the laws of the State of Delaware.
2. The Common Units have been duly authorized, and when issued in the
manner set forth in the Registration Statement, will be validly issued, fully
paid and non-assessable.
We are attorneys admitted to practice in the State of New York. Our
opinion relates only to the laws of the State of New York, applicable federal
law of the Untied States of America and the corporate and limited partnership
laws of Delaware. We express no opinion on the law of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Validity of Common Units" in the related Prospectus.
Very truly yours,
PHILLIPS NIZER BENJAMIN
KRIM & BALLON LLP
<PAGE>
Exhibit 8.1
Draft
December __, 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 (the "Offering") of up to
7,820,000 common units representing limited partner interests ("Common Units")
in the Partnership pursuant to the Registration Statement on Form S-3 of the
Partnership (Registration No. 333-______) relating to the Common Units (the
"Registration Statement"). In connection therewith, we have participated in the
preparation of the discussion set forth under the caption "Certain Federal
Income Tax Considerations" in the prospectus included in the Registration
Statement (the "Prospectus"). Capitalized terms used and not otherwise defined
herein are used as defined in the Prospectus.
The Discussion, subject to the disqualifications stated therein,
constitutes our opinion as to the material United States federal income tax
consequences for purchasers of Common Units pursuant to the Offering.
We hereby consent to the filing of this opinion as an exhibit to the
Prospectus and to the use of our name in the Discussion. The issuance of such
consent does not concede that we are an "expert" for the purposes of the
Securities Act of 1933.
Sincerely,
ANDREWS & KURTH L.L.P.
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Partners of Star Gas Partners, L.P.:
We consent to the use of our reports incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Stamford, Connecticut
December 3, 1998
